Rising house prices lead to rising spending – beware the perils of debt
The rapid rise in house prices in Auckland and other parts of New Zealand has left many people feeling wealthy. It has also boosted spending and seen a rise in debt levels.
That could spell trouble if the housing market slumps or if interest rates rise. You might think that everything looks bright for the property market. But by the time you realise the storm clouds have gathered you might be lost in the rush for an umbrella.
The latest Reserve Bank statistics show that household debt (housing and consumer loans) rose to163 percent of disposable income in the March 2016 quarter.
That is slightly up from 162 percent in the December 2015 quarter and well up from100 percent in the December 1998 quarter.
In dollar terms New Zealand households collectively have disposable income of $151 billion and financial liabilities of $246 billion.
The Reserve Bank figures show that households are paying 8.8 percent of their income in interest payments (on housing and consumer loans) compared to 9.6 percent in the March 2015 quarter.
That is an improvement on the peak of 14.2 percent in the September 2008 quarter.
But it is not as low as the middle of 1999 when households were paying 7.6 percent of their income in debt repayments.
It is understandable that spending is rising along with house prices, which is partly a reflection of people spending more on renovations.
But it is also driven by the desire many people have to unlock some of the "value" in their property. If your house has risen by hundreds of thousands of dollars in value it is tempting to borrow a bit more against the value of that home, especially with interest rates being so low.
Total debt is rising and so is the popularity of interest only mortgages.
Economists at ANZ estimate that around 50 percent of rental property investors and 30 percent of owner occupiers have negotiated interest only mortgages.
But financial advisors people need to ask themselves a few questions.
Could you cope with the payments if interest rates were to rise?
How would you cope with an unexpected job loss?
The Sorted.org.nz website has an online calculator that allows you to work out what your payments would be if the interest rate went up by one percent, two percent, or more.