Household indebtedness increasing

[UPDATED] New Zealand household debt levels are still high, which creates more uncertainty than normal about how they will respond to increasing interest rates, Reserve Bank Governor Graeme Wheeler says.

Friday, March 14th 2014, 1:47PM

by Susan Edmunds

Latest data from the Reserve Bank shows that financial liabilities have risen to 147% of households’ disposable income.

New Zealanders owe banks and non-bank lenders a combined total of $202.798 billion.

They have total financial assets of $265.309 billion, with superannuation savings worth $42.742 billion, life insurance of just under $6 billion, managed funds of $35.189 billion and direct domestic equities worth $24.714 billion.

What will concern the Reserve Bank is that financial liabilities seem to have reversed the trend seen over the past couple of years. While liabilities dropped from 153% of disposable income in 2008 to 143% in 2011, they are now back to 147%.

Household liabilities as a proportion of disposable income were as low as 60% in 1991.

Wheeler mentioned household debt in yesterday’s Monetary Policy Statement.

He said high levels of debt and interest rate increases would keep a lid on house price inflation. “If you take household debt as a share of household disposable income, in the early 90s that was 60%. By 2000, it was 100%, now it’s 146%. It fell a bit after the GFC but now it’s rising again. If you see mortgage rates rising over a significant period of time, debt sustainability will be uppermost in borrowers’ minds.”

But he said the Reserve Bank would monitor how spending and demand in the household sector developed over the coming quarters, as interest rate rises bit after a long period of being very low.

The Bank thought it was possible there could be an over-reaction and house prices could slow down more rapidly as a result of interest rate rises than they had in previous cycles.

Wheeler said: “Interest rate increases will start to affect their debt servicing capacity. That’s something we’ll look at quite closely to see how households react.”

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