2 Existing studies

The following is a brief summary of findings from a small number of studies that have analysed the extent of household indebtedness. Most of them relate to other countries but a small number of New Zealand studies were found. A variety of measures of indebtedness have been used and applied at either the aggregate or household level.

Kelly, Cassells and Harding (2004) use the HILDA Household Survey for Australia to analyse household debt in 2002. Total household liabilities as a share of disposable income was 130%, which was almost exactly the same as in New Zealand in 2002. In that year, Australia’s total household debt was 60% of GDP while in New Zealand it was 67%. By 2005, total household debt in New Zealand in relation to GDP was slightly above the average for the Organisation for Economic Cooperation and Development (OECD) of 80%, but very comparable to that of Australia and the USA. However, in 2005, mortgage debt as a share of total liabilities in New Zealand was the highest in the OECD.[3]

Household leverage, defined as the ratio of liabilities to net wealth, is a further indicator of the potential vulnerability of the household sector to changes in asset prices. Yet, for this indicator, New Zealand was amongst the lowest in the OECD in 2005.

Increased borrowing in New Zealand has been associated with higher levels of interest payments for debt servicing. In the decade up until 2000, interest costs in relation to disposable incomes in New Zealand were largely in line with comparator countries. However, by 2005 the ratio had risen sharply and was nearly double the average for the Euro area. By contrast, the median level of debt in relation to per capita income was amongst the lowest in a group of 10 major OECD countries for those in the lower half of the income distribution. In other words, those with relatively low incomes in New Zealand had much lower levels of debt in relation to income than in other OECD countries.

Overall, the evidence from comparisons with other countries is mixed. By some measures, New Zealand households are amongst the most indebted. On other measures, New Zealand ranks amongst those with low levels of debt. In any event, debt levels per se do not necessarily translate into a share of households for whom debt is a problem. There are only a few indirect measures, such as difficulty paying bills, bankruptcy rates or mortgage defaults, that allow cross country comparisons.

La Cava and Simon (2003) report findings for Australia that indicated that up to 22% of Australian households were cash constrained in 2001. This includes all households answering yes to any one of a series of seven questions designed to capture the financial fragility of households. However, such measures do not necessarily distinguish between over-indebtedness and problems associated with such factors as low incomes, erratic employment or long-term welfare dependency. While undoubtedly being cash constrained will be at least partially correlated with debt problems, one cannot assume that all those reporting cash constraints are necessarily overly indebted. The authors further report that most of the rise in household debt was attributable to households that were not cash constrained. In other words, increased aggregate debt does not necessarily mean an increase in the number of overly indebted households or even an increase in vulnerability.

There is very little evidence of the extent to which debt is a problem for New Zealand households. Valins (2004) examined evidence from the Household Savings Survey (2001), the Living Standards Survey (2000) and the Federation of Family Budgeting Services (2002/03) in an attempt to estimate the share of households that might be over-indebted in the sense that they were struggling to meet payments on monies owed. In 2000, some 17% of the population felt that they would not be able to obtain $1,500 in an emergency, suggesting that these people might be over-indebted, in the sense that existing debt levels would preclude further borrowing. He concluded that “a tentative working assumption is that up to 15% of New Zealand households may be over-indebted”. However, he noted that only a third of these (about 5% of the population) are likely to have longer-term problems, possibly requiring external intervention.

Redhead and Rose (1999) reported that over two-thirds of those filing for bankruptcy in New Zealand in 1999 were beneficiaries, and nearly half were aged between 25 and 34.

May, Tudela and Young (2004) reported similar findings for the UK. Much of the household debt was owed by homeowners with mortgages who appeared to have little problem in debt servicing. Debt problems were concentrated among renters. In part, this could be a reflection of the life cycle pattern of debt and asset holdings. Renters were typically younger with lower incomes and higher levels of unsecured debt.

Two salient points emerge from this brief synopsis of existing studies. In the first place, there is a wide range of measures that purport to capture the extent of household indebtedness. For this reason, this paper uses a number of indicators. Second, while aggregate data for the household sector can provide an overview of broad trends, detailed household-level measures are needed if we are to better understand the factors which underlie households' decisions to acquire debt, and the extent of vulnerability. In this paper we draw on both aggregate data and the results of a major national survey covering the assets and liabilities of households. The former source provides an overview of the growth of household debt and relates it to assets and net wealth. The latter is used to explore the factors associated with high levels of debt and to estimate the share of those with debt who are “at risk”.