Editorial: Debt remains a threat to economic recovery

Despite everything we hear about the Government’s strong fiscal position and its ability to borrow through this crisis, New Zealand remains a heavily indebted nation. The problem, and the risks, lie with our private debt.

Soaring house prices lifted mortgage debt to eyewatering levels in the past decade.

So too, the dairy boom saw agricultural land prices rise and concerns about farm debt grow. Both areas were a concern before Covid-19. Now the Reserve Bank (RBNZ) warns that we can add business debt levels to the list of worries.

The RBNZ yesterday highlighted issues for the commercial property sector and others directly hit by Covid-19. Commercial property — especially accommodation, hospitality, retail, and some office properties — accounts for around $40 billion, or 8 per cent of total bank lending.

But for all that, the latest RBNZ Financial Stability Report was broadly reassuring about our banks’ ability to cope. It expects they can afford to keep lending through the downturn.

That’s good news because now is not the time for Kiwis to panic and put their wallets away with a view to industriously paying down debt. The past few years were the time for that and thankfully we did make some small progress — at least reducing the rate at which debt levels were rising.

The RBNZ now describes the New Zealand financial system as “well positioned” to weather the Covid-19 pandemic, with good “capital and liquidity buffers”. In fact, it estimates that unemployment would have to rise by 18 per cent and house prices would have to plunge by almost 50 per cent before NZ banks would require radical action like new capital raising.

But the RBNZ doesn’t sugar-coat the damage the pandemic will do. It is projecting a sharp decline of 10 per cent for annual GDP in 2020 — the largest fall in at least 160 years.

The associated losses in income will cause financial distress for a significant number of households and businesses, it says.

The RBNZ sees households facing income shocks from two sources: an increase in unemployment; and lower pay.

So what next? For better or for worse, rates of bank lending look set to fall.

As optimistic as the RBNZ is about the banks’ long-term health, the immediate prospect of lower profits will result in more conservative behaviour.

With house prices expected to dip by as much as 10 per cent, the amount people need to borrow should also fall — or at least rise less rapidly.

That means some rebalancing of private debt levels — as we saw after the Global Financial Crisis — is inevitable.

We should be thankful that rebalancing looks likely to be an orderly affair, supported by both monetary and fiscal policy.

That will hopefully allow those who don’t lose their jobs, or see their businesses fail, to keep spending and provide the economy with some much-needed stimulus.

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