3 Debt in the aggregate balance sheet of households

This section examines the aggregate balance sheet of households in New Zealand. Using the long-run annual series of the financial assets and liabilities of households compiled by the RBNZ, we present changes and trends in the level and composition of household debt.[4]

3.1 Trends in household liabilities

Total household liabilities have increased in both real and nominal terms. However, until 1990 the growth was moderate (Figure 1). Following the deregulation of financial markets, the growth of liabilities accelerated, and in the past five years has been driven by lower real interest rates and rising house prices.

Figure 1 - Total household liabilities: 1978-2007

Sources: RBNZ; the Treasury; real data are in constant 2007 prices

3.2  Assets, liabilities and net wealth

While concern has been expressed at the rising level of household debt, this has to be placed in the context of the aggregate balance sheet of households. Table 1 provides several snapshots of the growth of assets, liabilities and net wealth from 1982 to 2007. Although total liabilities have grown at a faster rate than assets over the period, real net wealth per capita has still grown at an average annual rate of 3.6% over the period.

The period between 2002 and 2007 stands out as having strong growth in assets, liabilities and net wealth (see column 7 of Table 1 and Figure 2). This is largely owing to unprecedented increases in both housing assets and liabilities. Housing assets grew at an annual average rate of 13.9% between 2002 and 2007 and mortgages grew by 12%. As a result, there was a fall in the ratio of liabilities to assets in housing and an increase in net equity in housing of nearly 15% per annum. Overall, the rapid growth in liabilities was outpaced by the growth in assets over this period, resulting in a substantial increase in net wealth of households. Notable, however, is that of the total increase in net wealth between 2002 and 2007, nearly 80% came from housing.

¹Growth rates are calculated as geometric averages for the specified periods.

Sources: RBNZ; the Treasury

Figure 2 - Annual average rates of growth in assets and liabilities: 1979-2007

Source: RBNZ; Treasury

It is likely that these data understate the true level of household net wealth. In the first place, the RBNZ series on which this analysis is based does not include all assets. Specifically, business assets owned by households are excluded along with some other categories. The RBNZ notes that the following are excluded:[5]

• equity in farms
• equity in unincorporated businesses
• shares in unlisted incorporated businesses
• capitalisation of the New Zealand Alternative Market (NZAX), the “second board” of the New Zealand Stock Exchange
• direct ownership of assets such as forests
• consumer durables
• overseas property owned by New Zealand residents
• non-equity overseas financial assets
• notes and coin held by households.

At the same time, the data for mortgage liabilities is likely to overstate the level of housing liabilities. This arises as some types of mortgage accounts allow the holder to draw down funds for other purposes such as investments in unincorporated businesses owned by households. A more comprehensive view of the assets and liabilities of the household sector would likely result in higher estimates of net worth.

Figure 3 presents the level of net wealth per capita since 1979 (in constant 2007 dollars) along with its percentage change. In 21 out of 28 years, net wealth per capita has increased from its level in the previous year and has increased in each of the last seven years. So in the context of the growth in assets and net wealth, the observed increase in the level of household debt looks less alarming. However, it is again worth stressing that the recent gains are largely attributable to housing. A fall in house prices could be expected to remove at least some of these gains.

Figure 3 - Net wealth per capita: 1979-2007 (in 2007 constant prices)

Sources: RBNZ; the Treasury