Households tighten belts, but there's more pain to come, RBNZ says

Kiwis have been quick to tighten their belts as the global economic and financial market turmoil unfolds - but the worst may not be over for many. Households' collective appetite for credit has fallen sharply in the past year and the ratio of household debt to disposable income appears to have peaked, the Reserve Bank notes in its Financial Stability Report issued today. And sharply lower turnover in the housing market means that fewer people are taking out mortgages to trade up or buy their first home. However, the central bank's analysis of how the global economic crisis is playing out in New Zealand homes comes with a couple of notable warnings."Despite the levelling out of the household sector's aggregate debt-to-income ratio, some households may face financial strain over the coming year, particularly if income comes under pressure due to changes in employment conditions or other factors. "Banks have tightened credit standards, so consumers with borrowing or a high loan-to-value ratio mortgage might also find it difficult to get additional funds." The Reserve Bank notes that mortgagee sales and personal bankruptcies had increased. And no assessment of New Zealanders' financial well-being would be complete without reference to credit cards. On this score, there are also worrying signs. Despite a levelling off in overall credit card debt, the outstanding portion of interest-bearing debt held on credit cards grew 12 per cent in annual terms during August - up from 5 per cent in August 2007. It was the fastest annual growth since 2002. The Reserve Bank predicts it will take some time for households to work through the strains brought on by the economic downturn. "Overall, the sharp slowdown in consumption and what appears to be an increase in household saving has involved an orderly restructuring of aggregate household balance sheets to date. "This process will continue in the near term as the economy continues to soften and asset prices return to more sustainable levels."