Property Institute repeats warning of ‘DTI disaster’

Property Institute of New Zealand Chief Executive, Ashley Church, has repeated an earlier warning that the introduction of ‘debt-to-income’ limits on mortgage lending would have the potential to do significant damage to the Auckland housing market, and the wider New Zealand economy, if the Government gives the Reserve Bank to power to impose them.

Mr Church was responding to todays announcement that the Reserve Bank is proposing to set a limit on home mortgages of more than five times a buyers' income and is asking the Government to allow it to add the power to do so to its macro-prudential toolkit.

However, Mr Church says that such a policy would have ‘serious and unintended consequences’ for the Auckland property market and would ‘almost certainly make the Auckland Housing crisis even worse’.

“These things often sound like good ideas until you start thinking through what would happen if they were actually implemented”

A similar policy, introduced in the United Kingdom in July 2014, theoretically restricts a buyer to a mortgage that does not exceed 4.5 times their annual earnings – however, the UK policy isn’t compulsory on the banks and only applies to a section of the market.

“The Brits wisely chose to use this tool as a way to protect those who were at most risk of a market crash rather than as a blunt tool to curb house price inflation. But our Reserve Bank already has that ability, in the form of the LVR restrictions – so you’d have to question why they would want this tool unless they want to kill the market – something they’ve repeatedly tried, and failed, to do”.

Mr Church says that the probable consequences of such a policy would be disastrous.

“The number of new homes being built – the very thing that Auckland needs most – would plunge as the number of people earning enough to build or buy them would dwindle to a trickle. So the policy could very well kill off the one thing that can fix the Auckland housing crisis – the construction of new homes”.

Mr Church says the policy would also lead to a dramatic increase in rents over a relatively short space of time as property investors looked for ways to increase income so as to be able to buy more property.

“In an environment where every extra dollar enhances borrowing power – Landlords will want to maximum rentals – and they’ll be able to do it because the Reserve Bank policy will exacerbate the current housing shortage”.

Mr Church says that the proposed policy could also:

* Create a further barrier to young people looking to buy their first home – a prospect already made almost impossible by the Reserve Bank clampdown on loan-to-value lending.

* Restrict, or eliminate, the ability of small business owners to use the equity in their home as security for cash-flow – potentially putting thousands of small businesses at risk.

Mr Church says recent house price inflation, in Auckland, was the result of strong demand and a severe lack of supply and that the Reserve Banks efforts to artificially slow down demand have made the situation much worse.

“The introduction of stricter ‘Loan to Value’ rules has already compounded the issue and dragged out the speed at which the market corrects itself”.

“We understand the Reserve Banks desire to protect the economy against the risk of financial shock – but doing anything which reduces the construction of new dwellings is a hollow solution because it will only delay an even bigger problem down the track”.

Ends

© Scoop Media