No sub-prime here, but no room for complacency either

It takes at least 81.2% of the average take-home pay to afford a standard mortgage payment of a median-priced house. In June 2002, it took a much lower 45.3% of take-home pay to make a mortgage payment on a median house and in May 2006 the figure was 68.2%. (Extract from the CTU’s recent submission on the monetary policy framework.)

So, while New Zealand’s financial markets and economy continues to sail along healthily, our high levels of debt remain an iceberg under the surface that we need to navigate our way around. As CTU Economist, Peter Conway, notes:

“There is some speculation about how immune New Zealand is to the global credit crunch. Obviously it has hit some finance companies. Although we have many people who have stretched very considerably to buy a house (and will be finding it tough with the increased mortgage interest rates as they roll over their fixed term), we do not have all that hedge money chasing sub-prime mortgages as in the USA. But there are many people with high credit card debt and significant hire purchase payments. So while there is no need for particular alarm – there is no cause for complacency that it could never happen here.”

Finsec continues advocate for New Zealand’s finance institutions, and in particular its major banks, to take leading role in reducing debt and thus reducing this risk to financial stability, by removing the target pressure on staff to sell debt. The BNZ, as the bank that many identify as most vigorously driving staff to sell debt to customers, could take an important leadership role this month by committing to review its target system.

As Conway noted last month there are economic concerns about pay systems which can encourage customers to take on more and more debt:

“This not only adds to house price inflation, but also runs the risk that customers may not be able to sustain such high levels of debt. At a time when there is renewed focus around the world on financial instability caused in part by high debt levels of some home owners, we need to be careful about this.”

(thanks to Dominic’s Pics for the photo)