Institute warns of consequences of 'loan-to-income' limits

Property Institute of New Zealand Chief Executive, Ashley Church, is questioning a proposal, from Treasury, to further restrict mortgage lending by banks and has repeated his warning of ‘unintended consequences’ made earlier this year. Treasury papers released under the Official Information Act note that the growing divide between house prices and incomes is cause for concern and suggest that debt-to-income limits could offer an additional way "of managing financial system vulnerability by targeting the likelihood of default". The Reserve Bank has previously confirmed that it is collecting loan-to-income data from the banking sector but would not be drawn on whether the central bank was considering new income-related lending limits. The effect of such a policy would be to limit a typical Auckland family to a mortgage of less than $400,000 if New Zealand followed similar rules to those recently introduced in the UK where most home buyers can only borrow 4.5 times their annual income. However, Mr Church has repeated his warning, made earlier this year, that such a policy would have ‘serious and unintended consequences’ for the Auckland property market and would ‘almost certainly make the Auckland Housing crisis even worse’. "These things often sound like good ideas until you start thinking through what would happen if they were actually implemented" Mr Church says that some of the probable consequences of such a policy would include: - Fueling an artificial boom in apartment construction - caused primarily by the fact that these would be the only dwelling most people could afford to buy under such a policy. - Creating a further barrier to young people looking to buy their first home - a prospect already made almost impossible by the Reserve Bank clampdown on loan-to-value lending - Causing real estate listings to plummet because home owners would choose to hang on to their properties rather than accepting much lower prices for them - Killing off in-fill development - and possibly even larger scale housing development - due to developers being caught by the mortgage lending restrictions Mr Church says house price inflation, in Auckland, is the result of strong demand and a severe lack of supply and that attempts to slow down demand only risk making the situation even worse. "We understand that Treasury and the Reserve Bank want to protect the economy against the risk of financial shock - but doing anything which reduces the construction of new dwellings is a hollow solution because it will only delay an even bigger problem down the track". Mr Church says history shows us that, left to run their course, property booms eventually peter out once the underlying issue - lack of supply - is resolved. "The only sustainable way to fix the Auckland housing crisis is to build more homes as quickly as possible".