Is “Debt to Income” (DTI) the answer to cool down the real estate market?

Banks have always played a big part in controlling the real estate market, often at the request of the government.

In times like this, where the market is firing on all cylinders, no one would have thought during a pandemic the property prices would of increased by more than 20% in 12 months.

So, now the government has the duty to ensure this market doesn’t continue to rise at this rapid fire speed. It’s clearly not sustainable and may create a longer lasting problem of unaffordability. On top of this the big issues would arise when interest rates increase, and people cannot afford their record high mortgages any longer.

In 2020 banks started to introduce a measure called ‘’Debt to Income’’ ratios. It’s a calculation of your total debt and divided by your annual income.

For example, if you earn $100,000 per year and you have debts totalling $450,000 your “DTI” is 4.5.

Some lenders are quite strict on their DTI assessment already and if you exceed a DTI of 6, you can’t obtain a loan.

Others have just introduced the DTI assessment and haven’t made it policy (yet) to decline a loan based on their DTI.

But is clear back in 2020 the government flagged these measures with the banks to commence rolling it. It looks like this will be their tool to use when the market has overheated.

My personal opinion, there is no doubt something needs to be done to slow down the market. Some of the sales results we are seeing on a day-to-day basis are surely not sustainable. People are willing to increase their budgets by 10, 20 or even 30% to get into the market and when rates rises (which they will at some point) it will create a lot of pain and see people having to sell their home under duress.

So DTI seems like the most sensible lever to pull to try and slow this thing down.

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