There is a lot of talk in the press about whether we are in a ‘technical recession’ or not and the state of the economy. As mortgage advisers we are seeing continued pressure for home buyers, investors and business owners with rates on average still rising on the average mortgage due to historically low fixed rates, living costs continuing to rise and incomes falter.
A trend often seen when times get tough is an increase on the reliance of consumer debts. Individuals will look to credit cards, personal loans, buy-now pay-later and other mechanisms as means to maintain their lifestyles or even just to get by.
In this article we investigate NZ consumer debts and some worrying trends.
I should preface this blog by saying that this is just an observation and opinion and shouldn’t be construed as personalised advice in any way.
Credit Cards
Feb 2020 – Sept 2021
In the 18 or so months from February 2020 through to September 2021 New Zealand, along with much of the world, saw unprecedented availability of cheap credit. This spurred a property boom that saw huge increases in property values.
Coincidentally we also saw a great contraction in credit card debt. Credit Card Limits as at February 2020 were $23.423 billion with outstanding balances of $7.299 billion. By September 2021 this had fallen to $21.939 billion and $5.544 billion respectively.
That is an enormous fall in balances by $1.755 billion or 24.04%.
We can speculate what the cause of this fall was, however, it was likely driven by kiwis shifting debt onto their homes and reducing outstanding credit card and consumer debts. Data shows that home lending increased from ~$280 billion in February 2020 all the way to ~$324 billion in September 2021 (an increase of $44 billion or 15.7%).
Government support (cash payments) over this time no doubt also played it’s part as did lower borrowing costs freeing up cash for consumers to spend rather than ‘tick up’ against consumer debts.
One last thing to note, balances over 90 days due fell from $61 million to $40 million and continued falling through to September 2022 to reach a low of $30 million.
Sept 2021 – today
September 2021 proved to be the low water mark for credit card debts. Most of us will intuitively know that this was when inflation began to take hold rising from 1.5% in March 2021 to 4.9% in September 2021 and continuing on to peak at 7.3% in June 2022. It was also when the Reserve Bank began increasing interest rates. The OCR sat at 0.25% from March 2020 through to October 2021 when it increased to 0.50% and then continued that upward journey peaking at 5.50% in May 2023 where it remains to today.
Again, coincidentally, credit card balances began climbing from their low point of $5.544 billion reaching $6.177 billion today. Now, that is a smaller increase than the fall over 2020 and 2021 being $633 million or 11.42%, however, it is the trend we are more focussed on.
What is interesting to note is that credit card limits over this time have continued to fall. From $21.939 billion in September 2021, they have fallen a further ~$1bn to $20.947 billion today. That means that drawn limits are now 29.49% of overall credit limits as opposed to 25.27% in Sept 2021. The percentage is, however, lower than Feb 2020 where it sat at 31.16% but it is climbing as limits fall and balances rise each month.
Crucially also, balances over 90 days due are now back to $61 million (as at April) from their low point of $30 million in September 2022. These are also steadily climbing month to month increasing from $42 million in November 23 to the $61 million in April (45% over 5 months).
Consumer Debts
That was credit cards, now let’s look at personal consumer debt – this excludes credit cards.
Feb 2020 – Sept 2021
Personal consumer debt fell from $16.846 billion to $13.727 billion sharing in time the same low water mark as credit cards. That is a total debt reduction of $3.119 billion or 18.51%.
What is curious is that over this period personal consumer debt from banks fell from $11.030 billion to $7.409 billion ($3.621 billion or 32.83%) whereas non-bank personal consumer debt increased from $5.816 billion to $6.319 billion ($503 billion or 8.65%). Only speculating but this would suggest and time well with the proliferation of tools like afterpay changing consumers behaviours and encouraging further debts.
As with credit cards, however, the overall trend suggests that New Zealanders were shifting leverage from unsecured positions to their homes.
Sept 2021 - today
Slightly different to credit card debt, personal consumer debts didn’t seem to turn in September 2021 but rather remained flat for the next 12 months hovering around the same total levels. Total personal consumer debts as at October 2022 was $13.838 billion split $7.415 billion with main banks and $6.422 billion with non-banks. The change was barely registerable.
However, between October 2022 and today, personal consumer debts have climbed steadily reaching $14.696 billion total in April 2024. This is split $7.687 billion with main banks and $7.009 billion with non-bank lenders. This has flattened slightly in the last 3 – 4 months however.
October 2022 would time well with several borrowers needing to refix off the absolute low interest rates of 2% that were on offer late 2021. This might mean that discretionary income for your average consumer was falling and they were seeking other means of completing purchasers.
It is interesting that in February 2020 bank personal consumer debt accounted for 65.5% of the total personal consumer debt. Today, that has fallen to 52.3%. In other words, New Zealanders are taking on a lot more personal consumer debt with non-bank lenders.
Lay-Buy
As has been in the press recently, Lay-Buy has gone into receivership. They have cited that the economic downturn in the UK and New Zealand has meant that they haven’t been able to return to profitability despite rapid growth over the last 4 – 5 years. Gary Rohloff stated;
"While we have been making good progress over the last two years, the economic downturn has been longer than we expected, and this had had a significant impact on the retail sector in both New Zealand and the United Kingdom.
"As a result, we have see reduced consumer spending, higher credit losses, and increased fraudulent activity. This alongside increased financing costs created a perfect storm that was difficult to recover from."
Interestingly noted here is the comment of higher credit losses and increased fraudulent activity.
What does this all mean?
Firstly, I will confirm that a lot of this is informed speculation and crystal ball gazing. However, the trends above suggest that Kiwi’s are struggling confirming anecdotal evidence we are seeing daily.
What is a worry is that there is a limit to credit card and personal consumer debts. As Gary Rohloff mentions, higher credit losses and fraudulent activity are abound. These, similar to the over 90 balances on credit cards, suggest that there are further defaults and difficulties on the horizon.
It also means that economically we are likely going to continue through a soft patch and possibly have another dip. At the point that limits are reached on credit card or consumer debts people will be forced to reign in their spending and focus on reducing debts. These debts do not disappear, we need to ‘de-leverage’ and repay them which takes time.
Overall, don’t expect for a rapid bounce back to economic conditions in the next 12 – 24 months. We believe things will remain soft for a while yet. This will likely result in higher unemployment and poor GDP results.
These could prompt the Reserve Bank to respond and ease the tension, however, I would caution about a view suggesting a rapid return to activity.
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