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20 Sep 2018

The State of NZ Household Debt

New Zealand households, like much of the world, are struggling with unsustainable levels of debt. While the New Zealand economy is in pretty good shape, the household debt to income ratio has risen from less than 60 percent in the early 1990s to 166 percent today. While it's yet to exceed the all-time high of 166.2 percent recorded in the second quarter of 2017, the ratio is stabilising rather than retreating. The situation in New Zealand mirrors what's happening in the rest of the world, with global debt levels higher today than they were during the credit crisis of 2008. 

As a proportion of GDP, consumer debt in New Zealand adds up to more than 90 percent. While mortgage debt is a huge contributing factor, this measure also accounts for credit cards and personal loans among other financial products. Debt levels in Australia are even worse at 121 percent of GDP, with Australian households now living with an additional $1.2 trillion of consumer debt since the credit crisis in 2008.

This means that our household debt is higher than the US, the UK, and worryingly, also higher than the troubled economies of Spain, Greece and Italy. According to the Reserve Bank of New Zealand (RBNZ), household debt as a proportion of national income is now well above the level recorded during 2008. While household debt is high in New Zealand, government debt is relatively low at less than 30 percent of GDP. 

While we have seen dampening house price inflation in heated New Zealand markets, household debt remains at levels that worry the Reserve Bank. Perhaps the biggest concern is the lack of room the RBNZ has to move. The Official Cash Rate in New Zealand was 8.25 percent in 2008, which left plenty of room to slash interest rates and soften the blow to borrowers if things got out of control. With the current interest rate at just 1.75 percent, there is much less room to move if the international situation starts to affect the domestic economy.

Authorities in the United States and Europe took steps after the 2008 crisis to avoid a repeat episode, including measures by US regulators for banks to hold significantly more emergency reserves. Higher lending standards in the U.S. can't fix the problems experienced in developing nations, however, with emerging markets highly vulnerable to rising interest rates after borrowing money in dollars and euros. While Chinese borrowers have been the most active among developing markets, they are mostly immune because the majority of their bonds are issued in yuan.

From the previous crisis in Greece through to the current situation in Turkey and many South American nations, growing debt burdens in developing economies are already creating global problems. The loss of investor confidence in the Turkish lira has led to a drop of more than 40 percent this year, with similar issues facing Argentina, Brazil, South Africa, Russia and Indonesia just to name a few countries. While the New Zealand economy is mostly immune to these problems, a global collapse would put us in a precarious position when combined with unsustainable house prices and high levels of household debt.


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