4  Household saving and net wealth in New Zealand

Measured household net wealth in New Zealand is the value of households’ financial and real assets (housing only) less households’ liabilities. Financial assets include assets with deposit-taking institutions, other fixed interest instruments, assets with life, super and managed funds, and directly held domestic and overseas equities. Household liabilities are financial liabilities and consist of loans from financial institutions, life, super and managed funds loans, solicitor and contributory mortgage loans and student loans. They include home mortgages, hire purchase loans, credit card and student loans and other debt. Table 1 shows a stylised household balance sheet.

A measure of the saving rate can be derived from the change in the stock of households’ net wealth (total assets minus liabilities). The “stock” measure of saving together with the “flow” measure from the Household Income and Outlay Account in the System of National Accounts is plotted in Figure 1. Both measures of saving are calculated as a percentage of disposable income.

Figure 1 shows two main differences between household saving measured in terms of flows and in terms of changes in the stocks of accumulated net wealth. First, the stock measure appears to follow business cycle fluctuations more closely than the flow measure. Second, as in other OECD countries (discussed further below), the stock measure of saving is significantly larger than the flow measure in New Zealand. The two measures are plotted on scale of 10:1.

The savings rate derived from households’ accumulated net wealth is more cyclical than the flow measure (see Figure 1). It declines during economic contractions and increases during periods of expansions. This can be seen from Figure 2, which plots the implied savings rate together with three measures of economic activity used by the Reserve Bank of New Zealand.[7] For example, the saving rate implied by household net wealth fell over the second half of the 1980s and early 1990s following the structural and fiscal reforms and period of disinflation and rose during the period of strong economic growth in the mid-1990s.

Figure 1: Household saving in New Zealand (three-year moving average, as a percentage of disposable income)[8]

Source: Reserve Bank of New Zealand, Statistics New Zealand and The Treasury

The cyclical behaviour of saving is in line with the life cycle model of Modigliani and Brumberg (1954) and Ando and Modigliani (1963). In the life cycle model, households optimally choose how much to save and how much to work over their lifetimes. These decisions are constrained by lifetime budgets that restrict households from spending more in (present value) on consumption goods than they earn (in present value) in the labour market. In order to equalise the discounted marginal utility of consumption from one period to the next, optimising households smooth consumption over time. For example, households save when income is high (during economic expansions) and dis-save when income is low (during economic contractions).

The second difference between the flow and stock measures of saving is that the household saving rate from the National Accounts is significantly lower than the stock measure and would imply much lower net wealth than balance sheet estimates suggest. For example, Figure 3 plots the implied stocks of net wealth by cumulating household saving from the National Accounts (dotted line) and changes in net wealth (solid line) under the assumption that initial net wealth is zero in 1979.[9] Until the mid-1990 both measures of implied net wealth were generally trending upward, however over the second half of the 1990s the flow measure of net wealth declines sharply, whereas the stock measure continues to increase.

Figure 2: Household saving in terms of net wealth and business cycle fluctuations (in percent)

Source: Reserve Bank of New Zealand, Statistics New Zealand and The Treasury

Figure 3: Implied household net wealth (as a percentage of disposable income)

Source: Reserve Bank of New Zealand, Statistics New Zealand and The Treasury

Savings measured as changes in net wealth and as the difference between the flow of current income and expenditure differ for the reasons discussed in Part 3 – unforeseen asset price movements and measurement problems. The stock measure of household saving continued to increase over the second half of the 1990s in part because of surprisingly strong increases in house prices. The consequent gain in the value of housing stock may actually have contributed to the decline in the flow measure of saving. This is because an unexpected (permanent) increase in assets prices (or discounted future cash flows) is a real income gain that is likely to encourage more consumption today and in future and would tend to reduce current saving as measured by the difference between current income and expenditure.