Wednesday 11 May, 2016

Property Institute warns of ‘unintended consequences’ of proposed ‘debt-to-income’ limits

Property Institute of New Zealand Chief Executive, Ashley Church, has reacted with concern to news that the Reserve Bank is actively investigating Debt-to-income limits as a means by which to reduce house price inflation.

Rumours, last year, that the Reserve Bank was considering such a policy came to nothing – but earlier today Reserve Bank Governor Graeme Wheeler confirmed that he was now "seriously considering" introducing new lending control measures, including a new Debt-To-Income (DTI) ratio control and that it was possible that the controls could apply nationally, as well as to Auckland.

The effect of such a policy would be to limit a typical Auckland family to a mortgage of less than $400,000 if New Zealand followed similar rules to those recently introduced in the UK where most home buyers can only borrow 4.5 times their annual income.

However, Mr Church has repeated his warning, made last year, 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”

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 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.

“Most Landlords are currently showing restraint and choosing to accept lower returns because capital growth is so strong. But 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 would also:

· Fuel an artificial boom in apartment construction – caused primarily by the fact that these would be the only dwelling most people could afford to buy under such a policy.
· 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

Mr Church says house price inflation, in Auckland, is the result of strong demand and a severe lack of supply and that the Reserve Banks attempts to artificially slow down demand are making the situation much worse.

“There’s a strong case to be made that 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 Bank want 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”.

Mr Church says history shows us that, left to run their course, property booms eventually peter out once the underlying issue – lack of supply – is resolved.

“The only sustainable way to fix the Auckland housing crisis is to build more homes as quickly as possible”.

ENDS

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