Higher debt servicing charges are expected to add about $80 a week to the average household budget by the end of the year, on top of rising prices for basic goods and services.
A report by ASB Bank suggested some households would come under considerable pressure, with more than half of all loans likely to be repriced at much higher interest rates over the next 12 months.
ASB economist Mark Smith said debt servicing costs would average an extra $100 per week by the end of 2024, with some heavily indebted households spending hundreds more a week.
Still, the message was not all doom and gloom.
“The housing market will eventually recover as it always does,” Smith said.
“It’s just a matter of consumers for now battening down the hatches, living within their means and just remaining as optimistic as they can in the current environment.”
In the meantime, much depended on how the housing market responded to higher debt servicing costs.
He said the Reserve Bank could hike the official cash rate (OCR) above the forecast peak rate of 5.5 percent if its efforts to cool spiralling prices failed to have the desired effect.
“A return to a lower inflation environment will eventually make life much easier for households. But in the interim, sizeable OCR hikes will mean higher debt servicing costs that will place some household budgets under considerable pressure,” he said.
“Discretionary spending will be hard hit and we foresee recessionary conditions for the household sector in 2023.”
Smith said a drop in discretionary spending will also hit businesses, particularly those with high debt levels.
“Household spending is the bulk of economic activity. So that’s an important flow through,” he said.
Story Credit: rnz.co.nz