New Zealand household debt: is it too high?

Rising levels of household debt has been a concern in many industrial countries. This is because high level of household debt may hinder future consumption growth. Furthermore, households may become more susceptible to changes in economic variables such as increasing price levels and interest rates. Specifically in New Zealand, the total household debt to disposable income ratio has increased from 59% in 1991 to 162% in 2008. Moreover, 93% of household debt is housing debt (RBNZ, 2008b). This dissertation attempts to determine the indebtedness of New Zealand households relative to those in Australia, the United Kingdom and the United States. The research first studies the relevant literature in an attempt to gain a better understanding of possible causes of rising household debt levels in New Zealand. The research then applies quantitative data analysis, including regressions, and qualitative content analysis to further investigate household debt. In particular, the trends of household debt to disposable income ratio and debt service to disposable income ratio in New Zealand are compared to Australia, the United Kingdom and the United States. Focusing on New Zealand and Australia, a multivariate regression analysis is then used to further explore the possible causes of rising household debt levels. Specifically, the model seeks to test the relationship between the household debt to disposable income ratio and changes in house prices and interest rates, and how it differs between New Zealand and Australia. A content analysis is then conducted on the relevant newspaper articles to investigate the New Zealand media’s opinions on the level of household debt. This research finds that the 1980s financial deregulation and consequent drops in interest rates, and the increase in house prices seem to be the main causes of increased household indebtedness in New Zealand. However, the level of household debt in New Zealand has been moving at a similar pace to Australia and has converged with the United Kingdom and the United States. Moreover, even though the level of household debt in New Zealand is at a similar level to the three aforementioned countries, it seems to be highly dependable on changes in house prices and interest rates. This is an indication that households in New Zealand are relatively more vulnerable to economic downturns and therefore the level of household debt may not be sustainable