NZ household debt in perspective

New Zealand’s most-recent Reserve Bank Financial Stability Report, which dropped in late May, called for more progress in reducing high levels of debt in both the household and dairy sectors. 

"High debt and low interest rates are very different to low debt and high interest rates.”

Household debt currently comprises around 170 per cent of household incomes. As you would expect, the vulnerability is larger for households with a mortgage.

In general, households which do have a mortgage have a big one, with total outstanding debt more than three times income. 

Household debt as a proportion of disposable income: total and mortgage holders

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At the current juncture, servicing New Zealand’s household debt is ‘manageable’ because interest rates are low – the Official Cash Rate is at a record-low of 1.75 per cent even though we are a decade into an economic expansion.

In recent years the cost of servicing high debt levels has been stable at around 8 per cent of household incomes owing to low interest rates.

When it comes to debt servicing, composition matters: high debt with low interest rates is very different to low debt with high interest rates.

When debt is high, households’ debt-servicing burdens are more sensitive to changes in interest rates. In terms of New Zealand’s structural vulnerability, this means households are more exposed should interest rates rise.

Serviceability and debt

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Whatever way you cut it, household debt is high and interest rates are expected to eventually rise.

Even in the best case scenario, this means future consumption could be more constrained by debt repayment and credit rationing than would otherwise be the case.

In the worst-case scenario a significant lift in interest rates and/or a sharp decline in household incomes could make servicing high debt levels problematic, triggering a downward spiral in economic activity.

Miles Workman is an economist at ANZ NZ