Editorial: Borrowing can lead to huge debt

Amy Wiggins.

Recent figures showing the increase in debt racked up by Kiwis during the past five years is a huge concern.

Reserve Bank figures show household debt, excluding investment property, has risen by 23 per cent in the past five years to $163.4 billion, while incomes have grown by only 11.5 per cent. Households are now carrying a debt level that is equivalent to 162 per cent of their annual disposable income - a peak higher than the level reached before the global financial crisis.

Satish Ranchhod, a senior economist at Westpac Bank predicted that many people were using their home loans to make consumer purchases.

"We think a lot of the increase in lending on housing loans will also be an increase in spending ... people feel wealthy when the value of their home goes up."

That worries me.

I believe you should not take out a loan to buy anything other than a house, or maybe a car if it is absolutely essential.

A much better option is to save for a few months to buy the items you need or want.

Even if it is an interest-free loan you inevitably end up paying more than you would if you bought the item outright.

While taking out unnecessary loans is unwise, in itself, piling up the debt based on the fact the value of your house has gone up is even more ridiculous.

We've all seen how fast the market can come crashing down - leaving those with large debts scrambling to stay afloat.

Taking out loans for items that depreciate quickly using the equity of a house does not seem sensible to me.

If things went belly up you would lose money on selling the items you had taken out the loans for and you may not be able to get as much for your house as you thought. That leaves you with no assets and a whole lot of debt.

In simple terms, that is what caused the Global Financial Crisis in 2008.

Jeffrey Stangl, a CFA and economics lecturer at Massey University, said businesses had learnt lessons from the crisis and were backing out of debt but now households were the most at risk. We need to be careful not to repeat the mistakes which caused the 2008 crisis.