Subscribe

NZ households: building buffers but still vulnerable

Since late 2017, households in New Zealand have been building their housing equity. In part, this reflects reduced turnover as the housing market has cooled. 

Click image to zoom Tap image to zoom

Sales have taken a step down in recent months and house price inflation has been consistently running at around 4 per cent year-on-year. In 2017, house price inflation moderated from the elevated rates of 14-15 per cent year-on-year that prevailed over 2016. 

" ANZ Research expects the Reserve Bank of New Zealand will take a cautious and gradual approach to easing loan-to-value ratio restrictions.”High turnover tends to be associated with increased debt as buyers typically have less equity than sellers. The recent lower turnover partly reflects government policy changes, uncertainty and affordability constraints but credit conditions have played an important role in reducing turnover and building housing equity too.

Click image to zoom Tap image to zoom

Building buffers

Since 2008, household debt has remained elevated but households have generally been building their equity buffers, with consumption growth more moderate on the whole. Households are perhaps more constrained or cautious towards debt in this post-crisis period, with less new debt associated with housing turnover.

 

Click image to zoom Tap image to zoom

Households have been improving their equity stakes - a good thing in that it shores up household balance sheets. Household equity in housing has risen, although aggregate net worth is not much higher than it was in the mid-2000s as a proportion of incomes.

Click image to zoom Tap image to zoom

A key vulnerability

Despite this improvement in equity, it is important not to be complacent about New Zealand’s structural vulnerability associated with high levels of household debt: households are vulnerable should house prices fall or interest rates rise.

Households are highly indebted and house prices are “overvalued” – they are very elevated relative to incomes and rents, particularly in Auckland and Tauranga. House prices and debt levels are high in an international comparison too.

Click image to zoom Tap image to zoom

But those same high levels of debt may now be contributing to the “new normal” of low interest rates. If mortgage rates were to head back to 9 per cent, then 48 per cent of incomes would be required for new purchases (all else equal) for New Zealand as a whole, compared with 33 per cent currently.

Click image to zoom Tap image to zoom

Cautious approach

In light of financial stability risks, ANZ Research expects the Reserve Bank of New Zealand will take a cautious and gradual approach to easing loan-to-value ratio restrictions.

Buyers entering the market now have bigger buffers, helping to mitigate the risk and potential fallout of a disorderly housing market downturn, with macro-prudential policy having played an important role.

The pace of macro-prudential easing will depend on how housing market and credit conditions evolve over coming months.

But one thing seems clear: the RBNZ will want to be sure there’s no more fuel in the tank before taking its foot completely off the brake.

Liz Kendall is a Senior New Zealand Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

27 Aug 2018

NZ housing: snakes and ladders

Elizabeth Kendall | Senior Economist, ANZ NZ

Are New Zealand’s ongoing high prices in the housing market harming productivity?

05 Jun 2018

NZ household debt in perspective

Miles Workman | NZ economist, ANZ

High levels of household debt in NZ are manageable because interest rates are low – for now.