1. Requiring banks to apply a prescribed minimum test interest rate to affordibilty assessments is a simple, less distortionary, alternative to DTI limits. It would provide the Reserve Bank with an interest rate policy tool that can be directed to imbalances in the housing market.
2. Despite the Bank’s claims to the contrary, there is no substantive evidence that higher DTI loans are ‘excessively’ risky. But there is significant evidence that DTIs do not predict loan defaults, or reduce the likelihood or severity of crises. For example, the European Systemic Risk Board found, in a recent assessment of GFC performance, that DTI levels did not have any “relevant effect either on the prediction of the crisis or on the depth of the crisis” . The DTI is a poor risk measurement metric that will, perversely, tend to target some better quality loans. It ignores the more sophisticated and proven affordability assessments frameworks already used by New Zealand banks.
3. DTI are not a necessary part (complementary to the LVR restrictions) of a macrostability toolkit.
4. Higher future interest rates do not pose a material housing lending systemic risk, providing the conduct of monetary policy is competent.
5. The application of the DTI limit to investor loans is misconceived and will generate perverse outcomes, because DTIs are only designed to deal with owner occupier borrowers. The DTI metric implicitly assumes that household essential living expenses, which are an important part of an affordability assessment, increases in line with income, which is simply wrong. The effect of the policy could be to impose an effective LVR limit as low as 30 percent on professional investors. No other country has imposed DTI restrictions on investor loans.
6. Our assessment of the net welfare impact of the DTI policy, is that it is negative.
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