NZ is balancing a mortgage debt time bomb. Will it blow? – Liam Dann.

We kid ourselves we’re wealthier because of capital gains on our homes but in reality our collective balance sheet is looking worse than ever.

Last week I wrote about the world’s total debt hitting a record $230 trillion.

That’s a big pile of money. The rate at which it has been growing worries the International Monetary Fund which tallied it up. The IMF fears it could be a trigger for the next financial crisis.

Most of last week’s column got side-tracked by government debt and the debate about whether ours can afford to borrow more. ANZ economists made a good case for doing that.

As expected finance minister Grant Robertson ruled it out last week, reiterating his preelection commitment to fiscal responsibility.

The Government’s target of net core crown debt (20 per cent ofGDP) makes us look very conservative, the US Government owes more than 80 per cent of the country’s GDP.

But, as numerous correspondents pointed out, it’s New Zealand’s private debt that is the real problem for this county.

We are up to our neck in it and that creates a serious risk particularly if interest rates rise rapidly as they did before the global financial crisis (GFC) in 2008.

The Reserve Bank’s latest tally puts the total at $433.07 billion a whopping 160 per cent of GDP. That includes mortgages, credit cards, business borrowing and agricultural debt.

It will come as no surprise that our overcooked housing market is to blame for a big rise in mortgage debt over the past decade. That sits at $247.37b 91 per cent of GDP.

It has risen by 57 per cent in the past decade. As house prices have soared so has the amount Kiwis have to borrow to buy.

We kid ourselves we’re wealthier because of capital gains on our homes but in reality our collective balance sheet is looking worse than ever.

This is no revelation, of course. To be fair, it is the issue that probably tops the Reserve Bank’s long list of things to worry about. It is one of the reasons the Bank moved to introduce tough loan to value ratio (LVR) restrictions between 2013 and 2016 as annual growth in mortgage lending neared 10 percent (it peaked at 9.3 per cent in December 2016).

High private debt levels are one of the reasons the Government can’t afford to be reckless on the borrowing front.

New Zealand isn’t unique in this.

As the IMF pointed out, throughout the developed world we have seen debt mount rapidly in an environment of easy money and super low credit, essentially due to the radical policies put in place by central banks to avoid total meltdown in the GFC.

The next crunch will come when we find out how serviceable that debt mountain is, when interest rates rise to more normal levels.

That process is under way now and it worries many economists. They see this a time bomb. Some even predict another massive financial crisis coming our way.

I’m not going to argue this couldn’t happen. But I think it is important to keep the relative scale of the risk in perspective. Debt will almost certainly be at the centre of the next financial mess however it unfolds. But at a certain point that becomes about as meaningful as saying the next crisis will be caused by money.

Debt is effectively a form of currency that enables value transactions to take place in the future rather than just the present. Like money it works as long as there is confidence in the system that accounts for it and enforces payment.

So could the whole thing come tumbling down? Sure.

But let’s look at some reasons why it might not, at least anytime soon.

What’s happening with interest rates is not a shock for markets in fact it’s a slow, orderly process. New Zealand’s official cash rate is 1.75 per cent and it is not expected to go up for at least a year.

Mortgage rates could still rise because local banks need offshore funds to cover their lending costs.

But the proportion they need has fallen. Ten years ago when the GFC hit about 40 per cent of bank funding was sourced offshore. Now it’s less than 30 per cent.

We have learned and made some progress since the GFC.

There are plenty of headlines about US rates rising right now. Even then, the US Fed’s forecasts are for 2.9 per cent by the end of 2019 and 3.4 per cent by the end of 2020. That is hardly apocalyptic. In Europe they are still extremely low. Their forecasts suggest they’ll still be just 0.75 per cent by the end of 2020.

The other positive is that local house prices have flattened out without crashing. That has meant the annual rate of growth in the nation’s mortgage debt has stabilised at about 5.8 per cent.

If rates rise slowly and the growth in housing debt stays steady, if the Government pays down debt and if New Zealand keeps a top grade credit rating then we should be okay.

That is a lot of ”ifs”.

It is not a formula likely to reassure many of the gloomier economy watchers.

But it’s about as much optimism as I can muster on the issue. The risks are real and this country can’t afford to relax about its private debt levels.

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