Property Investment

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Private property issue #94 - DTI's what happens to house prices?

Last week, the Reserve Bank announced debt-to-income restrictions (DTIs). Since the news broke, many investors have asked: “What will happen to house prices?” Let’s look at the numbers and see.


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Last week, the Reserve Bank announced debt-to-income restrictions (DTIs).

Since the news broke, many investors have asked: “What will happen to house prices?”

Let’s look at the numbers and see.

How much will NZ house prices increase when DTIs come in?

DTIs link the amount the country can borrow to our incomes.

As incomes grow, the country can borrow more. That pushes up house prices.

So, there are two questions to ask when thinking about the new rules:

  • How fast do incomes go up?
  • What’s the average DTI already?

The average household income went up 4.1% per year (since 2000).

More recently, household incomes have grown by over 5% per year.

This gives a sense of how fast house prices could go up if everyone was already maxed out under the new rules.

But not every New Zealander is maxed out. The average DTI per household is just 1.65x.

That’s because not everyone has a mortgage.

Many older Kiwis have paid off their home loans. Then there are tenants. They don’t have mortgages at all. But those people might not be looking to buy.

So, let's just look at Kiwis who have a mortgage. My back-of-the-envelope calculations put the average DTI at only 4.5x.

So, the average DTI is below the Reserve Bank’s new limits. So, there is scope for the average Kiwi to borrow more.

So house prices can still go up because:

  • Kiwis can still borrow more
  • And even if we max out our borrowing, incomes go up by 4 – 5% a year

But we can also look overseas to see what happened when other countries brought in DTIs.

What happened to other countries when DTIs came in?

Ireland introduced DTIs in 2015. Since then, Irish house prices have gone up 64%, or 6.4% a year.

Ireland is an interesting case, though. They had a massive property price boom between 1990 and 2007.

Then, house prices dropped by over 50%. So, some of that increase is recovery from the falls.

But it’s fair to say that DTIs didn’t stop Irish house prices from going up.

8 years before that, Latvia brought DTIs in, too.

Since 2009, Latvian house prices have doubled (in just 13 years).

That’s 6.7% a year on average.

In Norway, house prices have gone up 4.4% a year since their rules came in (in 2015).

So the international evidence suggests that house prices can still go up with DTIs …

Even the Reserve Bank agrees. They say:

“The international evidence is mixed … some studies find significant impacts [on house prices], and others find little to no impact.”

Screenshot 2024 02 01 at 11 04 40 AM

Of course, these countries have different circumstances. Norway is different from Latvia, and New Zealand is different from Ireland.

But it’s clear. House prices can still go up when DTIs come in.

Here’s what I think will happen

Here’s my best guess for what will happen.

  • House prices will increase at some rate.
  • But DTIs will take some heat out of the market.

Over the last 32 years, Auckland house prices have gone up by 7% a year. Everywhere else has gone up 6.2% a year.

Don’t expect that level of growth to continue.

I’d go for a more conservative 6% in Auckland and 5% everywhere else.

And if you want to learn how to keep borrowing even when these new rules come in, come to my next webinar. It’s on Tuesday 13th February at 7 pm.

1,619 people are already registered. It’d be great to have you as part of the community.

→ I want to come to the webinar and learn how to keep borrowing when DTIs come in

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Andrew Nicol

Managing Director, 20+ Years' Experience Investing In Property, Author & Host

Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.

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