Household debt rises despite the ‘conservatism’ of credit cards in the Covid era
New Zealanders focused on paying down their consumer debt when Covid-19 first hit the country, but an increase in the size of our mortgages means we are still more in debt than ever before.
The Reserve Bank’s National Household Balance Sheet shows that between December 2019 and December 2020, households paid $ 2 billion on their collective consumer debt, such as credit cards. The total fell from just under $ 17 billion to just under $ 15 billion.
But that’s not glaring evidence of a new national financial conservatism inspired by tens of thousands of households that had to seek mortgage repayment “vacations” from banks during the nationwide foreclosure in April and May of the United States. last year.
Overall, households are now more indebted than they were before the signing of Covid-19, because while consumer debt is down, mortgage loans have pushed the national household debt down by $ 236 billion. from $ 250 billion, according to figures from the Reserve Bank.
“We certainly saw that last year, during the foreclosure, people were paying off their credit card debts,” says Lyn McMorran, executive director of the Financial Services Federation, the industry lobbying body for lenders. second-tier like Instant Finance and Avanti Finance.
But, says McMorran, what households have done since then with their debt is less clear.
Financial research website Moneyhub has compiled the 12 “ holy rules ” of credit cards that every cardholder should follow if they don’t want to fall victim to easy and expensive consumer debt.
The Centrix credit bureau is tracking credit applications and reporting that consumer credit demand is strong again.
“A year after the economic shock of the Alert Level 4 lockdown, credit demand has returned to 95 percent of its pre-Covid level,” McLaughlin says.
“While the demand for credit fell in March and April 2020, we are facing a different scenario this year following a steady recovery. Our latest data shows a 3% month-over-month increase in credit demand in March 2021 compared to February, ”says McLaughlin.
Consumer confidence remains high, he says, but borrowing patterns are uneven.
Demand for buy it now and pay later is more subdued than during the lockdown, when people were doing a lot more of their shopping online, he says. The demand for auto loans is increasing.
But buying now, paying later has shifted some credit card spending, and McLaughlin sees this as an advantage, as it’s shorter-term, lower-cost debt that makes it especially appealing to young people.
“Auto finance remains the most popular credit product,” says McLaughlin.
“People usually improve their cars when they’re feeling optimistic about their future, strong auto financing is a sign of consumer confidence,” says McLaughlin.
Auto finance collapsed the deepest of all loan forms during the 2020 foreclosure, so some catch-up spending may be underway.
But even Centrix data may not give the full picture of credit demand, some believe.
Demand may well be dampened slightly by delays in global freight movements, which force people to wait longer for items.
“People would borrow to finance a new motor vehicle,” McMorran says. “But buying a motor vehicle is another matter.”
McMorran says households at the start of the year saw that there could be three to four month waits for certain products like thermal pools and lounges.
There can also be a lot of consumer debt covered up.
McMorran says mortgage debt with banks also includes items such as cars and living rooms financed by mortgage loans but recorded as mortgage debt.
She also doubts that lower-tier loans were factored into the Reserve Bank’s figures.
And here at the lower end of the lending pyramid, where fees and interest rates are much higher, reflecting the riskier nature of loans, McLaughlin says some borrowers may hold back.
“It was a forced conservatism that followed the introduction of responsible lending,” he says.
The introduction of responsible lending rules has led to a decline in loan defaults year after year, and changes have continued to occur, reducing the willingness and ability of lower level lenders to extend loans to borrowers. more marginal, he says.
In June, lenders who charged interest of 50 percent or more were prohibited from making more than 100 percent of the amount they lent to any borrower on a loan.
A tightening of the rules for more responsible lending is underway. All lenders will soon have to conduct income and expense audits when deciding whether to extend loans, top-ups, or increase a credit limit.
There is no evidence of conservatism in mortgages, especially among first-time homebuyers, according to data from the Reserve Bank.
First-time home buyers take out larger loans and multiples of their income.
In December 2019, the average pre-tax income of a couple buying a first home on a loan of four to five times their income was $ 108,000.
In December 2020, that was the average pre-tax income of couples taking out loans of five to six times their income.
“Is this a change in attitude towards debt or is it simply the desperation of people to move up the property ladder?” McMorran asked.
A survey by Finder, an online financial products advertising website, also found that some aspects of consumer debt are not related to current financial conditions, but to the financial ineptitude of borrowers.
Finder said they surveyed people aged 18 and over and found that 41% had credit card debt, with an average credit card debt of just under $ 3,800.
And the main reason they cited for having credit card debt was not low income, but poor budgeting skills.
Kevin McHugh, Finder editor in New Zealand, explains that the main reason people said they hadn’t paid off their balance yet was because they were either badly in budgeting or didn’t have money. savings to count on.
“Other reasons regularly included giving in to impulse purchases, not having the means to pay off with a credit card, or using a credit card to keep up with bills and refunds,” says McHugh. .
The skills gap was smallest among young people.
“Among those with card debt by age group, 18-24 year olds are the most likely to have an outstanding balance because they are bad at budgeting or have no savings,” says McHugh.
Nationally, the increase in household debt has been eclipsed by the additional wealth added by rising house and land prices – worth $ 70 billion between December 2019 and September 2020.
Another $ 22 billion in wealth has been added to their pension funds, businesses and equity portfolios.