Home truths: Reserve Bank, John Key eye income cap on buyers

A typical household would be blocked from getting a mortgage of more than $405,000 under income-related lending restrictions being considered by the Reserve Bank. Photo / Michael Craig

A typical household would be blocked from getting a mortgage of more than $405,000 under income-related lending restrictions being considered by the Reserve Bank.

As house prices begin to rise again, the Government is refusing to rule out debt-to-income limits as a potential response to cool the housing market and prevent "a bubble emerging".

If adopted, the policy would stop people from borrowing too much relative to their income. It is already used in the United Kingdom, where most buyers cannot get a mortgage higher than 4.5 times their annual earnings. But opponents say any such policy would hit first-home buyers hardest, making it even harder for them to attain home ownership.

Debt-to-income limits were raised by the Reserve Bank yesterday after it warned the Government that resurgent house prices were a risk to the economy. Governor Graeme Wheeler said the average house price in Auckland was nine times larger than the average income, making it one of the least affordable metropolitan markets in the developed world.

The bank has raised the idea before, but said yesterday that it was now "seriously considering" the measure.

Prime Minister John Key would not rule out an income cap. "We don't want to see a bubble emerging in the housing market," he said yesterday.

"And potentially if there are recommendations, the Government is not ruling out adopting those recommendations or allowing the Reserve Bank to do it."

It is the latest in a series of policies to be considered by the Government to address soaring property prices, which was highlighted in the Herald's Home Truths series.

Another potential policy, a land tax on offshore buyers, was all but ruled out this week after new data showed non-residents were having a relatively small impact on the housing market.

Independent economist Shamubeel Eaqub said income limits would be an effective move, though further measures to ramp up supply and fix expensive planning rules were also needed. The limits could help relieve debt pressure and put the brakes on house price inflation, he said.

"If you can't borrow much relative to incomes, then the asset price can't increase very much relative to incomes."

Others said an income cap could keep first-home buyers out of the market.

Property Institute chief executive Ashley Church said it would limit a typical family to a mortgage of no more than $400,000 - based on the median household income of $90,000.

"The policy could very well kill off the one thing that can fix the Auckland housing crisis - the construction of new homes," he said.

Labour Party housing spokesman Phil Twyford said his party supported the limits, but only if they were targeted at speculators.

"First-home buyers should not be asked to take a hit yet again for this Government's failed housing policy," he said.

The Reserve Bank said it would prefer the restriction to apply broadly, rather than singling out Aucklanders or investors. It predicted that income-related limits would affect investors more than first-home buyers.

Mr Eaqub said if the limits applied only to Auckland, they would simply "export" housing affordability problems to surrounding regions.

Debt-to-income limits Q&A

What are debt-to-income limits?

A limit on what a person or household can borrow relative to their income. They are designed to restrict banks' lending, to prevent economic instability and cool house price inflation.

How would they affect home-buyers?

Overseas, buyers have been prevented from borrowing more than 4.5 times their income.

The median household income in New Zealand is around $90,000, which means most families would not be able to borrow more than $405,000. A household would need an income of $180,000 to afford a median-priced Auckland house ($812,000).

How soon could they be in place?

Neither Government nor the Reserve Bank has committed to the limits. They would need to amend their Memorandum of Understanding before a cap could be introduced.

Restrictions would leave few options

For new parents Gemma Mann and Mike Alsweiler, having their ability to buy a house restricted by their income would be just another hurdle in an already tough property market.

The Auckland couple, who the Herald followed as part of its Home Truths series, were already considering leaving Auckland to find a more affordable house - even if it meant saying goodbye to their families.

But if New Zealand followed the UK by setting a mortgage lending restriction of 4.5 times the borrower's annual income, they could be locked out of the Auckland market all together.

Mr Alsweiler understood the reasons behind the proposed move but said it was "frustrating".

"It's another hurdle to jump."

The couple, who had a joint income of $110,000-$120,000 a year, had hoped to borrow at least $500,000 to buy a house in the range of $600,000.

But they'd only be allowed to borrow up to $495,000 at the lower end of their estimated income if the ratio was set at 4.5.

While Mr Alsweiler expected their salary to continue to grow in coming years, with an 8-month-old baby, he said they were working less.

He wasn't sure what they'd do if they couldn't borrow, but there were few options left other than leaving Auckland. However, even that wasn't a great option, he said.

"We might save $100,000 on a house, but is that enough to give up family and a job?"

- Corazon Miller