Treasury finds assets balance household debt

There is a lot of shaking of heads among business commentators about the high level of household debt but research by Treasury has found that the overall position of household balance sheets in New Zealand does not appear to be a cause for concern.

"A caveat to this is the relatively high proportion of housing in both assets and liabilities, leaving households more exposed to changes in the housing market than they would otherwise be with a more diversified portfolio," researchers Katherine Henderson and Grant Scobie said in a Treasury working paper published on Christmas Eve.

Trends in household debt between 2002 and 2007 have raised some questions about whether there is a "debt problem".

"Household liabilities have grown rapidly over this period, largely as a result of borrowing for housing," the paper said.

But assets have also increased because house prices have risen.

Net wealth, both per capita and as a share of household incomes, has increased to unprecedented levels.

The authors acknowledged that having a high proportion of housing in both the liabilities and assets of the household sector increased the exposure to price changes in the property market. But the paper concluded that the proportion of families who could be considered at risk was low.

Non-partnered individuals not affected by student loans were in a good position.

The average debt servicing as a percentage of income was about 15 per cent, with low-income families being about five percentage points higher. Using a median figure, rather than average, the figure fell to 6.8 per cent for couples and 3.6 per cent for non-partnered individuals.

Typically between 5 and 10 per cent of families had debt servicing costs greater than 30 per cent of their gross income in 2003-04, a level regarded as one indicator of potential over indebtedness.

For non-partnered individuals, those deemed at risk were concentrated in the younger age groups but there was an artefact of accounting in this group.

Their liabilities included student loans and they had no corresponding assets.

If it is assumed that life time earnings will at least equal the value of the student loan, the share of non-partnered individuals with negative wealth nearly halved, and the share at risk fell by more than 20 per cent.

- NZPA