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Do we need debt-to-income restrictions?

The have been plenty of media reports about the Reserve Bank of New Zealand’s [RBNZ] consultation on introducing debt-to-income restrictions.

If the restrictions are implemented, new rules will control how much the banks can lend based on an applicant’s income.

The RBNZ move is designed to stop house prices from rising dramatically and to protect the financial stability of the banking sector.

As many will remember, the housing market during the height of covid-19 was, to put it lightly, unusual, with prices rising steeply across the country. It was, at times, a diametric opposition to the predictions of many observers who thought prices would, in fact, take a significant fall.

An RNZ article after the pandemic price hikes reflected on this time, with one expert calling it a “bizarre period.”

The boom in the market has long since subsided, and the property market is currently regarded as steady, after a sustained period of falls. So why does RBNZ feel the need to introduce lending restrictions now?

Which brings me back to the banking sector.

One wonders if the collapse of Silicon Valley Bank in the United States or Credit Suisse Bank in Switzerland influenced the RBNZ proposal.

The collapse of those two banks could have been the metaphorical initial push of the snowball down the hill and to unknown destruction.

It was likely a small fright for RBNZ at the time.

It is also possible that the debt restriction move is unrelated to external events and is based more on local economic analysis.

Regardless of the reason, they are calling for the public to provide an opinion on the matter, which they then plan to act on accordingly.

Taking into account the outlook of RBNZ, it is still worthwhile asking around for the opinions of others on such matters.

A recent conversation with two Wairarapa experts quickly established that they opposed the idea. Restrictions were more of a detriment, they said.

They had serious doubts about its effectiveness, concluding it would just make it harder for property buyers to purchase, whether owning or investing.

Incomes do not seem high enough to make buying a house using the proposed new restrictions possible, despite the current lower average house price.

One of the experts was also of the view that the banks don’t need more stabilising and, in fact, already have good tools to keep risk low. It’s hard to argue against that, given the revenues of New Zealand’s retail banks are any indication. Despite a property sector correction, the banks still measure their after-tax profits in the billions.

It is also interesting, if nothing else, to get an opinion from someone who understands the market more than your average Joe. That said, the experts I talked to have a genuine stake in the fortunes of this sector of the economy, so their views must be taken with a grain of salt. People in property make a living out of being particularly persuasive.

Considering the many different views on the topic, I’m still unsure about what impact lending restrictions would have on the housing market.

But I suppose time will tell on that one.

Freddie Wilkie
Freddie Wilkie
Freddie Wilkie is a journalist at the Wairarapa Times-Age; originally moving from Christchurch, he is interested in housing stories as well as covering emergencies and crime.

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