New Zealanders are throwing caution to the wind by taking on too much debt, warns Westpac Bank.
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The bank said the excessive debt came at a time when the main factors driving the economy were unsustainable.
Westpac chief economist Dominick Stephens said the economy was being propped up by strong population growth, the Canterbury rebuild and debt-fuelled spending amid rising house prices.
He said those three things could not last forever, and as a result house prices could start to fall by 2018.
"Earlier this decade the Canterbury rebuild was ramping up and the dairy sector was booming, but households were behaving cautiously. That phase is now well and truly over," he said.
Dominick Stephens said the household debt-to-income ratio is higher than than before the global financial crisis hit. Photo: Wespac Bank
Mr Stephens said the economy was now in a new phase of the economic cycle.
"Growth is being challenged by the dairy downturn and the levelling off of the Canterbury rebuild."
He said that was being partially offset by service sector activity, rapid population growth, and burgeoning construction activity in Auckland as well as "a few other hotspots".
"But the real kicker for growth in the current phase is debt. Households have thrown caution to the wind, and a borrow-and-spend dynamic has emerged amid rising house prices," he added.
He warned that debt-fuelled growth was not sustainable.
"For that matter, neither is the Canterbury rebuild or rapid population growth, both of which we expect to taper off."
Mr Stephens expected the New Zealand economy to enter a phase of slower GDP growth, beginning around 2018.
The economy expanded by 2.5 percent in 2015. It was forecast to grow by 2.7 percent this year and 2.6 percent in 2017.
"While those are healthy rates of growth, they mask a mixed outlook across the economy."
Economic growth might start to wind back in 2018, Mr Stephens said.
Low interest rates spurred on by Auckland house prices had prompted Westpac to raise its property price forecasts. It now expected nationwide prices to rose 10.5 percent in 2016, up from 6 percent previously.
That was encouraging more households to take on more debt, which was serviceable now given interest rates were low.
"However, if interest rates do rise materially in the future, today's house prices will start to look less supportable and debt levels will be harder to service - both of which could result in marked deteriorations in economic activity," he said.
"At that time, we would expect to see interest rates and the exchange rate falling, while house prices stagnate or fall," he said.
Mr Stephens said the household debt-to-income ratio is now 162 percent, which was higher than in 2007 before the global financial crisis hit.
