NZ’s debt bomb keeps ticking
With interest rates low, the housing market relatively stable and the Government accounts in good order it might be easy to forget that New Zealanders are sitting on some of the highest private debt levels in the developed world.
Luckily, the Reserve Bank never forgets.
Today the bank’s financial stability committee delivers its latest report which is sure to serve as a reminder that elevated levels of housing and agricultural debt continue to make New Zealand vulnerable to financial shocks.
If you tally up private and public borrowing, New Zealand now carries more than half a trillion billion dollars of debt, about $115,000 a head.
Unlike some nations, we don’t have great savings rates to offset our debt. Most of it is owed internationally and the big four Aussie banks hold the bulk of the loans — against the value of our houses and our farms.
If the prices of either were to fall rapidly then we could have a serious problem.
Unsurprisingly, the rate of credit growth in New Zealand is tightly linked to the housing market and the size of the mortgages we need to buy a home.
“A material portion of New Zealand households and dairy farms have high debt levels that they would struggle to service if their incomes fell or costs rose,” Reserve Bank governor Adrian Orr said in the May financial stability report.
“Banks would face large losses if many borrowers defaulted on their loans, particularly in an environment of sharply falling house and farm prices. This scenario is unlikely but it remains possible, if there were a large shock to New Zealand’s economy or financial system.” If there is good news, it is that the rate at which debt levels are growing has slowed as the property market cooled.
Today’s stock-take of financial risk will offer the Reserve Bank a chance to loosen the loan to value ratio (LVR) restrictions it has imposed on lending.
LVRs have had a key role in the stabilisation of debt levels since they were introduced in October 2013. After several adjustments, they now restrict the amount of highly leveraged lending banks can do to both home buyers and investors.
With signs of new life in the housing market, the Reserve Bank should not ease them yet. Dairy-farm debt is also a cause for concern. In May, the Reserve Bank noted that 35 per cent of dairy-sector debt was to highly indebted farms which required a milk payout of about $6.20 per kilogram of milk solids just to break even.
In recent months, those farmers most vulnerable to debt problems were delivered a lucky break. Interest rates have fallen and dairy prices have risen, with payouts firmly above the break-even line this season and next.
For those indebted farmers, there now appears to be a golden window to pay down debt and restore some stability to the sector.
Today, farmers will likely get another hard word from the Reserve Bank. But homeowners would also be wise to make the most of this period of lowrates economic calm to tackle high debt.