The Reserve Bank may impose debt to income limits next year. (file image) Photo: RNZ / Marika Khabazi
The introduction of debt-to-income (DTI) caps on mortgage lending could make short order of a recent pick-up in the housing market.
Property research firm CoreLogic said last month's new mortgage lending registered the first annual rise in the past two years, pointing to an increase in house market activity.
However, CoreLogic chief property economist Kelvin Davidson said the dream of home ownership could remain out of reach for many, if the Reserve Bank went ahead with formal caps on DTI ratios.
While the Reserve Bank had not released any details as to when it might introduce a DTI, Davidson said there was a reasonable chance the central bank would impose DTI caps next year, which would make it harder for average income earners to secure a mortgage.
He said mortgage lending would likely be capped at seven times the borrower's income, which was high by international standards, but reflected the high cost of New Zealand housing.
"I know in the UK and Ireland, they have a DTI system and the numbers are set at something closer to four. It's a pragmatic number that just reflects the reality in each country. If you set it too low, you're simply going to completely scuttle the market."
For example, a DTI set at seven would require a borrower to have an income of $100,000 to secure 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 said.
DTIs would tend to tie house prices more closely to incomes and therefore also limit the number of properties which anybody could own until their incomes meet the necessary threshold, Davidson said.