Household loans up 15pc on year ago

Borrowers have lost none of their appetite for debt, taking on an additional $1.4 billion of mortgage debt last month, according to Reserve Bank data released yesterday.

That pushed total borrowing secured by mortgages to $120.5 billion, up 16 per cent on the level at the end of 2004.

When $11 billion of consumer credit is added, household borrowing at $131.5 billion is 15.3 per cent up on its level a year ago, to maintain the rampant pace at which it has been growing for more than two years now.

This gives scant comfort to Reserve Bank Governor Alan Bollard, who said last Thursday that he was looking for clear evidence of a sustained weakening of domestic demand before he took his foot off the brakes.

ANZ National Bank chief economist John McDermott said strong credit growth risked reigniting the housing market, especially since fixed mortgage rates were already falling.

But excessive credit growth was symptomatic of a structural issue of imbalance between savings and investment, which New Zealand shared with other Anglo-Saxon countries, he said. It required a structural solution as opposed to cyclical one through interest rates.

New Zealanders were responding to incentives to shove all their eggs into one basket - housing, McDermott said.

Measured against disposable incomes, household debt has almost trebled since 1990.

And the proportion of the household sector's income required to service debt has climbed from just over 8 per cent in 2000 to a record 13 per cent now, Deutsche Bank estimates.

That figure is diluted by the fact that only about a third of households are owner-occupied with a mortgage; the rest have either paid theirs off or are renting.

And as fixed-rate loans mature borrowers face significant increases in debt servicing costs, especially if they were two-year loans taken out in 2004 at rates below 7 per cent.

A similar term today would cost around 8.15 per cent.

Economists are forecasting house price inflection, and the corresponding growth in mortgage debt, to flatten off this year.

That is expected to turn off the "wealth effect" where homeowners borrow against and spend some of the increase in the value of their properties.

Forecasters expect household consumption, which is around 60 per cent of the economy, to slow markedly this year.

It has grown at an average 6 per cent over the past three years, which is about twice its long-term average, but Deutsche Bank expects it to slow to 1.4 per cent this year and 1.8 per cent next year as growth in employment dries up.

The Bank of New Zealand's forecasts have private consumption slowing to 2 per cent this year and a barely perceptible 0.7 per cent next year.

BNZ economist Stephen Toplis said the household sector would not take a big knock until people started fearing for their jobs. Only then would the chequebooks be put away.

But the impact of labour-shedding by firms would be mitigated by dwindling inflow of migrants.

The labour force grew by 69,000 in 2004 and about half that number last year. BNZ expects it to grow by only 18,000 a year over the next three or four years.

This will keep the unemployment rate low - rising to just above 4 per cent - and keep upward pressure on wages.

Deutsche Bank forecasts wage rises of 4.8 per cent this year and 4.6 next year, enough to keep private consumption growth in positive territory, even if anaemic by the standards of the past three years.

Overall, economists have revised down their forecasts of economic growth this year and revised up their forecasts of inflation.

In Reuters' latest survey of 10 private sector forecasters the pick for growth this year ranged from 1 to 2 per cent, with the median at 1.4 per cent, down from 2.1 per cent in October. But the median forecast for inflation, currently 3.2 per cent, is still 3 per cent at the end of the year.

DEEPER IN DEBT

* New Zealanders owed $120.5 billion on their mortgages in December, 16 per cent higher than the year before.

* Total household borrowing of $131.5 billion is up 15.3 per cent.

* 13 per cent of household income is now required to service debt, up from around 8 per cent in 2000.