Former Economics Editor of the NZ Herald

Brian Fallow: Debt monster gaining weight

As mortgage loans soar, incomes aren't keeping pace
Illustration / Anna Crichton
Illustration / Anna Crichton

The ratio of household debt to income, already at a record high, is only getting more stretched, recent statistics indicates.

The stock of residential mortgage debt rose 8.8 per cent to $221 billion over the year to June. That is the fastest increase for eight years.

But Wednesday's wages data shows gross weekly earnings of wage and salary earners rose 5.1 per cent over the same period.

That is not the increase in the average wage, which was 2.1 per cent. Rather, it is the collective increase in labour market incomes, reflecting the combined effect of wage rises and more people employed.

It represents most of the aggregate income out of which that fast-growing stock of mortgage debt has to be supported.

Meanwhile, on Tuesday Quotable Value reported that its house price index rose 6.1 per cent nationwide in the June quarter, making 14.1 per cent for the year to June.

In Auckland the increases were 5.2 per cent for the quarter and 16 per cent for the year.

It pushed the average Auckland house price on QV's measure to just shy of $1 million, compared with a national average of just over $600,000. It is a fair bet that household incomes in Auckland are not two-thirds higher than the national average.

And it seems the Auckland disease of house price inflation has metastasised.

Hamilton recorded an eye-watering 31.5 per cent rate of annual house price inflation, Tauranga 25.7 per cent and Wellington 14.4 per cent.

The 8.8 per cent year-on-year rise in residential mortgage debt on the banks' books is a net increase. That is, it reflects both new borrowing and repayments.

The banks lent $20.6b on new mortgages in the June quarter, a 17 per cent increase on the June quarter last year. Most of that is explained by the rise in house prices over the same period.

Of the $20.6b, 37 per cent was borrowed by investors (more than two-thirds of which was by Auckland investors), 11.4 per cent by first home buyers and almost all the rest by other owner-occupiers. In the same period last year, investors accounted for 32 per cent of the new borrowing and first home buyers 9.8 per cent.

The picture of rip-roaring house price inflation contrasts starkly with subdued wage inflation. Wages and salaries make up about 70 per cent of household income from all sources.

There is a limit or a level that if deposit rates fall to, people just won't want to put money in the bank.

The 2.1 per cent average wage rise for the year ended June is the increase in average ordinary time hourly earnings (to $29.62) from Statistics NZ's quarterly employment survey, a survey of employers.

Average weekly earnings grew 1.9 per cent over the year, the difference reflecting a drop in average hours worked.

A different statistical series, the labour cost index, showed that 44 per cent of pay rates were not increased over the past year and the median increase for those that did rise was 2.2 per cent.

So we have a picture where house prices and new mortgage borrowing are climbing at annual rates deep into double digits, while the wages and salaries out of which mortgages and rents have to be paid are creeping higher at around 2 per cent.

The other factor in affordability is interest rates.

Over the year to June, the Reserve Bank cut its official cash rate four times by a cumulative full percentage point.

The effective mortgage rate -- a weighted average across all maturities -- has fallen by three-quarters of a percentage point to 5.1 per cent over the same period.

And the bank has indicated it is minded to cut the OCR again next week. Certainly, the feeble wage inflation reported this week would not stand in the way.

You can't logically expect the OCR to fall and for it to be fully passed on to lower deposit rates and borrowing rates in a savings-deficit nation, particularly in one where the central bank is barracking about the increased riskiness of a major component of lending -- housing.

Good news for borrowers. For depositors, not so much.

There are limits to how much further retail interest rates can be reduced, from what are already multi-decade lows, in a country where people are much more inclined to borrow than to save and which is already a net debtor to the rest of the world to the tune of $139b, or 56 per cent of GDP.

As ANZ economists noted this week, while borrowing is accelerating, deposits are decelerating. The widening gap can be filled by tapping offshore wholesale funding markets but they are more expensive than they were last year.

"There is a limit or a level that if deposit rates fall to, people just won't want to put money in the bank," they say.

"You can't logically expect the OCR to fall and for it to be fully passed on to lower deposit rates and borrowing rates in a savings-deficit nation, particularly in one where the central bank is barracking about the increased riskiness of a major component of lending -- housing."

A key parameter in affordability is the proportion of the borrower's disposable (after-tax) income required to service the loan.

The Reserve Bank says that as of last March, the debt servicing ratio for new borrowers nationwide was 33 per cent, but for new borrowers in Auckland 46 per cent.

It has said it is looking into the possibility of regulating banks' mortgage lending on a debt-to-income (DTI) basis, to bolster its existing loan-to-value ratio (LVR) restrictions, which are to be further tightened at the start of next month.

"We intend to consult with the banks on the viability of a DTI policy and data issues before making a decision on implementation," deputy governor Grant Spencer said in a speech a month ago.

Adding DTI curbs to the Reserve Bank's macro-prudential toolkit would require the Minister of Finance's approval. Given the Government's vulnerability over the housing crisis, it is unlikely to resist anything that might make a difference.

But it leaves the Reserve Bank in the absurd position of simultaneously restricting access to credit while making it cheaper for those who can access it. Since when is hitting the brakes and the accelerator at the same time a good idea?

Facts and figures:

House prices (QV): Up 14.1 per cent

Mortgage debt: Up 8.8 per cent

Wage and salary earnings: Up 5.1 per cent

(Year to June)

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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