That’s the Herald’s headline for its new “Nation of debt” series, where they state “New Zealand now owes almost half a trillion in debt”.
Whatever “New Zealand” and “owes” might mean.
The New Zealand government has some debt – $109 billion of it, in gross terms, according the Herald’s numbers, spread between central and local government. Of course, these very same entities have financial assets as well. The financial assets aren’t as large as the financial liabilities, but by most reckonings the New Zealand public sector isn’t particularly indebted.
Another way of reckoning ‘New Zealand’s debt might be the amount New Zealand firms, households and governments owe to foreigners. That isn’t $500bn, but – according to Statistics New Zealand – $247 billion (gross). Again there are some assets on the other side. And actually the net amount of capital New Zealand resident entities have raised from abroad is largely unchanged, as a share of GDP, for 25 years. It is quite high by international standards, but the ratio isn’t going anywhere.
But the Herald chooses to focus simply on the gross debt of New Zealand entities, and pays no attention to what might be going on elsewhere in the balance sheet. Since they end up focusing on households, lets do that. The Herald focuses on $232.9 billion of gross household debt, but pays no attention to what has been going on with household deposits. Here is the chart, using the Reserve Bank’s household statistics, of the gap between household debt and household deposits.
It rose very rapidly in the boom years of the 2000s, but has gone nowhere at all for seven or eight years now. GDP has gone up a lot in that time, so that the ratio of this gap (between loans and deposits) to GDP is materially lower than it was back in 2007/08. This isn’t some novel point – the Reserve Bank has been mentioning it in FSRs for years now.
Even ignoring deposits, household debt to GDP itself has gone nowhere for eight years, after a huge increase in the previous 15 years.
Probably these ratios will increase somewhat over the next few years. HIgh house prices, and a housing stock that turns over only quite slowly, does that. Here is a chart I ran a while ago illustrating how debt to income ratios keep rising for quite some time – all else equal – even if there is just a one-off increase in house prices.
In the chart below I’ve done a very simple exercise. I’ve assumed that at the start of the exercise, housing debt is 50 per cent of income, house prices and incomes are flat, and people repay mortgages evenly over 25 years. Only a minority of houses is traded each year, but each year the new purchasers take on new debt just enough to balance the repayments across the entire mortgage book.
And then a shock happens – call it tighter land use regulation – the impact of which is instantly recognized, and house prices double as a result. Following that shock, house purchasers also double the amount of debt they take on with each purchase, while the (now rising) stock of debt continues to be repaid in equal installments over 25 years.
In this scenario remember, house prices rose only in year 1. There is no subsequent increase in house prices or incomes. But this is what happens to the debt to income ratio:
None of this is reason to be indifferent to the scandal of house prices, especially those in Auckland. But high house prices – that result mainly from the interaction of population pressures and the thicket of land use restrictions which rig the market against the young – tend to increase the amount the young need to borrow from, in effect, the old to get into a first house. It is quite risky for the borrowing cohort, but on the other side are much higher financial assets held by the older cohort, who sold the young the houses. “New Zealand” isn’t more indebted – one significant cohort of New Zealanders have much more debt, and others have much more financial assets. And that outcome is mostly down to choices made by successive governments.
The Herald is also keen to run the line that people are treating their houses like ATMs – drawing down on the additional equity to boost consumption. No doubt some are – and for many it will be quite rational to do so. If you are 60 now, living in Auckland, and thinking of moving to Morrinsville or Kawerua to retire, you might as well take advantage of the rigged housing market now and spend some of your equity. On the other hand, people trying to get on the housing ladder are having to save ever more to get started in the market (through some combination of market constraints and regulatory restrictions). But whatever the case at the individual level, here is a chart I’ve run a couple of times recently, showing household consumption as a share of GDP.
If you didn’t already know there had been a massive increase in house prices, and gross household debt, over these decades, there is nothing in overall consumption behavior to suggest a problem (or even an issue). High house prices don’t make New Zealanders as a whole better off, they simply involve redistributing wealth from one cohort to another. If they don’t make New Zealanders as a whole better off, we wouldn’t expect to have seen a surge in consumption. And we don’t.
I’d hate to be one of the young taking on mortgages of the staggering size that are all too common today. Even if house prices never come down much – quite plausible if the land supply mess is never properly fixed – they face a heavy servicing burden for decades. If house prices do fall a lot, those people risk carrying an overhang of debt that could make it all but impossible to move. And some risk of serious distress if the borrower were to be out of a job for very long.
But it isn’t “New Zealand” that owes this money. It is one lot of New Zealanders who owe it to another lot of New Zealanders, in a market rigged by governments. Fortunately – and I didn’t see this in the Herald story – even our Reserve Bank (constantly uneasy about debt and housing) has repeatedly run severe stress tests and found that the banking system is robust enough to cope with even some nasty adverse shocks. The same, of course, won’t necessarily be able to be said for all the borrowers if something very bad does happen.