How Covid19 is changing the way we borrow
But Mr Bloor says the Reserve Bank still expects to see some more downward pressure on house prices and mortgage borrowing.
‘‘The labour market and lack of immigration will start to weigh on the housing market in the coming quarters,’’ he says.
‘‘It is still our expectation that the housing market is likely to slow and with that we would expect household debt accumulation to slow as well.’’
The worries the central bank had about housing debt in previous years have not gone away, but its concerns about the rising risk have diminished.
‘‘Generally our concern is that during boom times for the economy asset markets become overheated, there is too much debt accumulation and there is too much risk taken.
‘‘The big worry is that as you go into the downturn phase, those risks are actually realised,’’ Mr Bloor says.
‘‘So right at the moment we probably don’t have a great deal of concern about risk building up in the financial system; it is probably more of a concern about previous risks crystallising.
‘‘This is where things like the LVR policy were really important.
‘‘That prevented a large amount of debt being taken on at low deposits. So as we go through the downturn it’s less likely that a large number of borrowers get into difficulty because they have those buffers built in.’’
The other red flag for the Reserve Bank in the past few years has been the buildup of agricultural debt.
But now, nominal agricultural debt has dropped 1.3% in the year to July.
The dairy sector has been deleveraging in a relatively orderly fashion over the past 24 months, Mr Bagrie says.
‘‘The problem child is becoming less of a wayward child.’’
Ultimately, looking at New Zealand’s overall debt situation in 2020, the most important point is that interest rates have dropped substantially and are expected to remain low for a long time, Mr Bloor says.
‘‘That does allow higher levels of debt in the economy — both the public sector and private sector.’’
Both he and Mr Bagrie point out that overall debt servicing ratios are now very low by historic standards.
Reserve Bank data shows that interest payments as a percentage of household disposable income are the lowest they have been since at least 1999 (when the data series began), at 7.1%, compared with a peak of 13.8% in 2008.
‘‘Monetary policy is working,’’ Mr Bagrie says.
There is about $150 billion worth of fixed term mortgage debt that is going to refinance on much lower rates in the coming 12 months, he says.
‘‘So the cash is there. But the surge in those deposit numbers tells me that monetary policy is having to work pretty hard to get out there and get people to spend as opposed to save.’’
Covid19 has created problems that central banks cannot fix, such as lockdowns and supply shocks, he says.
‘‘Monetary policy is the supporting actor in this crisis and fiscal policy needs to be the lead actor,’’ he says.
Meanwhile, the Reserve Bank faces a difficult balancing act.
‘‘They need to be careful about what they do. Monetary policy is contributing to more of a social imbalance across New Zealand. There is still financial stability risk if the property market surges again . . . at what point do you act?’’ — The New Zealand Herald