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The implementation of debt-to-income (DTI) restrictions in mortgage lending could swiftly dampen the recent upturn in the housing market, according to property research firm CoreLogic.
In the previous month, new mortgage lending recorded its initial yearly increase in the last two years, signaling an uptick in housing market activity. Nevertheless, CoreLogic’s Chief Property Economist, Kelvin Davidson, cautioned that the aspiration of homeownership may remain elusive for many if the Reserve Bank proceeds with formal DTI caps.
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While the Reserve Bank has not disclosed a timeline for the introduction of DTI regulations, Davidson indicated that there is a reasonable likelihood that the central bank will impose DTI limits next year, making it more challenging for individuals with average incomes to secure mortgage loans.
He anticipated that mortgage lending could be capped at seven times the borrower’s income, a figure relatively high on a global scale but reflective of the steep housing costs in New Zealand. In contrast, countries like the UK and Ireland have DTI systems with lower thresholds, around four times income, which Davidson regarded as a pragmatic approach that aligns with each nation’s housing reality.
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For instance, if a DTI of seven were to be implemented, a borrower would need an income of $100,000 to qualify for a $700,000 mortgage. “If imposed, they’d mean the RBNZ is already ahead of the curve for when interest rates do eventually fall again and possible financial stability risks from larger new mortgages re-emerge,” Davidson emphasized.
DTI limits would have the effect of tethering house prices more closely to incomes, thereby constraining the number of properties an individual could own until their earnings reached the required threshold, Davidson noted.