There comes a time when debts are called in

Shock, horror, houses are unaffordable. Not as unaffordable as Australia but enough to de-gloss the supposed “Kiwi dream”.

This amounts to a newly sharpened division in our society: the have-house category is shrinking and the have-not-house category is growing.

This is no surprise. The income and wealth range (technically measured by the Gini coefficient) has lengthened significantly since the 1980s reforms. The best off have got relatively much better off.

This has happened in all of our sorts of societies and also internationally: rich countries have got richer relative to most poor countries.

And as a result these rich countries and individuals in them have felt freer to take on debt. The United States is now staggeringly indebted and sucks huge quantities of money from other countries to fund its consumption and high house prices.

New Zealand is even more staggeringly indebted. Not the government, which has long kept its now small overseas financial liabilities balanced with overseas financial assets. Companies and individuals hold the debt.

Companies borrow mostly to fund income-generating activity which is a good thing. Individuals borrow to buy houses and consume goods and services. That is sensible within limits. But it has gone beyond sensible limits.

The Reserve Bank calculates the average household’s debt is close to 160 per cent of disposable income and debt servicing now takes up 12 per cent of disposable income, up from 8 per cent in 1999.

That debt is owed mostly to foreigners, via banks here. Total debt to foreigners is 87 per cent of GDP (total production).

Our annual account with the rest of the world, the current account balance, is 9 per cent of GDP in deficit, a level usually associated with banana republics.

In the long term this cannot be sustained. It can for now because foreign individual investors are enamoured with our relatively high interest rates and the world economy is chugging along nicely, partly offsetting the high exchange rate with high commodity prices and enthusiastic tourists.

But what happens if the world economy slows?

In the United States house prices have fallen for some months, which means owners can no longer borrow against rises in their houses’ “value” to fund their retail therapy. Wage and job growth have been sluggish.

In China there is social tension — 87,000 riots and disturbances were officially recorded last year (equivalent to around 300 here, which we would think a lot) — and some multinational firms are now diverting investment to other countries. In India severe water problems threaten to cap and maybe even reverse the “green revolution” which has fed its burgeoning population.

Resources prices (which underpin Australia’s boom) last year hit levels which threaten to brake manufacturing profitability in east and south Asia, on which much of the world’s recent buoyancy is based.

None of this necessarily presages calamity or even a serious slowdown. There is reason, most economists say, to expect the show to roll on with at least enough momentum to keep us in the manner to which we are accustomed. At home investor confidence is very positive. Business and consumer confidence has lifted.

Just the tune Michael Cullen, hoping for a fourth term, likes to hear.

But there is also reason, some economists add, for a measure of caution and a corresponding personal precaution: less flipping the credit card, less enthusiasm for real estate, the prices of which have risen far beyond the rise in rents or wages or past long-term trends.

Caution is wise because, whatever the world outlook, our economy is seriously unbalanced and it will rebalance. The issue is when that rebalancing will come, what path it will take and how rough that path is. After several years of false alarms — rebalancing seemed to have gently begun last year but reversed when petrol prices fell — is this the year the squeeze comes?

And if it is, whom will the squeeze hit hardest?

First, obviously, the most active credit card flippers and house buyers. Second, greedy lenders to flimsy finance companies. And, third, the already less well off because jobs will go and incomes will be constrained.

That is, the Gini coefficient will go up. Which is the opposite of what Labour ministers think they are mandated to achieve.

For seven years the magic machinery of the debt-funded economic boom has worked in the opposite direction, employing people and so lifting average incomes at the bottom, notably among Maori, and furnishing Cullen huge windfalls to redistribute through Working for Families, education, health and housing spending — all without unduly treading on the toes of the well-off.

The flipside has been the falling affordability of houses for Labour-voting people. A house price crash as part of a sharp economic rebalancing would fix that. But that is not the way to a fourth term.

Meantime, Labour’s people are stuck with renting. That is Cullen’s conundrum for 2007.