"Continued low interest rates have sparked a sharp increase in household borrowing at a time when income growth has been very modest."
Housing loan debt has risen 23.4 per cent to $132.83 billion. Student loans were up 22.9 per cent to $14.84 billion and consumer loans are up 16.6 per cent to $15.7 billion.
Ranchhod said much of the rising debt on housing was down to investors, as more people jumped into the property market on the back of rising house prices.
He also predicted that many people were using their home loans to make consumer purchases.
"We think a lot of the increase in lending on housing loans will also be an increase in spending ... people feel wealthy when the value of their home goes up."
Hannah McQueen, an Auckland financial coach and managing director of EnableMe, said she had seen three clients in the past week alone who had put a new car on the house by using the equity in their home to increase their mortgage debt and pay for the purchase.
"It's definitely on the increase.
"People think I'm worth so much more now ... "
But the risk of continuing to add to the mortgage to pay for one-off big ticket items was that one day the bank may say no or the debt became too much.
McQueen said one couple she knew were having to sell their property to pay back their loan because they could no longer service the debt and the bank had said no to lending them more money.
Research showed around 80 per cent who did this once, did so again.
McQueen said one-off big purchases like cars or holidays should be paid for out of cashflow rather than housing equity. Otherwise people were spending more than what they earned - a move which could catch up to them when interest rates rose or if they lost their job.
Jeffrey Stangl, a CFA and economics lecturer at Massey University, said people were getting caught up in the euphoria without considering the risk of an economic shock which could be caused by an event outside New Zealand.
