9 November 2006
Speaking to the PricewaterhouseCoopers Annual Tax Conference in Auckland, Dr Bollard said New Zealand investors' preoccupation with housing assets has been at the expense of other assets normally found in household portfolios, such as equities.
The gap has been filled by foreign equity, which brings many development advantages for large businesses, but is less conducive to supporting start-ups and other small businesses. It has also left the economy more vulnerable.
Holdings of equity by New Zealand households are particularly low by OECD standards, with direct holdings of both domestic and foreign equities making up no more than about 4 percent of total assets.
"This limits high-growth, high-risk firms' access to growth capital, particularly important in a market where home bias is strong due to the inevitable uncertainties in assessing start-up / growth firms."
Instead, New Zealanders have spent heavily on investor housing - houses and apartments beyond their own homes - investments stimulated by expectations of exciting capital gains rather than exciting rental yields."
This exposure to housing is being financed by increased mortgage debt from the banking system. The average New Zealand household's debt has risen from around 100 percent of disposable income to around 170 percent over the last five years, imposing a heavier mortgage-servicing burden.
"The typical household now commits about 13 percent of its disposable income to service debt. This makes these households much more vulnerable than they used to be to adverse events, such as increases in unemployment and rising interest rates. These debt servicing rates are significantly higher than in other OECD countries."
For the country overall, this preference for housing investment and debt has worsened the current account deficit and substantially increased net foreign claims on New Zealand. Our foreign debt means we are inevitably more exposed to changes in global interest rates or sudden shifts in the investment preferences of overseas investors. At times, this can make it more challenging to maintain price stability and avoid unwanted swings in economic activity. This pattern of household investment also impacts economic performance."
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