Debt levels may be high, but low interest rates mean that households are no worse off today than they were in the years up to 2003 in terms of servicing a mortgage

Among the comments in yesterday’s story about the current low levels of New Zealand bankruptcies, was the observation that our debt-to-income (DTI) ratio is close to 170%.

The implication is that a DTI measure is a better indication of household economic stress than bankruptcy levels.

And that is fair enough.

But there is a broader perspective behind the DTI data.

The raw data is available on the RBNZ website, here.

This source also gives data for the average mortgage rate, which can be added to the standard RBNZ chart perspective like this:

As mortgage interest rates fell, the household debt-to-income ratio has risen.

Low interest rates allow buyers to bid up asset prices while keeping their servicing costs “under control”.

This DTI is the relationship between a ‘stock’ (household debt levels) and a ‘flow’ (household incomes).

But it suffers from the same problem that “median multiples” suffer from. They are measuring an economic relationship, but not one that relates to how households actually assess their budgets.

The core affordability assessment is between take-home pay and the cost of making the regular payments (both ‘flows’). That is quite different to relating take-home pay to an asset price, or a total debt load.

Serviceability is the key here.

And the RBNZ’s data also includes that: “Servicing as % nominal disposable income” (sic).

So, what do we have here? It clearly shows 2016 serviceability at the same levels that existed in the decade plus between 1991 and 2003. The anomaly was 2004 to 2010.

This supports the idea that in 2017 household financial stress is not elevated.

This RBNZ data is not available regionally. Nor by income deciles. Both these aspects may well paint a different picture to the overall, national perspective.