Brian Fallow: Household thrift boosts economy

Bank of New Zealand senior economist Craig Ebert says households have made progress in getting on top of debt. Photo / Filephoto

The image of New Zealand households as perilously improvident and debt-laden is increasingly out-of-date.

While there may be little joy in it for businesses chasing the consumer's dollar, Bank of New Zealand senior economist Craig Ebert says the progress households have made in getting on top of debt and improving savings is helping lay the foundation for solid and sustained economic expansion ahead.

The conventional wisdom is that by the time the financial crisis struck the level of household debt had reached 160 per cent of disposable (after-tax) income, driven by a doubling of house prices in just five years.

Such a ratio would be extremely problematic even by the latest international standards, Ebert said. But he argues the ratio is really closer to a much less alarming 100 per cent.

Partly that is because the starting point of household debt and savings rates was not as bad as previously thought.

Statistics New Zealand in December published updated and more refined figures for household income and outlays, which among other things moved a lot of mortgage interest costs attributable to landlords from the household to the business sector, where they belong.

It estimates that in the year to March 2010 households' dis-saving rate was 2.2 per cent, an improvement from 4.9 per cent in 2009 and 8.9 per cent in 2007.

On average over the past five years it now has households spending $1.06 for every $1 of income compared with $1.13 on previous estimates.

Those are net rates which include an allowance for depreciation of the housing stock.

On a gross basis households managed a positive savings rate of 1.2 per cent in the March 2010 year.

Ebert estimates it has improved to around 5 per cent in the March 2011 year and will maintain that next year. "It's the strongest in nigh-on 20 years."

Reserve Bank figures show mortgage debt flattening off over the past couple of years; in December total household mortgage debt actually fell.

At the same time disposable incomes have been rising, though more from income tax cuts than increases in gross wages and salaries. Completing the rebalancing trifecta, with an improved savings rate and reduced debt-to-income load, is a less overvalued housing market.

The BNZ reckoned in early 2008 that house prices, then averaging about six times average disposable incomes, were overvalued by about 30 per cent. By now about half that overvaluation has been relieved, Ebert said, through declines in house prices and a "reasonable" increase in disposable incomes.

"Good income growth over the next few years, coupled with flat to slightly declining nominal home prices, would probably go a long way to eliminating the housing valuation excesses altogether."

Ebert argues that gains made in the process of repairing overstretched household balance sheets help resolve the apparent paradox that surveyed consumer confidence is relatively robust while consumer spending has been "awful".

"The way we look at it is that consumers are feeling okay ... because they are getting on top of this stuff - almost by definition because they are not spending so much."