Escalating household debt in New Zealand is beginning to pose risks to the wider economy and has prompted a warning from the Reserve Bank.
In its monthly Bulletin, Reserve Bank macro financial department adviser Chris Hunt outlined the rising levels of household debt and risk it poses to the economy, and also considers how the Reserve Bank manages the housing sector, including its loan to value ratio (LVR) restrictions and other potential tools.
Mr Hunt said high levels of household debt increased households' sensitivities to any shock to their income. During periods of financial stress, those households tended to cut spending.
''This can amplify a downturn and helps to explain why many advanced economies, since the 2008-09 [global financial] crisis have had subdued [economic] recoveries,'' Mr Hunt said.
Before the crisis, household indebtedness in several countries was ascribed to several factors, including loosening of credit standards, declining borrowing costs, rising house prices and financial market innovations.
''In New Zealand, house prices were a key factor driving the increase in debt to historically unprecedented levels.''
Around 2008, household debt peaked at 175% of disposable income; by September 2014 that had eased to 164%.
However, since late 2011, rising house prices, easing credit conditions, an increase in lending at high LVR rates during 2012-13 and low interest rates contributed to the growth of household debt, Mr Hunt said.
''It is possible that some younger households buying property today believe that house prices reliably rise, based on their parents' experience as homeowners,'' Mr King said.
Because data had shown a rise in the proportion of borrowers with a high LVR and high debt-to-income ratio, that supported the view the Reserve Bank's LVR limits had been apt to curtail risks to New Zealand's financial security.
However, there has been criticism elsewhere of the Reserve Bank's introduction of the LVR, which stopped many younger people from getting their first home.
Mr King said while there was no single definition of ''over-indebtedness'' for households, one definition was a household spending 25% of its gross monthly income on servicing consumer debt, or more than 50% on the household's total debt obligations.
Another longitudinal study, of 11,500 households from 2002-10, defined ''at risk'' households as those whose debt costs were more than 30% of gross income.
''High and rapidly rising levels of household debt led to serious financial system and wider economy problems in several countries during the global financial crisis,'' Mr Hunt said.
Regulatory frameworks in most countries had since been reformed to boost the resilience of their respective financial systems, in particular the household sector vulnerabilities.
Policymakers in those economies, including New Zealand, became concerned over household debt in recent years, he said.
In October 2013 the Reserve Bank instigated its LVR, meaning banks' overall portfolios must not have more than 10% of mortgage lending to buyers with a deposit of less than 20%.
Mr Hunt said the LVR reflected developments in the housing market, which if left unchecked, ''could have threatened future macroeconomic stability''.
Other central banks, in addition to LVR restrictions, imposed limits to maximum debt servicing-to-income, debt-to-income limits and higher risk weights on housing loans and prudent lending guidelines.
''Over time, housing loan portfolios have become a larger share of bank lending ... increasing their potential to play a larger part in a future financial crisis.''
