Articles by Matthew Gilligan

DTI and social policy

Friday, August 25, 2017
I wonder if the Reserve Bank’s enthusiasm for introducing debt-to-income ratios has more to do with social agenda than strengthening the economy and protecting the banking system. 

In her August blog, GRA’s Janet Xuccoa notes that debt-to-income ratios (DTIs) are potentially dangerous and that they can have perverse outcomes. I agree with this and would further note that DTIs would be regressive because they affect low income earners much more.

Effectively, DTIs would link the availability of capital to growth in incomes. Without an increase in income, no further lending would be possible under a 5:1 ratio. Most of Auckland’s investors and many homeowners (including new homeowners) would instantly be unable to borrow. A huge crash in house prices could result, followed by destabilisation of the banking industry. Hardly good prudential control in my view, and ill thought-through policy. 

DTIs recessionary
DTIs would be recessionary because they shut off available capital to businesses and investment in housing, which leads to a catastrophic decrease in house supply because property investors and developers won’t satisfy these ratios. The RBNZ are playing with fire here.

I wonder if Mr Wheeler’s real motivation is social engineering to cause a property crash. Is Mr Wheeler’s real agenda Robin Hood politics and nothing to do with prudential control?

The banking industry is already well managed, which Janet notes in her blog. Both Jacinda Ardern and Bill English are saying they do not support the introduction of DTIs because they see them as unnecessary, thank goodness. 

DTIs unnecessary
The DTI is unnecessary in the light of new liquidity controls flowing from the introduction of LVRs, which have been highly effective in reducing property investors’ appetites. No further mechanisms are needed. LVRs, in my opinion, are brilliant innovations that shelter New Zealand from financial shocks and control house price inflation, without causing financial pressure on households. This is because they don’t directly affect household cash flow. 

I have always disliked the OCR (Official Cash Rate) as a mechanism to control the housing market because, absurdly, it guts New Zealand households of cash flow and pushes an increase in interest paid to offshore banks. The new alternative, LVRs, simply strangle the market by decreasing the availability of capital without affecting household incomes. Not only are they effective, they can be switched on and off as required. 

DTIs would lead to an immediate decrease in liquidity, which could cause the housing market to crash and limit long-term growth options. With DTIs you can’t get more cash until your income grows proportionally. People without high incomes would be condemned to a life without borrowing and the New Zealand housing market would be served up on a platter to foreign investors and high net worth individuals. All for what I believe is the current RBNZ Governor’s real agenda of Robin Hood politics and reengineering the housing market to break investor’s appetites to participate in property investment and home ownership. 

The sooner Mr Wheeler leaves office, the better, in my opinion, and he can take his DTIs with him.