Hamish Rutherford: Reserve Bank hints new lending tool might be worthwhile, even if only applied to investors

Deputy governor Geoff Bascand appeared to soften the Reserve Bank stance that debt to income ratios, if implemented, needed to apply to all borrowers. Photo / Mark Mitchell

OPINION:

Top officials at the Reserve Bank say their preferred tool to restrict bank lending may have an impact even if it applies only to investors.

Although it is still to provide advice on further lending restrictions to the Beehive, giving the Government an excuse to exclude aspiring homeowners may clear a political hurdle for debt to income (DTI) ratios to be advanced.

The central bank has been instructed by the Government to focus on sustainable house prices in its policies, particularly when monitoring the health of the banking sector.

Adding to the complication, Finance Minister Grant Robertson has not just asked for the focus to be on house prices generally, but on dampening investor demand and improving affordability for first home buyers.

In the coming weeks the bank will give advice to the Beehive about what tools it might use for this purpose, but at Wednesday's financial stability review, it repeated that DTIs appeared to be the best option available. But it made an important concession.

Governor Adrian Orr - who was absent on Wednesday due to illness - has said repeatedly that it would be "incredibly difficult" to segment macroprudential tools for particular sectors or groups.

But deputy governor Geoff Bascand conceded that its latest analysis showed that around 70 per cent of residential property investors were considered to have a high DTI (debt of at least five times income) and so may hit the sector "relatively" hard.

"As we've been examining this we've become probably a bit more conscious that it would have reasonable purchase, a reasonable impact on the investor market."

The comments make it much more likely that the rules have a chance of becoming reality. Robertson has said he did not want the new tools to have a particular impact on first home buyers.

With the Minister of Finance likely to take increasing control in the future over who exactly the Reserve Bank's macroprudential rules can apply to, designing rules which can be applied around political considerations is likely to become increasingly important.

Bascand also gave strong comments that the bank has growing concerns that the housing market was at growing risk of a correction, with the Reserve Bank currently required to turn its attention to exactly what "sustainable" means when it comes to house prices.

At the same time as population growth is slowing, housing construction is increasing and tax increases from the Government are looming, meaning that the outlook for house prices are weakening. Yet prices were increasing. "'The gap between prices and reality is widening," Bascand told MPs.