4  Household saving and net wealth in New Zealand (continued)

Factors that likely contributed to the divergence of the stock and flow measures because of mismeasurement include:

• a higher ratio of household expenditure on health care to total consumption expenditure in the early and mid-1990s in part due to increased medical care costs,
• rising household expenditure on tertiary education over the second half of the 1990s, and
• strong growth in consumer durables due to the elimination of tariffs on motor vehicles, parallel importing, and increasing importance of computers.[10]

Overall, the trend in the National Accounts’ household saving rate has been downward in New Zealand (see Figure 1).[11] The implied savings rate from households’ balance sheets has also fallen (see Figure 1). However, its decline has not been as gradual as it has been for the flow measure. Household savings measured by the change in household net wealth appear to have shifted to a lower level following the financial market liberalisation during the second half of the 1980s.[12] Statistical tests for structural change indicate that this shift occurred in 1987.[13]

Over the period 1980-86, households, on average, saved about three times more than in 1987-99, as measured by changes in households’ net wealth as a percentage of disposable income. However, despite the fall in household savings in 1987, the average saving rate from household balance sheets, at about 20 percent, remains significantly larger than the average saving rate from the National Accounts over the period 1987-99, which was –0.2 percent (see Figure 1).

Saving in terms of changes in household net wealth has been positive and as a result total net wealth as a percentage of disposable income has grown modestly over time. Total net wealth increased from about 350 percent of disposable income in 1979 to about 400 percent in 1999 (see Figure 4). Over the first half of the 1980s total net wealth rose because of increasing financial net wealth (financial assets minus liabilities) and rising real assets.

Figure 4: Household total net wealth, financial net wealth and real assets in New Zealand (as a percentage of disposable income)

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

Figure 5: Financial assets and liabilities in New Zealand (as a percentage of disposable income)

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

Household financial net wealth as a percentage of disposable income reached a peak at about 180 percent in the mid-1980s. It rose during the first half of the 1980s because of an increase in financial assets, while household liabilities remained virtually unchanged (see Figure 5). Since then, household financial net wealth has generally been trending downward and below 100 percent over the late 1990s. The marked deterioration in households’ financial net wealth is largely the result of strongly rising debt (liabilities) following the deregulation of financial markets in the second half of the 1980s. Moreover, financial assets as a proportion of disposable income fell sharply following the stock market crash in 1987 and so far, although rising, have not yet recovered back to the peak reached in 1986. As household liabilities have continued to increase, financial net wealth has continued to trend downward since the second half of the 1980s.

Total household net wealth fell less sharply than financial net wealth following the stock market crash in 1987 and during the period of reform and restructuring (second half of the 1980s to early 1990s). It fell less because the decline in housing value was less marked during this period. From 1992 to 1996, household total net wealth as a percentage of disposable income once again rose with higher real assets offsetting the continuing decline in financial net wealth. The value of housing stock rose in part because immigration and population growth and decreasing household size increased demand for housing and put upward pressure on house prices. From 1997 to 1999, total net wealth fell, largely because of declining house prices and a consequent fall in the value of housing stock.

Housing has been important in the portfolio of New Zealand households for three main reasons. First, relative rates of return to real assets have been high because of high and persistent inflation in the past. Relative rates of return to real assets tend to be higher during periods of inflation. In New Zealand, consumer price inflation, except for the price and wage freezes in 1983-84, was high and persistent during much of the 1970s and 1980s. This led to low and falling real interest rates and negative real returns on some financial assets as prices and inflation expectations only adjusted sluggishly.

Second, the advent of low inflation and financial liberalisation made access to home ownership more widespread. Following the deregulation of domestic financial markets in the mid-1980s, New Zealand households gained access to finance previously not available. Moreover, low inflation made it easier for lower income households to qualify for housing finance. This is because banks and other lenders apply repayment-to-income tests to intending borrowers and for any given size of loan, the higher is the nominal interest rate, the higher is the income to qualify for a loan (Stevens 1997). Lower nominal interest rates (because of falling inflation) made housing finance possible for lower income households.

Third, owner-occupied housing is the most tax-preferred form of saving in New Zealand (Goss and Duncan 1999). Owner-occupied housing provides a flow of services to the occupant that are non-monetary in nature and therefore are not recorded as part of the occupant’s income for tax purposes. This non-taxed “imputed rental income” leads to an advantage of owning a house over renting. However, the size of the tax advantage declines as leverage increases. Because mortgages as a proportion of housing value have been rising due to greater access to financial borrowing the tax advantage has been declining.[14]

These three factors have affected home ownership rates. The percentage of New Zealand households owning their own house (with or without a mortgage) rose steadily over the period of high and persistent inflation during the 1970s and 1980s (see Figure 6). Following financial deregulation in the mid-1980s, the increase in owner occupied housing was particularly dramatic. In 1986 and 1991, 73.5 percent of households owned their own house compared to 71.2 percent in 1981, 69.6 percent in 1976 and 68.1 percent in 1971 according to census data. However, in the 1996 census, home ownership rates grew more slowly than the number of households. As a result the percentage of New Zealand households owning their own house declined. The slowing in home ownership rates in the 1996 census is not surprising as the initial impact of financial deregulation and the move to low and stable inflation started to wear off and the tax advantage from non-taxation of imputed rent declined.

Figure 6: Owner occupied housing (as a percentage of total “specified” housing)

Source: Statistics New Zealand

As rates of home ownership decelerate and the relative importance of housing declines, one would expect a re-allocation of households’ portfolios from housing into equities and other financial assets. There is some indication that this portfolio re-allocation may have started to take place. Over the three years from 1997 to 1999, real assets as a percentage of disposable income fell, while financial assets as a percentage of disposable income rose (see Figure 7), resulting in a change in the composition of households’ assets. Households have started to hold a higher proportion of their portfolios in managed funds, including life insurance and pension funds, and equities, both domestic and foreign at the expense of traditional instruments of savings, such as deposits with banks and other fixed interest assets and housing (see Figure 8).