Kiwis' debt continues to dwarf household disposable income, but courtesy of the low interest rates this debt is still being comfortably serviced

By David Hargreaves

The bad news is that Kiwi households are still in record levels of hock relative to disposable income. The good news is continuing low interest rates are keeping debt servicing costs at moderate levels.

In other words, at the moment, the debt pile is affordable.

The new quarterly household financial statistics from the Reserve Bank show that household debt as a percentage of disposable income was 168% as at the end of the June quarter. This is a record high, though it has stayed the same as it was in March, which may encourage the RBNZ (which has been concerned about the debt levels) to believe that the ratios have now plateaued.

Meanwhile, however, the figures indicate that while the debt pile is high, the serviceability of it - that is, what people have to pay in interest as a portion of their incomings - is at only moderate levels.

In the 12 months to the end of June the interest payments were on average sucking up 8.4% of household disposable income. This figure was again unchanged from the March quarter, but actually down from 8.9% a year ago.

And, to give some historic perspective, at the height of the Global Financial Crisis in 2008 this ratio was up as high as 13.8%.

Then, of course, mortgage interest rates were much higher.

At the moment with the picture for inflation still looking benign the RBNZ's forecasting it won't have to raise the Official Cash Rate from the historically low 1.75% till late 2019.

Late last year and earlier this year, however, banks were noticeably edging their mortgage rates higher in as they faced a squeeze from shrinking deposit levels relative to the amount they were lending out.

However the signs are that squeeze is now abating.

New separate figures out also on Wednesday from the RBNZ on retail interest rates on lending and deposits show that the calculated average floating mortgage rate for new customers in August was 5.84% - the same as it had been for the past two months.

Earlier in the year there had been a discernible move up in the floating rate, from 5.61% as at the end of 2016.

Likewise, the average six month deposit rate had moved up (though not by as much). Having ended 2016 on 3.3% the six month rate dropped down to 3.25% by February this year, before then kicking up to 3.34% in May and then dropping back to 3.31% in June, which is the level it remained at in August.

Going back to the household financial figures, these show that including rental properties total household financial liabilities stood at $268.747 billion as at the end of the June quarter, up from $264.987 at the end of March.

Net household wealth (which doesn't have the value of housing and land included - as that's added in later) was up very slightly in June to $611.495 billion.

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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78 Comments

Blimey that's a concerning amount of debt, I wonder what percentage of debt renters have vs their landlords? All this gorging on cheap credit is going to cause some pain when the piper decides they want paying.

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Super cheap money is the western worlds way of kicking the consequences can down the road.

Money printing is the western worlds attempt to inflate away the debt (not being very successful, pushing on the strong here).

Welcome to the great economic stagnation.

Japan's thinking of negative interest rates at the moment and still can't shift the inflation dial. I may be wrong here, but prior to lowering of interest rates and QE, I can't remember that inflation had too much difficulty rising? Maybe the policy isn't working?

I believe the mental challenge here is understanding that the monetary system acts somewhat like a pressure system.

It is not *only* the raw quantity of money (water) in the system it is also the temperature of that water (velocity of money).

When the system is fully up to temperature small changes in volume make significant differences but if the temperature drops then ten times the volume increase of before doesn't produce any measurable change.

This explains in overly simplistic terms (and not wholly accurate because my specific linking between temperature and velocity of money is not quite right) why QE has no effect right now. They are keeping up huge volumes of water but the bottom has fallen out of the pressure - however the temperature variable links it is very very low right now.

Huh? My pipe has sprung a leak....

I assume you've never studied thormodynamics?

Or maybe, you have NFI what the policy is•¿ Maybe the policy is to stop deflation, aka bursting bubbles. In which case the policy is working.

The debt is at a record level. I don't think we'll get through the household debt problem completely unscathed but hopefully we can avoid the economy completely melting down.

With respect to landlords and tenants it depends on interest rates. Credit card rates and most personal loans are unchanged by the OCR. I would say those with unsecured debt would be unaffected by interest rate changes because they don't fluctuate.

Landlords are probably in a good position right now but a worse position if the rates climb significantly. Which is better paying 8% on $250,000 or 4% on $500,000?

I feel there are (at least) two general schools of thought on the debt problem.

1. The great explosion
The idea that kicking the can stopped a meltdown (like the great depression sized meltdown), but the inherent resulting system instability means any sizeable hiccup will make the bubble burst. Because the safety valve of public debt is mostly full already central banks will struggle to contain it next time (which is very shortly).

2. The great stagnation
The idea that in the year 1900 the average Chinese peasant earned (in real terms) very little more than his ancestor earned in the year 1500. Because the system is inherently stable the can will be kicked further and these things can (and have) gone on for a very very long time and this period has no foreseeable end. Low growth, low inflation, low productivity.

What does 8% on $250k to 4% on 500k mean

Not sure exactly - but if there was a 10% market correction then I know which one I'd rather have

The total interest is the same. However if the interest rate increases the large sum increases at twice the rate.

When people were paying around 8% and the rates went up to 9-10% prior to the GFC is wasn't easy for people but they could cope. With the much higher debt load 1-2% increase will do a lot of damage to household cashflow.

Precisely, the amount to service a loan of $500k at 8% is exactly the same as servicing a loan of $1m at 4%, halve the interest rate, double the debt, which is exactly what has happened here over the past decade (and more if you include Labour's run at it, although the interest rates were still normal then).

The bank doesn't lose either way, which is all fine and dandy, until interest rates start moving up then you're servicing a $1m loan on a 6% interest or 8% interest and you've doubled your payments - can't afford to make them, then you still have a $1m debt. This is increasingly problematic when you have people using interest only loans - much like 50% of specuvestors and many FHBs.

Ahhhh....whaaat?

The amount to service a $500k loan at 8% is not the same as that of servicing $1mil @ 4%, over any period.
Sure the nominal interest amounts may work out the same on any given v 2x principal, but that's not really the issue.

Perhaps this type of flawed financial understanding is what is getting us into this mess.
Seriously, even if you don't have the intuition, there is a calculator on the sidebar of 90% of interest.co.nz pages that you can use to reconcile your logic before posting comments like this.

Apologies Nymad a Steven Joyce fiscal moment there, it's closer to 3% that's the same, I shalln't double down a la Joyce on my mistake and I'll just admit to it instead.

Yeah interest only. Stupid comments and comparisons

If we're making comparisons, up to 2008 people taking out mortgage with interest rates at 9% couldn't take on so much risk. Market corrects after 2008 GFC. People are better off because there risk wasn't that bad and interest rates started coming down helping a LOT. In time interest rates got to about 4.20%, but still the market stayed down for years. NOW People taking out mortgages at low interest rates over the last few year with risk to the max. We correct . Any little thing will wipe them out and some did interest only mortgages and guess what . Interest rates can't come down much to help, everything's maxed out. And we've killed our savers to boot and having to get money from overseas. How's those apples

Yet some wombles insist that there is no problem with the housing crisis and price bubble in New Zealand, and that any suggestion there is and any plan to address the long-term issue in NZ is tall-poppyism, theft, envy etc.

Silly in the extreme.

So you were comparing 2008 with now, well I'd rather have 2008 any day with $250k at 8%. Paying down the principal would be easier and interest rates could change for the better

Rental prices and speed to keep tenanted better stay healthy is all I can say

"Courtesy of the low interest rates"....well that depends what your comparative benchmark is. On a time series chart, interest rates are low; but if you can compare them to other OECD countries, the interest rate differential with NZ is persistently wide. Has worked very well for the Aussie banks in the pursuit of wholesale funding for mortgage lending (clipping tickets has always been easy money) and is the basis for the carry trade. Correct me if I'm wrong.

Stop over thinking everything. Outside and local demand pushed housing to far to fast because of to many. (The brain child of national). Helped with low interest rates. Nz makes RECORD dept levels and unaffordability. Demand ends. Prices will mostly go back to find affordability. End of story

The consumer economy depends on ever-higher consumer spending. If wages are stagnant, how can households spend more money? The conventional answer = Drop Interest Rates, and blow asset bubbles in stocks, bonds, and housing, and then households can spend this newfound wealth.
Sounds good!. But if the 'wealth' of New Zealanders become trapped inside the No 1 provider of 'income' - property values, then what? Lower interest rates some more? That's what will happen....and the self-reinforcing cycle of eventual poverty takes another turn of the wheel as the Pile of Debt continues to rise.....

It's very difficult to demonstrate that consumer spending is being supported by a kind of "wealth effect" from high asset prices (primarily houses), but it's pretty hard to deny that it's not so, particularly given that consumer spending is always elevated in other housing bubbles seen outside NZ. But this behavioral economics, which is not fashionable or often discussed in NZ.

Japan is probably the perfect case of where lowering interest rates has not worked as an incentive tor consumers to spend. Since the bursting of the bubble, Japanese households have been saving even greater for that rainy day and asset and price deflation have been persistent. But the NZ mindset is completely different. Household, consumer, and individual debt is part of out DNA.

DNA seems to change through fire, though. Kiwis were once great speculators in shares, but not so much now. Then it was finance companies, not so much now. When people get burnt badly enough that DNA will likely change.

Wow, I think it's the first time I give a thumbs up to every single comment. Great, insightful comments guys/girls

Agreed! Great and insightful comments.

I note that the average household income was $40791. So in reality we end up with another over quoted statistic, comparing income/household debt, when demographically and in particular regionally a households ability to keep on paying or indeed increasing that debt to maintain wealth could mean a percentage from 0-1000 percent. Using 168 percent sounds manageable , when the reality in Auckland it is not.

That figure isn't an average, it's the quarterly total in millions. So it's $40,791,000 disposable household income per quarter. $160,153,000 total annual household disposable income, and $201,084,000 in houshold financial liabilities (giving the 168% ratio.

Conrad, we both are astray. My argument remains/was that household debt across households of which there are 1,724,000, is heavily skewed towards certain households , mortgage holders as opposed to those debt free , regions for example Auckland, and age. By using the 168 % ratio is disingenuous at best, as it covers/glosses over some major debt issues among certain households and by default becomes an average. I jumped the gun , because the series description gives the source of household totals and I made an assumption without double checking. You can edit yours if you want.

Isn't the purpose of "The System" to turn all of us minions into Debt Slaves?

Capitalism will turn you into a debt slave.

Socialism will turn you into a real world slave.

There is a whole lot of territory between the extremes of those two systems, even a mixture of both.

History isn't like a place you choose to stand. History is like a river that carries you along in spite of yourself.

the Danish would be surprised to be told they are real world slaves and so would be living in the Indian State of Karela and the Italian region of Emilia-Romagna, where the people have continuously elected Parties who campaigned on an explicitly Marxist political platform for the past 70 years.

And yet Mao and Stalin, both successful leaders of socialist regimes, removed the freedoms-of and killed so many of their own citizens that Stalin was quoted as saying:

"If only one man dies of hunger, that is a tragedy. If millions die, that's only statistics."

But nice attempt at cherry picking against the tide.

I love Big Brother (Smith not Peters)

David, question New Zealand uses the gross disposable income in measuring its ratio income/debt, is this consistent with other nations.

Debt is affordable , until Labour does something stupid that causes a spike in interest rates .

Agree with you, Boatman.

Those who get themselves donkey-deep in debt take a huge risk....... A change of government leading to a change in policies could soon spell the end of cheap money.

In those circumstances, some will soon be dog tucker.

Those who get themselves donkey-deep in debt take a huge risk....... A change of government leading to a change in policies could soon spell the end of cheap money.

Nonsense. A change of government leading to the "end of cheap money" would effectively mean preventing global capital flows. As for being donkey deep, you're part of the collective, whether you have any debt or not. That is the negative implication of a bubble bursting. Even if you didn't participate, there is a likelihood that you will be affected in some way.

Heard someone say on talkback radio today that " no govt can solve a housing crisis"

Probably right but a National govt "can create a housing crisis"

After 9 years of nothing its time to give the other team a go - its the Kiwi way.

LOL, somewhat inconsistent there isn't it.

A government can create market conditions that dramatically affect how many house get built and at what cost. But such conditions take affect over long periods of time, like 30 years, the length of time it took us to dig our current hole.

They can take time, true. We do have a good history of NZ governments being involved in alleviating housing inaffordability in the past. The good thing is that even moving in that direction can start to address the housing crisis components that are pure speculation - as speculation is based on expectations of future gain. If the government starts moving in the right direction, speculation is likely to look for an exit.

There is something mildly ironic to me about governments mounting white horses to save us from the very consequences of their own incompetence and idealism.

Hi JC,

Clearly, you don't know much about macroeconomics.

Fiscal policy can impact on credit and interest rates through a range of mechanisms.

Those who find themselves over-exposed (through increased interest rates) may well face harsh consequences. There's no denying that.

If labour gets in I'm sure most people are aware of the things labour might and might not do. But the people would have spoken

Indeed O4 normal,

The people are right, even when they're wrong.

So they're right then cool

Wow Boatman - are you telling us Labour has direct access to the global financial levers?
Then everyone should vote for them!

Talk about a fools' paradise.

But all those new ever bigger motgages is how we create money, stop the circus and the wheels will fall off.

Indeed AJ, over $30,000 million from the private sector to the end of the 2nd quarter.
That's a mighty big cash injection into the economy and a mighty big hole to fill when it dries up.

Lest we forget , house prices also spiked under Helen Clark's Government between 2000 and 2008

You mean prices went from f-all to a little expensive. Hardly the same as what National have 'achieved'

Not true, on % terms they went up more than national, labour cooked it and national put the icing on the cake

In 2011 there was a little secret and that was auckland was undervalued, while some people I know were busy telling me about better returns offshore, Auckland was a sleeper, and is now catching up to global equilibrium , still a while to go yet, once ponsonby cooks to $2mil average we will have got there

The little secret was a change in immigration policy...

Like the other countries he's talking about that are now crashing. The plan didn't work and really how could it. High immigration and overseas investors forever. Had to end badly in the end and revert back to the buyers that are left. The locals and there small incomes . Wast of time

keywest,

undervalued relative to what? Can you explain what global equilibrium means to you? It sounds pretty meaningless to me,but I wait for you to enlighten me.
What about incomes? Would it be good to see them 'catch up to global equilibrium' too? How about productivity?

Shhh Keywest....people on here don't do percentages very well.

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Lest we forget, National campaigned on making housing more affordable because of Labour's carelessness, then did nothing about it for 9 years.

Lest we forget that National flooded the country with low skilled immigration, inflated house prices to the most expensive in the developed world, said that high property values equals success, did nothing to increase our mediocre productivity and spent the whole time denying there was ever a problem.

Clark's Labour government certainly has a bit of blood on their hands for their negligence, but National shoved both arms elbow deep into the carcass and told everyone it smells of flowers and potpourri.

Awesome comment Wildcard. I'm quoting you the next time ecobird/tothepoint starts her/his pro National rabid tirades!

Love it

Average mortgage interest rate is 5.84% - blimey, must be a few suckers out there.

Must be a fair few people on revolving or offset mortgages for 5.84% to be the mean.

Read recently average person couldn't raise 10k at short notice ,no wonder with all that debt servicing!!

Would be interesting to know your source for that information. In the case of Australia,

27% of h'holds have less than $1000 cash in hand
51% have less than $10,000
64% have less than $30,000

https://www.mebank.com.au/media/2656694/household-financial-comfort-repo...

They cannot possibly know that with certainty. Sheeple are notorious for over-inflating self worth and under-reporting debt.

Property debt for interest tax offset on income. Show how bad it has got. Tax loss ring fencing in soon. See what happens then.

Pushing inflation higher while wages stagnate can be charitably called insane. Less charitably, it's evil, as it strips purchasing power and wealth from all whose income isn't keeping pace with central bank-engineered inflation. The private banking sector benefits from inflation. The lifeblood of banking profits is transaction and processing fees from issuing new credit. Because inflation enabled wage rises allows households to buy more stuff with credit and service more debt, banks benefit immensely. Deflation, on the other hand, is Kryptonite to bank profits. As wages stagnate, an increasing percentage of the populace becomes uncreditworthy, i.e. a marginal borrower who isn't qualified to borrow (and thus spend) more. Unfortunately for Central Banks, there is no way they can push wages higher to keep pace with inflation. Short of creating $1 trillion in new currency and sending a check for $10,000 to every household (something central banks aren't allowed to do - yet!), Central Banks can't force employers to pay higher wages or force customers to pay higher prices to enterprises.

(CH Smith)

An ongoing squeeze on household incomes is stoking fears that a solid pick-up in economic growth may be short lived.... the national accounts revealed another dramatic 6 per cent slump in the terms of trade and a fall in national income per capita.

http://www.afr.com/news/economy/income-squeeze-casts-doubt-over-growth-p...

The Elephant in the Room is Oil. Billions of frequent fliers buzzing all over the globe on fossil fuelled holidays at an ever-increasing rate. Then the taps turn off?! But not in my lifetime I hear you say.

The debt system is now ONLY viable with ever lower interest rates ... which brings consumption forward (but plunders the future). This is an excellent article.

https://surplusenergyeconomics.wordpress.com/2017/09/05/104-why-mr-trump...

It's certainly representative of the current trend: sacrifice the wellbeing of young and upcoming generations to pad one's own nest.

unfortunately we are at a point where its economic crash now or crash later. Human nature votes for later.

To give the pad nester's some due, asset price inflation is just an indirect result of ever lower interest rates (they are just temporary beneficiaries on paper of a flailing system). But its ultimately meaningless in terms of the stability of the debt system.

Without low interest rates none of this would be possible but the fact is inflation/wage growth have been very, very tepid, there isn't a great deal of investment within our economy (e.g. infrastructure, skills etc.) to improve underlying productivity while we have an ageing workforce so the situation continues on and on.

1) The phase of price inflation. Nominal rates go up, while real rates go down. It thus pays to borrow in order to buy real assets.
2) The phase of asset inflation. Nominal interest rates go down structurally, but real interest rates go up. This monetary illusion gives borrowers the false impression that borrowing is very cheap, since the nominal cost keeps going down. However, the reality is that while servicing debt is cheap, rising real rates make repaying principal tougher and tougher.
3) The phase of debt deflation. Every borrower struggles to repay debt. The velocity of money collapses, which causes prices to collapse
4) The final phase can last as long as 20 years. During this phase not much happens for as long as the generations who suffered from the financial collapse and the debt deflation are still around. In this period, the velocity of money remains close to zero, with nominal interest rates also close to zero.

(Irving Fisher via John Mauldin)