Our New Zealand cousins are ahead of so much that the country is an interesting laboratory to see what might happen here in Australia.
The housing boom in New Zealand is very mature, with prices rising 31% over the past year to nearly NZ $ 1 million, prompting the government to change taxes to trying to keep prices down – something that has been touched on here but is still in its infancy. .
Inflation rose faster and earlier in New Zealand, 4.9% for the year of September compared to our 3%, although the latest figures show that we are catching up quickly.
Interest rates already on the rise
This higher inflation led the Reserve Bank of New Zealand to double official interest rates from 0.25% to 0.5%, potentially leaving our Reserve Bank to reverse its rhetoric of not increase its official rate by 0.1% before the start of 2024.
This promise seems much more difficult to keep now that the RBA’s inflation forecast has been overtaken by events, with our latest quarterly inflation rate of 0.8% recorded as Sydney and Melbourne were still stuck at much higher. provided that.
This rising inflation is a global problem, but it is not an issue the RBA can afford to ignore, given that countries like New Zealand, Canada, Norway, the Czech Republic and South Korea have all raised interest rates or reduced bond purchases to tighten monetary policy.
RBA’s decision will be vital
While the RBA is not expected to raise rates or ease bond purchases in the decision it will release on Melbourne Cup day, this is shaping up to be one of the RBA’s most important announcements as the Conseil reacts to the changing economic situation.
It would be a courageous move to hang on to current parameters without at least signaling the possibility of a shift to allow future moves to stay ahead of rising inflation if it continues to rise.
The regulation of upcoming mortgage loans in New Zealand
Another area where New Zealand is ahead of Australia is the regulation of home loans to accommodate exceptional price increases.
Bank of New Zealand (BNZ), which is owned by Australian NAB (ASX: NAB), took the groundbreaking decision to limit the amount people can borrow to buy a house to six times their income when they apply for a loan through a broker .
It is the first major New Zealand bank to officially adopt a debt-to-income ratio for home loans. Although there are indications that it will not be the last given the political heat that has accompanied the rapid rise in house prices and the decline in affordability.
Ratios will increase loan security and retard price growth
BNZ said it was acting within its responsibility as a responsible lender.
“With increased regulation on debt-to-income ratios as a way to create a more sustainable housing market, BNZ is making some changes to the way it rates loans in our brokerage channel,” the bank said.
“We are looking at the overall level of debt incurred by our clients to make sure they are in a safe position with rising interest rates.
“Currently this will be set at six times, but like all of our loan policies, we will constantly monitor and review. “
The change means that a household with a combined income of $ 150,000 could not borrow more than $ 900,000 and this applies to both homeowners and investors.
Debt service restrictions accelerate
Debt-to-income ratios were foreshadowed by the Reserve Bank of New Zealand and there is a good chance that they will impose a ratio on all banks in order to keep house prices down and reduce the risk of loans going badly. if interest rates keep going up.
The central bank announced that it had reached a deal with Finance Minister Grant Robertson on adding “debt service restrictions” to the tools it could use.
New rules have also been added to credit agreements so that lenders can impose more scrutiny of applications to ensure borrowers can afford their loans.
Mr Robertson said he believed debt-on-income controls should only apply to investors, but the Reserve Bank said it believed a single limit could be set at a level which would go a long way towards achieving this objective.
The bank said its analysis showed that tools such as debt-to-income limits were probably “the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and price sustainability in the economy. housing “.
Ratios also used in the UK
Controls are used abroad to limit the amount people can borrow to a multiple of their income. In Britain, borrowers are often limited to no more than 4.5 times their annual income.
The Reserve Bank told Robertson that a debt-to-income ratio of seven would have a minimal effect on first-time homebuyers but would deter some investors, and that a cap of six would have an impact on moderation. housing prices and investor demand, but could also prevent some first-time buyers from entering the market.
While there have been changes in the interest rate safety margin in Australian home loans, it wouldn’t be surprising if we started to see discussions around debt-to-income limits here in Australia.