As predicted, the Reserve Bank has asked for Debt to Income Ratios to help dampen down the housing market. That would mean that borrowers can’t borrow more than 5 times their income. This would shut about 2,000 first home buyers and 9,000 investors out of the market. The trouble is that it won’t stop the truly rich, because they don’t need debt anyway.
In isolation debt to income ratios seems like a good idea to help prevent New Zealanders from borrowing too much from overseas and potentially putting the country at risk. But like the other tools the Reserve Bank have introduced, it has downsides and is very much a second best solution.
The change will hit more investors than first home-buyers, which is a positive. But some first home-buyers will nevertheless be hampered, particularly in places like Auckland.
The bigger problem is that not everyone investing in housing needs debt. We have already seen that the big winners out of the Loan to Value Ratios have been cashed up investors, because they don’t need debt. The same will come of Debt to Income ratios, ultimately cashed up investors win.
And why wouldn’t they keep investing every dollar they make in housing? Our tax system ensures that housing is a far more attractive investment than anything else. Only closing that tax loophole as The Opportunities Party is suggesting will encourage them to put their money where it is best for our economy and society; in businesses that create jobs and exports.
The Reserve Bank’s main focus is risk to our banking sector. It isn’t their job to worry about housing affordability, and they can’t achieve that on their own. Government action is needed, but all political parties in Parliament at the moment lack the political will to solve this problem.