Last week we tried to answer the question Could a Capital Gains Tax on Property Increase Investment in Gold & Silver in NZ?
This came about as a result of the Labour party discussing changes to the tax system.
But there is also another change relating to property that has been talked about recently. The Reserve Bank of New Zealand (RBNZ) has even issued a discussion paper on the topic.
That is Debt to Income Ratios (DTI) relating to loans on property. This means the limit for the amount a person can borrow would be based upon their income. This could include personal income from a business or job. But also income from other properties they own.
Now last week we concluded that any capital gains tax would not likely have a major impact on precious metals demand in New Zealand. It may not even have that much impact on property demand either. We say this as a capital gains tax is in place in many other nations across the globe. These same nations also have or have had issues with property bubbles.
Could Debt to Income Ratios Have the Biggest Impact on the NZ Property Market?
Recently we read that it could be Debt to Income Ratios that may have the biggest impact on the property market in New Zealand.
This was by accountant and property investor Matthew Gilligan.
“DTIs would link the availability of capital to growth in incomes. Without an increase in income, no further lending would be possible under a 5:1 ratio. Most of Auckland’s investors and many homeowners (including new homeowners) would instantly be unable to borrow. A huge crash in house prices could result, followed by destabilisation of the banking industry. Hardly good prudential control in my view, and ill thought-through policy.
DTIs would be recessionary because they shut off available capital to businesses and investment in housing, which leads to a catastrophic decrease in house supply because property investors and developers won’t satisfy these ratios. The RBNZ are playing with fire here.
I wonder if Mr Wheeler’s real motivation is social engineering to cause a property crash. Is Mr Wheeler’s real agenda Robin Hood politics and nothing to do with prudential control?
…DTIs would lead to an immediate decrease in liquidity, which could cause the housing market to crash and limit long-term growth options. With DTIs you can’t get more cash until your income grows proportionally. People without high incomes would be condemned to a life without borrowing and the New Zealand housing market would be served up on a platter to foreign investors and high net worth individuals. All for what I believe is the current RBNZ Governor’s real agenda of Robin Hood politics and reengineering the housing market to break investor’s appetites to participate in property investment and home ownership.”
So keep the above in mind when you hear Debt to Income ratios being discussed. DTI’s could have a much larger impact than a capital gains tax. DTI implementation also isn’t dependant upon who is in government. Since it is the RBNZ who would implement them, a DTI limit could be put in place at anytime. Just as Loan to Value Ratios were last year.
So Debt to Income Ratios may well be the pin that pops the housing bubble if they were ever implemented by the RBNZ.
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