The Reserve Bank of New Zealand will add debt-to-income limits for mortgages to its financial policy tools in a bid to help slow the skyrocketing house prices.
On Wednesday, the RBNZ said the Minister of Finance had agreed in principle to the central bank's use of "debt serviceability restrictions" on the condition that any implementation is designed to avoid impact, as much as possible, to first home buyers.
This comes one day after The Real Estate Institute of New Zealand said house prices rose 29.8 percent in the year ended May and that there was little indication that government or central bank intervention has slowed the pace of house price growth.
The central bank analysis concluded that debt serviceability restrictions, such as a debt-to-income limit (DTI) are likely to be the most effective additional tool that could be deployed by the central bank to support financial stability and house price sustainability.
“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.”
Tools help ensure prices don’t deviate from sustainable levels
Reserve Bank Governor Adrian Orr said although the central banks did not have a remit to target house prices directly, policy tools can help ensure prices do not deviate too far from sustainable levels.
“We believe that a ‘sustainable house price’ is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates.
“Over the coming months, we will also be discussing with industry the feasibility of implementing a DTI limit and other debt servicing restrictions as part of our financial stability toolkit."
Any decision on implementing debt serviceability restrictions will be preceded by a full public consultation process, along with a regulatory impact assessment.