Summary
Many families in New Zealand are in debt (64 percent of single families and 82 percent of couple families).[1] In many cases this is non-mortgage debt (including student loans, bank loans and credit cards). Relatively few families have mortgages (26 percent of single families and 55 percent of couple families). Mortgages, nevertheless, 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). Aggregate figures, however, do not tell us much about how individual families are faring.
This report examines the indebtedness of New Zealand families and explores factors that might distinguish families who use debt well from those who do not. It examines both circumstances and behavioural factors. Our review of international literature and New Zealand data has revealed that these factors operate together in quite complex and potentially confounding ways and that further work is required to tease them out.
Some circumstances (notably being young, having children and separation) and some behavioural traits (basing aspirations on comparisons with others or being impulsive) appear to be important in determining who gets into debt. Other circumstances (notably having low income) and behavioural traits (having an external locus of control) appear to be important in determining who gets into problem debt. Having an external locus of control means that you believe your environment, some higher power or other people control your decisions and your life, rather than believing that you control yourself and your life (internal locus of control). The family and wider culture is also recognised in the literature as having an important role to play in financial decision-making.
In this paper we have singled out several areas for future research:
Define and identify families who are in or close to a problem debt situation. The Livings Standard Survey (LSS) dataset offers the most potential for determining both outcomes and explanatory variables. (Note that multivariate analysis of the LSS dataset for this purpose will be undertaken by the Families and Retirement Commissions in 2008/09.)
Mortgage debt of older people has noticeably increased in the past decade. It would be worth exploring whether this is because they are borrowing more, or because more older people are entering (or re-entering) the mortgage market. Data from the Household Economic Survey (HES) or the Survey of Family, Income and Employment (SoFIE) should shed some light on this research question.
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There is evidence in the United Kingdom of a positive, causal relationship between relationship breakdown and over-indebtedness. It would be interesting to explore whether this is the case in New Zealand. LSS and SoFIE data may be useful for exploring this research question.
Determine whether income is also a strong indicator of problem debt in New Zealand. LSS and SoFIE data should be suitable for this analysis.
There is little evidence linking ethnicity with indebtedness or over-indebtedness. In New Zealand, however, Māori and Pacific families have high debt-asset ratios compared to European families. This relationship would be worth exploring further if the effects of significant confounding factors like age and income could be held constant.
Evidence suggests that savings and debt decisions are influenced by various personality and environmental variables, which may result in the development of habits, heuristics and coping mechanisms. Identifying these variables and understanding what influences them may help us predict and influence financial behaviour. Environmental variables are particularly appealing because they may be more amenable to change. The role that family, parenting and communication styles play in consumer socialisation, and in family decision-making more generally, has emerged as a significant research gap.
Having an external locus of control, basing aspirations on comparison with others or having poor self-control (a tendency to be impulsive) tend to make a person more likely to have a spending than a saving habit. These traits may be significant factors influencing whether a family becomes financially better or worse off over time. Further research is required, however, to determine whether these relationships hold ex ante – that is, before people become indebted. Further research on gender and age differences in these variables is also required, as is an understanding of the interplay between these variables in a group or family decision-making setting. For example, where in a two-parent family one partner has an internal locus of control and the other an external one, it may be in the family’s long-term interests for each to be aware of their tendencies, strengths and weaknesses and to empower the partner with the internal locus of control to make decisions about the family’s finances.
Footnote
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- For the purposes of this report, ‘family’ has been defined as a single individual with or without dependent children (‘single families’) or two individuals in a social-marital relationship with or without dependent children (‘couple families’). [Return to reference]