Plan for tomorrow (not today)

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Plan for tomorrow (not today).

According to figures recently released by Westpac Institutional Bank, New Zealand households are now more indebted (as a share of disposable income) than they have ever been.

This won't come as a huge surprise to those of you who have been following the rapid rise of property prices here in New Zealand though. After all, falling interest rates have made greater levels of debt more accessible to us all allowing us to pay higher prices for all kinds of assets.

Statistics highlighting our indebtedness are eye-catching, and also a little alarming. But as the Westpac report pointed out, this does not necessarily mean a day of reckoning must soon be upon us. In fact, as long as this debt can continue to be serviced (interest and principal paid back when due) there is nothing to say this new debt record cannot be sustained or even grown.

Debt serviceability is where the rubber really meets the road. If this larger debt burden was only possible because of lower interest rates, as is our suspicion, then it stands to reason that rising rates could make things uncomfortable for those who have been doing this extra borrowing.

If you're wondering what on the horizon might cause mortgage rates to rise, you would be advised to keep a close eye on the inflation rate. This is because interest rates are simply a function of economic growth and inflation.

At just 0.2% over the last year, it might seem hard to imagine that inflation running too hot should be of any concern at this point. But adopting this backward-looking approach would be foolhardy in our opinion.

It is now highly likely that we have seen the lows in inflation for this cycle and looking further ahead we see tighter labour conditions, solid consumption, and surging construction helping to boost domestic inflation. The recent impressive rebound in factory prices in China also tells us we should now be preparing for a shift in the low inflation environment that New Zealanders have got so accustomed to. Now is not the time for complacency.


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