It looks as if KiwiSaver, which has had a huge uptake, will have a radical impact on the country’s savings patterns. This includes a reduction in our dependence on residential housing and an increase in investment in equities and other financial assets.

This could have a material impact on housing demand and prices while increasing the amount of funds available for non-property activities. These developments would bring New Zealand more in line with the rest of the world.

Individuals have two main types of savings – financial assets and residential property.

Financial assets are managed funds, individual share holdings, fixed interest securities, bank deposits, superannuation schemes and life insurance policies. Most of these assets produce income whereas owner-occupied residential property usually generates no income.

New Zealanders are more reliant on residential property than any other nation. According to Reserve Bank statistics we have 75 per cent of our gross assets in housing, which is well above most other countries.

Based on OECD statistics Italy is second with 66 per cent of household assets in residential property followed by France with 65 per cent. Australia has 57 per cent and three of the nine countries in this survey have less than 50 per cent. These are Canada with 48 per cent and the United States and Japan, with 39 per cent.

The Canadian, German, Italian and US housing percentages are slightly inflated because they also include durable goods owned by individuals.

The other point to note is that New Zealander’s indebtedness, at 20.4 per cent of gross assets, is the highest of the nine countries. We allocate a huge percentage of our investment funds to residential property – which generates little or no income – and then have to borrow to maintain our lifestyle.

New Zealanders have always had a strong bias towards property and this has increased in recent years.

In December 1979, the first year of Reserve Bank data, residential property represented 58 per cent of total household assets but fell to 55 per cent just before the 1987 sharemarket crash as money poured into high-flying listed investment and property companies.

New Zealanders turned their backs on the sharemarket after the 1980s debacle and by 1990 residential property represented 65 per cent of total individual assets. The figure peaked at 76 per cent in December 2005.

New Zealand has had one of the biggest increases in exposure to housing over the past decade.

Since 1995 residential property as a percentage of total individual assets for New Zealanders has changed as follows:
* In New Zealand from 65 per cent to 75 per cent.
* In Italy from 67 per cent to 66 per cent.
* In France from 58 per cent to 65 per cent.
* In Germany from 65 per cent to 58 per cent.
* Australia has remained static at 57 per cent.
* In the UK housing has risen from 42 per cent to 53 per cent of total assets.
* Canada has gone from 44 per cent to 48 per cent
* The US from 34 per cent to 39 per cent and
* Japan from 52 per cent to 39 per cent.

New Zealanders have had a huge bias towards residential property because there is no stamp duty on this asset class, no capital gains tax, no land tax and operating losses on residential investment property can be deducted from other income for tax purposes.

In addition many of our largest listed companies have performed poorly and financial assets have often been heavily taxed, particularly managed funds until the introduction of the PIE regime on October 1.

Housing should be included in every portfolio but too much reliance on it causes problems for both individuals and the economy.

An over-reliance on property is not good for diversification, which is a core principle of well-structured investment portfolios. This lack of diversification makes New Zealand more vulnerable than most countries to a housing downturn.

Too much focus on housing also means that individuals can be asset rich but cash poor. This forces them to borrow to maintain their lifestyle or invest in high risk financial assets in order to extract as much income as they can from this asset class. This is one of the main reasons why a large number of elderly individuals, who had most of their wealth tied up in an owner-occupied home, invested in high risk finance companies.

This asset rich, income poor phenomenon also means that shareholders put a great deal of pressure on boards of directors to pay high dividends. This can put enormous strain on growth orientated companies, which should be re-investing most of their earnings back in the business.

For example Pumpkin Patch generated operating cash flow of $25.9 million in the July 2007 year, paid dividends of $14.4 million and spent $35.5 million on expansion, mainly overseas.

The group’s overseas expansion was mainly funded by bank overdraft facilities, which increased from $13 million to $37.1 million during the year.

The corporate sector needs far more equity to fund its growth and shareholders must be willing to sacrifice short-term dividends for long-term capital growth. New Zealanders are not in a strong position to do this as households have financial liabilities of $152 billion compared with financial assets of just $186 billion, whereas in most other countries financial assets far exceed financial liabilities.

According to data released by the Australian Bureau of Statistics earlier this month Australian households have $1134 billion of financial assets and $733 billion of financial liabilities.

In other words the ratio of financial assets to financial liabilities in New Zealand is only 1.22 compared with 1.55 in Australia.

KiwiSaver should initiate a significant shift in savings patterns from residential property to financial assets with housing assets as a percentage of total assets probably peaking at around 75 per cent.

That doesn’t mean that New Zealanders will stop buying houses but it does indicate that the weight of money that has flowed into housing – and pushed up prices – will abate and the residential property bull market has come to an end.

The other short-term factors weighing on the housing market are high interest rates, the slowdown in migration, and affordability issues as far as first time buyers are concerned.

The main issues in the medium term are the big uptake in KiwiSaver and the large number of post-World War II baby boomers who have little or no superannuation and are asset rich but cash poor.  Many of these will be forced to trade down their residential property in order to generate sufficient cash to maintain their lifestyle.

This phenomenon could be more prevalent in New Zealand because of our relatively limited amount of financial assets.

KiwiSaver is an attractive development but individuals should be careful that they don’t relay totally on this new innovation and owner-occupied residential property. This is because the latter usually generates no income and all KiwiSaver funds remain locked up until individuals reach 65.

The best savings strategy for most pre-retirement individuals is to have a mix of KiwiSaver, financial assets and residential property.

Household Assets – New Zealanders’ love affair with residential property




 Gross Assets

Liabilities as a % of gross assets



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United Kingdom 








United States