Households need to find $15b more

Higher mortgage rates and other cost of living increases will mean households spend an extra $15 billion over the next 18 months, ASB economists say – and some recent house-buyers could end up spending 62% of their disposable income on their mortgages.

In their latest economic note, the economists say rising home loan rates will add a net $5.6b to aggregate household outgoings.

That should be fully offset by strong income growth, they said.

But when other cost of living increases were added, that would lift the extra outgoings to more like $15b, and would help to push consumer spending growth down to ‘‘anaemic’’ levels later this year.

They said most households were in decent financial shape.

Net worth across households had increased by about $600b through the course of the pandemic – largely due to rising house prices.

‘‘House prices are now falling, meaning a chunk of this (paper) wealth will be disappearing again. This flipping of the wealth effect is typically not good news for retail spending. Second, you can’t use your house to pay the bills.’’

The increase in required spending was equal to about two-thirds of the savings that households had built up during the pandemic. To cope, some people would probably run down those savings and – potentially to a larger extent – ‘‘cut up their credit cards’’.

Debt servicing costs for all mortgage-holders would increase from 5% of aggregate disposable income to more like 10% over the next few years, although individual circumstances varied widely.

A ‘‘typical’’ borrower with a loan of $260,000 would experience a $5700 increase in debt servicing costs from now until the end of 2023, the bank’s economists said.

That was equal to about 11% of disposable income now, increasing to 18%.

But the story would be different for people who bought a house recently.

‘‘This cohort typically has lower housing equity and, hence, higher debt. For example, consider a household that purchased an Auckland home at the median price of $1.2 million in August last year. Assuming a 20% deposit, and an even split between variable and one-year fixed rate borrowing, debt servicing costs (excluding principal) are about to rocket from $2800/month to $4500/month. That’s about 39% of average disposable income rising to 62%.

‘‘That will be really stretching things.’’

The bank economists said they expected wage growth of 6% or 7% over the next couple of years, which would cover interest rate increases at a high level.