A year since home loan rates started to fall, why’s nobody spending?

Sunday, 31 August 2025

Many households feel their cash is not their own as councils, insurers and supermarkets take their bites.

New Zealanders haven’t had a lot of fun with the extra money that’s come back into their budgets as mortgage rates have fallen.

That’s because much of it is being sucked out again by council rates rises, insurance company premium increases, and supermarket food price inflation, economists say.

And many households are directing much of what is left over not into living the high life, but paying down debts faster, and saving.

“We really used up our safety buffers at the top of the cycle,” says Squirrel Mortgages chief executive John Bolton.

Now, he says, the priority for many households is to rebuild buffers and emergency savings funds sucked dry in the post-Covid years when the Reserve Bank Te Pūtea Matua fought rampant inflation by hiking the high official cash rate (OCR).

Home loan rates peaked early last year, and really started to fall around the middle of the year after the Reserve Bank finally cut the OCR from its 5.5% peak in August, a level many economists felt was unnecessarily high.

Just how much of an impact those high rates had is shown by Reserve Bank data. In the three months ending March 2021, households paid $2.41 billion in interest on their home loans at major banks. In the December quarter of 2024, they paid $5.86b in interest on their home loans.

The prime minister has criticised the Reserve Bank for not going far enough in cutting the Official Cash Rate.

Says Infometrics economist Nick Brunsdon: “The money just disappeared into every day life; insurance, electricity, food.”

But not all of it. The savings rate rose as households that could prioritised building buffers as they worried about their jobs, and their ability to make their mortgage repayments.

Just how worried some are is shown by the August Tara-ā-Whare Household Expectations Survey from the Reserve Bank.

On average, the survey of 1000 households found those paying rent reported a 17.9% chance of not making a rent payment in the next three months, while households with home loans reported a 15.1% chance of not making a mortgage payment in the next three months.

For Westpac economist Satish Ranchhod, the expectations survey may not be the pinnacle of economic science, but it does give an insight into how households are feeling.

And another aspect of the expectations survey might hold clues for why consumer confidence to spend remains so weak, especially in Wellington and Auckland, and why people are focused on saving, rather than spending and borrowing.

Households are expecting their costs to rise faster than their incomes.

The average household expectation for inflation in the next 12 months was 6% (the median was 4%), compared to an expected 4.9% rise in income.

Inflation, as measured by the Consumer Price Index, is currently 2.7%, and the Reserve Bank expects it to fall in the next 12 months.

Why the disconnect?

“There’s still a lot of nervousness out there,” Ranchhod says.

Inflation expectations in the survey did tend to run “hotter” than actual inflation numbers would suggest, Ranchhod says.

But, he says, that’s because households are likely drawing their conclusions from what’s been happening to the prices of essentials like food, power, rent and insurance.

They put far less weight on the cost of items that might be pulling down the headline inflation rate, like the price of electronics and consumer goods.

All up, it paints a picture of households not expecting an improvement in the next 12 months, though that is what economists are telling them to be ready to enjoy.

Against such a backdrop, it is not surprising that the amount of money salted away by households in deposits at banks has climbed to over $260 billion, representing an all-time high of cash available to households in a crisis.

Despite households being “forced to spend” more money on higher rates, food baskets, power bills and insurance premiums, Jarrod Kerr, chief economist at Kiwibank, says many households have chosen to save more.

“We have seen a lift in savings. Households are cautious,” he says.

“People are still a little shell-shocked, and are wary that we are still in recession,” Kerr says.

The other form of saving that some households appear to have chosen to increase is by repaying debt more quickly.

When ASB reported a slightly lower profit earlier this month, it pointed to Reserve Bank figures that ASB chief executive Vittoria Shortt said showed: “Customers have made $17 billion worth of additional payments to pay down their home loans.”

But while that may represent a cohort of borrowers intent on reducing their future exposure to spikes in mortgage rates, Bolton says many aren’t paying down their home loans any faster.

Instead, from conversations he has had, it seems many are paying down other higher-interest debts, and building up savings as buffers in case they lose their jobs.

Credit card debt figures indicate that is happening.

In 11 of the last 12 months, Reserve Bank credit card data shows the total amount owed by households on their cards has fallen as more has been paid off debts than has been added.

The only month in which credit card balances did not fall was May, when they were flat, neither rising, nor falling.

Meanwhile, fears of job losses may be overblown.

A relatively small number of people have lost their jobs, says Brunsdon.

People are saving, more so than spending.

But it’s not just the prospect of losing a job that is the issue. It’s the widespread belief that finding a new job would not be an easy task.

In the August expectations survey, just 40% of people thought they could find a new job within three months of being made redundant.

The Government has been criticised by opposition parties as being culpable for worsening the recession by instituting spending cuts.

In reply, Finance Minister Nicola Willis has accused the previous Labour-led government of profligacy and overspending, and has criticised “merchants of misery” who she accuses of talking up financial pessimism, and risking making the economic hard times worse.

Those are words that Squirrel’s John Bolton thinks covers the frustration of politicians who have been pulling all the levers they think they have, and don’t know what else it can do.

“I think that’s what the Government says when it hasn’t got a clue,” Bolton says.

However, he says: “We didn’t talk our way into recession. The Reserve Bank hiked interest rates higher than it should have.

“People simply couldn’t afford mortgage rates up at 7%. They made ends meet, and borrowed Peter to pay Paul,” he said.

But that squeezed their ability to spend in shops, cafes, and on the other things that keep high streets up and down the country buzzing, and the tills of businesses ringing.

“The damage was done by interest rates,” Bolton says. “We had to have a recession of some description, but I think it’s been longer, and harder, than people expected.”

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