Housing boom triggers drop in savings

In a speech to the National Conference of the Association of Superannuation Funds of New Zealand this week, Associate Minister of Finance Clayton Cosgrove described the research paper, entitled, “Household Savings and Wealth in New Zealand”, as a “sobering insight into the problem”.

It found that the household savings rate has declined sharply in the last thirty years. Savings as a percentage of household income have fallen from 3.6% in the 1970s to minus 14.8% in 2005. The Reserve Bank findings show increased household net worth arising through the housing boom may cause households to see this increase in wealth as a given, and so reduce savings, “even though we know house prices can fall,” Cosgrove said.

“The wealth effect has also encouraged households to borrow more. The bank estimates this draw down in household equity may have totalled about $7 billion over the past four years. A significant proportion of this has most likely been spent.”

“In a nutshell,” Cosgrove said, “the report finds New Zealanders rely too heavily on capital appreciation to accumulate wealth.”

He said rising interest rates and a slowing economy should “hopefully put the brakes” on the big increase in overseas borrowing that has financed the housing boom and other consumption.

Cosgrove also told the conference that the KiwiSaver Bill recently reported back to Parliament will include a mortgage diversion option, whereby part of a person’s KiwiSaver contribution can go towards paying off the mortgage on their home. The rest of the contribution goes into their KiwiSaver account.

This would be on top of the provisions in the legislation under which the government would provide up to $5000 for each KiwiSaver wanting to buy their first home.

“We are recognising the reality that most New Zealanders see saving for their retirement as having two elements: the purchase of a freehold home and the building up of financial assets.”