Auckland City Mayor John Banks predicts a quarter of homeowners in the city will have mortgages worth more than their properties by this time next year.
The council has started trying to decide how to balance funding existing and new services amid the global financial fallout and worsening economy.
City councillors have held a preliminary meeting to debate council spending and review its long-term plan, amid predictions that some popular services will face cuts.
Mr Banks described the turmoil on the world markets as "a global financial apocalypse" and has warned some difficult spending decisions will have to be made.
He says financial problems affecting many residents are now beginning to affect the council, which hopes to keep rate increases in line with inflation.
In Wellington, Mayor Kerry Prendergast says for the first time councillors have to focus hard on getting their community to choose between existing and new services.