First, the bad news.
New Zealand's debt mountain is still growing.
The big, scary grand total — $571.04 billion in gross debt, or $115,000 a head — is about 16 per cent higher than it was three years ago when the Business Herald started tallying it.
The good news is that the rate of growth has slowed.
But despite both major political parties committing to lower public debt, and even a slowing housing market, debt still rises by billions every year. "It's not catastrophic," says independent economist Cameron Bagrie.
"But it is a point of vulnerability. It's high." And unfortunately, there's no easy way out.
The world has changed on us, Bagrie says. Inflation is no longer going to do the work for us and erode the value of our nominal debt.
Now, as our economic growth path slows, New Zealand needs to make some changes.
If the economy can't find another gear to lift it in the next year or two, then we could have big problems servicing that debt, Bagrie says.
The Reserve Bank — as guardian of the nation's financial stability — no longer minces words about the threat posed by New Zealand's debt levels.
"A material portion of New Zealand households and dairy farms have high debt levels that they would struggle to service if their incomes fell or costs rose," Reserve Bank governor Adrian Orr wrote in the May Financial Stability Report.
"Banks would face large losses if many borrowers defaulted on their loans, particularly in an environment of sharply falling house and farm prices. This scenario is unlikely but it remains possible, if there were a large shock to New Zealand's economy or financial system."
New Zealand's debt soared during the housing and dairy booms that followed the global financial crisis — our so-called "rock star economy" years.
Our borrowing has stabilised in the past two years but, as Reserve Bank assistant governor and general manager of economics, financial markets and banking Christian Hawkesby puts it, we still face the "hangover".
"Where things sit now, household debt is growing in a single-digit range rather than double-digit and at a rate that is more closely in line with nominal income growth or GDP and that's what leaves you with a debt-to-income ratio which is reasonably stable," Hawkesby says.
For the past three years our household debt has been between 92 and 94 per cent of the country's gross domestic product. By another measure — household debt as a percentage of income — debt has been steady at 163-164 per cent for the past two years.
"Glass half full, we are not getting any worse," says Bagrie. "Part of that is because the regulator [the RBNZ] has been a lot more active in regard to macro-prudential policy." Also, the housing market has cooled and with it mortgage lending.
But we shouldn't let the slowing rate of credit growth lull us into a false sense of security.
"The problem is, it's all concentrated," says Bagrie. "There's a lot of people out there with no debt, so the average figures paint a bit of a distortionary picture.
"Have we paid down a lot of debt? No."
Not getting worse is not the same thing as getting better.
"We haven't seen a sign of deleveraging," says Hawkesby. "The level of household debt relative to income has stayed elevated. It's not as high as some other countries, including Australia, but it is relatively high and has remained elevated since the GFC."
We talk a lot about New Zealand's terrible private debt position compared to our relatively benign levels of public debt.
But when you look at the league table for household debt to income, we barely make the leader board.
Some surprisingly sensible countries top the list: Denmark, the Netherlands, Switzerland.
But "we're more vulnerable than countries that can fund more [of the debt] internally with domestic institutions and savings," Bagrie says.
"New Zealand doesn't produce enough domestic savings to fund our investment needs," he says.
"So we've got a pretty big offshore funding requirement. It's not as large as what it was but it's still pretty substantial. And it's one of the reasons the Reserve Bank is seeking to do what it is going to do through New Zealand banks having to hold more capital."
There is also a greater depth and sophistication of financial markets in some of those other countries, Hawkesby says.
Other things at play include interest rates and serviceability.
Europe and Switzerland now have official cash rates in negative territory, so mortgage rates are extremely low.
And different countries have different risk profiles around their debt.
"So in Japan the government is the largest issuer of debt because they are trying to stimulate the economy and then on the other side households are saving ... almost offsetting what the government is borrowing," says Hawkesby.
Australia, with its A$2.8 trillion in compulsory superannuation assets, is an obvious example of how saving can offset debt.
New Zealand has actually started to get better at investing, Bagrie says.
"We used to be poor savers and poor investors," he says.
"When foreigners invested here they'd get the cash cows and when we invested overseas we got the dogs and fleas." Over the past eight or nine years, however, the investment returns New Zealanders have been getting have been pretty good, he says.
"The NZ Super Fund's been big part of that story.
"I wouldn't say the balance sheet is looking good. But if you look at debt levels compared to market value of assets — and the big asset is the house — then we have pretty high net worth. The problem is it's all concentrated."
In New Zealand, about 60 per cent of lending by registered banks is against houses, he says.
"Now, you are not going to grow a dynamic, productive high wage economy if housing takes up three-fifths of your borrowing."
The warning sign that central banks tend to look at is very rapid asset price growth, at the same time as rapid credit and lending growth.
That's exactly the kind of cycle New Zealand has just been through with its housing and agriculture sectors.
"We're not in that zone at the moment," Hawkesby says. "We have more moderate credit growth and much more moderate house price growth. But what we do have is we still have elevated household debt-to-income ... that's really just a hangover from that past credit growth."
So how do we get out of all this debt?
"Good question," says Hawkesby.
Clearly, the days when high inflation would erode the real value of borrowing seem to be behind us.
"Leading into a financial crisis you tend to see debt levels rising rapidly relative to incomes," says Hawkesby. "That's the leveraging process. After a financial crisis you see it falling sharply and that's your deleveraging process."
Traditionally, that's when we see people "taking their medicine, tightening their belts getting balance sheets back into better shape".
"But if that happens quickly it tends to be through the banking sector constraining credit availability ... that tends to be a more painful way to make the adjustment."
After the GFC, central banks tried to avoid that painful adjustment and keep the financial sector functioning.
Ultimately then, the way your debt-to-income level gets to a more sustainable level is through incomes rising more rapidly, Hawkesby says.
"That's the thing that hasn't happened through the GFC; incomes haven't risen faster than credit growth."
New Zealanders are going to need to adjust their mindset to shake off that binge and purge cycle, Bagrie says.
Our debt levels are forcing us to confront low productivity and some fundamental deficiencies in the economy.
"For the past 30 years we've been in the grips of what I'd call a financial credit accelerator," he says.
"When asset prices move up, the economy looks really good, everyone's got a job, they make it easier to get credit, so people leverage a little bit more, asset prices go up some and then a spiral is in motion."
Credit provision has been a big driver in both residential housing and the dairy sector, he says.
"What we're seeing in Australia is early signs that the financial accelerator is turning into decelerator.
"Suddenly, with house prices falling, you're not going to be taking that holiday or buying that car."
You don't even need the market to go backwards, Bagrie says.
"What say the market's just not going up for a couple of years? What say we end up in an environment — which I think we're going to end up in — where credit is roughly stable as a share of GDP?
"Credit is no longer a big driver of the property market and prices don't go up. So take out the wealth effect in regard to what is going to drive economic growth.
Take out the dairy sector as a driver of growth. Those are pretty big parts of the economy when you start to add them up.
"All of a sudden you're in a 2 per cent growth world. The economy is not going back to 3 per cent GDP growth."
It's taken New Zealanders a long time to get their heads around how serious this is, he says.
For now, low interest rates around the world mean high debt levels can be serviced and are sustainable, Hawkesby says.
But we can't rely on things staying that way.
"Central banks and regulators are conscious that interest rates might not stay this low forever, so we do need to take this as an opportunity to keep balance sheets looking strong," he says.
"These periods, where you've identified some potential vulnerability but the risks aren't crystallising, that's a good time to be getting your house in order."
But we need to do more than just talk, he says.
"We need action taken, not just from a regulatory, central banking point of view but from the financial institutions.
"And individuals themselves thinking about their situations."
By the numbers
• That big ugly number in our graphic ($571.04b) 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 Authority data on council debt.
• 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 to May 31 (page 15) and is the figure for Core Crown Borrowings.
• This is different from the Net Core Crown Debt figure often used by politicians when they talk about 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 2018.
• It captures all core council activities (Watercare, Auckland Transport etc) but excludes some commercial activities (e.g. Christchurch City Council's Orion lines company, Port of Lyttelton, Christchurch Airport) as these would also be included in RBNZ data.
• New local authority debt figures are due out soon and gross debt is forecast to be about $17.6b as of June 30 – however the LGFA notes that forecasts are sometimes overstated.
