Low interest rates have prompted New Zealanders to load up debt against their homes to levels higher than before the Global Financial Crisis.
A Westpac Bank report has found that a combination of low interest rates and very modest growth in people's incomes has led to households carrying rising debt levels, up to 162 percent of their annual disposable income. That is higher than the previous peak of 159 percent in 2009.
The report by senior economist Satish Ranchhod says low interest rates have boosted spending in two ways.
It's become less expensive for homeowners to fund consumption; that is spend money on everyday items or cars and holidays. But homeowners are also feeling wealthier because the strong demand for housing has pushed up prices and some have spent the windfall.
The effect on the economy is more borrowing and more spending.
Westpac says the amount households are spending on repaying debt will remain low or even drop further over the next few months as the effect of low interest rates flows throughout the economy. In fact, households' debt-to-asset ratios are at their lowest levels since 2007.
However, households will one day have to repay the debt and this will be a drag on the economy, especially in interest rates rise.
The report warns that if interest rates increase, some households won't be able to service their loans.
At the same time, higher interest rates would take the shine off the housing market, and that would put a downward pressure on prices.
Adding to the concerns, the report says many highly indebted borrowers have used funds to purchase investment properties, and high house prices have left rental returns at a low level. A spike in repayment costs could mean landlords can't meet their mortgages.
One final word of warning from Westpac -- even if interest rates don't rise, higher debt levels mean the economy is more vulnerable. That's because households have less of a buffer to cushion them from changes in economic conditions.
Newshub.
