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Home is where the dosh is

By Donal Curtin

Monday 1st September 2003

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If you'd asked an economist five years ago whether New Zealand had a savings problem, chances are the answer would have been "yes". New Zealand households seemed to be saving little - and progressively less over time - and a disproportionate amount of what we did save was in the form of house ownership. Indeed, by some analyses, households were actually going backwards - selling down assets or running up debt.

More recently, some of these assumptions have started to unravel. New research suggests that the actual level of savings could be larger than previously thought: a good place to get a feel for the issues (and quite a lot of the evidence) is the somewhat prosaically titled "Saving in New Zealand: Measurement and trends", a Treasury Working Paper. There's also new evidence that New Zealand households may be saving about the right amount, based on a kind of "retirement calculator" exercise comparing what they're doing with what they'd need to do to achieve various retirement objectives.

Some of the crisis thinking has consequently disappeared, though many people continue to be troubled by evidence showing low and undiversified personal savings rates that rank poorly by international standards, and an unusually high reliance on overseas savings to finance the investments we want to make.

Throughout the debate, however, there has been one constant: the huge role housing plays in household net wealth (i.e. what households own over and above their debts). At the end of last year, according to Reserve Bank figures, housing made up $247 billion, or 87%, of the $284 billion of families' net wealth.

It's important not to assume this is a problem, as some fund managers do - partly from a vested interest in selling non-housing assets, and partly from genuine a belief that investments should be more diversified and that people should have more invested in equities than they typically do. There's been a tendency to almost demonise housing, ignoring its many advantages as an asset class. These include its broad indexation to average earnings (house prices rise over time roughly in line with the money value of the economy), the implicit income stream it offers (in the form of rent that doesn't have to be paid), and the reasonably transparent and liquid nature of the housing market. Because houses can be borrowed against they are also an important source of capital for small businesses.

And then there's what my college textbooks called "psychic income" - things like positive feelings of security and ownership - not to mention that house price gains tend to be tax free, whereas many managed fund investments in other asset classes tend to be, under current New Zealand tax arrangements, tax handicapped.

In short, there are good reasons for housing to take up a chunky part of New Zealanders' savings. But even on this somewhat revisionist view, there are still two good reasons to wonder about the impact of an allocation as high as 87%.

One is that there is some force to the fund managers' arguments for greater diversification. That's a hard argument to make in New Zealand right now, where many retail investors have had their fingers scalded by the combination of the global bear market in world shares and a surging Kiwi dollar. Together, they've shredded the value of investments in overseas equities (tipping many "balanced" managed funds and personal superannuation plans into three years of loss). Even so, it's still a good argument: putting everything into housing may not be quite as rash as putting everything into alpacas, but it's not wholly sensible either.

The other is the question of whether the local savers' preference for housing has impacted on the cost of capital for New Zealand business. It's easy to overstate this issue: New Zealand borrowers have easy access to overseas capital, and it's not necessarily a good thing to drive business borrowing costs down from where they would otherwise be. A good part of Japan's current problems, for instance, stem from companies' privileged access to effectively free funding, which, in the finest economics tradition of responding to price signals, corporate treasurers promptly hoovered up and wasted. Interest rates, in short, serve a proper purpose of rationing money, and interference with their function can easily backfire.

That said, the distribution of household savings is so heavily lopsided in New Zealand that it is hard to believe this doesn't have an effect on the amount, or cost, of capital available to New Zealand business (and perhaps to small businesses in particular, for whom overseas funding isn't such a realistic option). Every society makes its "guns or butter choices": it's arguable that New Zealand has opted for the fitted carpet rather than the factory fit-out.

Donal Curtin is managing director of Economics NZ.

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