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

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.

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?

".. 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!

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?

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.

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.

https://tradingeconomics.com/new-zealand/current-account

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.

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-pe…

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.

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?

https://www.thincats.com.au/blog/banks-just-want-houses/

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.

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 ?

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.

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.

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%

This thread seems to attract the over-leveraged.

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.

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?

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/

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.

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.

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=12…

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.

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.

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 .

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.

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!!