When compared to the size of our economy, New Zealand’s household debt level is one of the highest in the developed world. But one economist argues that how much debt we have is not as important as whether we will be able to pay for it in the future.
In 2015, New Zealand’s household debt level was 91.3 per cent ranking us seventh highest out of 42 countries. Paul Bloxham, HSBC chief economist for Australia and New Zealand, says distribution and serviceability is more important than debt size.
When consumer credit soars, such increases in the levels of borrowing can leave households over-indebted and vulnerable. However, when interest rates are low and there is solid job growth and a favourable distribution of debt together with tightened lending standards, risks to households with high debt can be manageable.
Bloxham cites the US sub-prime crisis, saying the problem was lending to people who could not afford to service the debt, rather than high debt levels in themselves. The question for NZ was then around whether banks and financial institutions had been lending to households that could continue to service the debt, especially in Auckland where house price growth has been rampant.
Bloxham says there are a number of reasons why New Zealand ranks so highly up the international ranks for household debt. Partly it was because housing made up a larger share of household wealth than other countries because house prices were higher.
Our high debt was also down to the high number of individuals who own investment properties. In other countries, like the US, investment properties tended to be owned by corporates, so the debt did not show up on household balance sheets. “Here households own it directly,” says Bloxham.