Debt servicing to stay hard unless house prices come down - economist

New data shows the extent of the interest rate crunch that has hit households in recent years.

Data from Stats NZ shows interest payments increased 117 percent in the three years to September.

Over the same period, inflation as measured by the consumer price index (CPI) increased 15.7 percent.

"Mortgage interest payments remain high and continue to contribute significantly to living costs for many households," consumer prices manager Nicola Growden said.

In the year to September, interest payments were up 18.2 percent, a slower pace of increase than the more than 40 percent recorded at the peak of the rate rises.

Infometrics chief forecaster Gareth Kiernan said mortgage rates had started to fall in the last six months, so households should now be rolling off fixed rates onto slightly lower rates.

He said he expected retail mortgage rates to drift down to between 5 and 5.5 percent.

"There's quite a bit of uncertainty out there at the moment over exactly where the end point of the Reserve Bank's easing cycle is."

He said wholesale rates that banks use for funding had also been unusually low recently.

"There may be a bounce-back in those going forward."

He said by the middle of next year households should feel more secure in their budget and finances.

"Wages will continue to go up and the labour market will stabilise. Having said that, it is interesting when you look at the longer-term costs. The costs people are facing are still about 66 percent higher than in 2008.

"Mortgage rates then were about 9 percent, so that just shows you the effect of higher house prices. We focus on the mortgage rate component but over a longer-term perspective, the debt servicing issues caused by housing aren't going to go away unless we get a massive drop in house prices."

Jarrod Kerr, chief economist at Kiwibank, said movements in the official cash rate (OCR) would normally take 12 to 18 months to flow through, but because more people were fixing for short-terms at present, the impact of the OCR dropping would be felt more quickly.

"The lag is more like six months now. And even if your mortgage hasn't rolled off, you know it's coming and you feel a bit better about life knowing you will be rolling off, even though it hasn't happened yet."

Kerr also expected interest rates to settle around 5 percent.

"Some special rates will probably be below 5 percent, and there may be some other rates above 5 percent, but around that level will be where they settle at the end of next year."

He said households had been hit hard by the cost of living, but that was coming to an end.

"Inflation is running below wages now. The other bit is the rapid rise in interest rates - the worst of that is now over; relief is coming.

"People have had concern around their main asset, their house, and the outlook is better there as well. The only thing hanging over our heads is job insecurity, and hopefully that dissipates as well. That's why we are optimistic about next year; we think the worst is behind us."

Stats NZ's household living costs price indexes increased 3.8 percent overall in the 12 months to September, down from 5.4 percent in the year to June.

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