Mark Lister, 14 October 2016

New Zealand’s economy remains robust from a global standpoint. However, household debt is again on the rise and this, combined with an over-heated property market, could impact growth and equity markets should the global economic outlook darken.

The local economy is generally in good shape

The domestic economy remains in good shape. Growth remains reasonable at 2.8%, which is being supported by a low unemployment rate, booming migration and tourism, coupled with modest Government debt, a strong New Zealand dollar and record low interest rates Our central bank also has more room than most to provide monetary stimulus if necessary. Additionally, if the economic outlook does worsen, our currency has plenty of room to fall.

Low interest rates have fuelled a resurgence in household debt

We are currently witnessing the lowest borrowing rates since 1964. Unsurprisingly, a strong economic backdrop and high levels of consumer confidence have seen many people take advantage of this low cost of funding.

This borrowing spree has also seen household debt levels rise to more than 162% of nominal disposable income,the highest since 2010. While New Zealand stacks up very well against global peers in terms of government debt levels (approximately 30% of GDP), when household debt is added to the equation, we look much more indebted.

Much of this debt has been funded by offshore borrowings

Historically, New Zealand has had a very high level of external debt, meaning we owe a lot of money to foreigners.
This position has improved since 2008 as private sector savings have increased, offsetting the need for as much overseas funding. However, it is still something we should remain cognisant of as any increase in offshore borrowing costs could become problematic.

House prices are beginning to look stretched

House prices have experienced an exceptional rise during recent years, particularly in Auckland.

There are a wide range of views regarding the house prices in New Zealand. Many would argue they are already well into bubble territory, while others would cite strong migration and a lack of supply as indicators that fundamentals are driving the market higher.

We agree that fundamentals are indeed a strong factor but it is hard to argue that there is undoubtedly a highly speculative element also at play. Rents in Auckland have risen by 35% since the end of 2007, less than half that of house prices. Rents tend to lag prices, but if it were purely a supply/demand imbalance driving the market, we would have expected this trend to be closer together.

Rent yield is well below the long-term average, and suggests that many are buying on the expectation of further capital gains.

A commonly used measure of house values is the house price to income ratio. House prices should ultimately be linked to incomes, because at some point there are no more buyers left should prices continue to rise. The adjacent chart illustrates that prices in Auckland have become increasingly stretched relative to incomes.

But house prices don’t go down, do they?

Contrary to popular belief, house prices can, and do, fall. New Zealand has experienced high inflation in recent decades, which has masked the fact that house prices have declined on a number of occasions.

In ‘real’ terms (inflation-adjusted), New Zealand house prices have increased 2.5% per annum over the last 50 years. After adjusting for inflation, we can see that there have been six periods where house prices have suffered sustained declines over the past 50 years. In half of these cases, nominal house prices still rose, but at a much slower pace than inflation.

The biggest declines occurred in the late 70’s, the mid 80’s and in the years following the global financial crisis. These episodes all followed periods of very strong growth.

Household debt table

So what could go wrong?

The New Zealand economy is highly dependent on a strong and stable housing market. Housing is the investment of choice for many, owner occupiers are reliant on increasing prices to keep their personal balance sheets healthy, and many sectors of the economy rely on the wealth effect as well as activity levels.

A fall in house prices would likely accompany a recession. If this were to occur, the very high levels of debt that households are carrying would make things worse. High household debt leaves a much smaller buffer for homeowners to cope with rising unemployment, a return of interest rates to more normal levels or other economic uncertainties.


We certainty aren’t calling the top of the housing cycle. There is every chance the local economy remains robust, and that house prices remain well-supported by our increasing population and the growing perception of New Zealand as a safe haven, away from the troubles of the world. However, we should acknowledge the risks we face, and do our best to mitigate these.