Archive | Property in perspective

Housing boom backs $70 billion rise in Kiwis’ net worth in one year – but household saving actually negative

Published 29 September 2006

The Reserve Bank released a paper on Wednesday, Household savings & wealth in New Zealand, prepared as background for a presentation by Reserve Bank Governor Alan Bollard to the NZ Institute of Finance Professionals in Wellington.

The bank paper showed the implied net worth of the household sector had increased dramatically over the last few years, almost doubling in nominal terms since 2001: “In the year to December 2005 alone, net worth is estimated to have increased by nearly $70 billion. This increase in net worth has been dominated by large increases in the market value of the housing stock, which in turn have been driven by rising house prices.

“What contribution did savings make to the change in net worth? Household saving has been negative over this period. This means that households were borrowing heavily through this period and/or running down existing assets. The table shows a sustained, strong increase in household borrowing, much of which was secured over housing.

“Although new residential investment was relatively strong through this period, it was more than offset by this growth in credit. Even so, increases in house prices were so strong as to lead to a substantial increase in the net worth of households.”

Despite much discussion on the subject of household savings & wealth in recent years, and a raft of data from recent surveys, Dr Bollard & the Reserve Bank research team said there were still unanswered questions around this important topic. A key issue was why the household savings rate, as measured by Statistics NZ, had declined markedly over the past 20 years. “This is an issue the Reserve Bank has been devoting much of its research effort to recently.”

Details from the paper

The paper discusses a range of factors that may account for the decline in saving. There is the possibility that the measure of household income used to calculate savings is understated. Other factors include:

the influence of financial liberalisation in the 1980s
the strong labour market
demographic factors
the effects of various cash injections (such as migrant transfers) on the household sector, and
the influence of sizeable increases in asset prices on spending.

While saving has declined, the net worth of the household sector – the value of household assets less liabilities – has increased dramatically, almost doubling since 2001. This increase in net worth has been dominated by large increases in the market value of the housing stock, which in turn have been driven by rising house prices.

Many households appear to be relying on capital appreciation in order to accumulate wealth. For many homeowners, the wealth associated with rising house prices is unrealised.  However the evidence suggests that many households may view this increase in wealth as ‘in the bag’ and may have lowered their savings from current income as a result.

The paper notes that some households appear to have been actively withdrawing equity from housing either by selling properties or by borrowing more on properties that they own. This housing-equity withdrawal may have fuelled consumption spending.

The bank’s work to date indicates that significant housing equity withdrawal has occurred in the New Zealand economy in recent years, coinciding with a very strong housing market. Over the past 4 years, household equity withdrawal is estimated at around $7 billion.

Not all of this equity withdrawal is likely to have been spent, at least in the short term. A sizeable portion has probably been used to purchase financial assets, thereby having no immediate impact on consumption or savings. However, the conversion of housing equity into liquid assets makes it likely that a significant proportion of these funds are eventually spent.

The paper notes that recent borrowing to support higher asset prices has largely been financed from abroad. The rise in gross indebtedness creates potential vulnerabilities for both borrowers & lenders, even if the higher debt levels go hand in hand with higher asset prices. These risks relate to potential changes in interest rates or debt servicing ability, changes in the value of the security against which the lending is undertaken, and the continuing willingness of overseas parties to provide funds.

The ageing of the population could also present some challenges. As the population ages and more households attempt to realise wealth built up through capital gains, doing so will require that there be enough willing & able new buyers of these assets at current (or higher) prices. However, an increase in sellers as the baby-boomer generation retires over the next 10 years, coupled with fewer new entrants to the housing market, could potentially apply some downward pressure to house prices.

The upshot of this analysis is that New Zealanders’ heavy reliance on house-price appreciation to accumulate wealth carries risks. In general, policies aimed at encouraging a more diversified savings strategy on the part of households, and which reduce reliance on capital appreciation, seem sensible.

Website: Household savings & wealth in NZ


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Attribution: Reserve Bank release, story written by Bob Dey for this website.

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