Financial deregulation and household indebtedness

Leslie Hull

No DP2003/01, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: Low saving rates and high indebtedness are characteristics of the household sector in many developed countries. As in other countries, financial deregulation has contributed to increased household indebtedness in New Zealand. This paper discusses several aspects of the linkages between deregulation and household consumption decisions. It begins with an overview of the financial sector reforms and a discussion of how the reforms affected households' access to credit. Secondly, the effect of a change in house prices on consumption is measured. Given that New Zealanders hold about 80 per cent of their wealth in housing, changes in house prices have the potential to materially affect household consumption decisions. Also, there is evidence that the effect of changes in housing wealth on consumption is stronger in the period after deregulation. Thirdly, the role of the household sector in the current account is discussed as banks have increasingly been borrowing overseas to fund household borrowing. The results indicate that the household sector's net overseas surplus declined by at least $7 billion over the last decade. Finaly, the ability of the household sector to weather an economic downturn is considered. Highly leveraged households are more vulnerable in times of stress, and their debt servicing capabilities might deteriorate when interest rates rise. Also, deterioration in household balance sheets could negatively impact the financial sector.

JEL-codes: E2 F4 (search for similar items in EconPapers)
Pages: 28p
Date: 2003-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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