Changes in home loan interest rates continue to reshape the financial landscapes of households across the nation. According to ASB economists, a staggering 90 per cent of the strain stemming from these rate hikes has been borne by households, revealing a significant economic challenge on the horizon.
ASB’s senior economist, Mark Smith, shed light on the real impact felt by households. The average surge in debt servicing per household from 2021 to 2024 stands at just over $100 per week. However, this burden hasn’t been uniform. Those who entered the housing market near the peak of late 2021 experienced a staggering $300 increase in their weekly costs.
Smith foresees a persistence of relatively high-interest rates in the near future. Although advertised rates may decrease through 2024, the trickle-down effect on households will take time. He estimates that the average mortgage borrowing interest rate will climb towards 6 per cent by the year’s end, peaking at approximately 6.2 per cent in the middle of the following year.
This impending increase translates into a substantial additional cost, amounting to around $12 billion annually in debt servicing. Astonishingly, ASB notes that nearly 90 per cent of this financial burden has already been felt by households.
To put this into perspective, households currently shoulder about $368 billion in debt, roughly averaging $188,000 per dwelling. Approximately 95 per cent of this debt is tied up in mortgages alone.
Smith points out that these heightened borrowing costs and stretched affordability act as significant counterweights in preventing an unchecked surge in the housing market, despite record net immigration. These factors are expected to limit the anticipated surge in house prices throughout 2024.
While there’s optimism surrounding the OCR, projected to return to 3 per cent by the end of 2025, the relief may be somewhat tempered. Even with this decline, the average borrowing cost is estimated to sit a mere 90 basis points below the mid-2024 peak.
The repercussions on household finances are profound. As a percentage of disposable incomes, household debt servicing is projected to peak at slightly over 18 per cent by late 2024, persisting above historical averages until at least the middle of 2026.
Smith underscores the changing dynamics, noting the easing trend in household debt-to-income ratios due to slower borrowing growth in contrast to rising household incomes. However, this decline is juxtaposed against the relentless ascent in debt servicing costs driven by escalating borrowing expenses.
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