Banks to blame for NZ debt-to-income regime nearly double that of the US.

Auckland's housing market is "a casino" with the banks acting as "the house", says leading property academic Michael Rehm.

And it's not just Auckland: "I strongly believe that housing markets globally are casinos – and the banks are at the heart of it," says Rehm, senior lecturer in the Department of Property at the University of Auckland Business School. "Housing markets are really just a place to make a bet and the banks are central to it – they equate to the casino's house, in my opinion."

Rehm's remarks come on the back of his recently completed research looking at US housing data across 20 US housing markets. It became apparent that US debt to income (DTI) ratios are much lower than Auckland's. In the most unaffordable US market, San Jose DTIs peaked at 6, he says (meaning borrowers can receive loans of up to 6 times their income).

"The US gets a lot of criticism for being a crazy housing market," says Rehm, "and then you realise that, here in Auckland, we are seeing DTIs of 9-12. Compared to New Zealand and Australia, the US is tame."


Such a heavy DTI weighting means markets like Auckland are highly vulnerable to sharp corrections but the predominant view of that vulnerability appears to be "nonchalance", he says.

"People have simply got used to the idea that a loan of 80 per cent of the cost of the house soon becomes 60 per cent when the inevitable rise in equity kicks in."

The runaway house prices characterising the Auckland market were driven, in part, by the banks offering more and more credit: "We are exceptional in terms of the amount of debt that our banks are willing to lend on against income."

Rehm also points to recent pronouncements by the International Monetary Fund which said of New Zealand last month: "Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks…such shocks could trigger a disruptive housing market correction."

The IMF also said the Reserve Bank's use of loan-to-value ratio (LVR) restrictions had succeeded in moderating the housing market. However, further restrictions to LVRs would be less effective and the IMF suggested the bank add a debt-to-income instrument instead of tougher LVR rules.

Independent economist Cameron Bagrie, formerly chief economist at the ANZ, told Newsroom recently: "If the market keeps going up, it dilutes the power of the LVR tool, whereas a debt- to-income instrument doesn't get caught up in the movements of the property market per se.

"If the market is still as strong as an ox, then an LVR instrument just gets seriously diluted because the market keeps moving up." Household debt levels were high and that was a vulnerability across New Zealand, he said.

International consultancy firm KPMG, in its 2016 Financial Institutions Performance Survey, said: "When asked about the implementation of debt to income (DTI) tools, [Bank] Executives are in unanimous agreement that the Reserve Bank's consideration of DTI measures are taking place a bit late in the cycle as current DTI ratios have already exceeded levels that would have been considered ideal. According to executives, an ideal DTI level would be in the range of 5 to 7. However, they say that most borrowers are already at levels of 9 to 12."

"I think that is appalling," says Rehm. "The IMF also talks about synchronicity – when the big markets, sneeze all other markets catch a cold – and that is true in the housing market globally.

"Around the year 2000 house prices rapidly appreciated almost everywhere and the amount of debt to income also exploded. So people around the world, including Auckland, have increasingly seen housing as a one-way bet to gain wealth. It isn't about shelter or housing any more, it's about wealth.

"That's what I mean about the banks being the house in the casino. It's a glorious way to make oodles of money.

"Banks also keep lending massive amounts to investors – they are a huge part of the banks' portfolios. Those investors take as much money as possible so banks have played a significant role in allowing house prices to run away from incomes; they are gambling.

"The banks knew DTIs were too high but they kept extending credit. They also know that homeowners will do almost anything to avoid losing their house; the stigma attached to falling out of home ownership is that significant. They know you will pay the mortgage almost ahead of everything else."

Auckland was so entrenched in high DTI lending that any attempts to lower it by regulation might "collapse the market and could cause carnage".

"So now is not the right time - but maybe when the market makes a sizeable correction, that's the time to institute a DTI tool. It needs to be part of the Reserve Bank's toolbox. In my opinion, the ideal weighting is a maximum DTI of about 3, so you can see how far away we are from that."

However, the effect of investors on the market could be restricted if the LVR rules forced them to provide 50 per cent equity, rather than the current 35 per cent