Beyond reasonable debt: a background report on the indebtedness of New Zealand families.

AuthorLegge, Jaimie


This paper reviews international literature and New Zealand data to examine the indebtedness of New Zealand families and identify circumstances and behaviours that might distinguish families who use debt well from those who do not. Some circumstances (notably being young, having children and separation) and some behavioural traits (basing aspirations on comparisons with others and being impulsive) appear to be important in determining who gets into debt. Other circumstances (notably having low income) and other behavioural traits (having an external locus of control) appear to be important in determining who gets into problem debt. Having an external locus of control means you believe your environment or other people control your decisions.


Increasing indebtedness is largely a modern phenomenon. Deregulation, coupled with technology, has made access to debt widely available. In many cases little or no financial security is required to access funds. This provides opportunities that might not otherwise have existed for many people to get ahead financially or "weather storms". However, the cost of this access is greatest for those who can least afford it, creating a potential debt trap if unexpected events occur.

This is an area in which the Families Commission and Retirement Commission share a mutual interest. Both agencies want to ensure families are aware of the risks of using debt and recognise the warning signs before debt becomes a problem. In order to use indebtedness as an indicator of financial strain, however, we need to be able to isolate those who use debt well from those who do not. This paper provides a preliminary examination of a range of factors that may help us to distinguish these two population groups.

We do not undertake any multivariate analysis of families' indebtedness, but recognise that the way in which variables interrelate is critically important. Both Commissions plan to undertake some multivariate analysis with the Living Standards Survey dataset to examine this further, and are also considering some primary research to improve our understanding of families' knowledge of, attitudes to and behaviours relating to debt.

The paper begins with a brief outline of New Zealand families' debt situation. It then reviews the theory and evidence on the impact of circumstances and behaviour on families' indebtedness. (2)


According to Statistics New Zealand's SoFIE data, (3) 64% of single families with or without children and 82% of couple families with or without children had some form of debt in 2003/04.4 For single families the total amount of debt owed was $21,371 million, of which 69% represented mortgage debt, 12% student loan debt, 7% loans and credit card debt, and 13% other types of debt. For couple families the total amount of debt owed was $71,032 million, of which 82% represented mortgage debt, 2% student loan debt, 6% loans and credit card debt, and 10% other types of debt.

As a group the household sector5 has rapidly accumulated debt since the early 1990s, and much of the increase has been for mortgages (Reserve Bank of New Zealand 2006). A similar trend has been observed in Australia. The Reserve Bank of Australia has observed that while owner-occupier housing debt has accounted for much of the increase in total household debt, this debt is concentrated in less than a third of all Australian households, and this proportion has not changed significantly in the previous decade: "The rise in housing debt is not due to a higher proportion of households acquiring debt, but is primarily due to an increase in the average level of debt per debtor household" (Reserve Bank of Australia 2003:5). Aggregate figures, however, do not tell us much about how individual families are faring--particularly their ability to service debt. This is discussed further in the next sections.


A range of characteristics, circumstances and environmental factors are likely to influence and help to explain different families' decisions about savings and debt and their outcomes. This section outlines relevant theory and overseas and New Zealand evidence on the following:

* age

* relationships, children and transitions

* income, education and employment.

The full report on the Families Commission's and Retirement Commission's websites also addresses:

* wealth and home ownership

* ethnicity and region

* economic and social climate and policy.


The life-cycle model of saving assumes that most individuals, or in this case families, go through predictable stages at predictable times. The life-cycle model can therefore be thought of as capturing a series of age effects. Normal patterns of human capital development and working life entail people having earnings streams that rise with age and then decline, so the theory of consumption smoothing implies a period of borrowing, followed by saving, followed by dissaving (drawing down savings).

Overseas evidence: Age appears to be an important predictor of both debt use and debt problems, with families headed by younger adults being more likely to use debt, have longterm debt and have difficulty managing debt. In the UK, those in their 20s and 30s are more likely to have debt problems than other age groups: almost 40% of those who find debt a "heavy burden" are aged between 25 and 34 (Tudela and Young 2004). This age group is also particularly susceptible to long-term debt, which is consistent with acquiring major assets such as houses (Balmer et al. 2005).

According to Kempson (2002), age is one of five key factors increasing the risk of arrears in the UK, the others being family, income, use of consumer credit and priority given to paying bills:

The relationship of age to debt problems may be a consequence of better access and more liberal attitudes to using credit, as well as higher rates of setting up new homes and having children among younger respondents, both of which are major causes of debt problems. (Kempson 2002:40)

New Zealand evidence: Statistics New Zealand's SoFIE data, illustrated in Figures 1 and 2 below, demonstrate that a life-cycle relationship does exist between age and total debt: on average, New Zealanders become slightly more reliant on debt as they move through their 20s. This plateaus though their 30s, 40s and early 50s, then falls noticeably from their late 50s into retirement. This relationship exists for both single and couple families, although a greater proportion of couples have debt than singles.

However, the relationship is most apparent with mortgage debt and bank and credit card debt. Student loan debt, and to a lesser extent "other" debt, exhibit a negative relationship with age. This is to be expected in the case of student loan debt, as most students are likely to be young. The relationship with "other" debt, however, may reflect greater reliance on nonmainstream (and unsecured) forms of credit for young people who have less income and asset security, especially those in a couple family.


Preliminary examination of Household Economic Survey trend data, illustrated in Figure 2 below, suggests that older age groups are becoming more indebted. The figure shows mortgage repayments (including interest and principal) against the age of the household "reference person" for those who reported such expenditure. Three points stand out: the broadly inverted U-shape is consistent with the life-cycle model; there is a general upward drift over time, consistent with an increase in household mortgage debt (this may include non-housing debt secured against property); and there appears to be an increase among older age groups.


Relationships, Children and Transitions

Family formation is one of the key life stages captured by the life-cycle model. People have traditionally partnered and had children at the start of their working life, and this helps to explain the relatively high ratio of borrowing to saving at this life stage: incomes are low and costs are high. Increasingly, however, the "average" family is forming later, is having fewer children, is more likely to have both partners in paid work, and is more likely to re-form or be a blended family (Statistics New Zealand 2005).

Overseas evidence: There is mixed evidence from overseas as to the effect family size has on use of debt or indebtedness...

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