Reserve Bank of New Zealand have updated their macro-prudential policy toolkit - added in debt serviceability restrictions to the list of potential tools available.

  • In February this year, New Zealand's Minister of Finance issued a formal direction to the Reserve Bank to have regard to house price sustainability when making financial stability decisions.
  • Separate from the Monetary Policy Committee's monetary policy remit.

The Bank has thus added debt serviceability restrictions to it toolkit

  • such as a Debt-to-Income (DTI) limit

RBNZ says likely to be the most effective additional tool that could be deployed to support financial stability and house price sustainability

  • analysis demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first home buyers
  • RBNZ considers that a DTI limit would be a complementary tool to mortgage Loan-to-Value Ratio (LVR) restrictions
  • DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default

The RBNZ says that debt serviceability restrictions are a tool that could help ensure house prices do not move too far from sustainable levels.

The wait is on now to see if, and how, the RBNZ use the new tool.