Household finances in a vice

This reinforces Westpac’s expectations for subdued household spending and economic growth over coming months. While the Westpac McDermott Miller Consumer Confidence Index rose 5.4 points this month to 83.1, it is well below average.
Consumer confidence has been at low levels for more than a year across all regions, age groups and income brackets.

Westpac chief economist Kelly Eckhold says this is despite New Zealand’s strong labour market. Unemployment is 3.4% and disposable incomes have risen by 6.5% over the past year.

“Even as earnings have pushed higher, the majority of households are reporting their finances are being squeezed. In fact 43% of the households we spoke to in June told us their financial position had deteriorated over the past year, while just 14% had seen an improvement,” he says. 

The pressure on household finances is coming on two fronts including living costs, with consumer prices up 6.7% over the past year; a big chunk of which has been the costs of necessities – housing and utility costs up 7% in the year to March and food prices up 12% in the year to May.

The other main factor squeezing households’ finances has been mortgage rates. Interest rates have been on the rise although with about 90% of New Zealand mortgages on fixed rates, many borrowers were temporarily insulated from those increases.

But that picture has now changed with large numbers of mortgages rolling on to higher rates. “In fact, accounting for the extent of interest rate fixing, we estimate that the average ‘effective’ mortgage rate New Zealand borrowers are paying has increased by about 120 bps since early 2022,” says Eckhold.

And there’s more pain to come, he says.

About 50% of all fixed rate mortgages will come up for repricing over the year ahead, and the average mortgage rate is set to rise by a further 150 bps by early 2024. That will see the average household’s spending on interest costs increase from about 5% of disposable income in 2022 to 10% in 2024, and some borrowers will face much larger increases.

In the face of these powerful financial headwinds, overall spending levels in the economy have actually remained firm in recent months, Eckhold says.

However, that apparent resilience in the headline spending figures masks weakness beneath the surface. “Although nominal spending levels have been pushing higher, those gains are entirely due to the impact of price increases. The amount of goods that households have actually been taking home has been trending down for the past year,” he says. 

Crucially, households are likely to continue to rein in their spending over coming months. “We expect that per capita household spending will fall by about 2% over 2023 and 2024 combined. Household spending accounts for about 60% of overall economic activity, and the retrenchment already in train will be a significant drag on economic growth,” Eckhold says. 

While many households are challenged, consumer confidence has actually risen slightly from last year’s record lows. Eckhold says there could be a further rise over the coming months.

Notably, the interest rate cycle looks close to peaking. “We’re already seeing signs the housing market is finding a base, with both house sales and prices rising over the past few months. In addition, the high rates of inflation that have been eating at household spending power have started to moderate, and further easing is on the cards over the coming year.”

Although mounting financial pressures will be tough, the slowdown looks like it will be manageable for the economy as a whole.

On average, New Zealand households are entering the downturn with their finances in good shape. As well as a strong labour market, savings rates have picked up in recent years.

At the same time, many households have taken advantage of the low interest rates in recent years to get ahead on mortgage payments. And while interest costs are pushing higher, that’s been a rise from extraordinarily low levels.