3 Debt in the aggregate balance sheet of households (continued)

3.3 Composition of liabilities in the aggregate household balance sheet

Figure 4, Figure 5 and Table 2 show the breakdown of total liabilities in terms of levels and composition since 1978. Over the period 1978-985, housing debt averaged 74% of total debt. However, relatively strong growth since then has resulted in an increase in its share of total liabilities, averaging 85% between 2002 and 2007. Before the deregulation of financial markets in the late 1980s, some borrowing for housing took place through such mechanisms as solicitors' trust funds. As a consequence, the data do not necessarily capture all housing loans, and both the level and proportion of debt owing to housing may in fact be understated in the earlier period. In contrast, as noted above, the use of housing as collateral for loans to unincorporated small business enterprises owned by households may overstate the true level of housing liabilities in the later period. This would suggest that over the period 1982 to 2007, the annual average rate of growth in housing liabilities may well have been below the estimate of 8.5% shown in the last column of Table 1.

Nevertheless, housing debt remains a large component of household liabilities. Figure 5 underscores the volatility of the composition of liabilities over the late 1970s and 1980s. This period was characterised by substantial intervention in credit markets and a number of changes in the regulatory regimes and controls. Since financial deregulation in the late 1980s, the composition of liabilities in the aggregate household balance sheet has exhibited greater stability. The deregulation has led to less reliance on credit cards and hire purchase; their share of total liabilities has fallen as other avenues of credit have become more freely available (Sources: RBNZ; the Treasury Table 2)

Figure 4 - Housing and non-housing liabilities

Sources: RBNZ; the Treasury

Source: RBNZ

Figure 5 – Composition of liabilities

Source: RBNZ

3.4  Liabilities relative to assets

Figure 6 displays trends in total liabilities as a percentage of assets and gives a housing and non-housing breakdown. The ratio of housing liabilities to housing assets is generally referred to as the gearing ratio and is sometimes used as an indicator of the indebtedness of households. The gearing ratio increased steadily from the mid-1980s, with mortgages as a share of housing value peaking at 29% in 2000. The recent boom in house prices was accompanied by a drop in the share, but it has remained steady at 25% since 2003. It should be noted that this measure of gearing includes all homeowners regardless of their debt level; the gearing ratio would be higher if it were possible to exclude the almost one-half of all households with housing assets that are mortgage free.

Total liabilities grew by more than total assets over the period 1979 to 2007. As a percentage of total assets, total liabilities increased from 14% in 1979 to 22% in 2007. The trend tends to follow that of the housing gearing ratio owing to the fact that housing is the largest component of both assets and liabilities[6], although the level is slightly lower owing to the fact that non-housing liabilities are a smaller share of non-housing assets than is the case for housing.

Total household liabilities as a share of assets have increased substantially since the liberalisation of the financial markets. Arguably, a significant part of this rise has been a response by households to adjust their portfolios to their desired ratio of liabilities to assets. Credit and loans were not as readily available in the past; levels of household liabilities were probably constrained below that which households would have found optimal.

Figure 6 - Liabilities as a percentage of assets: housing and non-housing totals for 1978-2007

Source: RBNZ