Reserve Bank urges asset diversification – again

Housing is an average of 75% of household assets in New Zealand: this compares to about 60% in Australia, 50% in the United Kingdom and 40% in the United States.

The Reserve Bank concedes there are plenty of factors pointing New Zealanders towards housing over other assets – tax, a feeling the house is a more “real asset” than financial assets, preparation of banks to lend, and historical factors such as the 1987 sharemarket crash.

The basic message of the Reserve Bank is not that housing is a bad investment: instead, it argues the need for greater diversification.

“Relying on continued house price inflation to justify risk taking is problematic, especially when house prices appear to be out of line with economic fundamentals.”

“In addition, house prices, unlike some financial prices, are tied to local economic conditions.”

The Reserve Bank’s economists point to a study which shows regional house prices in this country are strongly influenced by economic cycles – “suggesting that housing provides a poor hedge against local household income security”.

Bollard also warns houses are a “lumpy” asset usually requiring a high level of borrowing.

“The large borrowing required adds to the riskiness of housing, while the reduction in financial savings implies that households have less means to cope with significant shocks to their income.”