Gulp! Income-to-Loan Ratios are on the Horizon!

You can think of the Reserve Bank as an increasingly angry parent and you, dear Auckland property purchaser, have been a very naughty boy.


You’ve been stuffing the capital gains candy into your mouth for the past four to six years and you’ve been inviting your wealthy friends around too often, the ones with those Asian-sounding names. 


Papa Wheeler has been doling out gentle punishments for the past six months, following a firm-but-fair attitude to parenting. If your foreign friends don’t have IRD numbers and bank accounts, they can’t come over and play.


Well, last week, you were given another warning and I would take this one on board because if Mr Wheeler dishes it out, there will be much wailing and gnashing of teeth.


In case you missed it, Governor of the Reserve Bank, Graeme Wheeler, strongly indicated that the Reserve Bank is looking at income ratio restrictions. This would mean you couldn’t borrow more than a certain multiplier of your income (probably around five times). So if your household earns $100k, you wouldn’t be able to borrow more than $500k.


Is this a good idea? Well, the answer is the same as all answers in economics: it depends.


The problem, at least in Auckland, seems to be coming from a housing shortage, not from people wantonly borrowing because they can. If they want to upgrade they have to borrow more but they’d prefer not to.


In my opinion, Governor Wheeler doesn’t actually want to pull this lever. The Reserve Bank is simply using the media as a way to scare the market into re-thinking its property craze.


And it’s worked a little. It’s got the financially literate circles of society talking about it. It’s got friendly mortgage advisers (who may or may not be included in the aforementioned circle of society) talking about it. We’ve even had one bank decline a construction loan because they were afraid the new income ratios would be implemented by the time the house was built (we can’t tell you who it was but we can tell you their name rhymes with Ray-Ren-Tsed).


My advice is to watch the rules, stay informed and behave yourself.


Rupert Gough is an Authorised Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.