Household Debt Levels Take Off

BNZ Layman's Guide

Household Debt Levels Take Off

WHAT HAPPENED?

The Reserve Bank released monthly data on lending to the business, rural and household sectors. In October debt outstanding to the business sector was up 1.1% from a year ago from 0.1% growth in September and 5.6% a year earlier. We economists tend not to look much at this series as a business sector health indicator as it gets knocked around easily by large corporate financing deals. Rural debt was up 20.6% from a year ago from 21.1% in September and 15.5% a year ago. Large corporate deals have less distortionary effects for this series. The strong growth the past year reflects the massive upgrading of infrastructure in the farming sector and general lift in land prices etc.

Of greatest interest in the monthly numbers is the household debt series. In October debt stood 8.7% up from a year ago at $80.3b after annual growth of 8.6% in September and 6.6% a year ago. This is the highest rate of growth since April 2000. Lending for housing purposes makes up almost 91% of total household debt with the rest being personal loans, hire purchase and credit cards – the latter at roughly 4.4% of household debt. The data exclude student loans.

WHY DID THIS HAPPEN?

High household debt growth of 8.7% reflects Record dwelling sales the past year of 98,267. Below average interest rates since June 2001. Strong household incomes growth near 6% the past year. A tight labour market boosting job security and therefore preparedness to take on more debt. House prices rising on average 8.5% the past year.

WHO IS AFFECTED AND HOW?

Borrowers as the high debt growth suggests current interest rates are stimulatory and unless something comes along to quickly slow economic growth monetary policy will tighten. Lenders as the data show a strong market. NZ shock-tolerance as debt growth exceeds household income growth so the debt to income ratio will rise further from the 114% level officially recorded at the end of June. The rising debt increases the vulnerability of householders and the economy overall to an income shock if one should occur.

WILL THIS CONTINUE?

Compared with 17% household debt growth in Australia the past year our 8.7% is quite mild. It is also a low rate compared with average per annum debt growth of 11.7% from 1992-99 and a peak of 16.6% in May 1996. Put alongside the 8.5% rise in house prices and strong incomes growth the debt rise is not worrying in our opinion. While we expect economic and household spending growth to slow over 2003, still rising house prices should see debt growth close to or slightly below the 8.7% rate in the coming year.

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