Worrying prediction as cost of living crisis deepens for debt-riddled Kiwi households

With the cost of living crisis biting and a recession looming, Kiwis are being warned they'll need to buckle down and reduce spending to weather the storm. 

In its latest report, ASB bank warns each household will be paying an extra $80 per week to keep up with debt repayments by the end of the next year. And, it predicts it will rise again to $100 per week by the end of 2024.

ASB blames rising inflation and the Official Cash Rate (OCR) rate hikes, which have impacted how much interest banks charge on mortgages and other lending. It also says the Government's now moving away from its COVID-era policies that helped support households and is now focussing on tightening its belt to combat rising inflation.

The bank also warned, "this is going to hurt". 

Household debt is sizeable 

As mortgage rates rise, our discretionary (the extra we have leftover) spending will be hit hard. Reserve Bank of New Zealand figures show Kiwi household debt totals $340 billion - equating to $180,000  for each household. But, RBNZ warns, around half of all loans are likely to be "repriced" in the next 12 months - that is, the interest rates will have to be refixed, mostly to higher rates.

By way of example, ASB says: "...borrowers who fixed for two years back in December 2020 at 2.59 percent are now looking at an equivalent rate close to 6.75 percent. For someone with a $500,000  mortgage, this equates to an extra $300 per week. Ouch." 

And even though house prices are dropping significantly, it's still not good news for those wanting to get onto the property ladder for the first time. The numbers show, on average, first-home buyers tend to have the highest mortgages relative to their incomes. That's because they've had to take on a much bigger debt to buy the home than someone who already owns a home and wants to upgrade. 

The concern isn't just about repaying debt, on top of the $80 per household, ASB says higher prices for goods and services equates to an extra $70 per week of spending, per household. That is if we don't change our spending habits.

But it's not all doom and gloom - it appears Kiwis are getting the message and have already started pulling back on how much we spend on big-ticket items. Household incomes have also been on the rise and during the COVID-19 pandemic, Kiwis saved up around $30 billion dollars, according to RBNZ.