New Zealand households are heavily indebted by historical and international standards. Up to their necks in debt, you might say, if not up to their nostrils.
Households with a mortgage started the year, the Reserve Bank tells us, with debt levels 3.23 times their disposable (after-tax) income. For all households the ratio was 1.64 times.
Both measures are the highest we have seen since at least the start of the millennium when these metrics stood at 1.92 and 1.01 times respectively.
When household debt is measured against the size of the economy it is a similar story.
The Bank for International Settlements, which tracks these things, puts New Zealand households' ratio of debt to gross domestic product at 94 per cent.
That is up from 88 per cent of GDP five years ago and just 29 per cent in 1991. The average for advanced economies is 72 per cent of GDP.
This conspicuously high level for household debt should be borne in mind when people point to the relatively low level of government debt. It reflects three main factors.
First is that we have a tax system which, for a generation now, has discouraged saving and encouraged borrowing for the purchase of housing.
The exceptionally harsh tax treatment of retirement savings introduced by Sir Roger Douglas 30 years ago was described by Sir Michael Cullen, while Finance Minister, as the worst example of intergenerational theft he had seen.
A pity, then, that the tax working group he lately chaired recommended no change to it.
The second factor is the exceptionally low interest rates which have prevailed since the global financial crisis — rates which make it easier to service a given level of mortgage debt, but provide depositors with a negligible return after tax and inflation.
The third factor is the housing crisis. The misbegotten offspring of market failure and regulatory failure has been a large gap between additions to the housing stock on the one hand and demand for housing driven by a population shock from net immigration on the other.
So long as that excess demand persists — and it will take years to remedy — we can expect upward pressure on house prices and rents. The only question is how high prices go to burn off or frustrate that excess demand. Which brings us to the banking system.
A key feature of New Zealand banks' business model is to borrow offshore, add on a healthy interest rate margin — the Reserve Bank notes, pointedly, that their return on assets is the fourth highest among 30 advanced economies — and then lend to New Zealanders willing to pay each other absurd prices for housing.
The extent of this reliance on imported savings is not surprising given that most years New Zealand households have a negative saving rate: their collective spending exceeds their income.
The external accounts released by Statistics New Zealand on Wednesday show that by March this year net foreign liabilities were $164 billion, equivalent to 55.5 per cent of GDP, up from $156b or 54.8 per cent of GDP a year ago. As usual, the banks accounted for the lion's share, with their net external position $119b in the red, up from $110b a year ago.
That foreign debt funded just over $1 in every $4 of their combined loan book, nearly half of which was to households for owner-occupier loans and consumer finance lending.
At 50.5 per cent of GDP New Zealand's net external debt is down from 52.7 per cent a year ago and well down on the peak of 84 per cent of GDP 10 years ago.
Reflecting on the improvement in net foreign liabilities in a speech two years ago Reserve Bank deputy governor Geoff Bascand noted, however, that much of it was explained by positive valuation changes, without which NZ's net foreign liabilities would have been 8 percentage points of GDP worse.
This pattern continues. In the latest quarter net financial flows and exchange rate changes explain only $800 million of a $4b improvement in the net foreign liabilities position.
The persistent current account deficits New Zealand runs — $10.6b in the latest March year — reflect the gap between investment spending (as opposed to consumption) and saving (income less expenditure). The gap has to be covered by importing the savings of foreigners.
"Relying on non-residents to fund our level of investment makes us vulnerable to changes in the availability or cost of that funding," Bascand said. "For example we saw during the global financial crisis how quickly previously liquid sources of funding dried up."
Because banks facilitate most of the financial flows between New Zealand and the rest of the world, high levels of offshore debt increased the risks that the banking sector and the financial system more broadly come under pressure in times of financial stress, he said.
While the Reserve Bank would act to provide liquidity to the banking system and do what it could to lower interest rates, "households and businesses might still have difficulty in accessing finance".
A key source of risk surrounding the outlook for NZ's net foreign liabilities, and the economy and financial system more generally, is the saving and investment behaviour of households, Bascand said.
"Much of the investment undertaken by the household sector is in the form of new house builds and renovations to existing homes. If the housing demands associated with population pressure and existing shortages cannot be met by increased household sector, or domestic saving more generally, it will be reflected in a deterioration in our net foreign liabilities position."
Two years later that is exactly what we do see.
So while the net external accounts may have improved — thanks to unsustainably low interest rates and, for the time being, buoyant equity markets — the country's position as a net foreign debtor leaves it lying low in the water. As the global seas get more stormy ...