Here’s where debt-to-income ratios will hit hardest

Monday, 1 July 2024

From July 1, debt-to-income ratios will limit the amount that someone can borrow for a home loan in relation to their income.

Property buyers will need a household income of about $120,000 to get a mortgage on a home at the national average asking price under new lending rules, Realestate.co.nz says.

The Reserve Bank’s long anticipated debt-to-income ratios (DTIs) come into force next week on July 1.

They will limit the amount that someone can borrow in relation to their income, and they are intended to help moderate the housing market.

From July 1, only 20% of banks' new lending will be able to go to owner-occupiers with a DTI ratio of over 6, while only 20% of new investor lending can have a DTI ratio of over 7.

That means an owner-occupier with an annual income before tax of $100,000 could borrow up to $600,000, while an investor could borrow up to $700,000 for a house purchase without being impacted by the restrictions.

The housing minister says he wants a long-term fix to the country's housing affordability crisis.

Now, Realestate.co.nz has analysed average asking prices on its website over the last year to find out what level of household income would be required to buy a property in different parts of the country.

It found that based on its 12-month national average asking price of $902,988, a property buyer would need a household income of $120,398 to get a mortgage.

The calculation assumed a 20% deposit, and divided the total loan amount of $722,390 by six in line with the new DTI regulations.

Realestate.co.nz spokesperson Vanessa Williams said the $120,398 figure was just $6,0411 less than the average annual household gross income of $126,411.

The analysis also showed that in many regions there was an even more significant gap between household incomes and what would be required under the DTIs.

Queenstown buyers would face the biggest gap as the district had a 12-month average asking price of $1,953,091, the most expensive in the country.

Under the DTIs, a buyer wanting to borrow the 80% on a property in the area would need a minimum household income of $260,412, the analysis showed.

Queenstown buyers will need a minimum household income of $260,412 to buy a property at the district’s average asking price.

On Waiheke Island where the 12-month average was $1,901,507, buyers would need an income of $253,534 to buy a property.

Wanaka, Rodney and North Shore City rounded out the top five districts as incomes of between $175,544 and $245,381 would be required to buy.

Williams said the gaps were likely to be challenging, but that individual circumstances would vary, and opportunities could be found in every market.

But due to local economic conditions, population density and demand for housing prices varied significantly across regions, and in more affordable areas the gap would be lower, she said.

That meant buyers in Kawerau in the Bay of Plenty, which had a 12-month average asking price of $432,604, would need an income of $57,681 to meet DTI requirements for a 80% loan.

Buyers in Grey on the West Coast and Gore in Southland would need incomes of around $60,000, while in Clutha in Otago and Waimate in Southland they would need incomes of around $65,000.

Realestate.co.nz’s Vanessa Williams says DTIs are intended to slow the market and help prevent people from getting into unmanageable debt.

Williams said the DTIs might reduce the number of buyers by limiting their options, but given high interest rates were preventing some people from entering the market, it was unlikely they would start biting immediately.

“The idea of DTIs is to slow down the market and help prevent people from getting into unmanageable debt, which isn’t necessarily a bad thing. We will have to wait and see what impact this has overall.”

CoreLogic chief property economist Kelvin Davidson said some people thought DTIs were a terrible idea, but they were far from bad policy.

On balance, more people thought they were worth a shot if they could help restore some kind of normality to the housing market in terms of affordability, he said.

“Although there’s a strong awareness that longer term declines in mortgage rates will start to see DTIs become a more significant restraint on lending, the sentiment in regional markets is still fairly relaxed.

“That’s because property values are lower in relation to incomes anyway, so high DTI lending is always less of an issue in these areas.'

But there was interest in whether or not banks would “hold” the DTI speed limits for more expensive markets, he said.

“If the 20% allowances for high DTI lending will actually just be reserved for borrowers in pricier areas, such as Auckland, that might mean mortgages can flow relatively well for everyone.

“But if those allowances aren’t reserved for expensive markets, it’s conceivable that some buyers from those areas will look outside their home patch.”