Kiwis' debt pile now exceeds annual disposable income by nearly $100 billion

By David Hargreaves

Kiwis continue to get into hock on their houses at record levels, new quarterly household financial statistics from the Reserve Bank show.

The latest figures show that household financial liabilities (mostly mortgages) were nearly $252 billion by the end of the June quarter.

This number dwarfs the $152.7 billion annual disposable income figure as at June.

The debt figure now makes up some 165% of the disposable income figure – which is a new all-time high, jumping up from 163% (which was also a record) in March.

The debt to income figure has risen sharply in the past year, up from 159% as of last June.

In the past 12 months household debt has risen by 7.75% (in dollar terms by over $18 billion), while disposable income has increased just 3.75% (over $5.5 billion).

During the same period net household financial wealth has shrunk very slightly, from $460 billion to $459 billion.

However, those figures don’t include house value – with houses of course being the main reason for the debt. There’s a lag on the house value information being collated, but the figures up to the end of the March quarter showed that the value of houses had shot up 14% in the previous 12 months to $679 billion, which had led to a 7.6% increase in total household net wealth to over a trillion dollars.

The figures do show, however, the extent to which New Zealand household wealth is centred around the housing market. These latest figures will again concern the Reserve Bank, which has, for financial stability reasons, introduced new lending restrictions that come into effect next month.

The latest household financial statistics follow on from the RBNZ’s monthly sector credit figures for July, which showed that total household claims (mostly mortgages, but also including consumer finance) rose a seasonally-adjusted 0.9% to $238.432 billion (from upwardly-revised $236.791 billion in June).

This was the fastest monthly rise since the 1% gain recorded in the month of November 2007 when the previous housing boom was just starting to tail off.

In terms of just mortgages, the total in July rose to $223.052 billion (from $221.42 billion in June), and is up 9% in the past 12 months.

That’s the biggest rate of annual growth since May 2008.

Nearly $18.5 billion was added to the country’s mortgage bill over the past 12 months.

The new LVR restrictions to be placed on housing investors were announced by the RBNZ on July 19. Whether there has been therefore something of a surge in the latter part of the month to ‘get in’ before the introduction of the rules will become more apparent over the next few months.

One seemingly contrary aspect of the new household financial figures for the June quarter, however, is that while the debt pile for Kiwis is getting bigger – their ability to service it is improving. This is because of the historically low – and falling – interest rates.

The latest figures show that on an annual basis as at June interest payments were consuming just 9% of disposable income – and that’s actually down on the 9.2% figure as at the end of March.

In historical terms that current 9% figure is comfortably manageable. In 2009 at the end of the last housing boom, the percentage of income chewed up by interest payments was a touch under 14%.

But what the Reserve Bank would be concerned about is that when interest rates do start to rise again (and clearly that’s not on the horizon at the moment) the affordability of interest repayments will be quickly squeezed.

In the meantime, and at these levels of affordability, there’s nothing to really stop people continuing to ramp up the debt.