A couple of (RBA) housing finance charts

Comment on the Governor’s sprawling speech “Geopolitics, New Zealand and the Winds of Change” (curiously, a speech in which “geopolitics” didn’t appear at all) is held over until tomorrow.

But I was reading an interesting speech from a senior RBA official, Assistant Governor Michele Bullock, which happened to include this chart.


It captures a couple of important points relevant to thinking about household debt.   You quite often see comment about how high the level of household debt is in New Zealand.  But Bullock’s chart illustrates a pretty straightforward point: when almost all your housing stock is owned by households (whether owner-occupiers or investors) you’d expect that, all else equal, household debt relative to household income (or GDP for that matter) would be higher than in countries where a larger share of housing stock is owned by other sectors.  Of the countries Bullock shows data for, New Zealand and Australia have the highest share of the housing stock owned by the household sector.  New Zealand is very close to the median country in this sample, notwithstanding the high share of houses owned by households.

The chart highlights another important point sometimes lost sight of in international comparisons (but which our own Reserve Bank sometimes acknowledges).  In some countries, interest on an owner-occupied mortgage is tax deductible.  That might, all else equal, encourage household to take on more net debt (cost of borrowing and bringing forward consumption is lower), but it certainly tends to encourage people not to rush to pay off the mortgage even as they may be accumulating financial assets (and the tax treatment of some financial assets is also often quite favourable relative to, say, the situation in New Zealand).   And so Sweden, Switzerland, Denmark and Norway have much more gross household debt outstanding –  but not necessarily any more financial system risk –  than countries with similar household sector ownership of the housing stock but a different tax treatment.   (The US is a bit of an outlier here, and from the look of it the data may not be fully comparable.)

Of course, what Bullock doesn’t highlight in her chart is two things:

  • Australia and New Zealand have high house price to income ratios by international standards, which tends to boost the amount of household debt required to accommodate such prices, and
  • Australia’s compulsory private superannuation system will, all else equal, tend to mean that Australian households will more often have substantial financial assets tied up in superannuation schemes while at the same time having large outstanding mortgage debt.  (Kiwisaver, more recent and on a smaller scale, will now be tending to have the same sort of effect in New Zealand.)

There was one other interesting chart in the Bullock speech.

bullock 2

For all the talk about households taking on more and more debt, the median advanced country’s ratio of household debt to income hasn’t changed materially in a decade, despite the fall in global interest rates.  Of course, all else equal, if interest rates had been higher debt would have been lower, but so would real and nominal GDP, asset prices, inflation (but, pace Lars Svensson, debt to GDP ratios might not have been much lower)…..and unemployment would have been higher.   All else is never equal, and it is important to remember that interest rates are low for a reason (or set of reasons) grounded in the fundamentals of the really economy, factors which central bankers and banking regulators have little influence over.

7 thoughts on “A couple of (RBA) housing finance charts

  1. “All else is never equal, and it is important to remember that interest rates are low for a reason (or set of reasons) grounded in the fundamentals of the real economy, factors which central bankers and banking regulators have little influence over.”

    I guess it depends how widely/tightly one defines “banking regulators”. The long term move down in interest rates and bonds from the 1980’s reflects the freeing up of credit regulations over that period. Interest rates are so low now as money has little value. Globally we are in debt up to our ears having just above leveraged as much future consumption as possible.


    • I don’t really buy that story. After all, at the level of the whole economy, nz’s negative Niip position ( share of gdp) has got no larger since around 1990. And altho household debt has risen with house prices, household consumption as a share of gdp has also been pretty stable for decades.

      The other big thing that had changed, for the worse in this regard, is tighter land use restrictions.


  2. I’d argue that it had its roots in heavy govt interference in the market for housing finance (in the US) combined with govt activity in the creation of the euro (in all sorts of ways – idiosyncratic crises in Spain and Ireland, and the activities of the German banks in particular pursuing yield across border). Rising housing debt wasn’t a problem in floating exchange rate countries where the govt kept out of the market.

    By contrast, land use restrictions that have driven up house/land prices are a deeply unjust social menace (but not a fin stability issue).


  3. It would be interesting to see the change over time for the other high % countries. My understanding is that in Denmark, NL, Switzerland you can lock in very low interest rates for very long periods, with 15 or even 30 year terms not uncommon. Was the ramp up a recent phenomenon as low cost financing for other asset investments? Contrast Aussie and NZ with shorter terms (max 5), interest premiums and higher mortgage rate volatility. So servicing becomes an issue if rates rise (including if NZD falls further given we wholesale fund from offshore?). At least in Aussie household net asset position includes higher other balances that can be used to delever? In NZ is net asset wealth mainly in (debt propped) housing?


    • NZ Household Housing Debt = $182 billion
      NZ Household Cash deposit Savings = $174 billion
      NZ Household Investment Funds in Listed Shares = $67 billion
      NZ household Investment in Unlisted companies = $327 billion
      NZ household House value = $807 billion

      from RBNZ Statistics.

      The Bear, why would you think that the NZ household asset wealth is in debt propped housing?


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