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Household Debt in New Zealand

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  • Katherine Henderson
  • Grant M. Scobie

    ()
    (The Treasury)

Abstract

In recent years, the total debt of the household sector has risen appreciably. This has led to concerns about “excessive” borrowing, and to the possibility that some households may have become unduly vulnerable in the event of unexpected shocks. This paper draws on both aggregate and household level data to assess the extent and composition of household debt; to analyse the distribution of debt in relation to income; to examine the factors associated with high ratios of debt servicing relative to income and consider the extent to which individuals and households are vulnerable to unexpected shocks. Between 1982 and 2007, household debt grew from 33% to 149% of household disposable incomes. However due to the faster growth of assets, net wealth grew from 319% of disposable income in 1982 to 430% by 2002 and 604% by 2007; ie, even before the sharp rise in house prices, the overall balance sheet of households was stronger in 2002 than any time in the previous two decades, despite the increase in debt levels. Mortgages represented about 85% of total liabilities, the balance made up of credit card debt and student loans. Higher absolute debt levels amongst couples were associated with home ownership and higher levels of assets and income. Maori and Pacific Island couples recorded liabilities some $6,500 greater than European couples. The paper defines those as vulnerable as having debt servicing obligations exceeding 30 percent of their gross income. It is estimated that in 6.2% of non-partnered individuals and 8.1% of couples fell into this category in 2004. When the underlying levels of income, asset values and mortgage interest rates were adjusted to correspond to values in 2008, it is estimated that these proportions doubled. Those at risk were defined as having debt servicing obligations exceeding 30 percent of their gross income and, at the same time, recording negative net wealth. In part, negative net wealth arises because of lack of any assets that match the liability of student loans. Some 1.9% of individuals were deemed at risk, falling to 1.5% when student loans were excluded. Student loans distort the net wealth estimates of those holding them as only the liability with no corresponding asset is recorded. When this is allowed for, the share of nonpartnered individuals at risk drops further. The unit record data ended in 2004. However the paper makes projections to 2008. For non-partnered individuals; there was little or no change in our estimate of the proportion with negative net wealth who also had debt servicing costs exceeding 30% of their income (ie, at risk). However for couples our estimate of the proportion at risk rose from 0.8% to 1.1%, corresponding to an increase from about 6,000 to 8,000 families.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-03/twp09-03.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 09/03.

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Length: 68
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:nzt:nztwps:09/03

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Web page: http://www.treasury.govt.nz
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Related research

Keywords: Household debt; New Zealand; vulnerability;

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References

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  1. Gianni La Cava & John Simon, 2003. "A Tale of Two Surveys: Household Debt and Financial Constraints in Australia," RBA Research Discussion Papers, Reserve Bank of Australia rdp2003-08, Reserve Bank of Australia.
  2. Ravallion, Martin, 1996. "Issues in measuring and modeling poverty," Policy Research Working Paper Series, The World Bank 1615, The World Bank.
  3. Nathalie Girouard & Mike Kennedy & Christophe André, 2006. "Has the Rise in Debt Made Households More Vulnerable?," OECD Economics Department Working Papers, OECD Publishing 535, OECD Publishing.
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Citations

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Cited by:
  1. James Enright & Grant M Scobie, 2010. "Healthy, Wealthy and Working: Retirement Decisions of Older New Zealanders," Treasury Working Paper Series, New Zealand Treasury 10/02, New Zealand Treasury.
  2. Grant M. Scobie & Katherine Henderson, 2009. "Saving Rates of New Zealanders: A Net Wealth Approach," Treasury Working Paper Series, New Zealand Treasury 09/04, New Zealand Treasury.
  3. Simon Anastasiadis, 2010. "Health and Wealth," Treasury Working Paper Series, New Zealand Treasury 10/01, New Zealand Treasury.
  4. Mark van Zijll de Jong & Grant M. Scobie, 2006. "Housing: An Analysis of Ownership and Investment Based on the Household Savings Survey," Treasury Working Paper Series, New Zealand Treasury 06/07, New Zealand Treasury.
  5. Trinh Le & John Gibson & Steven Stillman, 2010. "Household Wealth and Saving in New Zealand: Evidence from the Longitudinal Survey of Family, Income and Employment," Working Papers, Motu Economic and Public Policy Research 10_06, Motu Economic and Public Policy Research.
  6. Grant Scobie & Trinh Le & John Gibson, 2007. "Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Finding from SOFIE," Treasury Working Paper Series, New Zealand Treasury 07/04, New Zealand Treasury.

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