3.2 New Zealand's imbalances 

While sovereign debt has risen quickly since 2008 from its previously low level, New Zealand's imbalances have manifested mainly in the form of high household/farm and offshore debt. However, high household debt is not unique to New Zealand; it has risen similarly in many Organisation for Economic Co-operation and Development (OECD) countries (Steenkamp, 2010). Furthermore, like many OECD countries, these debts have been slowly reducing since the start of GFC. Nevertheless, they are still at a high level throughout the OECD and New Zealand. Therefore, the following discussion focuses more on the build-up in the level of New Zealand's debt rather than the impact of the GFC.

3.2.1 High household/farm debt 

Figures 1 and 2 together show that New Zealand's households have a high level of debt that is generally secured against property at valuations that exceed incomes by significant multiples. Figure 3 shows that farm debt and prices are also high relative to earnings. In aggregate, as at April 2011, household and farm debts were around 117% of GDP compared to 37% and 32% for business and central government respectively (RBNZ, 2011b and Treasury, 2011).

Household debt is high because most households do not have the savings to buy a house without significant borrowing (typically banks are willing to lend up to around 80% of the value of the home). However, high house prices can only be supported because household are willing to take on large debts ahead of increased savings for property purchases (on average every household directly owes nearly $100,000). Therefore, there is an issue of causality, are house prices high because of banks' willingness to lend, or because of households' willingness to borrow? This issue is discussed further in Sections 4.1 and 7.

Figure 1 also shows that high debt is expensive to service, so for the average household, housing affordability is low. This is especially the case for first-time buyers who tend to need to borrow more because they have lower savings. However, since 2008, lower interest rates and a softening of house prices after the GFC has helped significantly in this regard.

Figure 1- Household debt and servicing

Source: RBNZ

Figure 2 - Multiple of house prices to household disposable income and rental income

Source: Real Estate Institute for New Zealand, Statistics New Zealand, Department of Building and Housing, The Treasury

Figure 3 - Agricultural debt and farm price to income ratios

Source: RBNZ, Statistics New Zealand, Quotable Value New Zealand