Westpac said Kiwis were in a "borrow and spend" cycle that could not be sustained and it expected economic growth would slow from 2018.

Earlier this decade the Canterbury rebuild was ramping up and the dairy sector was booming, yet households were behaving cautiously, chief economist Dominick Stephens said in a quarterly report.

But that was in the past, he said.


"We are 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."

Rapid population growth, driven by strong migration, was underpinning parts of the service sector and the construction industry in Auckland.

"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."

Stephens forecast debt-fuelled spending could only last another year or so before the consequences kicked-in.


"Debt-fuelled growth is not sustainable. For that matter, neither is the Canterbury rebuild or rapid population growth, both of which we expect to taper off," he said.

"We expect the New Zealand economy to enter a phase of slower GDP growth, beginning around 2018. At that time, we would expect to see interest rates and the exchange rate falling, while house prices stagnate or fall."

Westpac's report said the average household had debts equivalent to 162 per cent of their annual disposable income.

It said that was higher than the peak of 159 per cent reached in 2009 during the "global financial crisis" and had "completely reversed the reduction in debt levels seen over the last few years".

The bank also believed net migration was about at its peak and that the migration boom would fall away as quickly as it had risen, with net migration dropping below 15,000 by 2020.

Now and then

Westpac forecasts economic growth (GDP growth) will almost halve from 3.6 per cent last year to 1.9 per cent in 2018.
It expects unemployment will rise modestly from 5.4 per cent at the end of 2015 to 5.6 per cent by the end of 2018.
Inflation will pick up from 0.1 per cent in 2015 to 2.4 per cent in 2018.
Westpac estimates average house price rises will drop from 10.7 per cent last year to 1 per cent in 2018. That is below its forecast inflation rate, meaning that would represent a price drop in real terms.