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Debt Serviceability Restrictions Added To Policy Toolkit

RBNZ
  • The Reserve Bank – Te Pūtea Matua and the Minister of Finance have agreed to update their shared Memorandum of Understanding (MoU) on macro-prudential policy and add debt serviceability restrictions to the list of potential tools available.
  • In February, the Minister of Finance issued a formal direction to the Reserve Bank (under section 68B of the Reserve Bank Act) for us to have regard to house price sustainability when making financial stability decisions. This is separate from the Monetary Policy Committee's monetary policy remit.
  • The Minister also requested more information and analysis on debt-to-income ratios and interest-only mortgages. The Bank provided this advice to the Minister last month, and we are today releasing it publically.
  • Our analysis detailed that debt serviceability restrictions, such as a Debt-to-Income (DTI) limit, are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability. The analysis also demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first home buyers. In our advice we also noted that we consider that a DTI limit would be a complementary tool to mortgage Loan-to-Value Ratio (LVR) restrictions as they address different dimensions of housing-related risk; DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default.
  • In his response, the Minister has agreed to add debt serviceability restrictions to the MoU in principle, on the condition that any implementation is designed to avoid impact, as much as possible, to first home buyers. We will now work with the Treasury to update the wording for the MoU, which will need to be approved by the Minister.
  • Click for full release.
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
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MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
BulletMarketsFixed Income BulletsForeign Exchange BulletsHomepage

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