NZ First Impressions: NZ households finances – June 2024
Household finances have remained under pressure, but there is light at the end of the tunnel.
Income growth slowing, spending on interest up
Today’s update on households’ finances from Stats NZ highlighted the continued pressures in the household sector.
Looking at the economy as a whole, disposable income levels have increased by 4.7% over the past year. While that’s not ‘low,’ it is a step down from the rates of over 6% that we saw last year.
Importantly, that growth in overall income levels has been boosted by the growth in the population. Adjusting for population changes, we estimate that disposable incomes for individual households rose by a more modest 2.8% in the year to June. That’s below the 3.3% rise in consumer prices over the same period.
Looking at the past three months, the pressure on incomes has been particularly stark. In fact, a number of households have seen their earnings going backwards as small business profits have fallen.
A particular point of pain for many households has been the rise in interest costs. Over the past few years, increasing numbers of households have rolled off the low interest rates that were on offer in the wake of the pandemic and on to higher interest rates. Stats NZ’s data shows that the average New Zealand household now spends around 10% of their income on debt servicing costs. That’s the highest it’s been since 2016.
Of course, not all households have mortgages. Around a third of New Zealanders have a mortgage on their home, roughly one third rent and about a third own their own home outright (however, even those without mortgages may still be affected by changes in interest costs. For instance, rental properties may have mortgages).
If we just look at those households who have mortgages, we estimate that their spending on interest costs has risen from a low of 10% in 2021 to 21% now. That’s the highest it’s been in more than a decade.
Inflation, savings and the spending squeeze
That combination of slowing income growth, high interest rates and large increases in living costs over the past few years has been a significant squeeze on households purchasing power. Even for households whose incomes have kept pace with overall inflation, many have found that an increasing share of their incomes have been spent on non-discretionary items, like the costs of utilities, local council rates and insurance. That’s left less for discretionary spending in areas that add to households’ standards of living. For instance, the past year has seen sharp falls in spending in areas like dining out or household furnishings.
The pressure on household incomes has seen savings dropping again over the past quarter. In fact, New Zealanders’ savings levels have gone backwards in six of the past eight quarters.
Outlook
Some of the powerful financial headwinds that have buffeted households over the past few years are now easing off. Consumer price inflation is dropping back, and next week’s figures are set to show inflation back below 3% for the first time since 2021. At the same time, the RBNZ has been cutting the OCR, with a large 50bp cut yesterday and more expected over the next few months.
It will take some time for those changes to flow through to households back pockets. And at the same time, the labour market is weakening, with unemployment set to rise above 5% before the end of this year. As a result, we don’t expect a big rise in spending through the back part of the year.
However, there is a growing sense in the economy that the worst is behind us, with business and consumer confidence turning higher in recent weeks. Combined with reductions in borrowing costs, we expect to see spending and economic growth gradually pushing higher over the year ahead.
Media Contact:
Satish Ranchhod, Senior Economist
P: +64 9 336 5668
M: +64 21 710 852
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