Many New Zealanders 'just getting by', economists say

Friday, 23 February 2018

Debt becomes a problem when economic circumstances change.

Falling numbers of New Zealanders are declaring bankruptcy, but there is a warning those statistics do not reflect the number of people who are living from one pay cheque to the next.

New Zealand bankruptcies are now at a five-year low of 3215 for 2017, down more than 15 per cent on 2016.

On a per capita basis, New Zealand's bankruptcy rate is about half of Australia's. Last year, Auckland had twice the bankruptcies of anywhere else in the country.

Hazel Phillips, spokeswoman for credit score reporting website CreditSimple, said it was a sign of a good economy over recent years, which had boosted employment.

Gareth Kiernan said many bankruptcies were related to business failure.

'The outlook is still good, but there are a number of changes that people should bear in mind: This year we have a new government, new legislation being passed and it's difficult to predict what will happen to our economy.'

Economist Cameron Bagrie, of Bagrie Economics, said the rate of household saving was better than it was in 2008 but still poor.

'New Zealanders have always been poor savers, partly because we tend to 'save' through the equity in our houses. We tend to spend today as opposed to invest for tomorrow.'

He said a huge chunk of society was just getting by.

'Wages are low, housing costs are high and New Zealand is not a cheap place to live - ask any Brit who goes supermarket shopping here. There is just not a lot of spare change after core expenses are taken care of.'

Households have more debt than they did before the global financial crisis, Bagrie said. That would make them more sensitive to any movement in interest rates. Rates would need to move up 2 per cent before stresss became apparent, he said.

'A big threat to the economic expansion, households and jobs is inflation. If it appears, then interest rates move up.

'Higher interest rates are a lethal cocktail when mixed with extended asset values and high levels of debt. We have the latter two.

'Luckily inflation is low in New Zealand. But we are seeing some movement in the USA and a key issue will be whether than transmits around the globe.'

Philips said people needed to be realistic about the level of debt they could afford.

'It's crucial that Kiwis continue to budget and ensure they have an emergency fund to fall back on if personal circumstances suddenly change,' she said.

'Having a cushion of money to draw on if you lose your job or enter a tough spot financially means not having to rely on high-interest sources of credit, which can sting you more in the long term. If you begin to struggle and ignore your bills, it can significantly damage your credit score and can often be the start of falling into bad financial habits.'

Commentators said bankruptcies were an option of last resort.

Economist Shamubeel Eaqub said bankruptcies were a lagging indicator because people would not default on a mortgage until they had exhausted all their other possibilities.

'Banks will then try and manage the situation to avoid a default if possible. Bankruptcy is a pretty extreme outcome and as a result not very common and lags the economic cycle.'

Chief forecaster Gareth Kiernan, of Infometrics, said his firm had highlighted rising household debt levels as a concern over the past six to nine months.

'I'm doubtful as to whether they would lead to bankruptcy, which is very much a last-ditch option.

'Given that the debt levels are mostly related to housing, and given that most mortgage lending has been with a deposit of 20 per cent or more, very very few people are at risk of being left with negative equity if they are hit by a combination of being unable to keep up their mortgage payments - due to a job loss, for example - and house prices falling. So even if a mortgagee sale occurs, they would probably still walk away with some money from the sale, and therefore not need to file for bankruptcy.'

He said most bankruptcies were probably due to people who were self-employed and hit difficult business conditions.

'From what I understand, with most businesses, it's a problem with cashflow rather than profitability that tends to send things pear-shaped.'

A recent survey by the Commission for Financial Capability found that only 48 per cent of 12,000 respondents completely agreed that they paid their bills on time.