BEYOND REASONABLE DEBT
The extent to which financial behaviour can explain over-indebtedness amongst New Zealand families

Overview

The Families Commission and Retirement Commission published a report Beyond Reasonable Debt: A background report on the indebtedness of New Zealand families (Legge & Heynes, 2008), which revealed two out of three single families and four out of five couple families were in debt. Most of these families appeared to be able to service their existing levels of debt and/or have sufficient financial assets to fall back on. However, some families are not in this situation and the current economic recession is likely to significantly increase the number of indebted families who are experiencing serious financial difficulty. Numerous other reports, including qualitative research by the Families Commission, have revealed the extent to which financial strain negatively impacts on families’ quality of life.

Legge & Heynes (2008) report reviewed international and New Zealand literature and data to better understand why families got into debt and why some families became over-indebted. The purpose of the report was to identify opportunities for both Commissions to better support financial decisions made by families.

An interesting finding in the 2008 report was the role that financial behaviour, over and above more obvious family characteristics and financial circumstances, appeared to play in determining whether a family was indebted or over-indebted.

In this current research study, data from the Ministry of Social Development’s Living Standards Survey (LSS) 2004 were identified and used to test the degree to which financial behaviour could explain over-indebtedness in New Zealand families.

Families were considered to be over-indebted or in ‘problem debt’ if they reported experiencing any of the following in the last 12 months: not keeping up with utility, mortgage, rent or credit payments; borrowing from family or friends or pawning or selling something to meet everyday living costs; or receiving financial help from community organisations.

The respondent’s age and social marital status, the respondent’s family income, debt and asset position, and the number of children in the respondent’s family were all found to be significant in multivariate analysis, but to have little marginal effect on whether families were over-indebted. By contrast, spending rather than saving behaviour by the respondent was found to be significant and to increase the likelihood of a family being over-indebted by more than 20 percent, holding everything else constant.

A similar effect was found when over-indebtedness or ‘problem debt’ was defined as families who also reported using any mainstream credit or being in a negative equity situation. Prudent financial behaviour therefore appeared to be an important resilience factor in avoiding over-indebtedness or problem debt, however defined.

This is a significant finding because it potentially introduces another way in which saving and other financial policies can improve economic wellbeing. Traditionally, income, wealth and life stage have underpinned these policies. This research has shown that these factors are still important, but that financial behaviour may be more important.

This research report will therefore provide both the Families Commission and Retirement Commission with a sound basis for advocating a range of policies to support or strengthen financial behaviour. Current saving messages, for instance, could be better tailored to groups according to their existing saving behaviour.

This study has highlighted some possible limitations in using economic family unit income and wealth data. However, assuming these limitations can be addressed, the study has also highlighted the potential to use the LSS 2004 data to further investigate what influences financial behaviour. The results of the Retirement Commission and ANZ’s 2009 Financial Literacy Survey may also shed light on the relationship between underlying personality traits, financial knowledge and financial behaviour.