Middle-income homeowners are the ones most at risk as the economy slows, the Reserve Bank warned yesterday.
Residential property investors are particularly vulnerable to potential financial shocks, Governor Alan Bollard cautioned in the bank's Financial Stability Report.
New Zealand's financial system was well placed to weather the slowdown in the
economy, but "household indebtedness has reached a record high, raising households' vulnerability to higher interest rates, unemployment and a downturn in house prices", said the bank.
"Overall, those who may need to reassess their positions appear to be the lower and middle-income households."
The bank identified households with incomes of $30,901 to $67,600 as most at risk from interest rate rises and cuts in their income.
In the 12 months to December, household debt - about 90 per cent of which is mortgage lending - grew by 15 per cent to more than $132 billion.
Although house-price inflation had moderated somewhat, it was still in double digits while growth in the value of other assets was comparatively modest, meaning property accounted for an even bigger share of households' assets.
Analysis of mortgage debt showed much lending seemed to have gone to high-income households, who were better able to manage it, while lower-income households did not hold much debt.
Those in between were the most likely to feel the squeeze as the economy slowed.
"Indebted households in the middle-income quintile are on balance more exposed to shocks to interest rates or disposable income. This is because they have relatively low debt-servicing ability compared to the higher income groups and account for a relatively larger proportion of total debt compared to the lower income quintile."
And, said the bank, people who recently invested in rental property are particularly at risk.
Such investors, it said, "may have taken on higher levels of debt than in the past, and could find a period of softening house prices and lower economic growth relatively more difficult to manage".
