If you think New Zealand's households are much more vulnerable now than just before the GFC, you are wrong according to the data collated by David Chaston

If you think New Zealand's households are much more vulnerable now than just before the GFC, you are wrong according to the data collated by David Chaston

By David Chaston

It's the 10-year anniversary of the Lehman Brothers collapse and the acknowledged start of the Global Financial Crisis.

And it is fashionable to claim that "things are worse now" than in 2008, especially where household debt is concerned.

In those 10 years, New Zealand household debt has risen by a massive $100 billion, a jump of almost 55% to $284 billion.

Click-bait commentary decries the jump. It is everywhere. Apparently there is reason to be fearful of the massive rise in "unsustainable" household debt. A reckoning is coming; end-of-the-world bunker sales are on the rise. Rich Americans are buying their New Zealand bolt-holes. Prepare to panic.

Except it is a mirage. A silly beat-up.

The fact is, debt levels have barely changed from the beginning to the end of those 10 years, compared to GDP levels, compared to household assets, compared to household disposable incomes.

And much more importantly, debt servicing is very much easier now, an item that is almost universally overlooked.

Here is the key data you should think about before jumping off any nearby cliff:

                cumulative
as at June   2008 2018   change   change change pa
    $ $   $   % %
Household financial assets* $ bil 566.471 877.219   310.748   54.9% +4.5%
* excludes housing                
H/h financial liabilities** $ bil 183.597 284.332   100.735   54.9% +4.5%
- for rental property investment $ bil 46.705 69.414   22.709   48.6% +4.0%
Net h/h financial liabilities $ bil 136.892 214.918   78.026   57.0% +4.6%
** includes housing                
H/h property values (excl rentals) $ bil 457.955 814.930   356.975   77.9% +5.9%
                 
H/h disposable income $ bil 116.880 170.953   54.073   46.3% +3.9%
H/h debt servicing (excl rentals) $ bil 11.590 10.042   -1.548   -13.4% -1.4%
                 
Annual GDP (nominal) $ bil 189.050 289.340   100.290   53.0% +4.3%
                 
Number of dwellings (total) # 1,672,300 1,856,000      183,700   11.0% +1.0%
Number of dwellings rented # 563,300 691,100      127,800   22.7% +2.1%
Number owner occupied # 1,109,000 1,164,900        55,900   5.0% +0.5%
                 
Population # 4,259,800 4,885,300      625,500   14.7% +1.4%
                 
People per dwelling # 2.5 2.6   3.4      
                 
per capita                
- H/h financial assets $ 132,981 179,563   46,582   35.0% +3.0%
- Net h/h financial liabilities $ 32,136 43,993   11,857   36.9% +3.2%
- Annual GDP (nominal) $ 44,380 59,227   14,847   33.5% +2.9%
- H/h disposable income $ 27,438 34,993   7,555   27.5% +2.5%
                 
CPI # 865.4 1015.0   149.6   17.3% +1.6%
2 yr fixed mortgage rate % 9.21% 4.65%   0.0   -49.5% -6.6%

You should base your own judgments on this Reserve Bank of New Zealand sourced data. (This story is based on RBNZ series C21, M5, and data sourced from Stats NZ Infoshare.)

In my view, the main thing that jumps out here is how 'normal' most changes are. Remember, the 10 years we are reviewing encompass the GFC.

And the unusual data here is related to the improvement in servicing, all driven by very much lower interest rates.

Interest rates would have to double to push us back to 2008 levels - and if that happened, there is little doubt that asset prices would fall sharply. Yes, that is a risk, and a painful one at that for some households who took on high LVR debt recently (or households that are using their equity to 'invest' in residential rentals). But for most, the risks are low even with a doubling of interest rates. To be fair, the chances of rates rising are very low given the tame loan demand in the wider New Zealand economy and the very flush household bank account growth. We would need to get back to the economic growth we had in the 2015 to 2017 period to see any threat to interest rate rises. Since 2017 the prospects have certainly dimmed.

One key risk obvious from the data above is the long term under building of residential dwellings. We may now be facing up to that, and a consequence is it could underpin economic activity for another 10 or so years. Dealing with the housing issues should make for the sustainability of the overall economic situation.

This is not to say that there aren't rough edges and particular issues that need addressing. But overall we are in a similar debt-level situation now as just before the GFC, but with debt servicing significantly easier.

We don't know how lucky we are.

Investing in residential real estate to rent is a business. And the assets, liabilities and revenues of this business should not be mixed in with normal household finances. It isn't in other countries and it isn't right to do it in New Zealand. The headline household debt-to-disposable income figure of 166% needs to be deconstructed to be properly comparable. Without the 'renter liabilities', this reverts to just 126% and is how we should compare ourselves with others, like Australia's 202% or Canada's 171%, or the USA's 93%.

And for reference, this ratio was 117% in 2008. (On a per capita basis, the data is 126% in 2018 and 117% in 2008).

We are not pushing out to unsustainable levels now, and even if they creep up a little, we are far from that point.

This message won't stop the breathless doomsters, but at least you now have the raw overall data to form your own view.

And just in case you want to know what that $877 billion in household financial assets consists of, here is the detail:

      cumulative
as at June 2008 2018 change pa
  $ bln $ bln %
Notes & coins 1.891 3.635 +6.7%
Deposits at banks etc. 89.944 174.379 +6.8%
Debt securities 4.854 3.494 -3.2%
Loans 0.750 0.290 -9.1%
Equity & investment fund shares 427.885 594.950 +3.4%
Super funds & life insurance 41.148 100.470 +9.3%
       
Total household financial assets $ 566.471 $ 877.219 +4.5%

The fast growth in bank deposits, and the emergence of KiwiSaver have been the main drivers.

*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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This is good news for a Sunday morning. Awesome work Mr Chaston.

Investing in residential real estate to rent is a business. And the assets, liabilities and revenues of this business should not be mixed in with normal household finances.

Indeed, indeed.

I agree it is a business. However, there are accidental landlords, those that bought another one for retirement, jumping on the bandwagon to keep up with the Joneses (those bloody dinner parties) etc etc.. Its business Jim but not as we know it

You dont hear of people buying the local dairy for retirement (also a business), at least I dont. Accidental bookshop owners...

Some call it a business.
Id call it a people Ponzi scheme.

"Investing in residential real estate to rent is a business. And the assets, liabilities and revenues of this business should not be mixed in with normal household finances."

Perhaps I’m missing the point - but I would suggest that they can be very much intertwined.

I doubt that for many small timers there is no definitive firewall between the household finances and their residential rental business – and consequently where one goes so may the other.

No more intertwined than if you had another sort of business. Raising capital on the equity in a family home to put into a business would be quite common I imagine.

What tends to happen with a rental property is that an owner may put in 500-1000 a month but will have a mortgage free home. I did this for many years but eventually I got into a position where the rentals were paying me 500-1000 a month.

When you don't have a mortgage on the family home the money you would ordinarily put into a mortgage or rent may as well be channeled into some other investment. Leveraging seems a sensible strategy in Auckland anyway.

Yes, and I have done the same – sort of.

Anyway, and not wishing to labour the point – you mention you were putting in $500 - $1,000 into your “rental business” at one point – what if, and for whatever reason, you were sadly at some point unable to continue to do so.

It may have been because the economy had suffered a downturn, income perhaps dried up – heaven forbid, you may have had to sell your rental property to stop the bleeding, but the possibility of negative equity then looms. You now cover the shortfall after sale with a new mortgage on your previously mortgage free home.

As you say – “Raising capital on the equity in a family home to put into a business would be quite common I imagine.” – except if the “business” is residential real estate – the initial security and subsequent “business” are, in some respects, fully aligned – again, where one goes, so may follow the other.

The last couple of decades have been relatively kind to leverage and residential values – all I’m saying is that this may not always be the case in the future – and I do question the separation of household finances and an associated residential rental business when it comes to current and future risk analysis.

Hi Custard. Looks like the banks are really ramping up their 'brainwashing' to keep David's aggregated household asset values underpinned.

https://www.youtube.com/watch?v=9khstFJD3R8

https://www.youtube.com/watch?v=tsAO5yVeEO8

Unbelievable! I'm often stunned by TV ads when I see them as I dont watch it at all. But those...

Hi South_island_Simon

I don't watch TV either but my wife does occasionally and this caught her eye. So we haven't had any irresponsible lending in NZ? We've definitely had irresponsible advertising by the banks though, the two to me would seem to go hand in hand. The whole system just stinks, and the panicked promotion of the 'debt for equity' trap.

In NZ during the GFC not many people lost their jobs. So things were fairly good here. You can imagine a scenario where people did start losing their jobs. There would be a very different outcome.

Perhaps someone could answer this for me; The difference in yield on a 2 year US treasury bond and a 2 year NZ fixed mortgage rate is currently about 1.5%. This just fundamentally doesn’t seem right? That’s saying the risk premium of lending to a guy with an average job to buy a decrepit property in provincial NZ is 1.5% more than lending to the US government commanding taxation over a 21 trillion economy and the the most powerful military of all time... what am I missing?

I'm no expert but I imagine that 1.5% makes all the difference. Banks have to pay out interest to depositors and cover all their running expenses so they could invest in 2 year US treasury bonds with depositors money and lose money or they could lend it to the guy with an average job to buy a decrepit house and make a handsome profit.

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".. the chances of rates rising are very low..." They are 50/50, as every binary decision based on chance is! If it wasn't, rates would be somewhere else, that then would also be 50/50.
That's why markets' settle' - there is an equivalent 'chance' of moving from a pivotal point in either direction.
And point me to the wiseacre that told us in 2007 that USA and many other Global Interest rates would push down to virtually 0%! If anyone had called that in September 2007, they'd have been marched off to the FunnyFarm. Massive hyperinflation was supposed to happen after that! did it?

$100,000,000,000 worth of additional debt is $100,000,000,000, regardless of what happens to the 'value' of asset backing of the debt; regardless of a change in interest rates and regardless of a change in GDP.
Debt is Fixed - all else is Variable!

Umm, no. It will either rain tomorrow or it won't, but the chance isn't 50/50. I will either die tomorrow or I won't and the chance definitely isn't 50/50. Just because a (fair) coin has a 50/50 chance of heads or tails does not imply "every binary decision based on chance is." Similarly, if there are three possibly outcomes then they don't have a 1/3 chance each, in fact it would be very rare if they did. You can trust me on this but in case you don't:
"This may arise due to a misunderstanding of probability; that two outcomes or positions lead to a probability of 50:50 for each, and so both deserve an equal chance to put themselves forward. In fact, probability is not necessarily equal." from https://rationalwiki.org/wiki/Balance_fallacy

bw,

Avatar99 is quite right about 50/50 chances. The best book I know on this is The Drunkard's walk by Leonard Mlodinow. Well worth reading.

Can also be learnt during high school stats class 5th form; if still having trouble ask any 15 year old that's into math - and yes i do mean to be patronizing as this stuff is easy and you getting it wrong undermines every comment you post. Zero tolerance for bad math on a financial forum.

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For a nation that apparently promotes home ownershi or tv shows about home ownership the numbers simply reinforce the skewing of wealth since 2008 With a population increase of 625500, an average of 3.5 per additional household,(forgetting flow and stock or indeed the difference in actual numbers in a home of renters or owner occupied ), the period of historically low interest rates has highlighted ' building 'inequalities, which neither Kiwibuild or higher mortgage rates alone will fix. For those that can access credit or debt ,they have done so in bucketloads ,made out like bandits,yet for an increasing percentage of Kiwis their economic futures appear less secure and more reliant on other agencies to remain afloat.Does this make for a better New Zealand?

Nope. A couple of things could help sort that. Disallow investing in existing properties, other than properties where an older single dwelling will be demolished to allow multiple units on the same section. If you want to build a rental portfolio, then do just that, build it, and insist that banks charge the same commercial rates for property investment as other businesses.

Cowpat, this article is about household debt and how vulnerable the debtors are. Your comment seems to be about equality and fairness in NZ. Maybe you can write a separate article on the topic you refer to?

To my surprise I note a compound yearly increase of disposable household income of 3.9% = 46.3% over the last 10 years, much higher than I expected

Yes , Yvil I care about all creatures whether perissodactyls or those that come dressed in sheeps fleece.
.
Yvil out of curiousity, on the figures above what is the average percentage change in mortgage debt over the decade per home owning household . Remember mortgages or financial liabilities are not solely about the stock , you also need to look at the flow.

It seems from David's numbers that people in NZ are living with marginally larger sized debt than before, as debt grew faster than the population, and much faster than the growth in the number of households.

What I'd really like, is to see an age-structured population graph consisting of people who can service a mortgage of 30 years in duration (that's everyone aged 18-35). Else I am just stuck with the total population, or the number of households which is less meaningful than the number of people who can theoretically get a mortgage.

Hi Jock

You may struggle to get your hands on that, but this is an article from 3 years ago predicting that 1/3 of kiwis will hit 65 with a mortgage. How does that happen you ask when they are the ones who paid shillings for their houses 40 years ago? Bit of greed, bit of bad planning, bit of getting sucked into the gamblers den! That's why Uncle John left the doors open.. Pile some pressure on housing resources and hope that the elderly are able to get out with a debt for equity swap.

https://www.stuff.co.nz/business/money/72598973/A-third-of-Kiwis-will-ha...

Thankyou David nothing like a bit of common sense and real data. You just ruined the DGM's Sunday guess they will find something else to focus on !

Top notch article, cheers David.

The New Zealand economy isn’t the Celtic Tiger that so many here seem to hope it is.

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It's a very uneven economy, while we have those already owning houses making huge unearned income , a lot of investment in unproductive assets, we also have people working on dairy farms for $17 an hour.

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Good article.
What it doesn't address is the 'fat' to cut interest rates that we used to have. There's far less room now to wiggle out of a downturn.

Are we just as lucky to have just 8% of households owe just 40% of mortgage debt?; https://www.stuff.co.nz/business/money/104323467/reserve-bank-says-8-per...

Davids article certainly indicates cheaper money has kicked the can. I wonder how many debt shackled farmers would interpret this article differently. More and more are having to front up with a stronger business case as opposed to an increased property valuation! Its highly unlikely the next financial crisis will deliver us a much needed white knight as China did previously. It's more likely to deliver sustained and much higher levels of jobless.

From the article:

But it also reported that much of the country's record high household debt was concentrated in the 8 per cent of households which own investment properties.

I thought we had established that we don't need to include these folk in the high household debt worries.

Zachary, noting you're probably one of the 8%, no rug is big enough to sweep this under - lol!

It's not a glaring problem until the downhill leg truly starts. The chance of that happening soon are increasing.

"just 8% of households owe just 40% of mortgage debt"

Makes for a great headline for the layman who will interpret it as "OMG these 8% of households are so over leveraged and in massive trouble" until one realises that these 8% of households also own the majority of real estate assets.
Quote from your own link: "much of the country's record high household debt was concentrated in the 8 per cent of households which own investment properties".

There are a number of property investors who have a large portfolio of investment properties financed with debt. Some have low loan to value ratios, whilst others may have high loan to value ratios. Some may have high interest coverage ratios, some may have low interest coverage ratios. Some are using interest only loans, whilst others are using principal and interest only loans. Different borrowers may have different debt covenant restrictions in their loan agreements - banks and lenders classify borrowers as retail borrowers and business / commercial borrowers.

There is increased vulnerability for a borrower if they are highly indebted, have high debt balances relative to a lender's single borrower credit concentration exposure limits, have debt covenant levels which are close to their debt covenant restrictions, have low interest coverage levels, have negative cashflow from their investment property(ies), low liquidity levels, etc. Given the increased vulnerabilities, they are potentially more financially sensitive to a small change in the borrower's circumstances, or to one of the above variables, or to the credit environment or to the overall economic environment and this could cause financial stress for the borrower.

Higher debt levels generally result in lower ability to ride out adverse circumstances. Property investors are generally optimistic and may not have prepared for economically difficult environments. For example, how many interest only borrowers can afford to make payments when their loan turns into a P&I mortgage - many investors who financed their property purchases in 2013 - 2015 with these types of loans when the credit environment was very different, may have assumed that their interest only loan would be refinanced at the end of the interest only period. Under current credit conditions, this may not now be the case. I have heard mortgage brokers seeing this happen very frequently recently. Bear in mind that the economy is nowhere near an economic recession with higher rates of unemployment, so what is likely to happen in that economic environment? Another area where highly leveraged borrowers get caught out is an unexpected need for liquidity, and sometimes that need for liquidity is urgent.

Given that these property investors own a large number of properties collectively, in a financially stressed environment, they could look to sell their properties within a short time frame. If a highly leveraged property investor (or investors) with a large property portfolio comes under financial stress, then they could look to list a large number of their property portfolio for sale at the same time - this is the impact of concentration of debt with a small proportion of the population. The laws of supply and demand would mean that more supply of properties listed on the market for sale, may overwhelm the demand in the property market, which would have a potential impact on property prices.

The impact on property prices would likely have an impact on broader economic activity and the credit environment. Lower economic activity may result in higher unemployment as businesses cut costs due to falling revenues, which then would potentially put financial stress on highly leveraged owner-occupier households, especially those where two incomes were required to service the mortgage on the house. Those owner occupiers who wish to downsize to cut costs or others who face financial stress, may also look to list their property for sale further adding to the listings of property for sale and may put further downward pressure on property prices.

A property price drop may cause lenders to reassess the collateral value supporting the loans for property investor borrowers. Some which are highly leveraged may suddenly face a liquidity issue in a falling property price environment.

Wow, what a long post.

The bigger investors $100 Million + are also the most astute and I put it to you that they are a lot less vulnerable that the mum and pop investors who bought 1 house in the last 3 years. Therefore, owing more to the bank does not at all mean being vulnerable. I'm much happier owing a few millions to the banks with equity of 60% than owing $500 k with equity of 10%

And much more importantly, debt servicing is very much easier now, an item that is almost universally overlooked.

That's the most important bit in my view. What happens if debt servicing becomes a whole lot harder?

It seems these days the biggest fear by far is rising interest rates. Unless all hell breaks loose how can they drop much further? If we all want a return to a normal and thriving global economy that's no longer on life support, then borrowers need to factor in much higher interest rates.

When you look at what some other countries charge for mortgages it look to me like we could still go considerably lower. Our rates are quite high:

https://www.deposits.org/world-home-loans.html

Yeah, like Germany with a 1.07% mortgage rate and a 0.1% deposit rate. Netherlands with a 1.2% mortgage rate and a 0.05% deposit rate.

Maybe we should ask Boatman what he thinks.

by Boatman | Wed, 19/09/2018 - 12:24

Maybe they could give us Boomer - aged depositors a better deal on our savings for starters

Switzerland, mortgage 1.2% deposit rates 0.3%

RP is a depositor and therefore wants/hopes rates to increase

When you look at what some other countries charge for mortgages it look to me like we could still go considerably lower. Our rates are quite high:

Then bank shareholders' returns will suffer. Do you really thnk that home loans can and should be as cheap as in the EU?

Nzdan, here is D Chaston's response to your question, it's in the article, please read it in full.

"Interest rates would have to double to push us back to 2008 levels - and if that happened, there is little doubt that asset prices would fall sharply. Yes, that is a risk, and a painful one at that for some households who took on high LVR debt recently (or households that are using their equity to 'invest' in residential rentals)"

My question was rhetorical but thanks.

"Interest rates would have to double to push us back to 2008 levels - and if that happened, there is little doubt that asset prices would fall sharply. Yes, that is a risk, and a painful one at that for some households who took on high LVR debt recently (or households that are using their equity to 'invest' in residential rentals)"

Depends on your assumptions, which in David's argument is "all other things remainig equal." For example, availability of credit for mortgages has been restriced by up to 40% because of changes as to how borrowers have been claiming living expenses and the benchmarks that banks have been using. That has all changed in the P3M and interest rates have barely moced.

Very good for David putting this together. As an aggregate, it looks like the "same old" and NZ h'holds have not been on an unsustainable debt binge nor are our households worse off than comparable countries. I think it is good to point out the following:

-- NZ house prices came off a low base during the whole global shift to "bubble economics", which became more pronounced during the early 2000s. Debt accumulated on housing at that time and before, let's say even up to the GFC, is incuded in this aggregate. Now let's say that you're going to purchase a representative house today, while your debt servicing is going to be lower as a proportion, I very much doubt the debt load will be more manageable, particularly as a nominal amount relative to income. Unless, of course, you purchase a property of a much lower standard than in the past. That is not what we should call "progress".

Vulnerability exists. It's just not obvious to those at the latter end of their lives. These are the same people who like to project their standards to younger people about how they should live as an economic agent. The challenge for them is very real and it deserves everyone's attention.

-- Given that the aggregate is backward looking, what does this say about vulmerability going forward? Are income growth, credit accessibility; and money printing going to move like in the past? If those questions are unknown, why does that suggest NZ h'holds are not vulnerable? Are we going to show the Japanese that we know how to do bubble economics? (On that note, Japanese h'hold debt to disposable income and GDP were never as high as in NZ at this time). There seems to be an understanding that credit growth can stall and everything can truck along as normal. Good luck with that.

-- House prices are arguably useful for consumer spending, the bedrock of the economy. If everyone is so comfortable with their debt levels and serviceability, then why are 40% of FMCG manufacturers resorting to discounting to meet sales targets and incremental sales? That suggests that there is real pressure among shoppers and tightening budgets. It doesn't add up with "everything is hunky dory" in a representative NZ h'hold. NZ is the highest price discounter in the world, according to Nielsen.

Very thoughtful. Regarding your last paragraph, don't forget that the difference between now and before GFC is we have kiwisaver which defers between 3-8% of everyone's spending until retirement. That plus the marginal increase in debt must surely combine to dampen household spending.

Correct. Kiwisaver is a burden on disposable income and consumer spending.

Yes/No. Look at the percentage thats going out each month propping up the FHB segment of the housing market.

So what are these property and financial assets going to be worth after another melt down ?
And around 40% of households are renting how will they fear ?
Central Banks have repressed interest rates for so long do we really know the true value of anything any more ?

When we measure everything in monopoly money, are only concerned with increasing levels of perceived "wealth", do we really know the true value of anything?

THANK YOU SO MUCH FOR THIS DATA DAVID CHASTON. I admit I was unaware of it and it allows me, (all of us) to draw our own conclusions, without the subjective hype.
Possibly the most important, informative article of Interest or any other media in recent times.

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Lets see how it all plays out in the next downturn and then we will really be able to see where things were at. Kiwi's were stretched with debt in 2008 and they still are with a large amount living week to week and wage growth extremely low. Since 2008 interest rates halved and instead of Kiwi's reducing their household debt like other countries did, we decided to take on more debt and even larger mortgages too. The one thing this article fails to point out in its key data is our household savings rate which has been falling these past 3 years and is now at minus 2.8%. Given the record levels of household debt, negative household savings, sluggish wage growth and everything else going on things are unsustainable. A flat sales and rental market in Auckland while we are meant to be having a housing shortage is a telling sign that things are unsustainable and the market has hit its affordability limits. To be honest I'm not convinced by this data above as it doesn't give a true reflection of where things are really at. Time will tell I guess but given the global situation at the moment and economic troubles brewing across the world I'm happy to play things a bit safer and smarter with our investment strategies moving forward.

Adam, here are some of D Chaston's data:
per capita
- H/h financial assets $ 132,981 179,563 46,582 35.0% +3.0%
- Net h/h financial liabilities $ 32,136 43,993 11,857 36.9% +3.2%
- H/h disposable income $ bil 116.880 170.953 54.073 46.3% +3.9%

Your narrative above seems to contradict these numbers, are suggesting D Chaston's data is wrong?

I'm suggesting this article paints a far more rosier picture than what is actually going on out there and it certainly doesn't give a complete picture of things. The data may also be misleading in the way it was collected and presented. I need to look into it all further when I have time.

So based David's numbers we can conclude that:

Each and every person owns $179,562.97 worth of property, with financial liabilities of $43,992.79.

Because surely you just take the household assets and household liabilities and divide that by the total population of New Zealand?

Could it be a case of on average being quite well except for the blue feet? Averaging over a whole country ignores the sore spots.

The one thing this article fails to point out in its key data is our household savings rate which has been falling these past 3 years and is now at minus 2.8%. Given the record levels of household debt, negative household savings, sluggish wage growth and everything else going on things are unsustainable. >/i>

Yes. Furthermore, given that house price growth has far outstripped people's ability to earn and save for a prolonged period, to suggest that vulnerability is sommehow benign is arguable.

"debt servicing is very much easier now, an item that is almost universally overlooked"

Indeed as exemplified by the DTI. As I have mentioned before and as any decent accountant would confirm, Liability (Debt) should be compared to Assets and Income with Expenses but DTI compares Liability (Debt) with Income which should never be mixed.

Here is a plain example why this is wrong: Let's say we agree a DTI of max 5 is agreed upon for new bank loans. What happens if (hypothetically) interest rates were to double? Well borrowers would find their cashflow severely reduced yet DTI's would not change one bit (D = debt is still the same and so is I = Income). That means DTI makes no difference to bank lending wether interest rates are 5%, 10% or 2.5%

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This thread seems to attract the over-leveraged.

An article about household debt attracting commenters that are leveraged? Do you really think so? Insightful!

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You are clearly one of those in the overleveraged camp.

Thanks for your concerns, although not very genuine I suspect ; )

Guwop, well said. Yvil having posted 11 comments here, he/she is self outed as a quivering member of the 8% club.

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and thanks for including me in the 8% wealthiest people in NZ, RP

Yvil. Indeed ! I personally have zero debt but nevertheless think this interesting article and the insightful commentary thread, are very informative. Too often we are fed by breathless media the notion that most of us are in hock to our eyeballs, that debt stress will cause widespread trauma when the GFC apocalypse horsemen ride in. Shallow alarmism spun by lazy journalists. DC’s quality research, analysis and logical conclusions yet again demonstrate the calibre of this site and many of the commentators it attracts.

The major concern I have is this article is using aggregate data and is using averages as well. A great number of sins can be hidden in aggregate data / averages. As quoted above 40% of debt is held by 8% of households. Without further break down the statistic can be considered meaningless. What percentage of income is used to service this debt? It is the concentration of debt and the amount of income used to repay that debt that I would consider more important. I would hazard a guess that a majority of households would have a low percentage of income used to service debt but as you move from left to right on a graph the percentage of income increases till some will be expending over 100% on income on debt servicing (those recently unemployed). While most of that 40% debt is with those with investment properties how many of those are using negative gearing to make the numbers "work". What if things change....

Ask better questions and get better answers.

BRobot. But even if it is crude, the 8%/40% ratio challenges the media promoted narrative that a broad swathe of NZ is heavily exposed to potential debt stress, when clearly it is not. It’d be terrible times for those forced to become jingle mailers but, in perspective, a relatively modest minority, not the Armageddon predicted by some.

While true - it could be that that small group of debtors, could cause a major financial crisis. The thing is, we just don't really know and many are quite willing to be ignorant and just put it in the too hard basket. The concern I have is that the RBNZ should be honest and say that they really don't know and they are just hoping and praying that it all works out OK.

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WHICH households are so lucky Mr Chaston?
The 86% of under 30 year olds in Auckland who cannot afford a mortgage?
The children of the Maori prison population (50% of it)
The people whose wages are now 10% lower as a share of returns on national income than they were 30 years ago, due our employer-cuddly laws ?
Those with no wealth in assets at all, compared to the owner occupants with multiple rented out houses (where 20% of the landlords have 80% of the property rented out?
The minuscule % of the population who own shares?

Now look, what's really important here is that a bunch of overseas buyers have made a lot of money. They were obviously poor too.

And those millenials are too busy on their iPhones etc. Their fault, no work ethic.

Yeah I don't believe this article. The RBNZ (where the stats come from) aren't impartial either.

A few nincompoops who disagree on "don't panic" whom you are labelling "doom and gloom":

Warren Buffett; George Soros; Steve Keen; Martin North; Schiller; Mauldin etc etc

By the by: servicing ease = 40 year loan instead of 25 years 30 years ago: which equates to a lot longer paying interest - meaning the bank, due to compounding, makes more money. wage slaves a lot longer then....

For those of you who understand economics and want a look at debt crises - Link to free pdf file of book - https://www.principles.com/big-debt-crises/

Downloaded that a couple days ago, will get stuck into it in a few days after I finish Dhandho Investor by Pabrai.

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What Mr Chaston seems not to get, is that 'household assets' is actually the same houses that were 'assets' ten years ago.

Which means the assets are the same little boxes on the hillside, owned by Kiwis, as they were ten years ago.

But Kiwis owe the banks twice what they did. And the houses are ten years older.

It also means that the buy/sell of a house isn't a 'zero-sum-game' - it's an 'increased debt to the bank' game.

One thing is certain - that game doesn't go on forever.

Why can't it go on forever pdk?

It cannot go on forever of course. It CAN go on for a long time ( hundreds / thousands of years .. rather like fossil fuels :) ) .
PDK of course thinks that if the world is to end it will happen no later than tomorrow,.

Debt holds commodity prices up. The system requires MORE debt to keep operating and the only work around now is ever lower interest rates ... until they cant go lower.
If your "Debt"= money loses its value, you cant get your fossil fuels out of the ground.

So its all about FAITH in the value of currencies holding. Which you might find can evaporate very quickly when Money really is free. If your token doesnt buy you some energy ... it aint worth squat.
You dont run out of fossil fuel ...but its of zero use if you cant burn it... as Venezuela is finding.

Not correct. If you have owned your house more than 10 years you do not owe the bank twice as much for it. If fact if you went hard in paying off the mortgage for 15 years like I did you owe the bank nothing for it. What is VERY difficult is to just look at a load of data and work out everyone's exposure to a serious GFC.In fact I would say it just cannot be done accurately. You don't know for a start how much money individuals waste on discretionary spending and how much they are prepared to pull their heads in during a recession. This does become obvious however after a crash as people begin to default. How many people are in the seriously over leveraged position ? what percentage of households will fold if interest rates double ?

You've missed the point. Household liabilities up 54.9% from $183,597 to $284,332. But David makes things look cherry by ratios to assets comparisons - BUT the assets are the same old dog boxes - just 10 years older. Their values are based on the ponzi property bubble.

The assets will go down....the liabilities won't. Then watch those ratios blow out.

This is a terrible article.

Using aggregate numbers, as the article does, we could infer that roughly 200,000 - 220,000 people currently qualify to comfortably pay off an average mortgage* and have enough room to weather the worst when interest rates increase. That's quite a large pool of people, and it also ignores the different household or mortgage compositions (i.e. two or more incomes) so it might be fair to guesstimate up to double, or even 500,000 "entities" capable of servicing an average mortgage.

Working on from that, it becomes obvious that in order to gauge the vulnerability of housing in New Zealand, we need to understand the market distribution and participants. In order to measure vulnerability, we need to know as much as possible about those 200,000 individuals or *possibly* up to 500,000 "entities".

*Based on income data from Stats NZ/IRD.

I recall one of the Banks, possibly ANZ, detailed the LVR composition of its mortgage portfolio, which is another data source. I recall it didn’t show any concern either. Looking through the responses it’s clear that some believe what they want to believe no matter what the data and some even went off the reservation to give it a political twist. If people don’t like the price of existing houses, they can build their own.

Hi David, Thks for this article. I'd like to add this idea:
That , the economy todays is a 2 level economy.. ( the top 40% and the bottom 60% ). ( This 2 level economy is a consequence of growing wealth inequality...I think )
If one accepts this idea ( I do ), then aggregate statistics can be misleading.. ( I'd say the are misleading ).
Ray Dalio worte a good piece about this :
https://www.linkedin.com/pulse/our-biggest-economic-social-political-iss...

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

An interesting read about Fonterra in Chile... They are predatory and making a mess of things...
( Chasing short term profits at the cost of long term relationships and strategies )....duh..

In a downturn of course asset prices will drop, supposing a housing bubble. Interest rates will rise, reducing affordability. The figures won't look so rosy then...

In reality a 2% increase on borrowing costs would collapse the system. They don't even need to go to 8 or 9%. Not a lot of leeway given what's already happening with inflation on household costs.

Great data David. Is it comforting? I'm not so sure it is and I still feel it is irresponsible to mark houses at mark to market aggregate value, not sure what the alternative is but it doesn't work like that in reality so I have to question the strength of the household 'asset' table. If 4 in 10 Barfoot listings have been withdrawn this year (as their own data suggests), what are the 4 that didn't sell really worth? and volumes of sales aren't rocketing up.

Glad to see your still around working on your personal development.

"It became apparent that the smartest person in the room isn’t always right. In fact, most of the time their intelligence works against them because they’ve become so sure of themselves and their investing abilities that they’re unable to change their mind or accept the fact that the markets don’t care what your IQ is."

Source: https://www.morningstar.in/posts/45177/smart-people-can-bad-investors.aspx

That's wonderfully simple Simon.

Still I'd always take IQ as giving a big advantage! Sheep tend to follow and also are easily scared, most don't have the IQ to do anything other than run with the other sheep, in whichever direction the herd takes them.

Real investors are shepherd's, not sheep.

Wonderfully simple? Thanks, I'll take that as a complement Mr complex Jargo Nic.

"I’ve also realized that the people who go out of their way to make things sound complicated and use excessive jargon are overcompensating. The best investors in the world have the ability to explain complex topics and strategies in a way people can actually understand them. It’s always a struggle to keep things simple in a complex world."

Source: https://www.morningstar.in/posts/45177/smart-people-can-bad-investors.aspx

Quoting an article that references Ben Graham. brilliant.

Now Ben is a massive advocator of 'value' investing and getting value from the underlying investment. I can't ever seem to remember him advising massive leverage to support prices for other people who bought the same value investments much earlier in the cycle. If you can find it in his teachings I'm happy to stand corrected. As for references to 'emotional intelligence' the confidence survey published in the herald should give you an indication of where market expectations are for the coming months. if you read more than just the one article that you've referenced three times today you will also see his warnings about how markets often get oversold in a downturn to create the opportunity for 'value' investing once more.

Markets are largely about timing of a purchase and not paying too much for the underlying asset. But you only got into the game in the last couple of years didn't you. Should have read a bit more before you did.

I'm very familiar with Benjamins work have read and reread intelligent investor and securities analysis. His chapters on the idea of intelligent speculation are very interesting. He ends by saying essentially you can never end up winning long term if you speculate. He defines investing as a sound return on capital and security/safety of the principle. You think money in the bank is safer than property?

You are on record speculating. You speculate that property prices will fall by large amounts. By taking this speculative position you are no better than someone who buys a 3% yielding Auckland house based solely on the hope prices will go up. Both of you are taking a big speculative position and haven't looked at investment potential based on return on and safety of principle invested.

I'd have to be invested in 'shorting' the New Zealand housing market to have a speculative position. I don't hold a position so their is no speculation. As for buying a 2-3% yielding house in Auckland without realising that the fact the yield was so low has already removed any possible capital gains, now that's speculation. To do it with leverage, would be even more daft, therein lies the problem with the housing market, lots of people have done exactly that because of speculation and gambling is a NZ affliction which the changing demographics have done nothing to improve. Sound understanding of the principles, nah, it's been leveraged gambling.

Based solely on the time you invest in posting about property - always with a very bearish spin - you have already invested a lot - and its very clear you dont own but wish to one day own (ideally at a 40% discount to current prices!) and you would like this to happen sooner rather than later as you likely arent getting any return on wherever it is crazies like you keep their net worth (cash under mattress?).

The loss you are scared of is the opportunity cost of NOT buying sooner - You could lose 10's of thousands or hundreds of thousands if prices go up a few % per year while you wait for your predicted crash to happen.

So you have taken a position it's very clear - I'm not a big fan of the dynamics in NZ that lead to property prices getting so expensive - but to not have any exposure to property in a country like NZ is in fact extremely risky - buy some as a hedge against fiat currency at a minimum

You just said that the market value is irresponsible - You then say you cannot think of an alternative. What is value? Gold has limited utility yet the market seems happy to value that highly.

"The smarter you are, the better you are at constructing a narrative that supports your beliefs, rationalizing and framing the data to fit your argument or point of view. After all, people in the “spin room” in a political setting are generally pretty smart for a reason. In 2012, psychologists Richard West, Russell Meserve, and Keith Stanovich tested the blind-spot bias—an irrationality where people are better at recognizing biased reasoning in others but are blind to bias in themselves. Overall, their work supported, across a variety of cognitive biases, that, yes, we all have a blind spot about recognizing our biases. The surprise is that blind-spot bias is greater the smarter you are. The researchers tested subjects for seven cognitive biases and found that cognitive ability did not attenuate the blind spot. “Furthermore, people who were aware of their own biases were not better able to overcome them.” In fact, in six of the seven biases tested, “more cognitively sophisticated participants showed larger bias blind spots.” They have since replicated this result.

Source: https://www.morningstar.in/posts/45177/smart-people-can-bad-investors.aspx

As I said above, the data you really need is how many people are seriously over leveraged and simply would not be able to service a mortgage rate that doubled and yes I mean doubled which is not a remote possibility if you have 10+ years on it left to pay. Coupled with this could see you house price falling but you would have to sit tight and just weather out the storm if you financially could do so. I don't think a 2% rise in interest rates would collapse the system. It would alter peoples spending habits and you would have to prioritise your spending or else find yourself on the street.

if everyone "prioritizes their spending"... you get deflation.
The debt growth has to come from somewhere.

David - You cant monetize the housing stock. The so called wealth is a meaningless digital token.
Its incomes that are the issue in a GFC.
How do incomes holdup when debt dries up? When interest rates cant go lower?
When your tenant is jobless and reliant on Govt money printing, how long till he misses the rent?

So we are doing fine .

We are all doing exactly as we choose to believe!

One thing that is not mentioned is that fewer people own property today than 10 years ago - so the debt is concentrated in fewer, more leveraged, hands. In fact 8% of borrowers owe 40% of the total debt. So when that over leveraged 8% fold, they will take the rest of the market with them.

Everytime i see that 8% number mentioned it reminds me of this:

https://youtu.be/xbiDrzTd8fE?t=2m22s

Not really when the 8% fold, others in a better financial position see it as an opportunity. There is no end of people waiting to move in on your financial hardship caused by a GFC or even your marriage breakup when you are trying to sell the house in a hurry. The market will keep going until we hit a major shit storm. Nothing has really changed, start paying that debt down as fast as you can before it hits the wall.We really don't know whats going to trigger the next crisis but you can control the impact it has on you to a large degree.

Here we go again with the 8%, copy & paste from my post above:

"just 8% of households owe just 40% of mortgage debt"

Makes for a great headline for the layman who will interpret it as "OMG these 8% of households are so over leveraged and in massive trouble" until one realises that these 8% of households also own the majority of real estate assets.

Which means that the market value of real estate in New Zealand is set by 8% of households, which further reinforces the fact that using aggregate numbers are meaningless. In general, the systemic risk to real estate prices is going to come from Mum & Dad investors with 1 or more rental properties. If they're cash flow positive from rent, then the risk shifts to the segment of tenants that can afford to rent their properties. Then we can perhaps draw inference on the risk from aggregate numbers, however this presents another problem that crosses over into geography and how the different groups of participants (direct and indirect) are concentrated. As an example, we'd need to know where Mum & Dad investors are concentrated, and then model the demographics of those areas to understand the indirect risk derived from tenants employment outlook. I generally use "type" models wrapped around life stage scenarios and unforeseen event scenarios. For example, again, if say Whanganui has a concentration of Mum & Dad investors, and the tenant group is hovering around an age of say 25 - 35, and in order to maintain rent + lifestyle two incomes are required, then I look to map Life Stage "Pregnancy/Start Family" and Unforeseen Event "Unwanted Pregnancy". Then taking that further to things like employer distribution, so areas where a lot of people are employed by one or two big companies (factories, mills, mines, etc.) all follow economic cycles and their mass lay offs are quite easy to predict. The hard part is understanding the thresholds, as in, what percentage of this group of people need to go through certain life stages or events in order to create sufficient pressure that we see mortgagee events, or "moving towns for new work or cheaper accommodation", etc. The more interesting modelling comes from positive events too, such as people upgrading their lifestyle - moving to a better town, moving to a better job, etc. Can't just focus on the negative risks - there are positive too.

Debt is the only way people will get ahead financially.
It has to be good debt though!
Providing you can afford the repayments and you have invested in something that is safe like houses and it is positively geared always, then you will do well.
Personally wouldn’t invest in the sharemarket however we do have a large portfolio with an investment manager, however it wasn’t thru my investing!!