It's all moving in the right direction for the Reserve Bank.
House prices are falling and that's bringing with it sharp reductions compared with recent years in the amounts of mortgage debt new borrowers are taking on relative to their incomes.
This comes through very clearly in the latest debt to income ratio (DTI) figures produced by the RBZ. Owner occupiers nationwide, for example now have the least stretched DTI ratios since the RBNZ started this data series in 2017 - if looked at in terms of the amounts of mortgage money on DTIs of five-times or above.
Having finally received government approval the bank is working toward having a debt servicing framework ready so that restrictions could possibly be brought in by March 2024 if needed.
The RBNZ keeps a close eye on borrowing that's done on DTIs of over five - in other words where the amount borrowed is over five times the annual income of those taking out the mortgage. It's not completely clear what sort of DTI levels the RBNZ would be 'happy' with. And the question of what sort of limits might be imposed if a debt servicing framework is introduced have not yet been explicitly addressed.
What would be clear though is that the RBNZ would now be very happy with how the DTI ratios of new borrowers are tracking. And it would not have been very happy at all two years ago.
In terms of some of the highlights pinpointed by the RBNZ in the latest data release, which, remember is put out quarterly, but with monthly figures, the RBNZ says the monthly share of new mortgage commitments with DTI of above 5 has now decreased for 13 months in a row.
As mentioned, the debt-to-income data has been gathered and produced by the RBNZ since 2017. It is monthly, but released quarterly. Generally speaking the data between 2017-19 showed a falling trend, from quite high levels, before beginning to rocket. And now the figures since the height of the last housing boom in 2021 have been coming down again, with speed. It will be interesting to see if they do keep dropping from here.
As we've done since the start of this data series we are comparing the latest month's figures (December 2022) with the last month from the previous release (September 2022) and we are also comparing both these with December 2021.
DTIs of above five are regarded as getting up there, so we highlight the percentages of total mortgage money that is borrowed by both first home buyers and other owner occupiers at DTI ratios of above FIVE. Our calculations here exclude the (small) amount where the DTI size is unknown.
The table below shows the percentage of new mortgage money for first home buyers and other owner-occupiers that is on debt-to-income ratios of over five times:
| Group | Dec 22 | Sep 22 | Dec 21 |
|---|---|---|---|
| FHBs nationwide | 35.2% | 41.4% | 58.3% |
| Auck FHBs | 49.6% | 57.3% | 72.9% |
| Non-Auck FHBs | 23.8% | 27.9% | 46.6% |
| Other owner/occ nationwide | 26.5% | 32.8% | 48.5% |
| Auck other owner/occ | 37.3% | 44.1% | 62.2% |
| Non-Auck other owner/occ | 18.6% | 23.6% | 38.1% |
So, some pretty substantial falls evident there.
That's the FHBs and the owner-occupiers. Our second table looks at the investor and those owner-occupiers with investment collateral. For this table we choose a more bracing DTI level and look at the percentages of those with debt-to-income ratios of over SEVEN times.
The next table shows the percentage of new mortgage money for both investors and owner occupiers that have investment collateral that is on debt-to-income ratios over seven times:
| Group | Dec 22 | Sep 22 | Dec 21 |
|---|---|---|---|
| Investors nationwide | 11.7% | 12.7% | 35.5% |
| Auck investors | 16.4% | 17.2% | 45.2% |
| Non-Auck investors | 6.7% | 8.6% | 26.2% |
| Owner/occ + investment collateral nationwide | 8.3% | 13.4% | 34.0% |
| Auck owner/occ + investment collateral | 6.8% | 19.4% | 43.4% |
| Non-Auck owner/occ + investment collateral | 9.6% | 9.0% | 26.4% |
So, there again we have it.
Will this trend continue?
We'll still be keeping an eye.
55 Comments
Me:
Are New Zealand housing prices going to fall further?
ChatGPT:
As an AI language model, I cannot predict the future with certainty. However, I can provide you with some insights that might be helpful.
New Zealand's housing market has been on an upward trend for the past several years, with prices rising rapidly in many parts of the country. However, there are several factors that could potentially cause housing prices to fall in the future.
One factor that could contribute to a decline in housing prices is the COVID-19 pandemic. The pandemic has caused significant economic disruption in many countries, including New Zealand. If the pandemic continues to have a negative impact on the economy, this could lead to a decrease in demand for housing, which could in turn lead to a drop in prices.
Another factor that could contribute to a decline in housing prices is changes in government policies or regulations. For example, the New Zealand government has recently implemented several measures aimed at cooling the housing market, including changes to tax laws and new regulations on property investors. These changes could potentially lead to a decrease in demand for housing, which could cause prices to fall.
Finally, there is the possibility of a natural disaster or other unforeseen event that could negatively impact the housing market. For example, a major earthquake or flood could cause significant damage to homes and lead to a decrease in demand for housing in affected areas.
In summary, there are several factors that could potentially cause housing prices to fall in New Zealand. However, it is impossible to predict the future with certainty, and there are also factors that could cause prices to continue to rise.
Double-edged sword. The incomes of those who took the extra debt burden on is increasing as they move through the workforce, so theirs drops. And new entrants are buying cheaper. That doesn't do much for the servicing cost of the debt, which naturally still has to be repaid one way or the other. And if you can't do it when you sell, then you need to find that difference in your existing income/savings to make that next move work.
Recent changes in Ireland to DTI levels https://www.centralbank.ie/news/article/central-bank-announces-targeted…. Maybe one day in NZ?
Ireland’s massive bubble burst between 2006 and 2011, In 2015 after things stabilised the central bank brought in mandatory DTIs of 4.0 for FHB and 3.5 for all others. These are the kind of sensible limits we need to be looking at to ensure housing affordability, with added benefit that the country’s capital can be used more productively.
https://www.centralbank.ie/consumer-hub/explainers/what-are-the-mortgag…
Sales are also down. So all you can conclude is that hardly anyone is qualifying for a mortgage these days. If we want a world where only the really rich can buy houses, then we are probably going the right way about it. Lets stop all lower and middle income people from buying houses, then the Reserve Bank figures will look even better! I'm sure in a year or two people will start claiming that housing is now "classist" or "racist" and the Govt will decide to hand out free money to the supposedly poor in order for them to not have to borrow as much. Thus the seeds of the next housing boom-bust will be sown.
That was my thinking as well. Interest rates increase from 2.5% to 6.5%, only people that can service a loan at those rates will get a loan. And the only way you can do that is if you income is significantly higher than what the base amount required 2 years ago. So they have basically chopped out the bottom of the income value, hence DTI decreases.
Also, once you have a loan, your DTI is less relevant and it all comes down to cashflow. If you can service the loan, then the DTI doesnt matter because you have a 30 year term to pay it off.
Also introducing DTI caps seems stupid when NZ wages are pathetically low and rise slowly, where house prices are crazy high and rise rapidly.
NZ average wage: $62,000 (before tax I might add), DTI 5=310,000 6=372,000. So if that is the MAX you can borrow, you need a deposit of $77,500 or $93,000 respectively so can only buy a home with a MAX value of $387,500 or $465,000. That's an absolute joke.
Lets try a well off couple earning $90,000 each before tax: DTI 5= 900,000 6=1,080,000 Deposit 5=$225,000 6=$270,000 Total House value: 5=1,125,000 6=$1,350,000. With mortgage rates at 6% thats interest of 54k and 65k per year.
Cost of living for an individual in a major city is $3-4,000, Take $3,000 to be generous is 72k a year leaving savings of say $50k a year means it takes a professional couple 5-6 years to save a deposit.
Sure looks like a pretty good way to cut off the lower and lower-middle class.
Prices will come back to what people can afford.
the interest only rort needs fixing too…. if you can’t repay the capital don’t take the loan
its screwing the scrum in the banks favour and creates huge distortions that we see today
test rates should be based on the average interest of the preceding thirty years and then a substantial buffer on top
the way we are heading the banks will be bust only thirty years since they last went belly up
If banks have a lot of people with large DTI once house prices start falling at the pace it is, many defaults will start to occur. Back in the day I remember DTI was 3 x income and when rate’s went high people were still defaulting some were just giving keys back to mortgage company in uk.
DTI is just one metric.
The DTI on new mortgages will always drop as mortgage interest rates increase.
The ratio of weekly mortgage servicing costs relative to post-tax weekly income is a much more insightful metric of consumer financial stress.
Other useful metrics relate to the level of payment deficits and the level of voluntary repayments of mortgge capital.
KeithW
I keep thinking how will this all end .....if houses go down and rental demand is still there , then "capital laden" investors will scoop in and grab these properties ...fortunately to make property work WITHOUT capital gains, you have to have at least an 8% gross return..and even then, you may not cover you costs ???
Please can someone show me an existing property in Auckland, bought in 2021 that would give you an 8% or more gross return .....excluding new developments.
But the good thing for FHB's, is that each dollar you are saving now, will be worth 2 in the long run, as with prices falling you are getting that much closer to your required deposit....and less money to borrow, even at a higher rate of interest.
The boomer "ma n' pa" investors have had their fun ...time for a balance....capital gains tax on the sale of every second or subsequent property - no exceptions ....no matter how long you have held it for.
And here's the kicker - scrap any "capital loss on sale" tax deductions.
As the Hosk says "Happy Daze" :)
Some big changes reported here. And as posted above, it would be good to have the Dec quarter 2021 data for comparison as well. Things look like they are settling down - on paper anyway. I feel for the bottom enders, especially the older ones. If you're young you can take a risk as you've got 30-40 years to work with - in theory.
With things (in theory) also starting to settle down offshore as well, we may be near the bottom of the cycle later on this year (Sept quarter?) which pretty much takes us back to the beginning of covid. Once again, I think this is good sign.
As multiple property owners & boomers we're down almost a million from peak (on paper) but that's a price worth paying for the future of home ownership & economic stability.
I think you are confusing settling down with sitting on the sidelines. The only buyers in this market should be existing home owners moving on and the absolutely have had a gutsful or renting types.
Absolute folly to buy now unless you are in a really really bad spot.
I think you are confusing settling down with sitting on the sidelines. The only buyers in this market should be existing home owners moving on and the absolutely have had a gutsful or renting types.
Possibly a new definition of the 'marginal buyer.' We all know how important the marginal buyer is. They set the direction of the mkt more or less.
" we're down almost a million from peak (on paper) but that's a price worth paying for the future of home ownership & economic stability."
And taken in the spirit with which it was penned, that's exactly what New Zealand needs more of. There'd be others on this site who would applaud your thought and be in the same situation themselves, in varying degrees.
Reading the comments above, its pretty obvious we just cant carry on thinking and acting like we currently do about housing. A roof over your head is a necessity, spending your life paying for a box on a postage stamp is not the path least trodden.
Let go of housing is the only road to riches
Let go of your self image being a result of the house(s) you own.
Accept that we all cant be rich, you are average, embrace your averageness.
Financial yoga is a thing, you can do it.
I do mean what i said in the first bit, attitudes towards housing have to change, if we keep doing what we have been doing we cant expect different results. Needs to be a hard road travelled, lots of screaming from vested interests, generation or two down the line normality will prevail. Housing needs to be an unattractive investment.
I practice what I preach, no property ownership, because i refused to get involved in the madness. Built a business that pays me without showing up, Im rapidly approaching mid 50's. Im off grid for 6 months of this year in the South Pacific.
You are a long time dead, a great financial story doesnt make for a good eulogy.
Ok well 9 out of 10 people can't make a business last more than about 24 months, yet most manage to service a mortgage.
Having owned several businesses and properties personally I can say owning a business is generally more of an anchor than paying off a mortgage.
Sad fact is most people who don't own a house at 65 are going to keep working or live in a caravan or something. They probably don't feel as free and breezy as you.
The vast majority of people can't make a business that pays the without showing up, most people have to actually do something to get things done.
I would like to have a society where people can afford to have a place to live, that should not be considered rich but what is reasonable. The problem is that too many people wanted to be rich doing nothing but owning houses (or not showing up).
The RBNZ keeps an eye on DTI over 5, yet they kept the FLP alive and kicking for 8-12months longer than necessary which encouraged banks to lend as much as they could due to sheer financial incentive. RBNZ credability is low already, will they make the big hikes we need
Run the DTIs at what they would be in a more functional (ie less dysfunctional) housing market with say median income multiples of 4, 5 or 6.
It seems to come as a surprise to many that the debt you have is greatly influenced by the price you have to pay for the house.
Much of the debt people are now paying for, would not exist if we had better land-use policies.
Restrained DTIs can be expected to remove one driver of overinflated housing values...will they solve all housing issues no, but taking steps to hinder a speculative bubble can only be considered a positive.
They would also reduce defaults should mortgage holders find themselves in circumstances such as the current.
Agreed.
Rather than a series of imperfect workarounds (LVR, DTI, rent subsidies etc) I'd rather see an end to the root of the problem - Monetary Policy that inflates asset prices. As long the govt/banks cling to that power (which will be forever, obviously) we will chase the distortions around in circles and never get back to a functioning market.
#EndTheFed (and all its little buddies)
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