Thursday, January 27, 2005
The debt millstone grinds on
From time to time I've warned that Kiwis face a debt crisis. It may not hit us this side of the election (if it did, it would change the political landscape significantly), but it is going to arrive sometime soon. I am thoroughly aware of the very poor track record of prophecies like this, but my guess is no later than the end of 2006.
I appear to be backed up by political columnist Colin James, in a NZ Herald column headed "We love debt to bits but the party can't go on forever".
James says the belief that our personal finances are as safe as houses has fuelled an impressive consumer boom. But who is really paying for the boom and what does that mean for the future? Household debt has tripled to around 130% of household income over the past decade and a-half. By that measure it is among the highest, if not the highest, in the developed world.
"This is not quite as alarming as it looks because household assets, notably houses, have risen fast, too. But that is on paper: house prices are in a bubble. Over time house prices move roughly in synch with rents but over the past few years they have soared far ahead of rents. Because rents relate to real incomes, which cannot boom as house prices have, house prices will have to come back into line sometime - either by falling or by going sideways for a long time until incomes rise enough to allow rents to catch up. Moreover, a lot of the new household debt has been spent on leisure and goods - that is, on a consumption binge. We have been pawning the family silver to pleasure ourselves.
"The upshot is the buoyant economy [Michael] Cullen is basking in. But the upshot is also a big red deficit in the balance of payments current account with the rest of the world."
James says the current account deficit is poised to deepen. Moreover, the capital coming in from abroad to balance the account mostly goes not into productive investment but to pay for consumer imports and to fund mortgages and other personal borrowing.
The bubble will burst, and a lot of people are going to get hurt, particularly those reliant on two incomes to maintain the mortgage. For what it's worth, my advice is quit your mortgage as fast as possible, and only buy what you can pay for out of this month's income. Those who don't live within their means are going to face some torrid times.
From time to time I've warned that Kiwis face a debt crisis. It may not hit us this side of the election (if it did, it would change the political landscape significantly), but it is going to arrive sometime soon. I am thoroughly aware of the very poor track record of prophecies like this, but my guess is no later than the end of 2006.
I appear to be backed up by political columnist Colin James, in a NZ Herald column headed "We love debt to bits but the party can't go on forever".
James says the belief that our personal finances are as safe as houses has fuelled an impressive consumer boom. But who is really paying for the boom and what does that mean for the future? Household debt has tripled to around 130% of household income over the past decade and a-half. By that measure it is among the highest, if not the highest, in the developed world.
"This is not quite as alarming as it looks because household assets, notably houses, have risen fast, too. But that is on paper: house prices are in a bubble. Over time house prices move roughly in synch with rents but over the past few years they have soared far ahead of rents. Because rents relate to real incomes, which cannot boom as house prices have, house prices will have to come back into line sometime - either by falling or by going sideways for a long time until incomes rise enough to allow rents to catch up. Moreover, a lot of the new household debt has been spent on leisure and goods - that is, on a consumption binge. We have been pawning the family silver to pleasure ourselves.
"The upshot is the buoyant economy [Michael] Cullen is basking in. But the upshot is also a big red deficit in the balance of payments current account with the rest of the world."
James says the current account deficit is poised to deepen. Moreover, the capital coming in from abroad to balance the account mostly goes not into productive investment but to pay for consumer imports and to fund mortgages and other personal borrowing.
The bubble will burst, and a lot of people are going to get hurt, particularly those reliant on two incomes to maintain the mortgage. For what it's worth, my advice is quit your mortgage as fast as possible, and only buy what you can pay for out of this month's income. Those who don't live within their means are going to face some torrid times.
