Government policies targeting the housing market will likely "put the brakes" on household debt accumulation, according to new analysis by Westpac's economics team.
Westpac economist Satish Ranchhod says that while household debt levels are still historically high, debt accumulation has slowed over the past year.
"In recent years, the combination of low interest rates and the favourable tax treatment of housing saw house prices rising rapidly. These same conditions also saw household debt rising to record levels," Mr Ranchhod says.
"Now, with the housing market cooler than it was in previous years, the creep upwards in household debt has slowed."
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Mr Ranchhod says households are still carrying debt that is equivalent to 168 percent of their annual disposable income – a level that’s well above the peak of 159 percent that we saw just prior to the financial crisis.
However, "policies aimed at dampening housing market pressures will put a brake on further debt accumulation. These changes also signal a drag on households spending, and will have an important impact on the RBNZ’s policy stance."
Mr Ranchhod says the major contributor to the run up in household debt has been the low level of interest rates in recent years, and the related increases in house prices.
"With low interest rates generating low nominal returns on savings, investors have sought to diversify into housing and other assets. Combined with the favourable tax treatment of investment housing in New Zealand, this boosted the demand for housing assets and pushed house prices higher," he says.
"Aspiring buyers have had to borrow more. In addition, as has historically been the case, strength in the housing market also saw homeowners spending some of the windfall they perceive when the value of their house rises. The net effect has been more borrowing and more spending, with the low cost of borrowing reinforcing both of these trends."
Mr Ranchhod says that while the run-up of household debt has raised concerns it was unlikely to topple the economy.
"Despite the increase in debt levels, low interest rates mean that households' debt servicing costs remain modest: households currently spend an average of 8.3 percent of disposable incomes on debt servicing - well below the peak of 14 percent in 2009.
"On top of this, the labour market is in good health, and New Zealand hasn’t had difficulties funding its current account deficit in recent years."
Mr Ranchhod expects the recent resurgence in the housing market will be short lived.
Government policies that curtail the financial incentives associated with property investment will, he says, dampen housing market conditions.
"Over the coming years we also expect the ability to use losses on rental properties to offset other tax obligations will be significantly curtailed. Finally, there is the possibility that the government will look at introducing a broad-based capital gains tax if elected to a second term in office.
"This wide reaching suite of policies will significantly dampen the demand for housing, especially by investors. Consequently, we expect that the nationwide level of house prices will fall by a total of 2 percent over the next four years.
"This will have important implications for the Reserve Bank’s choice of policy settings, potentially allowing for a further loosing of LVR lending restrictions."
The slowdown in the housing market will also have a more general dampening impact on economic activity, removing any need for the RBNZ to hike the Official Cash Rate in the near term, he says.
