RBNZ’s DTI Restrictions To Make Rich Richer And Poor Poorer

• First home buyers and younger people likely to lose out to high-income earners.
• SMEs may struggle because business loans are often secured by the family home.
• Non-bank lenders likely to see a business boom.

There is a significant risk of history repeating itself with the new Debt-to-Income (DTI) restrictions which take effect in less than a month. Just as in the CCCFA scenario, the new measures could disproportionately affect first home buyers and those on low incomes, potentially causing them financial disadvantage.

Happy Prime, New Zealand's only specialist credit risk consulting company, is cautioning about the potential drawbacks of the new DTI measures. While the intentions behind these measures are commendable, they are seen as a blunt tool that could inadvertently favour property investors and the affluent.

Happy Prime CEO Meurig Chapman, a leading voice in the financial sector, points out that DTI restrictions have fallen out of favour with most OECD banks. He says that it is a mistake to assume that income is a good proxy for affordability, whereas other models, like uncommitted monthly income, could be better measures.

“The DTI restrictions will achieve the RBNZ’s aim of moderating property price increases, but they discriminate against first-time home buyers, young people and those on low incomes.

“DTI restrictions create unintended bias in the banking system because they favour people on high incomes with a level of equity on existing property, which includes property investors—no matter how geared those investors may be. At least it will be good for renters.”

Young people lose out

Chapman says even a young couple with no debt and a moderate lifestyle will be restricted from buying a home because young people tend to be on lower salaries early on in their careers. This is despite having to compete in the housing market with more mature, higher-earning buyers.

“The unintended consequences of the CCCFA were to lock a disproportionate number of people out of the property market, and DTI restrictions could have the same consequences, even if the borrower’s risk profile is good.”

Chapman says he would like to see more reliance on supervision of the lending market—such as through the prudential reporting process—rather than the current emphasis on regulation, including more frequent reviews of the consequences of the restrictions

“Police the banks to ensure they are stable instead of applying blunt regulations and policies. A more nuanced approach to lending is called for. However, the DTI restrictions are a simple calculation to implement and require less resources and effort to apply.

“The RBNZ’s recent policies are akin to cracking a walnut with a sledgehammer.”

Impact on SME Lending

Small and medium-sized enterprises (SMEs) are another area where current policies fall short.

“Many are unaware that business loans are often secured by property under a personal guarantee. With the debt-to-income (DTI) ratio obligations and an economic slowdown, SMEs may struggle to obtain the necessary working capital. This is particularly critical as businesses seek debt funding in a challenging economic environment.”

Chapman says institutions may need to rethink their product offerings, especially in the SME sector, to support customers without breaching macro regulations.

More business for non-bank lenders

Chapman says non-bank lenders, not bound by DTI mandates, may see increased business as consumers seek alternatives, potentially at higher interest rates.

Chapman says that while the intent behind the RBNZ's policies is commendable, their implementation reveals significant flaws.

“Policies need to be flexible and responsive to emerging economic conditions to avoid unintended negative impacts. The conversation around policy effectiveness should continue, with a focus on adaptive measures that address more nuanced economic challenges,” he says.

ABOUT

Established more than seven years ago, Happy Prime is a risk consultancy firm based in Auckland that helps firms decrease or eliminate risk in areas such as a business's operational, financial, and technology functions. Most of Happy Prime's work is with banks, finance companies, and utility providers.

Happy Prime helps clients navigate regulatory challenges and economic fluctuations, offering unique, expert solutions to manage credit risk and compliance. It focuses particularly on sophisticated risk strategies to de-risk businesses from potential market volatility and regulatory oversights.

© Scoop Media