Kiwis drowning in debt

Risks remain high despite some cooling in housing credit growth

New Zealand’s debt has topped half a trillion dollars and continues to rise, despite some signs of improvement in our borrowing trends. A year ago, when the Herald’s Nation of Debt series tallied the country’s total gross debt — combining household, business, agricultural, central and local government — the housing market was still red hot and the rate of credit growth was increasing. Twelve months later, while that debt figure is up by another 7.3 per cent to $ 528 billion, the situation has stabilised. In terms of housing credit growth, things “have definitely improved”, says Reserve Bank deputy governor Grant Spencer. The ratio of net debt to GDP has fallen as the Government targets debt reduction. Dairy prices have also improved, taking the cashflow pressure off debt- laden dairy farmers. “This loss of momentum in the housing market has seen the rate at which we’re accumulating debt slow down over the past year,” says Westpac senior economist Satish Ranchhod. However, the risks remain high. For New Zealand households, the ratio of debt to income has now reached another record of 168 per cent, well above the pre- financial crisis peak of 159 per cent.

As well as the continuing vulnerability to international financial shocks, New Zealand now faces a risk to economic growth as the borrowing trend slows, he says.

“With interest rates set to continue gradually rising over the coming years, we expect house price inflation will remain modest through 2017 and 2018.

“That’s likely to continue dampening credit growth, and will weigh on spending and economic activity more generally.”

The slowdown in debt accumulation and house price inflation makes it less likely that we’ll see a tightening of Reserve Bank policy in the near term, Ranchhod says.

But the RBNZ is still looking at introducing new tools such as debtto- income ratios for mortgage borrowers.