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 $284 billion.
Click-bait commentary decries the jump. It is everywhere. Apparently there is reason to be fearful of the massive rise in "unsustainable" household debt. A reckoning is coming; end-of-the-world bunker sales are on the rise. Rich Americans are buying their New Zealand bolt-holes. Prepare to panic.
Except it is a mirage. A silly beat-up.
The fact is, debt levels have barely changed from the beginning to the end of those 10 years, compared to GDP levels, compared to household assets, compared to household disposable incomes.
And much more importantly, debt servicing is very much easier now, an item that is almost universally overlooked.
Here is the key data you should think about before jumping off any nearby cliff:
|as at June||2008||2018||change||change||change pa|
|Household financial assets*||$ 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%|
|People per dwelling||#||2.5||2.6||3.4|
|- 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%|
|2 yr fixed mortgage rate||%||9.21%||4.65%||0.0||-49.5%||-6.6%|
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 $877 billion in household financial assets consists of, here is the detail:
|as at June||2008||2018||change pa|
|$ bln||$ bln||%|
|Notes & coins||1.891||3.635||+6.7%|
|Deposits at banks etc.||89.944||174.379||+6.8%|
|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.