While the debate about house prices is stuck in a holding pattern in Australia (with governments too scared to do anything too radical for fear of upsetting homeowners, and regulators averse to dealing with a problem that’s political in origin), the Kiwis just get on with it.
In a statement from the Reserve Bank of New Zealand (RBNZ) yesterday, the Kiwi central bank added debt-to-income levels (DTI) to its macro-prudential “toolkit” with the agreement of the minister of finance.
DTI levels are the ratio of a borrower’s total debt compared to their total income. Placing a limit on DTI levels can prevent borrowers from taking on debt beyond what they’re able to repay — rather than just leaving it to the judgment of the lending institution, like we do here.
Investors and wealthy owner-occupiers are more likely to be affected by a limit, because they tend to borrow more as a proportion of their incomes than first homebuyers. That’s exactly the area of housing demand NZ authorities want to curb.
Back in February, the RBNZ and the government agreed it would add house price sustainability to its list of considerations when making financial stability decisions. It’s important to note that that’s separate from the RBNZ’s monetary policy decision-making, and reflects that the RBNZ has a wider remit than our Reserve Bank, incorporating some of the roles of our prudential regulator APRA.
“Our analysis detailed that debt serviceability restrictions, such as a debt-to-income limit, are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability,” the RBNZ said in its statement. “The analysis also demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first homebuyers.
“In our advice we also noted that we consider that a DTI limit would be a complementary tool to mortgage loan-to-value ratio (LVR) restrictions as they address different dimensions of housing-related risk; DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default.”
LVRs were tightened this year in New Zealand in response to soaring house prices. The implementation of the DTI limit would be designed to avoid hurting first homebuyers, it added.
“Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels,” Reserve Bank Governor Adrian Orr said in the statement.
In Australia a similar scheme would have to come from APRA, after discussions with the rest of the Council of Financial Regulators (CFR) — ASIC, the RBA and Treasury. But mostly it’s just talk here. The CFR met last Friday and discussed, inter alia, “housing market risks”, noting that investors were now re-entering the housing market after a period of dominance by owner-occupiers: “There have been signs of some increased risk-taking recently, but overall lending standards in Australia remain sound. APRA has written to the largest authorised deposit-taking institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders’ risk appetites.”
You can be sure the big banks will reply that yes, they’re proactively managing risks and maintaining a strong focus on lending standards, like they always do. Meanwhile, investors and self-managed super funds will keep crowding into the market, subsidised by taxpayers.
The fact that it’s left to the financial regulators to do some hand-wringing about house price risks again illustrates the lack of political will to tackle housing in Australia. Macro-prudential tools have their place — especially when backed by a government-central bank agreement, as in New Zealand. But they’re only for treating the symptoms of the problem, not its structural causes. The Ardern government isn’t just relying on the RBNZ — it moved to abolish negative gearing (which enables investors to compete with owner-occupiers with taxpayer subsidies), treating the symptoms and the disease at the same time.
Here we still have buffoons peddling the idea of inflating housing demand still further by throwing superannuation into the mix, and calls for the RBA to be in charge of house prices. It’s a political failure of will that will cost new homebuyers for decades to come.
What do you think? Have the Kiwis got a better handle on their housing issues? Write to [email protected], and don’t forget to include your full name if you’d like to be considered for publication in Your Say.