Part 1: New Zealand families’ debt situation
Part 1 briefly outlines the scale of the debt market in New Zealand, including the proportion of families with debt, the amount of debt held, changes over time and how New Zealand compares internationally.
Note that Part 2 provides more insight into how debt is distributed. It explores the theoretical and empirical relationship between debt and various family characteristics including age, relationship and children, income, assets and ethnicity.
Proportion of families with debt
According to SoFIE wave 2 2003/04 data[2] 64 percent of single families with or without children and 82 percent of couple families with or without children have some form of debt.Figure 3 shows that of single families with debt, 26 percent have mortgage debt, 29 percent have student loan debt, 62 percent have bank loans or credit card debt and 43 percent have other types of debt. Of those couple families with debt, these percentages are 55 percent, 11 percent, 78 percent and 43 percent respectively.[3] These differences are not too surprising given the age differences between these two groups, which is discussed further in Part 2.
Figure 3: Proportion of indebted single and couple families with different types of debt
Source: Statistics New Zealand SoFIE data, wave 2 2003/04
Amount of debt held by families
In terms of the amount or total value of debt, however, the proportions are quite different, as illustrated in Figure 4.For single families, the total amount of debt owed is $21,371 million, of which 69 percent represents mortgage debt, 12 percent represents student loan debt, seven percent represents loans and credit card debt and 13 percent represents other types of debt.
For couple families, the total amount of debt owed is $71,032 million, of which 82 percent represents mortgage debt, two percent represents student loan debt, six percent represents loans and credit card debt and 10 percent represents other types of debt.
Figure 4: Value of different types of debt held by single and couple families
Source: Statistics New Zealand SoFIE data, wave 2 2003/04
Unsurprisingly, mortgages represent the single largest source of debt for both single and couple families. While only 26 percent of single families with debt and 55 percent of couple families with debt have mortgage debt, that debt represents 69 percent and 82 percent respectively of the total value of debt held. By contrast, 62 percent of single families and 78 percent of couple families hold either or both credit card and bank loan debt, but this represents only six percent of the total value of debt held by each group.
The type of debt people use, however, may disguise the purpose for which they borrow:
- Given that a large share of New Zealand’s household debt is in the form of mortgage debt, much of the increase in debt would have been used to fund investment in housing… From mid-2003 [until 2005, however], the increase in mortgage debt exceeded the value of new residential investment, suggesting households were accessing the increased equity in their properties for general consumption or investment purposes (for example, investment in a small business) (Goh, 2005, p 17).
Changes over time
According to aggregate National Accounts data,[4] New Zealand has had a current account deficit since 1973 (Reserve Bank of New Zealand, 2007). This means that, collectively, New Zealanders are spending more than they are earning (Bollard, Hodgetts, Briggs, & Smith, 2006). New Zealanders are reliant on overseas investors providing the money for their borrowing.The household sector,[5] in particular, has rapidly accumulated debt since the early 1990s and has been blamed for the recent deterioration in New Zealand’s current account balance (Bollard et al, 2006). Between 1991 and 2006, financial liabilities (comprising housing and consumer loans) have increased almost five-fold, from $31 billion to $152 billion (an increase of $121 billion or 490 percent), as illustrated in Figure 5 (Reserve Bank of New Zealand, 2006).
Figure 5: Total New Zealand household financial liabilities
Source: http://www.rbnz.govt.nz/statistics/monfin/HHAandL2006webcopy.xls
According to aggregate data, much of the increase in household debt has been for mortgages. There has been a slight increase in credit card debt between 2001 and 2006, from four percent to five percent of aggregate disposable income (Reserve Bank of New Zealand, 2006).
Similar trends can be seen in Australia. The Reserve Bank of Australia has observed that while owner-occupier housing debt has accounted for much of the increase in total household debt, this debt is concentrated in less than a third of all Australian households, and this proportion had not changed significantly in the previous decade:
- …the rise in housing debt is not due to a higher proportion of households acquiring debt, but is primarily due to an increase in the average level of debt per debtor household (Reserve Bank of Australia, 2003, p 5).
Figure 6: Average annual mortgage repayments of reporting households
Source: Statistics New Zealand Household Economic Survey data
Most of the increase in household debt is also thought to be explained by a shift to an environment of lower interest rates and lower inflation. This has had the effect of increasing the standard loan available for borrowing, but reducing the speed with which inflation erodes the real value of the debt (Reserve Bank of Australia, 2003).
International comparison
It is difficult to accurately compare the indebtedness in New Zealand with that in other countries because the most commonly reported statistics are debt ratios. These can distort the true situation as the denominator variables are not necessarily comparable.In 2003, New Zealand had the second highest household debt level as a proportion of disposable income (after the United Kingdom) of seven comparable Organisation for Economic Co-operation and Development (OECD) countries. New Zealand and Australia have had the fastest growing debt-income ratios in the OECD, partly because of their low starting levels. New Zealand is unusual, however, in having the lowest net financial wealth and total net wealth amongst the same OECD countries (Goh, 2005).
Figure 7, on the other hand, shows household debt as a proportion of Gross Domestic Product (GDP) for 15 OECD countries. Superimposed horizontal lines show the average levels for 1985, 1995 and 2005. Over the last 20 years, household debt appears to have been increasing at an accelerating rate as a proportion of GDP for many of the 15 OECD countries. On this basis, New Zealand rated the sixth highest in the OECD by 2005.
Figure 7: Household debt as a percentage of GDP
Source: OECD, 2006
New Zealand’s relative position would change again if we considered debt as a proportion of asset holdings. We have been unable to find data to compare this measure.
Summary
So what does this tell us about the indebtedness of New Zealand families?The information presented in this section tells us that a lot of families in New Zealand are indebted (64 percent of single families and 82 percent of couple families). In many cases, however, this is non-mortgage debt (including student loans, bank loans and credit cards and other). Relatively few families have mortgages (26 percent of single families and 55 percent of couple families). Mortgages, however, are much larger in dollar terms than other debts and account for the majority of the total value of debt held by each group (69 percent for single families and 82 percent for couple families).
Furthermore, it seems that most of the increase in the household sector’s indebtedness since 2000/01 may be explained by an increase in the size of mortgages, rather than the number of mortgages. The increase is also not thought to be a result of a significant increase in other types of debt.
Aggregate figures, however, do not tell us much about how individual families are faring – particularly their ability to service debt. This is discussed further in the next section.
Footnotes
- [2]
- SoFIE data presented in this report is based on analysis of the second wave, generated by the Treasury on 28 March 2008, unless otherwise stated. [Return to reference]
- [3]
- Note these percentages exceed 100 percent because some people have more than one type of debt. They also may disguise what people use debt for. [Return to reference]
- [4]
- The National Accounts are produced by Statistics New Zealand. They record the nation’s financial transactions in the form of a quarterly snapshot of the country’s economic performance, including businesses buying and selling goods, the Government collecting taxes and transferring money to beneficiaries, and people earning and spending money. Aggregate data do not capture a number of types of debt, including government debt, fines and bill arrears (Valins, 2004). There is also little or no data on non-status lending (see Definitions) (Valins, 2004), although presumably some of the debt captured by aggregate data is re-lent at higher rates by so-called ‘fringe’ lenders (see Definitions) (Ministry of Consumer Affairs, 2006). [Return to reference]
- [5]
- The National Accounts consider government, business, household and external sectors. [Return to reference]