When we hear about household debt stress, David Chaston wonders whether we are looking at the most relevant data. Household budgets will only be stressed when the servicing costs rise

What? Wait, under Labour, household debt servicing cost went up from 7.5% to 14% of income, and under National it went DOWN from 14% to 8.3%? What have we done? Bring back Bill English!

Is having mortgage debt in a lower percentage of households,undoubtedly more affluent households,who should have the financial capability to adjust if necessary, better ? Does the concentration in debt as seen by the fall in home ownership rates provide possibly a better outcome if interest rates were to rise significantly.

Isn't all of this to say that households/borrowers have hit the prudential and affordability 'stops' in the system?

Those "wealthy" enough to borrow have borrowed heavily to buy property (owner occupied and investments).
Those not "wealthy" enough to borrow spend a significant proportion of their income servicing their landlord's mortgage.

How is the debt concentrated? (i.e. Auckland mega mortgages).
Where does interest only borrowing figure in all of this?
How has the length of mortgages changed over the period shown?
How would a 100 basis point increase in wholesale rates (~20% increase in servicing) impact?
How would an increase in unemployment figure in all this?
If 168% isn't stressful then why don't we try our luck with 180% 200% 300%?

Australia is seeing increasing levels of mortgage stress despite record low rates. Caps to interest only lending are now flowing through the banking system and it is starting to hurt. Not to mention that Australian house prices are falling.

"Household budgets will only be stressed when the servicing costs rise", you sure hit the nail on the head DC, yet the majority of people can't see this.
You see Debt to Income comparison isn't smart, because Debt is a fixed Liability and Income is cashflow. Any accountant will tell you we should compare Debt with Assets (financial position at a given time) and Income with Expenses (cashflow over a period of time) but not cross over and compare Debt with Income.

Let me put that in a simple example; let's say we agree a DTI ratio of 5 is acceptable. What happens if interest cost go up 50% (from 5% to 7.5%) ? Well according to the DTI everything is fine, actually the DTI is exactly the same because the "D" hasen't changed nor has the "I", yet people will definitely struggle to meet their expenses.
DTI is a fraught measure

Think Emperors and clothes ...............and thank you David for pointing this out .

So while household debt as a % of disposable income is at a peak in your first Fig , it seems most households don't appear to be under stress at the moment.

We have employment in the 90's as a % of those looking for work and there is no shortage of work opportunities .

There are always exceptions , but for the most part we have likely never had it so good , and many people are spending money like drunken sailors . In so doing some are likely to be stretched financially .

The purchase of motor vehicles is at all -time records, Banks are declaring record profits with the lowest provisions for bad debts in years , mortgagee sales seem restricted to shonky property developers facing jail sentences,, flights to Aussie and the islands are chokka with tourists , and a visit to any waterfront precinct in New Zealand over a weekend will provide sufficient anecdotal evidence of an economic boom .

But as those of us who have seen terrible downturns will attest , it can change with the click of the thumb when the cost of money rises .

And I would not be a punter willing to bet on when its likely to happen , but it will .

These figures are quite useless for any risk analysis as I have stated previously. They include all households - roughly one third who don't have debt. Confirmed by RBNZ.

Analysis of this issue requires segmentation into say deciles and analysis of each.

A very different picture will then emerge - some not so pleasant I suspect.

What David says is correct to a point in terms of debt servicing but household stress also includes what net discretionary disposable income services. So if increased costs in other expenditures increases ( Eg Energy/Rates/Taxes) then other discretionary expenditures become stressed, paying the mortgage and other bills is fine to the point when what is left leaves nothing for non essentials and a rollercoaster to disaster as the Jobs and business's relying on discretionary spending see their business decline.

Rumpole. Taxes haven't gone up. Because proposed tax cuts were for 'only the rich', they were cancelled. Fiscal drag hasn't impacted middle NZ homeowners - you are simply recycling a rightist myth in asserting otherwise.

Nice work David, and an interesting view point - yet not entirely black and white as Rumpole correctly pointed out in the above ... but very good piece - thanks

We hope that borrowers will be able save a bit to store enough fat before the next round of interest rate rise.

I disagree with this analysis. Not because it’s wrong but in practical application I think there are some fishhooks in high debt-low interest-low inflation environment that aren’t obvious. People may have no trouble servicing their debt but that is not the same as having no trouble paying their debt off. If the question is will people pay their loans, I agree it’s probably easier. If the question is will people have the financial freedom to make life decisions and spend in a way that drives the economy, I say it will be harder. We are loading people up with record amounts of debt in an environment where inflation will do less work in eroding the value of that debt. The consequences of this won’t be fully evident until 5-10-20 years down the track.

The full impact of higher interest rates is not so one dimensional as simply not being able to afford to pay the higher rate on your “current income”, It is highly likely your current income will not go as far as it once did in the higher interest rate environment and your “current income” may in fact be less in a higher interest rate environment.
Higher inflation if I’m not wrong goes hand in hand with higher interest rates, then there is the general slow down in business activity due to higher costing money and risk associated with borrowing it which then results in less work for people on “current income”. Then there is the large sector of business’s particularly service sector business’s that have never experienced a down turn because they started up in the last 10 years. These service providers (whom all have new Utes & vans!) service industry sectors that use debt as an operational business tool, not an asset procurement tool. When finance / debt becomes less feasible as a business operational tool so will the viability of a lot of service sector business’s…… less “current income”.

AEP
Hong Kong Two flats here on Hong Kong's Mount Nicholson sold for $200m CREDIT: PROPGOLUXURY “Hong Kong looks increasingly vulnerable to financial stress. A potential trigger could be an accelerated Fed rate hiking cycle,” said Mr Subbaraman. This is exactly what is now coming into focus. The Bank for International Settlements says Hong Kong’s ‘credit gap’ - the overshoot above trend - surged to record highs last year and is in a league of its own, even by the frothy standards of China and East Asia.

Nomura warned clients to braise for a lot “dead wood rising to the surface” among Asian firms as the tightening cycle bites in earnest.

Hong Kong’s banking system is 8.3 times GDP - akin to the Irish banking system on the eve of the 2008 crisis - and is a contingent liability of the territory. The HKMA has imposed strong safety buffers. The liquidity coverage ratio is 146pc, easily meeting stress tests under the Basel capital rules.

Yet the banks have seen a surge in lending to entities in mainland China that exploit the offshore hub to circumvent curbs at home, or to finance an opaque ‘carry trade’ into yuan assets. The HKMA raised raised the ‘countercyclical capital buffer’ from 1.25pc to 1.875pc in January but has signalled that this may have to go to 2.5pc. “The risks associated with credit and property market conditions have not abated,” it said.

The territory’s property boom is officially out of control. Carrie Lam, the chief executive, said eight rounds of mortgage controls have failed to stop the speculation, and may even have been counter-productive. “The government really has no way to curb property prices,” she said.

In December, a mystery buyer paid $200m for two flats at ‘The Peak’ on Mount Nicholson, designed by Alexandra Champalimaud. The development is a favourite among Shanghai’s super-rich. Chinese investors now account for 40pc of all land purchases in the enclave, despite a 15pc stamp duty for outsiders.
https://www.telegraph.co.uk/business/2018/03/04/hong-kong-risks-becomin…

When we hear about household debt stress, David Chaston wonders whether we are looking at the most relevant data.

Not just David. I would think that the only way to really understand this properly is to understand "qualitatively and quantitatively" about h'holds. That means continuous tracking of h'hold budgets and how h'holds actually perceive their own level of stress. For ex, how have h'hold spending habits changed? Are h'holds going without goods or services because they're more concerned about their debt? To what level do indebted households feel secure? What is their level of discomfort with their debt?

As far as I know, no organization in NZ is really tracking this.

Staggering that this article doesn’t mention low interest rates in explaining the drop in the debt servicing ratio. Rises in wages have been minimal in the overall scheme of things and the drop in debt servicing cost has been massive in comparison.