New Zealand Prepares for Debt-to-Income Rules in 2024: A Closer Look at the Impact on Homeowners and Property Investors

Debt-to-Income (DTI) rules are set to make their debut in the New Zealand housing market next year, following the lead of several European countries that have implemented similar measures to rein in lending and stabilize housing markets. While the concept of DTI rules is not new, the specific ratios adopted by different countries vary significantly.

Surprisingly, these ratios tend to be relatively low in the countries that have already implemented DTI rules.

For instance, Ireland has a ratio of 3.5 times gross income for second homes, Denmark sets it at 4 times, the UK at 4.5 times, and Norway has the most relaxed ratio at 5 times. It's important to note that these ratios vary based on factors such as the cost of living and the risk appetite of each country's regulator.

However, a threshold as low as 3.5 or 4 times income would likely be too disruptive for the New Zealand property market, making it highly unlikely that the Reserve Bank of New Zealand (RBNZ) would adopt such stringent measures.

If 4 is too low, how about 5?

When considering the impact of a ratio of 5, it's worth noting that the percentage of bank lending in New Zealand with a DTI of 5 or higher has shown some fluctuations.

At the peak of the market in 2021, this percentage reached a high of 60%, but it has since decreased to a more manageable 33% as of March 2023. Surprisingly, the percentage of first-home buyers (FHBs) with a DTI of 5 or higher closely mirrors that of the overall market, with 28% of FHBs falling into this category, and 60% at the peak of the market in 2021.

Considering these figures, it's unlikely that the RBNZ would implement a threshold of 5, as it would negatively impact the very people they aim to assist, namely FHBs.

What about a ratio of 6?

At the peak of the market in 2021, RBNZ statistics show that 40% of loans had a DTI of 6 or higher. However, this proportion has dropped to just 13% in recent times.

Does that mean 13% of loan applications would be rejected if the threshold is 6?

It's important to understand that even if the threshold is set at 6, not all loan applications exceeding this threshold would be rejected. The RBNZ's framework allows banks to allocate 15% of their lending to customers with a DTI greater than the threshold. Hence, the impact on today's market could be relatively minor, at most.

How about lending to investors if the DTI threshold is 6?

For property investors, a DTI threshold of 6 would have a more significant impact since they tend to have the highest DTI ratios.

Recent data reveals that 25% of lending to investors went to those with a DTI of 6 or higher. Assuming banks exercise their right to lend 15% of their funds to borrowers with a DTI higher than the official threshold, it means that in the current market, only 10% of loan applications for investors would be declined. At the peak of the market, this figure could rise to around 40-45%, significantly curbing investor activity.

My personal view

I believe the RBNZ will likely choose a DTI threshold of 6 for several reasons.

Firstly, in the current soft housing market where demand dampening measures are unnecessary, a DTI of 6 would have little overall impact, albeit affecting investors to some extent.

Secondly, the RBNZ seems comfortable with the current subdued demand, evident in its decision to give local banks a year to update their IT systems.

Lastly, the RBNZ's research paper considered three different thresholds: 5, 6, and 7. The selection of these specific thresholds was likely not arbitrary, leading me to believe they will opt for the middle option of 6.

What’s the tail risk for investors?

Looking at the potential risks for investors, the RBNZ may choose to establish separate rules for investors and owner-occupiers, just as it has done with Loan-to-Value Ratios (LVRs).

If this approach is adopted, the RBNZ might be more stringent with the investor threshold, hoping to encourage the sale of rental properties to first-home buyers. However, reducing the number of rental properties available could result in higher rents, posing challenges for both tenants and the government alike.

As the RBNZ's implementation of DTI rules draws near, homeowners and property investors will be closely watching to understand the final ratios and their potential impact on the New Zealand housing market.

Oliver Pearson

Manager and Property Investor for 20+ years

Oliver Pearson

Manager and Property Investor for 20+ years

Oliver Pearson began investing in property aged 21 and has since bought, developed and sold real estate in the UK, USA, South East Asia and New Zealand. After a career in banking he is now on the management team at Waikato Real Estate and has contributed to property articles for NZ Herald, Stuff and Property Investor Magazine.

Based in Raglan, Oliver's passions extend beyond property to surfing, hydrofoiling, and providing a taxi service for his children.