Treasury wants loan-to-income cap to cool Auckland's heated property market

Treasury officials believe the plan will help to cool Auckland's heated property market. Photo / Getty Images

New rules that would restrict the amount house-hunters can borrow according to how much they earn are being pushed by Treasury.

The controversial proposal would help cool Auckland's property market and guard against the risk of large-scale defaults in the event of a market correction.

But an industry expert says restricting borrowing according to people's pay would only make it tougher for first-time buyers to afford a home.

Similar rules have been introduced in England where most home buyers can only borrow 4.5 times their annual income, and in Ireland where the loan-to-income ratio is 3.5.

Auckland's median house price is $771,000 - nearly 10 times the median household income - putting the housing market among the 10 least affordable in the developed world.

If the English limit was applied here, a typical Auckland family could borrow only around $370,000 towards a house, or $287,000 under the Irish model.

Treasury papers released under the Official Information Act warn the growing divide between house prices and incomes is cause for concern.

"Households and investors who are heavily leveraged, and/or have high servicing requirements are more vulnerable to defaulting on that debt."

The paper was written in July in response to a proposed expansion of the Reserve Bank's loan-to-value ratio (LVR) limits which restrict lending to low-equity borrowers and from November 1 will force Auckland investors to stump up 30 per cent deposits.

Treasury said it agreed that recent developments in the Auckland housing market threatened financial stability and there was a case for intervention.

However it questioned whether tweaking LVR lending rules was the best response given resurgent pressure on the back of historically low interest rates, record inward migration and a severe housing shortage.

Debt-to-income limits could offer an additional way "of managing financial system vulnerability by targeting the likelihood of default".

Treasury also hit out at the "unintended consequences" of the LVR restrictions, which had shut many first home buyers out of the market, while investors now made up more than 40 per cent of mortgage holders.

The Reserve Bank confirmed yesterday it is currently collecting loan-to-income data from the banking sector to better understand the New Zealand mortgage market.

The information would shed light on how leveraged borrowers were relative to their incomes, but a spokesman would not be drawn on whether the central bank was considering new income-related lending limits.

Loan Market mortgage broker Bruce Patten said debt-to-income restrictions were unnecessary and would only make it harder for those trying to get a foothold on the Auckland property ladder.

"If you are young, professional, purchasing your first home, you can stretch yourself because your income will go up and you are also normally prepared to take on boarders and the like to make ends meet. Under this sort of measure it will only shut more first home buyers out of the market."

New rules for investors and overseas buyers had already had an impact, he said.