And household debt rose 8.7% last year to reach $246.877 billion. New Zealand's debt-to-disposable-income ratio recently hit a record high of 167%. High-DTI households are also likely to reduce consumption more sharply during a severe downturn, in an attempt to continue servicing loans and increase precautionary savings." "Forced house sales by high-DTI borrowers would likely amplify house price declines, impair the ability of banks to resolve distressed loans, and increase loss given default for banks. Loan serviceability is a crucial determinant of probability of default, reflecting that many borrowers will attempt to service loans even if they are in a position of negative equity,' the Reserve Bank says. All else equal, borrowers with higher DTI ratios have less disposable income to draw on as a buffer to avoid defaulting on their mortgage, without selling their home, in a period of lost income or higher mortgage rates. "DTI policies can support financial stability by reducing the scale of mortgage defaults during a severe economic downturn.
It also says an important feature of a DTI policy is that the borrowing capacity of constrained borrowers grows in line with their incomes. The Reserve Bank says a macro-prudential DTI policy would allow it to limit the degree to which banks can reduce mortgage lending standards during periods of rising housing market risks, in order to protect financial system soundness. In the November report the Reserve Bank said about one-third of new mortgage lending was being done at a DTI ratio of over 6.
The table below comes from the Reserve Bank's November 2016 Financial Stability Report. And for Irish banks the DTI limit of 3.5 should not be exceeded by more than 20% of the value of all housing loans for owner-occupier homes during an annual period. The Bank of England's DTI ratio of 4.5 applies to no more than 15% of the total number of new mortgage loans for owner-occupiers. However, they say that most borrowers are already at levels of nine to 12," the FIPS report says.īoth the Bank of England and the Central Bank of Ireland have introduced DTI ratios in recent years. "According to executives an ideal DTI level would be in the range of five to seven. The report notes bank bosses are in unanimous agreement that the Reserve Bank's consideration of a DTI macro-prudential tool is happening too late given current DTI ratios have already topped levels that would have been considered ideal. New Zealand bank executives believe an ideal debt-to-income (DTI) ratio set by any Reserve Bank DTI tool should be between five and seven, according to KPMG's annual Financial Institutions Performance Survey (FIPS).
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