New Zealand's total gross debt has risen...but private debt growth is subdued/ Herald Graphic
In our annual Nation of Debt series, we tally all the nation’s debt statistics, from across the private and public sectors to give a big picture of how much New Zealand owes as a country.
New Zealand’s total gross debt continues to grow - not least because of a big rise in Crown debt over the past year.
But with higher interest rates doing their job and a slowdown in the economy, one upside is the rate at which Kiwis are borrowing from banks is easing.
In the year to May 31, we’ve hit a grand total of $827 billion. That figure is up from $790b last year - a rise of nearly 5%.
It represents an average of $153,777 in raw debt for every Kiwi.
But it could be worse.
Since the series began in 2016 that total nominal figure has ballooned by 68%, from $492.6b. That’s an average annual growth rate of about 7.6%.
If we strip out 11% growth in Crown debt over the past year (which we’ll look at in more depth tomorrow) then the annual rate of credit growth, in the year to May 31, has been moderate by historical standards.
The economic cycle has turned and the stimulus-fuelled pandemic boom is over. As the Reserve Bank has lifted the official cash rate the cost of borrowing has risen and we have borrowed less.
Housing accounts for nearly 44% of the nation’s total debt (see graph below). Most of that is owed to foreign banks so when it is rising rapidly - as it did in the last housing boom - it worries the Reserve Bank and international rating agencies.
But it is up just 3.3% in the past year - almost half the rate at which it rose in the year to May 2022. Consumer borrowing rose just 2.5%, business borrowing increased by 3% and agricultural debt is up just 0.5%.
The slower rate of credit growth isn’t surprising given the state of the economy, says ANZ senior economist Miles Workman.
“It’s pretty consistent with where we are in the cycle right now. Modest housing growth is a big part of the story,” he said.
“Essentially you don’t need to borrow much if prices are falling or going sideways. And also there isn’t a lot of demand out there. The number of sales is also exceptionally low.”
Conversely, when the housing market booms - as it did through 2021 - mortgage borrowing spikes.
Housing affordability is a big handbrake on the pace at which housing debt can grow, Workman says.
“When the housing market went bananas, after all that pandemic stimulus, the house price to income ratio lifted to almost nine times income, from about six and a half before the pandemic,” he says.
“Prices have come down and incomes have continued to grow so that metric is roughly about where it left off at about six and half times income.”
But that is still high by historical standards, Workman notes.
“In the 1980s you only needed three times income. So the affordability issue is a financial stability concern, but it also acts as a natural limit in terms of how far house prices can rise.”
Workman says it is no surprise that agricultural lending and business lending have slowed.
Agricultural debt is underpinned by the slowdown of Chinese consumption and weaker export prices, he said.
“If you’re an exporter, an agri producer there is just less appetite to borrow to expand production.”
“Business lending is a similar story... Domestic demand has taken a hit because of the monetary tightening.
“Businesses borrow to cover shortfalls - through Covid lockdowns, there was a bit of that. But business credit associated with investment - that’s the good kind of borrowing we want to see in a healthy and growing economy. It’s one of the more interest rate-sensitive parts of the economy so it’s not a surprise.”
In the past, the rate of lending growth in both housing and agriculture has been an area of concern for the Reserve Bank, which monitors the data as part of its Financial Stability brief.
Charles Lilly, RBNZ adviser in the Financial Stability Assessment & Strategy Department, said housing was considerably more subdued now.
“Households are facing elevated mortgage rates, there’s uncertainty about the job market and the housing market has been quite cool, so it’s not surprising that there is very low credit growth there.”
That was particularly the case on the investment side, he said. “First home buyers have been a bit more active so there is a bit more growth there.”
On agricultural debt, dairy farm lending had cooled considerably from the peak of the export boom, although horticulture was an area of strength, Lilly said.
Commercial property was one area of concern right now though, he said.
“That’s the area that we have got the most focus on in terms of the financial stability risks. The actual lending growth into the sector has been quite flat. There’s not been a lot of demand and as you can imagine it’s not the best time to start new office projects.
“The concern there is mainly the long-term impact of trends we’re seeing, like working from home, reduced demand for office, the flight to quality from second-grade to high-grade offices. ”
Those trends combined with elevated interest rates were putting the sector under pressure, he said.
Broadly though, the financial system had thus far proved more resilient to the rise in interest rates than had been expected, Lilly said.
There had been a significant increase in the OCR (525 basis points in 18 months), he said.
That had now largely flowed through in terms of mortgages and business loans repricing. “So we think that debt servicing burden is probably there or thereabouts at the peak.”
But the level of distressed loans was sitting well within what the banking system could handle, he said.
“We do stress test where unemployment gets to 9-10% and look at what that does to non-performing loans. What we have at the moment is nowhere near that.”
After the GFC, the percentage of non-performing loans reached 1.2% in the housing sector and 3% in the business sector. By comparison, they currently sit at 0.5% and 0.9% respectively.
“That resilient labour market has been really helpful in terms of enabling households to adjust to those higher mortgage rates. That’s been a key thing underpinning the relatively low levels of stress we’ve seen.
“Of course, unemployment is rising and there could still be more stress coming through,” he added.
Of course, the nominal figures still look scary. Our total gross national debt is approaching $1 trillion.
Before we get too worried about that, we should compare the figure to saving rates and assets to add more context.
Latest Stats NZ figures (for the year to March) showed New Zealanders’ household net wealth (as opposed to the Crown’s deteriorating position) rose by 0.3% for the quarter and is up 1.4% in the past year.
New Zealanders’ aggregate net worth is $2.34t - around three times our gross debt levels.
That sounds good but when we consider that a large portion of this wealth is tied to house prices, it is not an especially great ratio. There is no way around the fact that as a nation we don’t live within our means.
The fundamentals haven’t changed from a year ago, says Workman.
“New Zealanders are just not very good at saving and our net external liability reflects that. We borrow a lot from the rest of the world.
“It’s not growing rapidly as a share of GDP - but at that same time our current account deficit is too still wide to call sustainable.”
The current account is a measure of the money flowing into and out of the country. It includes the balance of imports versus exports, but also things like business profits and investments flowing in and out of the country.
New Zealand typically runs a deficit. But the deficit blew out during the pandemic to 8.8% of GDP - close to levels that might prompt international rating agencies to downgrade our reputation as a borrower.
“Rating agencies do look at it through an NZ Inc lens and that’s where the current account and the net liability position come into their equations,” Workman says.
“They will certainly be expressing a degree of discomfort around the current account. But they are forward-looking to the extent that they kind of understand why the deficit got so bad.
“We overstimulated domestic demand, which caused imports to surge and we cut off a big source of overseas income, in tourism and students. Those things are normalising now. That could get us back to a 4.5, 5% deficit. But it is still a deficit at the end of the day.”
Being dependent on foreign direct investment to make up that deficit created extra risk for the New Zealand economy, Workman said.
“If foreign investors decided - because of some shock - that we were not putting that investment capital to good use, then those investors could pull the plug. In which case we could no longer fund our current account deficit and we’d have to learn to live within our means very rapidly.”
That big ugly number in our graphic ($827b) is New Zealand’s total gross debt. It combines the latest Reserve Bank figures for private debt with Treasury numbers for Crown debt and Local Government Funding Agency data on council debt, and IRD’s data on student loans.
The Reserve Bank figures include housing debt, consumer debt, business debt and agricultural debt to June 30. These are updated monthly by the central bank as part of its brief to monitor and maintain financial stability.
The Crown debt figure is taken from the Treasury’s Interim Financial Statements (11 months to May 31) and is the figure for Core Crown Borrowings.
This is different from the Net Core Crown Debt figure often used by politicians when discussing debt-to-GDP ratios.
We use this (on Treasury’s advice) as it is a gross debt figure but excludes debt held by state-owned enterprises which would have been covered in the Reserve Bank statistics.
The debt figure supplied by the Local Government Funding Agency is gross debt for the year to June 30, 2023. It captures all core council activities (Watercare, Auckland Transport etc) but excludes some commercial activities (eg Christchurch City Council’s Orion lines company, Port of Lyttelton, Christchurch Airport) as these would also be included in RBNZ data.
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
New employment data this week will reveal the impact on jobs.