How resilient are household finances?
Tough times ahead
New Zealand is expected to experience an economic recession this year. The technical definition of a recession is when GDP declines for two successive quarters. With GDP having fallen 0.6% in the December 2022 quarter, we might already be in recession. How well positioned are Kiwi households to navigate their way through these challenging economic times? Here, we look at household finances – their incomes, spending, savings, debt and net worth to get a sense of households’ economic resilience.
There are some things that households can control and some things they can’t. Approaching an economic recession, we would ideally want to see households spending less and saving more, or paying off more debt. Other aspects of household finances such as property values (for owner-occupiers or property investors), the value of other assets such as shares, interest households pay on debts such as a mortgage and to some degree earnings are pretty much out of household’s control.
So with house prices down 13.3%pa in March 2023, if a recession were to cause share prices to tumble and a household member to lose their job, at least there is money in the bank and debt servicing isn’t too onerous.
Money too tight to mention
In real terms, average household disposable incomes have declined slightly, and spending has declined by a similar amount. But saving has declined much more than spending, and net worth has fallen quite dramatically.
On the positive side, debt levels have fallen in real terms. This fall is partly because of high inflation over the past 12 months. Accounting for inflation effectively increases the value of debt in previous years. In nominal terms, debt has risen. The fall in the past 12 months could be partly because falls in the value of houses mean people are taking out smaller mortgages. Unfortunately, interest rate hikes mean that the interest being paid on those mortgages has risen sharply. Between the December 2021 quarter and the December 2022 quarter:
- Net disposable income per household fell 0.4% in real terms from $2,275 per week to $2,265
- Consumption per household fell 0.4% in real terms from $2,189 per week to $2,184
- Deposits per household (a measure of how much households have in the bank) fell 4.0% in real terms from $126,3251 to $121,758
- Loans per household (a measure of household debt) fell 4.6% in real terms from $153,154 to $146,124, but mortgage interest payments per household have increased 81% in real terms.
The Devil’s in the detail
These estimates are based on quarterly national accounts data published by Stats NZ. The data is published in current prices as totals across all households. These published data show disposable incomes, spending and savings all rising. But we must take into account that rises in the cost of living have eroded the purchasing power of incomes and savings over time, and that rises in incomes, spending and savings across all households could be because of an increase in the number of households rather than households becoming better off.
So, it’s only when we recalculate the totals in real terms based on increases in the Consumers Price Index and divide the totals by the number of households to get an average per household, that the real picture emerges. To calculate real mortgage interest payments per household, we divided total real mortgage interest payments by the number of owner-occupied households.
Also bear in mind that all we can see with this data is the ‘national average’ household. We don’t know anything about the finances of across households with different levels of income or in different regions, for example. Household debt will be strongly influenced by whether or not a household has a mortgage, and average mortgage interest payments will include diverse households from owner occupiers to property investors to households that have paid off their mortgage.
Debt rising even as arrears increase
Worrying trends have emerged around household debt. According to Centrix Credit Bureau, the number of missed mortgage payments grew for the seventh consecutive month in February 2023. Overall, 1.29% of mortgages (18,900) were in arrears, up almost a quarter year-on-year. Centrix say this could be attributed to people rolling off fixed home loans and being unable to service higher interest rates.
Unsecured personal loan arrears were up 7.8% year-on-year in February 2023 and Buy Now Pay Later arrears were near an all-time high. All this means that the proportion of consumer accounts in arrears were 11.5% in February 2023, which is the highest it has been since 2019. What’s more, households are looking to increase their debt. Consumer credit demand was up 3% year-on-year in February 2023, driven by demand for credit cards, vehicles and personal loans.
Do yourselves a favour
So, households could do themselves a favour and save more of their disposable income. More saving would be good for households themselves and for the economy for two reasons. Firstly, because increased saving would put households in a better position if they need to tighten their belts over the coming 12-to-18 months. Secondly, because saving more and spending less now will help take the heat out of the New Zealand economy and reduce upward pressure on prices. Less upward pressure on prices would mean interest rates won’t need to rise as high and can be reduced sooner, which would help lessen the severity of recession. The Reserve Bank recently raised the Official Cash Rate a further 50 basis points to 5.75%, partly because of continued resilience in consumer spending.
The consumers price index increased 6.7% in the 12 months to March 2023, which was lower than many economists expected. But there’s still a lot of work to do to get inflation back below 3%. The Reserve Bank is taking aggressive steps to achieve this. The Government is walking a fine line between supporting households facing cost-of-living pressures and not stoking inflation further. Households need to do their part as well.