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Decline in household savings rate remains a concern

The Reserve Bank today released a paper entitled Household Savings and Wealth in New Zealand. The paper was prepared as background for a presentation by Reserve Bank Governor, Alan Bollard, to the New Zealand Institute of Finance Professionals in Wellington.

Despite much discussion on the subject of household savings and wealth in recent years, and a raft of data from recent surveys, there are still unanswered questions around this important topic. A key issue is why the household savings rate, as measured by Statistics New Zealand, has declined markedly over the past 20 years. This is an issue that the Reserve Bank has been devoting much of its research effort to recently.

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 four 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 and 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 and 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 ten 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.

For further information contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021 497418, [email protected]