On Tuesday 28th May, New Zealand’s central bank announced restrictions on the amount of housing finance lenders can extend to borrowers seeking high debt-to-income ratios. These regulations aim to mitigate default risks in the country’s volatile housing market. Effective July 1, banks must adhere to these new rules, applicable to new residential property lending for both owner-occupiers and investors, as outlined in the bank’s statement.

The Reserve Bank of New Zealand (RBNZ) will at the same time ease loan to value ratio (LVR) restrictions, which limit the amount of low deposit lending that they can make.

“Having both the debt to income (DTI) and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system,” RBNZ deputy governor Christian Hawkesby said.

The move had been well flagged to the market and does not have monetary policy implications, according to Westpac economists.

However, Westpac noted that the marked differences in regional house price to income levels could lead to changes in investor behavior.

“As house price levels relative to income vary significantly across the country, once DTIs become binding in high price regions, they may incentivise investors from higher income regions to invest in lower house price regions,” the note said. The new DTI settings allow banks to have 20% of their loan portfolios to owner-occupier borrowers with a debt to income ratio over 6.