Housing equity fuelling spending

Friday 1st October 2004

New Zealanders have been using their newfound housing wealth to spend up large on other things, Westpac economists say.

They estimate the nation's net housing wealth has increased by $89 billing since June 2001, largely because of rising house prices.

"In the year the June 2004, we estimate that New Zealand households withdrew around $2.7 billion out of housing wealth in order to fund an extended spending spree," they say.

"By our calculations, nominal consumption growth would have been half as strong over the past year if households had not been accessing the increased equity in their homes delivered by higher house prices."

The paper by Nick Tuffley and Donna Purdue says that a $1 increase in the country's housing wealth will increase annual household consumption by about eight cents compared with about seven cents in Australia and Britain and only five cents in the US.

But currently, New Zealanders have upped their spending to about 8.5 cents for every extra dollar of housing wealth.

But the party can't go on forever. "The implication is that consumer spending will be more vulnerable to a downturn in house prices this cycle than it has been in the past."

Westpac is forecasting that annual consumption growth after inflation will slow from more than 5% currently to about 1% by the end of next year and the risks mean it could be even slower.

"While this may seem like a dramatic slowing, it is important to remember that it will come in an environment where consumers are highly leveraged, further wealth gains are limited, interest rates are rising and the population boost from migration is waning."

The strength of the relationship between housing wealth and consumer spending largely depends on the ability of households to access that wealth, the economists say.

New Zealand's highly deregulated financial market, owner-occupation at about 66% of the population and the lack of capital gains taxes or stamp duty on housing all contribute to our propensity to borrow.

The type of mortgage products available is also a key factor.

"The introduction of revolving credit options (and the recent introduction of reverse mortgages) have given households far greater flexibility and, more importantly, accessibility to the equity in their homes."

The current spending spree is in contrast to most of the 1990s during which people were building their equity in their homes - the two exceptions, in 1995/96 and 1999 occurred when house prices were rising.

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