Academic journal article The Reserve Bank of New Zealand Bulletin

Household Debt: A Cross-Country Perspective

Academic journal article The Reserve Bank of New Zealand Bulletin

Household Debt: A Cross-Country Perspective

Article excerpt

1 Introduction

Households borrow for a variety of reasons. These include, for example, borrowing to purchase a home that otherwise would require a long period of saving and delayed consumption, or financing an investment in human capital through student loans. By bringing forward consumption and investment, debt can make resource allocation more efficient, and improve living standards.

But an increase in household borrowing does not always turn out well, either for individual households or for the sector as whole. The experience in a number of countries during the global financial crisis (GFC) suggests that sharply rising levels of household debt can materially increase the risk of financial crises and economic instability.

The level of household debt in New Zealand increased dramatically during the 2000s, although the household sector and the financial system were spared the dislocation witnessed in some other countries. Drawing on a new cross-country database produced by the Bank for International Settlements (BIS), this article puts developments in the New Zealand household sector in a broader international context. (2) The next section briefly reviews the New Zealand household balance sheet and is followed by a cross-country debt comparison in section 3. Section 4 reviews various explanations for the run-up in debt internationally, and some of the specific reasons in the New Zealand context. The final section examines debt developments since the GFC.

2 The New Zealand household balance sheet--an overview

Figure 1 presents a picture of the aggregate New Zealand household balance sheet. Total assets (or gross wealth) captured here are close to $1 trillion, an increase of 175 percent since 2000. (3) The majority of wealth is held in the form of housing assets. Strong growth in the value of housing over the last financial cycle (largely driven by rapid house price growth) explains most of the sharp increase in the size of the aggregate balance sheet over this period.

The stock of household debt (outstanding loan balances taking into account new loans and principal repayments) increased dramatically over the last financial cycle, with annual growth averaging 14 percent between 2003 and 2007 in nominal terms, and 11 percent in real (inflation adjusted) terms (figure 2). The overwhelming majority of this debt is in the form of loans secured on residential property (around 87 percent currently), the counterpart to the role of housing on the asset side of the balance sheet. The remaining 13 percent is accounted for by consumer and student loans (7 and 6 percent respectively).

Relative to household income, debt began to rise sharply from the late 1980s. Over the last cycle household debt-to-income increased 68 percentage points to a peak of 175 percent in 2008 (figure 3). (4)

A corollary of the sharp increase in the level of household debt is an increase in household debt servicing obligations (figure 4). The debt service ratio peaked in 2008, driven by both the increase in the stock of debt outstanding and higher interest rates over the upswing of the last cycle. With the decline in interest rates from 2008, interest servicing relative to income has fallen substantially, but will start to increase again as interest rates rise.

3 Placing New Zealand household debt in context--a cross-country comparison

In 2013 the BIS released a new cross-country database of total credit to the non-financial private sector. (5) The data are quarterly and covers 40 countries at present, including both advanced and emerging economies. The database encompasses credit from all sources including banks and other financial intermediaries, capital markets and non-residents--both loans and debt instruments. The total credit series for each country is broken down into credit to households and non-profit institutions serving households (NPISHs), and non-financial corporates (essentially all non-household debt excluding that of financial institutions). …

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