Borrowing on the rise again

The debt plateau starts rising again [Source:RBNZ data]
Uptick in borrowing – return to bad old ways? [Source:RBNZ data]
Debt levels by sector: housing bulge swelling again [Source:RBNZ data]

New Zealanders are starting to pile up the debt again.

Figures out this afternoon show why Reserve Bank governor Graeme Wheeler gave an unusually sharp nudge to households about debt levels this morning.

Private sector credit growth for the year to December rose 3.8%.

While clearly still a long way from the 10%-17% annual credit growth levels seen between 1998-2008, they start from a much higher base level of debt.

Private sector debt trebled between 1998 and 2008, and while it stopped growing so fast since the global financial crisis it has not actually declined (see graphs one and two).

This morning’s Reserve Bank statement, which contained the expected no change decision on the official cash rate, also contained unusually strong warnings about household credit levels and the risks these pose to financial stability.

“House price inflation has increased and we are watching this and household credit growth closely. The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply,” Mr Wheeler said.

The Reserve Bank has not had to concern itself with these matters for some time. Since late 2008 New Zealanders have become net savers for the first time in at least two generations, and credit growth has been well below the growth in nominal GDP.

“Deleveraging”, as the economists call it, is seen as necessary after the unprecedented growth in debt levels in the 10 years between 1998-2008. Private sector debt trebled in that time (see graph one).

Since then, though, prudence has been the watchword. There were signs of relaxation in the November credit figures released just before Christmas: the question was whether this was a blip or the start of a return to the ways of old.

The largest credit growth is in the agriculture sector, rising 5.1%. Borrowing for houses is up 3.7%, while business and consumer debt are up 2.5% and 2.4%, respectively.

Other figures out today indicate this is not a blip.

Dun and Bradstreet’s survey of consumer credit intentions show 40% of New Zealanders contacted expect to increase their credit limits over the next three months. The most recent survey showed only 25% had those intentions. 

Mr Wheeler is to give a speech to Canterbury business tomorrow lunchtime which is likely to expand on this and other economic issues.

The Reserve Bank is looking at different regulatory tools to target excessive credit growth and Mr Wheeler’s statement today strongly hinted they could be used to complement the OCR and be targeted specifically at housing.

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And this is a surprise? Throw cheap money with an ultra-low interest rate policy at the sheeple and what do they do? Borrow more to buy houses and imported tat.
One day this private debt level is going to blow up in our faces, and the authorities will have been culpable.

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Private debt is exactly that. Private.
Interests rates in NZ are not low when compared to interest rates in our trading nations. They are, as a percentage of, the highest they have been in my memory.
(And I can remember interest rates @ 17% with penalty rates @ 27%!)

Why are they kept this high? Because of our governments need to borrow, not the private individual. That is the truth. If our interest rates were lower, then nobody would fund our govt deb!! Then wha? Higher taxes? Cuts in welfare? Health? Education?
So the Reserve Bank is stuck.
It is good news that private borrowing is on the rise. That tells me that employment is also on the rise.
No, I hear all the "economists" crying! Well, tell me then, Mr Economist?
What else can this borrowed money be used for if it isn't eventually used to employ people?

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To buy existing non productive house assets in an inflationary spiral?

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And so the seller of "existing non-productive house" pays off debt or employs labour.

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Or much more likely simply bids up the price of a replacement, already existing, higher spec house to relocate to.

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Borrowing money to pay $1m for the house in Grey Lynn that was only worth half that not so long ago, means we have borrowed money for a net loss as a country. If assets are cheap, borrow to buy them sure. It just makes no sense borrowing to buy for pre-existing assets where the only end result is asset inflation and burgeoning debt. It can only go horribly wrong at some point, as all bubbles do.

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So, while credit growth has slowed during the immediate global financial crisis, the much talked about "deleveraging - i.e., reducing debt levels" by households - did not occur.

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