New Zealand now owes almost half a trillion dollars in debt - and a growing chunk of it belongs to ordinary households, mainly borrowing to buy property. In the start of a week-long series Tamsyn Parker spells out the problem.

New Zealand is sitting on a half-a-trillion-dollar debt bomb and Kiwis are increasingly treating their houses like cash machines, piling on the debt as they watch the value of their properties soar.

Reserve Bank figures show household debt, excluding investment property, has risen 23 per cent in the past five years to $163.4 billion. Incomes have risen only 11.5 per cent.

Households are now carrying a debt level that is equivalent to 162 per cent of their annual disposable income - higher than the level reached before the global financial crisis.

Experts fear downside of debt
NZ homes among most indebted


Including property investment the total debt households owed as of April was $232.9 billion, according to the Reserve Bank.

Satish Ranchhod, a senior economist at Westpac Bank, says the main driver has been low interest rates.

"Continued low interest rates have sparked a sharp increase in household borrowing at a time when income growth has been very modest."

And it's housing loans where the growth has mainly come from.

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.

Watch: Westpac economist on NZ household debt:

He also believed 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 paid for a new car by using the equity in their home to increase their mortgage debt. "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 might say no, or the debt could become 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 declined to lend them more money.

The reality is there will be a hiccup. It's a matter of when, not if.

Research showed about 80 per cent who did this once, did so again.

McQueen said one-off big buys such as cars or holidays should be paid for out of people's cashflow rather than housing equity. Otherwise people were spending more than they earned - a move which could catch up to them when interest rates rose or if they lost their job.

Ranchhod said while the debt was serviceable at the moment because interest rates were low, a rise in interest rates or a downturn in the economy which resulted in job losses could change that.

"If interest rates increase, many borrowers will find their debt servicing requirements ratcheting up, and for highly indebted borrowers such increases could be marked.

"In some cases, debt could even become unserviceable."

Jeffrey Stangl, a chartered financial analyst (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 of New Zealand.

"The reality is there will be a hiccup. It's a matter of when, not if."

Stangl said during the global financial crisis it was corporates that got caught out with too much debt.

"Businesses have got it right now. They are backing out of debt and have got their balance sheets in order. Prior to the global financial crisis corporates were the ones that got whacked really good."

Now, he said, households were the ones most at risk.

Five ways to get out of debt

with Raewyn Fox, head of NZ's Federation of Family Budgeting Services

1. Act now

If you are in a lot of debt and it's causing you problems or worries do something about it today - don't wait for it to get worse. Write it all down - your income, outgoings and commitments and don't forget the stuff you only pay for once a year. Add it all up and see if there is a surplus or a deficit. Fox says it will often show people are paying more out than they are earning. "You've got to figure out your situation before you can get out of it. Sometimes when you write stuff down the problem jumps out and hits you in the face."

2. Prioritise spending

Look at your spending and figure out what is a priority - what are your needs versus what are your wants. Negotiate with your partner on what you can do to haul your spending back into line. If you are in debt there are two ways to get out - increase your income or decrease your outgoings.

3. Maximise your income

Check your contract entitlements - are you being paid what you should be? If you have had a change in circumstances - such as a job loss - you may be entitled to help from the government such as working for families or an accommodation supplement. If it's too hard to work out by yourself get help.

If you have lost your job, check out your credit contracts - there may be a hardship clause in there which could allow you to put payments on hold for a couple of months or reduce your payments to ease the pressure.

4. Develop a plan

If you are struggling to make payments talk to your creditors about what you could pay, but be realistic and honest with yourself about what you can afford. "If you offer something and then can't keep it up it makes things worse. Once you have made an offer you have got to keep it up."

Fox says those who fail to keep up are unlikely to be able to renegotiate again in the future.

5. Track your progress

Keep an eye on your progress and set a goal of paying off a certain debt within a timeframe. Reward yourself when you get there.

Fox said the key was to have lots of little goals and not be too restrictive, otherwise it was likely people would just give up.