{"id":585152,"date":"2026-08-30T18:18:11","date_gmt":"2026-08-30T18:18:11","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/585152\/"},"modified":"2026-08-30T18:18:11","modified_gmt":"2026-08-30T18:18:11","slug":"nation-of-debt-how-the-economic-downturn-healed-nzs-borrowing-addiction","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/585152\/","title":{"rendered":"Nation of Debt: How the economic downturn healed NZ\u2019s borrowing addiction"},"content":{"rendered":"
Compared with concerns raised last decade by the Reserve Bank of New Zealand (RBNZ) and international ratings agencies, the past four years look like something for a successful rebalancing.<\/p>\n
It\u2019s enough for the Reserve Bank\u2019s debt specialist to describe current trends as \u201cpositive\u201d.<\/p>\n
Ten years of tallying New Zealand\u2019s total gross debt shows we\u2019ve nearly doubled what we collectively owe the world.<\/p>\n
In 2016, when the Herald first ran the Nation of Debt series, the tally of all available private and public debt figures came to $492.5 billion.<\/p>\n
A decade on, we are approaching a trillion in debt, with a tally of $937.5 billion.<\/p>\n
There\u2019s no question it looks bad, up almost 90% in 10 years.<\/p>\n
Although it\u2019s always worth remembering that inflation eats debt (as well as our savings).<\/p>\n
In real, inflation-adjusted terms, the rise in debt is closer to 34%.<\/p>\n
Most of the anger and outrage about New Zealand\u2019s accumulation of debt tends to be focused on government borrowing.<\/p>\n
Business Herald Wellington editor Jen\u00e9e Tibshraeny will take a deep dive into Crown borrowing as part of this series.<\/p>\n
But it is fair to say it has soared \u2013 thanks to Covid and its aftermath.<\/p>\n
Core Crown borrowing was just $95.8b in 2016. It is at $250b as of May 30 this year.<\/p>\n
But regardless, the bulk of the nation\u2019s debt continues to be underpinned by mortgage borrowing.<\/p>\n
And that is where the situation has started to rebalance itself.<\/p>\n
In the first six years of our survey, to mid-2022, we saw the tally rise by 7.8% per year (4.9% in real inflation-adjusted terms).<\/p>\n
We were on an unsustainable path, and the RBNZ was not shy of sounding the alarm bells about both elevated housing debt and elevated agricultural debt.<\/p>\n
In the past year, the debt tally has risen nominally by 4.48%. Inflation-adjusted, the real dollar value of New Zealand\u2019s debt rose just 0.38%.<\/p>\n
The past four years might have been tough for the economy, but they have forced a much-needed moderation in total borrowing.<\/p>\n
\u201cIt\u2019s a different picture to how it has been for a couple of decades,\u201d says the Reserve Bank adviser for financial stability assessment and strategy, Charles Lilly.<\/p>\n
\u201cMigration has slowed, housing supply has been stronger, and so you don\u2019t have this kind of economic growth driven by house price increases\u201d, he says.<\/p>\n
Meanwhile, much of the growth has been driven by export sectors and high export returns, which was a different growth model to what we had been experiencing.<\/p>\n
Unsurprisingly, there has been a positive shift in the profile of agricultural debt as farmers have paid down debt.<\/p>\n
Rural rebalancing<\/p>\n
Less than a decade ago the Reserve Bank was regularly highlighting dairy farm debt as one of the more precarious categories in its financial stability reports.<\/p>\n
\u201cIt\u2019s probably the strongest it\u2019s been in decades in terms of the financial risk profile and the strength of farmers\u2019 balance sheets,\u201d Lilly says.<\/p>\n
On top of the good export returns, there had been the $3b payout to Fonterra farmers from the Lactalis sale.<\/p>\n
The RBNZ could actually see that payout flow into its monthly statistics, Lilly says.<\/p>\n
\u201cIt was roughly half and half,\u201d he says.<\/p>\n
\u201cHalf of it was used to pay down debt, and then the other half was just put on deposit. So we saw some really big shifts in the numbers when that happened.\u201d<\/p>\n
That bodes well for farmers\u2019 balance sheets and probably offers a clue as to why we aren\u2019t seeing a rapid flow-through of export returns to the wider economy.<\/p>\n
Farmers clearly aren\u2019t splashing the cash and spending up, yet.<\/p>\n
Lilly says the RBNZ is quite pleased with the way New Zealand\u2019s debt balance has shifted in the past few years and is feeling confident about keeping it under control.<\/p>\n
Housing market correction<\/p>\n
The housing market downturn has clearly helped, but if and when it does turn up again, the RBNZ has the tools to keep investment bubbles in check, he says.<\/p>\n
He notes that Loan to Value Ratio (LVR) lending restrictions have been in place for 13 years now. Debt to Income Ratio lending restrictions have been in place for almost two years.<\/p>\n
LVR rules dictate that banks can direct only up to 25% of their lending to mortgages where the loan-to-value ratio is higher than 80%.<\/p>\n
Falling house prices have helped moderate mortgage lending.<\/p>\n
For commercial investors, that limit is 10% of total new lending with an LVR higher than 70%.<\/p>\n
With debt-to-income (DTI) restrictions, banks face a limit of 20% of new lending, which can go to borrowers with a debt-to-income ratio greater than six times their gross annual income.<\/p>\n
For investors, the limit is that 20% of new lending can go to borrowers with a DTI ratio greater than seven times their gross annual income.<\/p>\n
With the legislation to enforce these mechanisms in place, the RBNZ can change the settings as required \u2013 potentially tightening limits further if the market really takes off.<\/p>\n
But that seems a long way from today\u2019s market reality.<\/p>\n
Given the ongoing sales slump and accompanying slowdown in mortgage lending, it is unlikely that banks are bumping up against these restrictions at all right now.<\/p>\n
\u201cWhat we can do is get those set at a level where they\u2019re not necessarily tightly constraining new demand or people taking on relatively high-risk mortgages, but they\u2019re there in the background just stopping things getting out of hand,\u201d Lilly says.<\/p>\n
\u201cWe like to call them guardrails, especially the DTI tool. If interest rates were to get lower and people started to borrow more and more relative to their income, those would start to bind and start to limit some of that excessive risk-taking. So it\u2019s really comforting.<\/p>\n
\u201cIt\u2019s quite a different environment to what it was before.\u201d<\/p>\n
Business struggling <\/p>\n
While the economic downturn has had some positive side effects on housing debt, business debt is not such an encouraging story.<\/p>\n
That is one area of the economy where rising debt suggests confidence, and more investment in the productive parts of the economy.<\/p>\n
The trend in the past few years has not been good, with almost no lending growth in the year to March 2025.<\/p>\n
It has picked up this year \u2013 up almost 5% in the year to May \u2013 although how much of that is borrowing for investment and how much is borrowing to survive isn\u2019t clear.<\/p>\n
\u201cOne of the interesting things on the business side is the distinction between the small\/medium-sized firms and the larger corporates,\u201d Lilly says.<\/p>\n
It\u2019s clear smaller businesses are under pressure, something that comes through in the data for non-performing loans.<\/p>\n
\u201cFor most other sectors that\u2019s all trending down, that\u2019s all quite positive. But SMEs especially, we\u2019ve seen non-performing loans continue to tick up.\u201d<\/p>\n
There had been the interest rate relief, from the easing of monetary policy, which was helpful, but also a lagged effect from the economic slowdown.<\/p>\n
\u201cFirms may have got through Covid, when there was a lot of support, sales were good, the economic situation was strong,\u201d Lilley says.<\/p>\n
\u201cBut then with this overhang, the tightening of interest rates, slowing of the economy, that\u2019s all coming to fruition and a lot of firms are, small firms especially, are really struggling.\u201d<\/p>\n
That was coming through in data for credit stress and business liquidations.<\/p>\n
On the corporate side, things are steadier, he says.<\/p>\n
But still, borrowing is mainly for working capital needs.<\/p>\n
\u201cThere\u2019s not a huge amount of expansionary demand. The uncertainty of the economic environment is what\u2019s holding people back,\u201d he says.<\/p>\n
\u201cHopefully over the next six months as the economic situation recovers a bit, we do start to see a pickup in borrowing for expansion.\u201d<\/p>\n
By the numbers<\/p>\n
That big, ugly number in our graphic is New Zealand\u2019s total gross debt. It combines the latest Reserve Bank figures for private debt with Treasury numbers for Crown debt and Local Government Funding Agency data on council debt, and Inland Revenue (IRD) data on student loans.<\/p>\n
The Reserve Bank figures include housing debt, consumer debt, business debt and agricultural debt to May 31. These are updated monthly by the central bank as part of its brief to monitor and maintain financial stability.<\/p>\n
The Crown debt figure is taken from the Treasury\u2019s Interim Financial Statements (11 months to May 31) and is the figure for core Crown borrowings.<\/p>\n
This is different from the net core Crown debt figure often used by politicians when discussing debt-to-GDP ratios.<\/p>\n
We use this (on Treasury\u2019s advice) because it is a gross debt figure but excludes debt held by state-owned enterprises, which would have been covered in the Reserve Bank statistics.<\/p>\n
The debt figure supplied by the Local Government Funding Agency is gross debt for the year to June 30, 2024. It captures all core council activities (Watercare, Auckland Transport, etc) but excludes some commercial activities (eg Christchurch City Council\u2019s Orion lines company, Port of Lyttelton, Christchurch Airport) as these would also be included in RBNZ data.<\/p>\n
Student loan debt is from the IRD statistics to March 2025.<\/p>\n
COMING UP IN THE SERIES<\/p>\n
Tuesday: Business debt<\/p>\n
Wednesday: Housing debt<\/p>\n
Thursday: Government debt<\/p>\n
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.<\/p>\n