NZ Herald
  • Home
  • Latest news
  • Video
  • New Zealand
  • Sport
  • World
  • Business
  • Entertainment
  • Podcasts
  • Quizzes
  • Opinion
  • Lifestyle
  • Travel
  • Viva
  • Weather forecasts

Subscriptions

  • Herald Premium
  • Viva Premium
  • The Listener
  • BusinessDesk

Sections

  • Latest news
  • New Zealand
    • All New Zealand
    • Crime
    • Politics
    • Education
    • Open Justice
    • Scam Update
    • The Great NZ Road Trip
  • On The Up
  • World
    • All World
    • Australia
    • Asia
    • UK
    • United States
    • Middle East
    • Europe
    • Pacific
  • Business
    • All Business
    • MarketsSharesCurrencyCommoditiesStock TakesCrypto
    • Markets with Madison
    • Media Insider
    • Business analysis
    • Personal financeKiwiSaverInterest ratesTaxInvestment
    • EconomyInflationGDPOfficial cash rateEmployment
    • Small business
    • Business reportsMood of the BoardroomProject AucklandSustainable business and financeCapital markets reportAgribusiness reportInfrastructure reportDynamic business
    • Deloitte Top 200 Awards
    • CompaniesAged CareAgribusinessAirlinesBanking and financeConstructionEnergyFreight and logisticsHealthcareManufacturingMedia and MarketingRetailTelecommunicationsTourism
  • Opinion
    • All Opinion
    • Analysis
    • Editorials
    • Business analysis
    • Premium opinion
    • Letters to the editor
  • Sport
    • All Sport
    • OlympicsParalympics
    • RugbySuper RugbyNPCAll BlacksBlack FernsRugby sevensSchool rugby
    • CricketBlack CapsWhite Ferns
    • Racing
    • NetballSilver Ferns
    • LeagueWarriorsNRL
    • FootballWellington PhoenixAuckland FCAll WhitesFootball FernsEnglish Premier League
    • GolfNZ Open
    • MotorsportFormula 1
    • Boxing
    • UFC
    • BasketballNBABreakersTall BlacksTall Ferns
    • Tennis
    • Cycling
    • Athletics
    • SailingAmerica's CupSailGP
    • Rowing
  • Lifestyle
    • All Lifestyle
    • Viva - Food, fashion & beauty
    • Society Insider
    • Royals
    • Sex & relationships
    • Food & drinkRecipesRecipe collectionsRestaurant reviewsRestaurant bookings
    • Health & wellbeing
    • Fashion & beauty
    • Pets & animals
    • The Selection - Shop the trendsShop fashionShop beautyShop entertainmentShop giftsShop home & living
    • Milford's Investing Place
  • Entertainment
    • All Entertainment
    • TV
    • MoviesMovie reviews
    • MusicMusic reviews
    • BooksBook reviews
    • Culture
    • ReviewsBook reviewsMovie reviewsMusic reviewsRestaurant reviews
  • Travel
    • All Travel
    • News
    • New ZealandNorthlandAucklandWellingtonCanterburyOtago / QueenstownNelson-TasmanBest NZ beaches
    • International travelAustraliaPacific IslandsEuropeUKUSAAfricaAsia
    • Rail holidays
    • Cruise holidays
    • Ski holidays
    • Luxury travel
    • Adventure travel
  • Kāhu Māori news
  • Environment
    • All Environment
    • Our Green Future
  • Talanoa Pacific news
  • Property
    • All Property
    • Property Insider
    • Interest rates tracker
    • Residential property listings
    • Commercial property listings
  • Health
  • Technology
    • All Technology
    • AI
    • Social media
  • Rural
    • All Rural
    • Dairy farming
    • Sheep & beef farming
    • Horticulture
    • Animal health
    • Rural business
    • Rural life
    • Rural technology
    • Opinion
    • Audio & podcasts
  • Weather forecasts
    • All Weather forecasts
    • Kaitaia
    • Whangārei
    • Dargaville
    • Auckland
    • Thames
    • Tauranga
    • Hamilton
    • Whakatāne
    • Rotorua
    • Tokoroa
    • Te Kuiti
    • Taumaranui
    • Taupō
    • Gisborne
    • New Plymouth
    • Napier
    • Hastings
    • Dannevirke
    • Whanganui
    • Palmerston North
    • Levin
    • Paraparaumu
    • Masterton
    • Wellington
    • Motueka
    • Nelson
    • Blenheim
    • Westport
    • Reefton
    • Kaikōura
    • Greymouth
    • Hokitika
    • Christchurch
    • Ashburton
    • Timaru
    • Wānaka
    • Oamaru
    • Queenstown
    • Dunedin
    • Gore
    • Invercargill
  • Meet the journalists
  • Promotions & competitions
  • OneRoof property listings
  • Driven car news

Puzzles & Quizzes

  • Puzzles
    • All Puzzles
    • Sudoku
    • Code Cracker
    • Crosswords
    • Cryptic crossword
    • Wordsearch
  • Quizzes
    • All Quizzes
    • Morning quiz
    • Afternoon quiz
    • Sports quiz

Regions

  • Northland
    • All Northland
    • Far North
    • Kaitaia
    • Kerikeri
    • Kaikohe
    • Bay of Islands
    • Whangarei
    • Dargaville
    • Kaipara
    • Mangawhai
  • Auckland
  • Waikato
    • All Waikato
    • Hamilton
    • Coromandel & Hauraki
    • Matamata & Piako
    • Cambridge
    • Te Awamutu
    • Tokoroa & South Waikato
    • Taupō & Tūrangi
  • Bay of Plenty
    • All Bay of Plenty
    • Katikati
    • Tauranga
    • Mount Maunganui
    • Pāpāmoa
    • Te Puke
    • Whakatāne
  • Rotorua
  • Hawke's Bay
    • All Hawke's Bay
    • Napier
    • Hastings
    • Havelock North
    • Central Hawke's Bay
    • Wairoa
  • Taranaki
    • All Taranaki
    • Stratford
    • New Plymouth
    • Hāwera
  • Manawatū - Whanganui
    • All Manawatū - Whanganui
    • Whanganui
    • Palmerston North
    • Manawatū
    • Tararua
    • Horowhenua
  • Wellington
    • All Wellington
    • Kapiti
    • Wairarapa
    • Upper Hutt
    • Lower Hutt
  • Nelson & Tasman
    • All Nelson & Tasman
    • Motueka
    • Nelson
    • Tasman
  • Marlborough
  • West Coast
  • Canterbury
    • All Canterbury
    • Kaikōura
    • Christchurch
    • Ashburton
    • Timaru
  • Otago
    • All Otago
    • Oamaru
    • Dunedin
    • Balclutha
    • Alexandra
    • Queenstown
    • Wanaka
  • Southland
    • All Southland
    • Invercargill
    • Gore
    • Stewart Island
  • Gisborne

Media

  • Video
    • All Video
    • NZ news video
    • Business news video
    • Politics news video
    • Sport video
    • World news video
    • Lifestyle video
    • Entertainment video
    • Travel video
    • Markets with Madison
    • Kea Kids news
  • Podcasts
    • All Podcasts
    • The Front Page
    • On the Tiles
    • Ask me Anything
    • The Little Things
    • Cooking the Books
  • Cartoons
  • Photo galleries
  • Today's Paper - E-editions
  • Photo sales
  • Classifieds

NZME Network

  • Advertise with NZME
  • OneRoof
  • Driven Car Guide
  • BusinessDesk
  • Newstalk ZB
  • What the Actual
  • Sunlive
  • ZM
  • The Hits
  • Coast
  • Radio Hauraki
  • The Alternative Commentary Collective
  • Gold
  • Flava
  • iHeart Radio
  • Hokonui
  • Radio Wanaka
  • iHeartCountry New Zealand
  • Restaurant Hub
  • NZME Events

SubscribeSign In
Advertisement
Advertise with NZME.
Home / Business / Economy / Official Cash Rate

Brian Fallow: Debt monster keeps on growing

Brian Fallow
By Brian Fallow
Columnist·NZ Herald·
12 May, 2016 08:00 PM6 mins to read

Subscribe to listen

Access to Herald Premium articles require a Premium subscription. Subscribe now to listen.
Already a subscriber?  Sign in here

Listening to articles is free for open-access content—explore other articles or learn more about text-to-speech.
‌
Save

    Share this article

Reserve Bank deputy-governor Grant Spencer. Photo / Mark Mitchell.

Reserve Bank deputy-governor Grant Spencer. Photo / Mark Mitchell.

Brian Fallow
Opinion by Brian Fallow
Brian Fallow is a former economics editor of The New Zealand Herald
Learn more
Until politicians act, the quest for capital gains - and investors' readiness to borrow - will be irresistible.

The Reserve Bank was radiating signals this week that its next intervention in the housing market may well target debt-to-income ratios rather than the loan-to-value ratios it has focused on hitherto.

Any move in that direction is not imminent.

Apart from anything else, it would require a change to the bank's memorandum of understanding with the Government, as restrictions on debt-to-income ratios are not among the four macro-prudential tools it is currently free to use.

Regulating debt-to-income would be tricky to design, especially if you don't want to make life even more difficult for first home buyers.

Advertisement
Advertise with NZME.
Advertisement
Advertise with NZME.

And many small businesses rely on mortgaging a property to raise the funding they need, but have highly variable income streams.

However Prime Minister John Key is not ruling out such a move.

Even as governor Graeme Wheeler and deputy governor Grant Spencer were fronting a Wednesday press conference on the release of the bank's financial stability report, the Real Estate Institute was reporting that the median house price in Auckland has climbed 13 per cent - or $92,000 - over the past year.

Aucklanders' incomes on the other hand, it is fair to assume, have not risen at anything like that pace.

And mortgages and rents have to be paid out of household incomes.

Nationwide, households' housing debt rose 8 per cent in the year ended March, the fastest growth since 2008.

Discover more

Opinion

Brian Fallow: Migration minus inflation

15 Apr 12:50 AM
Opinion

Brian Fallow: Can NZ handle the heat?

21 Apr 07:00 PM
Opinion

John Drinnan: Throwing away key to the lockup

21 Apr 09:29 PM
Opinion

Brian Fallow: Shh - don't mention the pension

28 Apr 11:41 PM

But New Zealanders' collective (not average) income from wages and salaries - the lion's share of household income - rose more slowly, by 4.8 per cent over the same period.

The ratio of household debt to income - at 162 per cent - now exceeds the previous peak on the eve of the global financial crisis.

Advertisement
Advertise with NZME.

The Reserve Bank expects credit growth to continue to exceed income growth.

"Low mortgage interest rates have helped contain debt servicing costs but the household sector would be vulnerable to an increase in interest rates or an economic downturn," it says.

Wheeler was clear that, given the state of the global economy and the extraordinarily loose monetary policy other central banks are running, it will not be feasible for him "to increase interest rates in the foreseeable future.".

But, in the careful language of the financial stability report, "While a large increase in mortgage rates seems unlikely in the current global environment, a relatively small increase could put pressure on some borrowers."

By the end of last year, new borrowers in Auckland faced a debt servicing ratio of 46 per cent of their income, Reserve Bank data shows.

That is not too far shy of the brief period in 2007 when debt servicing costs were soaking up just over 50 per cent of new borrowers' incomes in Auckland.

Advertisement
Advertise with NZME.

And that was when floating mortgage rates were nearly twice what they are now.

Then there is the question of how secure those household incomes are. It would be unwise to assume that the other 99.8 per cent of the world economy has lost its capacity to sideswipe us with some sort of shock that would send unemployment climbing again.

Another area of concern is that household debt has been growing faster than deposits.

That makes banks more reliant on tapping wholesale debt markets offshore to fund their lending here.

The turmoil in those markets earlier in the year - though it has subsided, at least for now - has seen credit spreads (the risk premium on that source of funding) ratchet up, raising the banks' cost of funds and putting pressure on their net interest margins. Hence their notorious failure to fully pass on March's cut to the official cash rate.

While LVR restrictions have strengthened the resilience of banks' balance sheets, the impact on house price inflation has been more modest and transitory.

Advertisement
Advertise with NZME.

Fundamentally, house price inflation is driven by the imbalance between demand (swollen by net migration gains) and supply (hobbled in Auckland's case by regulatory restrictions and Nimby politics).

But that said, there is no doubt that investors play a key role in pushing up prices.

They represent 42 per cent of the buying in Auckland in recent months and in much of the market they are the marginal buyers. It is the point at which they drop out of the bidding that sets the price the home seeker has to pay to secure a property.

That rise to 162 per cent in the debt-to-income ratio is heavily influenced by investor borrowing. For owner-occupiers, the ratio is a more modest 109 per cent, though that is still a record high.

Investors also rank high for interest-only loans.

This is no surprise. The tax laws treat the buyers of rental properties as having gone into business, the landlord business, and therefore entitled to deduct the costs incurred, including interest, in earning a taxable income (rents).

Advertisement
Advertise with NZME.

The banking system, on the other hand, sees them as people borrowing on the security of real estate and will lend as much as the Reserve Bank will allow. With rental yields in Auckland now below 3 per cent - absurdly matching 10-year Government bond yields - it is clearly expectations of capital gain that are driving the prices they are willing to pay. And those are the prices a would-be owner-occupier has to outbid.

They don't have to worry too much about what is happening to tenants' incomes. That is topped up by an accommodation supplement - a straight subsidy from taxpayers to landlords.

They don't have to deal with tenants at all, if they don't want to, using a property management service instead. They can sit back and enjoy all the benefits of leverage in a rising market, amplifying the increase in their equity, until it is time to sell and pocket a tax-free capital gain.

It is very hard to match that deal by investing instead in the kind of business that expands the economy's output of goods and services and employs people.

It is a sterile use of households' rather meagre savings.

But until politicians muster the fortitude to deal with the tax distortions and take on the ever-growing vested interest in the status quo, the incentive to profiteer from extended periods of excess demand for housing will prove irresistible.

Advertisement
Advertise with NZME.

13 per cent Annual increase in the Auckland median house price

8 per cent Annual rise in housing debt

162 per cent Ratio of household debt to income

Save

    Share this article

Latest from Official Cash Rate

Premium
Opinion

Liam Dann: ‘Perfect storm’ for flat whites - what surging food prices mean for the economy

17 May 05:00 PM
Premium
Opinion

Liam Dann: After Orr – is it time for a Reserve Bank reset?

13 May 05:02 PM
Premium
Economy|inflation

Upbeat outlook: Westpac economists see recovery gathering steam

12 May 05:00 PM

The Hire A Hubby hero turning handyman stereotypes on their head

sponsored
Advertisement
Advertise with NZME.

Latest from Official Cash Rate

Premium
Liam Dann: ‘Perfect storm’ for flat whites - what surging food prices mean for the economy

Liam Dann: ‘Perfect storm’ for flat whites - what surging food prices mean for the economy

17 May 05:00 PM

Butter, cheese, coffee...do rising food prices signal the return of high inflation?

Premium
Liam Dann: After Orr – is it time for a Reserve Bank reset?

Liam Dann: After Orr – is it time for a Reserve Bank reset?

13 May 05:02 PM
Premium
Upbeat outlook: Westpac economists see recovery gathering steam

Upbeat outlook: Westpac economists see recovery gathering steam

12 May 05:00 PM
Premium
Liam Dann: In a world of grim news, here are five economic bright spots

Liam Dann: In a world of grim news, here are five economic bright spots

10 May 05:00 PM
Gold demand soars amid global turmoil
sponsored

Gold demand soars amid global turmoil

NZ Herald
  • About NZ Herald
  • Meet the journalists
  • Newsletters
  • Classifieds
  • Help & support
  • Contact us
  • House rules
  • Privacy Policy
  • Terms of use
  • Competition terms & conditions
  • Our use of AI
Subscriber Services
  • NZ Herald e-editions
  • Daily puzzles & quizzes
  • Manage your digital subscription
  • Manage your print subscription
  • Subscribe to the NZ Herald newspaper
  • Subscribe to Herald Premium
  • Gift a subscription
  • Subscriber FAQs
  • Subscription terms & conditions
  • Promotions and subscriber benefits
NZME Network
  • The New Zealand Herald
  • The Northland Age
  • The Northern Advocate
  • Waikato Herald
  • Bay of Plenty Times
  • Rotorua Daily Post
  • Hawke's Bay Today
  • Whanganui Chronicle
  • Viva
  • NZ Listener
  • What the Actual
  • Newstalk ZB
  • BusinessDesk
  • OneRoof
  • Driven CarGuide
  • iHeart Radio
  • Restaurant Hub
NZME
  • About NZME
  • NZME careers
  • Advertise with NZME
  • Digital self-service advertising
  • Book your classified ad
  • Photo sales
  • NZME Events
  • © Copyright 2025 NZME Publishing Limited
TOP