Rising household interest payments may force more borrowers to default on their mortgages, while unemployment is tipped to rise up to 5 percent by the end of 2024, ASB's chief economist says.
In its latest Financial Stability Report the Reserve Bank is forecasting the average share of disposable income used to pay interest will hit 18 percent in 2024, double the lows of two years ago.
People who bought homes in 2020 and 2021 at high debt-to-income ratios are expected to feel the most pain.
About two-thirds of mortgages fixed at very low interest rates during the pandemic have now rolled over to pricier loans, although the Reserve Bank says most borrowers have so far been about to cut discretionary spending to make ends meet.
But that could all change if the job market softens and people start losing work.
Today new statistics showed unemployment rose to 3.9 percent in the third quarter, up from 3.6 percent in the June quarter.
The figures are not dire, but they do show a change, ASB chief economist Nick Tuffley told Checkpoint.
Listen
"We're moving into an environment where the jobs growth is likely to be relatively flat," he said, but noted that there has been very strong growth until recently.
The growth in the number of people coming into the country is a factor in rising unemployment, he said.
"That strong flow of people does mean we've got an extra growth in the number of people available to work."
However, he said it was not that long ago that businesses were "crying out because they couldn't find people" due to travel restrictions during the Covid-19 pandemic.
Tuffley said unemployment may rise up to 5 percent by the end of 2024.
Interest rates are still relatively low by historical standards, he said, while acknowledging "there's pressure on some people".
"If you get people who lose their job and can't find one very quickly, those are the people likely to find that the pressure is most acute."
Loan defaults on mortgages are "actually extremely low", Tuffley said.
"Yes, you're going to see a rise but it's still going to look low even by what we've seen that last 10 years," he said, citing the Global Financial Crisis circa 2008-2009 as an example.
"We're expecting to see inflation gradually head down to roughly 3 percent by the end of next year."
Fuel prices, high costs to build a house, and rising council rates will all act as an obstacle to dropping the high cost of living, he said.
"It's going to take a while for inflation to get down to a level that the reserve bank's comfortable with."