Debt Levels

Debt, house prices out of whack with incomes - BNZ 02 December 2006


At least one bank is warning that New Zealanders are headed for trouble if debt servicing and house price levels continue to rocket out of proportion to income.
The Bank of New Zealand notes the average level of debt has doubled since 2001, but incomes have risen by barely a quarter.
More crucially, the amount of average debt people are servicing has ballooned from 7.8 per cent of income in March 2001, to 13.1 per cent in March 2006. The BNZ believes it will be closer to 15 per cent by next year.
While asset values for both houses and farms have also doubled during that time, people who base their wealth on house values are vulnerable, BNZ economist Craig Ebert says.
"A doubling of debt, asset prices, and interest payments, would be fine if incomes had increased by anywhere near a similar proportion. But they clearly haven't.
"It's all grossly unsustainable, but a tipping point doesn't seem imminent."
And recent strong consumer and housing data indicates the spending binge is not over yet.
Mr Ebert says debt accumulation would have to halve from its recent pace in order to create the domestic slowdown that the Reserve Bank is hoping for.
"The pace of consumer borrowing is still clearly way too fast to be consistent with the slump the RBNZ expects of the sector, in particular the housing market, in the period ahead".
But while the labour market remains strong, economists agree it will keep consumption rolling and the bogey of debt defaulting at bay.
"To our mind, a shakedown of the overly tight labour market remains the key to a consumer sector adjustment," Mr Ebert said.
"Yet we can't see much chance of this happening with activity indicators now picking up, and employment intentions, in particular, back to a strong level." The rise in debt and total household net wealth is a global phenomenon.
The OECD notes that wealth levels have risen not just on the back of house values but also the recovery of equity markets after the dot-com bubble burst.
In relation to other countries, New Zealand's debt levels are not greatly out of whack. Australians have more debt, says National Bank chief economist Cameron Bagrie, but our interest rates are higher than theirs, pushing up our debt servicing levels.
Australian debt servicing levels are about 8.5 per cent of disposable income, and in the US, it's nearer to 8 per cent.
But our houses are less affordable. New Zealand's house prices are about eight times the average disposable income, while in Australia they are six times, and five to six times in the US.
New Zealand's household debt-to-income ratio went from 105.1 per cent in March 2001 to 153.2 per cent five years later. The US ratio went from 100.7 per cent to 132.5, while Australia's rose from 98.2 to 159 per cent.
As an illustration of how debt has surpassed our income, gross disposable household income increased by just 23 per cent in the five years to March.
But household debt has risen to more than $17 billion of debt over the last 12 months, triple the annual figure five years ago.
The rural situation is no better, Mr Ebert says. Farm values have doubled in the last five years but so has debt.
Gross farm income has drifted lower to around $2.9b from $4.5b in 2000/01, and agricultural debt-to-income ratios have doubled in the five years to December 2005.
Farm prices are double the level of agricultural export receipts and debt is up nearly 15 per cent in the last year to $30.7 billion.
Mr Ebert says it is no coincidence that household savings had fallen $10 billion since 2001 or that a similar blow-out had occurred in the current account deficit.
It is unclear where it will all turn, but he believes the soft landing which every one is hoping for may just become an "abrupt adjustment".