When I bought my first home in Wellington in 1992 it was rare for banks to lend more than twice the income of the occupier. Generally, three times was seen as the upper limit.

The requirement for a big deposit and the limit on the loan-to-income multiple meant we could only afford a house worth $112,000, but it was the same for everyone. That house was around the average for Wellington and just fine for a young family buying a first home.

In 1992, mortgage rates had dipped under 10 per cent, but were as high as 15 per cent less than two years earlier, which meant the bank and I were reluctant to take on too much debt. Unemployment was still over 10 per cent and 18 months earlier I was a jobless ex-student.

Banks and borrowers were as risk-averse as each other and the idea of borrowing to buy multiple homes as investments was foreign.


Fast forward to 2015 and the mathematics are on another planet.

That house in Wellington has more than quadrupled in value, thanks in no small part to interest rates halving and the "normal" loan-to-income multiple more than doubling.

We all know the leverage had increased, but until this week we weren't sure how much. The Reserve Bank published its first analysis of loan-to-income multiples in its Financial Stability Report this week, having recently begun collecting the data from ANZ, ASB, Westpac, BNZ and Kiwibank.

About 40 per cent of mortgages between May last year and September this year were worth more than five times the borrowers' income. About 60 per cent of lending to landlords was at the same level and a stunning 27.3 per cent took loans worth more than seven times their incomes.

This is only possible while interest rates stay at record lows and tenants and landlords have jobs.

The Reserve Bank did not break down what proportion of these loans were in Auckland, but it did note 60 per cent of the value of house purchases in the past year were in Auckland.

This is why the Reserve Bank warned this week of a growing risk of a sharp correction in Auckland house prices and that the risks to financial stability had increased in the past six months.

It's also why the Reserve Bank toughened its loan to value ratio speed limits for Auckland landlords from November 1.


The drums are beating for the Reserve Bank to go further than limiting loan-to-value multiples. Treasury and the IMF have suggested the bank look at limiting loan-to-income multiples.

Last year the Bank of England imposed a limit on mortgages with multiples of more than 4.5. If a limit was imposed here, potentially more than half of new lending to landlords would be banned.

Governor Graeme Wheeler said the bank was watching Britain closely. And he was watching to see how the bank's two rounds of LVR limits were slowing the Auckland market.

He wanted to see another four months of sales figures before looking at whether a "multiple-pronged" attack on Auckland's inflated market was needed.

This week's figures suggest something is happening, although Deputy Governor Grant Spencer cautioned October looked weak in part because August and September had been so strong as buyers rushed in before the new LVR limit and the Government's "bright line" test and requirements.

Time will tell. If Auckland bounces back within a year, as after the Reserve Bank's first LVR round in October 2013, keep an eye out for the other prong of the attack.