Every Kiwi on average now owes $151,000 in raw debt. Photo / 123rf
New Zealand’s total gross debt continues to expand and break new records.
In our annual Nation of Debt series, we tally all the nation’s debt statistics, from across the private and public sectors.
This year we’ve hit a grand total of $790 billion. That’s up from $739b last year - a relatively subdued increase of 7 per cent.
But that’s now an average of $151,000 in raw debt for every Kiwi.
Since the series began in 2016 that total nominal figure has ballooned by 60 per cent - from $492.5b.
Of course, the nominal figures look scary.
We typically compare debt levels to GDP or offset them against saving rates and assets to add more context.
But while solid GDP growth can keep the international creditors at bay, the bottom line is that we don’t save enough collectively to offset our borrowing needs.
That’s highlighted by the country’s ongoing current account deficit - which is currently sitting at $33 billion or 8.5 per cent of GDP.
“The big issue with that isn’t that debt levels are high overall,” says ANZ senior economist Miles Workman. “It’s that New Zealand isn’t very good at saving.”
“There isn’t a pool of domestic savings to fund this demand for debt, so we have to go offshore to fund it.”
That was a vulnerability and was something that sovereign credit ratings agencies were watching, he said.
If we benchmark our debt levels against our assets the picture looks a bit better.
According to the latest StatsNZ data New Zealanders’ aggregate net worth is $2.2 trillion - around three times our gross debt levels.
Of course, most of that is “paper wealth” based on the elevated market value of our housing stock.
On that basis, we remain vulnerable to big housing market slumps. We’ve already seen our net wealth fall for five successive quarters (although it is still higher than it was pre-pandemic).
But there is some good news in the latest figures - especially if we park the pandemic-fuelled blowout in public debt.
It’s no secret that the massive scale of government stimulus through the pandemic has seen core Crown borrowing surge in nominal terms. It was up another 17 per cent in the year to May 30 - to $193.63b.
Crown debt levels are a hot political topic right now and this series will take a more in-depth look at them on Thursday.
Meanwhile, we can take some comfort in the fact that the in past year, the growth rate in private debt has been the most moderate since at least 2016.
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.
That is a sign that the system is working and RBNZ monetary policy is doing its job to reduce the money supply and curb inflation.
“In that sense, we’re not concerned about the slowdown,” says Chris McDonald, the RBNZ’s manager of financial system analysis.
“I guess one of the things we are watching is the lending appetite of banks,” he said.
“So far we haven’t actually seen any contraction in that lending appetite and think it partly reflects that the banks are well-positioned with plenty of capital and liquidity. That ensures they can maintain credit availability.”
The Reserve Bank runs a comprehensive data series, breaking things down across the different sectors of the economy.
The series provides insight for assessing New Zealand’s financial security risk, offering clues to broader trends in the New Zealand economy.
lt also highlights that New Zealand is most heavily exposed to mortgage debt.
“We’ve certainly seen a slowdown in household lending and a lot of that has been on the mortgage side,” says McDonald.
“We’ve gone from a period of very low interest rates - for about a decade or longer - and we’re moving into a higher interest rate period.”
As of May 30 housing debt was sitting at around $390b. That’s up 3.1 per cent in the past year - a much lower rate of increase than we’ve seen across the past decade.
In the year to May 2021, the rate of increase was 11 per cent.
“It’s been a wild ride in the housing market,” says ANZ’s Workman. “That’s what’s been driving mortgage-related debt.”
There are two factors there, he says: the price cycle and turnover.
“Turnover and sales haven’t at any point hit amazing highs, but prices certainly took off like a rocket.”
They rose by about 46 per cent, from pre-pandemic levels to a peak in November 2021.
So we saw debt follow suit.
“Then we saw the OCR hikes kick in and that impacted housing as you’d expect it to, and credit growth slowed quickly from elevated levels,” he says.
Relative to that 2021 peak, we’ve seen house prices fall by around 15 per cent.
Along with that, there have been lower levels of transactions, says McDonald.
“We’ve seen a real pullback in new mortgage lending.”
The growth rate for business lending has declined from 9 per cent two years ago to just 3.4 per cent.
That’s only sort of good news. Business is one area where higher debt can be positive as we want to see businesses borrowing to invest in new capital to expand and improve productivity.
“The key driver is just some of the softening we’ve seen in business sentiment, reduced investment intentions and the general outlook worsening,” says McDonald.
“In part that is consistent with the higher-interest-rate environment.”
Businesses generally don’t fix borrowing rates for as long as households so OCR increases tend to take effect more quickly.
The area where there had been some continued demand was for working capital.
In other words, some businesses are still borrowing just to stay on top of costs.
“That is creating some demand for credit but that is being more than offset by the softer investment outlook,” McDonald says.
Broadly though, both for business and agriculture (which we’ll look at more closely on Tuesday) debt is declining as a percentage of GDP.
“For business debt for example it’s gone from somewhere between 45 to 50 per cent of GDP and it has fallen to around 35 per cent of GDP,” he says.
“That makes business more robust and resilient to higher interest rates and slower economic activity.”
For households we haven’t seen that same decline, he says. The ratio has stayed flat over time.
“But we did see quite a reduction in debt services costs,” he says.
Average debt servicing costs dropped to 9 per cent, as a proportion of income, during the period of ultra-low interest rates to late 2021.
That figure has since climbed as interest rates have climbed, up to about 22 per cent, as of the most recent RBNZ Financial Stability Report.
“That’s all a fair bit lower than where it got to prior to the GFC,” says McDonald.
“On aggregate, and bearing in mind that many Kiwis have mortgages paid down to a low level ... the big picture there is that both households and businesses are in a relatively good position - for the vast majority,” he says.
“That’s not to say that there won’t be pockets of households that may struggle.”
That big ugly number in our graphic ($790b) 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 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 off in the Reserve Bank statistics.
Finally, the debt figure supplied by the Local Government Funding Agency is gross debt for the year to June 30, 2022. 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.
Tuesday: Rising costs and falling milk price mean farmers could struggle to break even
Wednesday: Living off the plastic: Cost of living pressures push spending onto the credit card
Thursday: Govt’s seismic borrowing is coming at a huge cost
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.
Economic recovery is coming but won't solve structural problems.