This article originally appeared in the NZ Herald.
The latest New Zealand household wealth figures show the booming residential property market is a major contributor to the country’s growing wealth inequality. This is because house owners are reaping the rewards from soaring property prices while renters are drifting further and further behind.
Statistics New Zealand released its latest household net worth data on June 28 with the following comment: “Household wealth in New Zealand was concentrated in the 20 per cent of New Zealand households, which held about 70 per cent of total household net worth”.
It went on to note: “The top 10 per cent of New Zealand households accounted for around half of total net worth. This is a wealth pattern consistent with the OECD average across countries for which data is readily available. The top 1 per cent of New Zealand households had 18 per cent of total net worth – the same as the OECD average, but slightly higher than in Australia where the top 1 per cent has 13 per cent of net worth.”
The figures in the accompanying table, under the Statistics NZ heading, clearly demonstrates why this has been the case.
According to Statistics NZ, New Zealanders have 30 per cent of their total assets in owner-occupied dwellings and a further 8 per cent in holiday homes and rental property, a total of 38 per cent.
House prices have soared in recent years, mainly because of the low interest rate policies adopted by central banks around the world. As a consequence, residential property owners, particularly those with multiple properties, have done extremely well. Individuals who don’t own a property, and are forced to rent, have dropped behind.
Individuals aged 45 or older hold 78 per cent of the country’s total household assets, clearly demonstrating that those who purchased residential property 10, 20 and 30 years ago have had huge net wealth benefits.
The ratio of mortgage debt to property value for the younger and older age groups also reveals the benefits of a rising property market. These figures are as follows:
- The 25-to-44 age group has a mortgage debt to property value ratio of 57 per cent.
- The ratio for the 45-to-64 age group is 24 per cent.
- The 65-plus age group has a mortgage debt to property value ratio of only 3 per cent.
Thus older individuals, with multiple properties and little debt, are in a far better position than renters because of the soaring residential property market. As a consequence, there has been a huge increase in demand for residential property as individuals attempt to maintain their place on the wealth ladder and avoid dropping behind.
The other major household assets are shares and trusts, which account for 30 per cent of total assets. This includes unlisted shares and equity in unincorporated businesses including sole traders and partnerships. This item also includes rental properties held through incorporated companies.
The shares/trusts figure includes the net value of family trusts, rather than the gross value of assets of houses and other assets and the borrowings undertaken by these trusts.
So, as owner-occupied and rental residential property is also included in the shares/trusts number, New Zealanders have a far greater exposure to residential holdings than the 38 per cent number in the Statistics NZ data.
The other main classifications are consumer durables, which includes cars, boats and household contents, and Superannuation, including KiwiSaver.
Given the huge rise in property and share valuations over recent years, it is not surprising that the gap between property and business owners and non-owners has widened.
The Reserve Bank of New Zealand (RBNZ) has compiled household assets and liabilities since 1998. Its classifications are slightly different to Statistics NZ as far as the treatment of rental properties, consumer durables and deposits are concerned. The central bank, which should be an authority on the issue, has a much higher household deposit figure than Statistics NZ.
There are a number of interesting observations from the RBNZ’s long-term data including:
- Property now represents 49 per cent of total household assets, compared with 45 per cent in December 1998.
- Superannuation has declined from 8 per cent of total assets in 1998 to 5 per cent at present, although there has been a pick-up since the introduction of KiwiSaver.
- The NZX remains unloved as listed NZ companies represent only 2.5 per cent of household assets compared with 2.9 per cent in December 1998.
The big difference between Australia and New Zealand, as indicated by the Reserve Bank of Australia (RBA) column, is that superannuation represents a much higher percentage of household assets across the Tasman.
Between December 1998 and June 2015, total Australian superannuation assets surged from A$391 billion to A$1.98 trillion or from 15 per cent of total household assets to 20 per cent.
Meanwhile, New Zealand superannuation assets increased from $30b to $68b over the same period, representing a decline from 8 per cent to 5 per cent of total household assets.
An article in the June 2016 edition of the RBA Bulletin headed House Wealth in Australia; Evidence from the 2014 HILDA Survey indicated that the gap between the rich and the poor had narrowed in Australia. The study stated that “households with the lowest level of wealth in 2010 saw the most growth of wealth over the four years to 2014”.
The Bulletin revealed that “most of the increase in wealth over the 2010-2014 period came from growth in the value of non-housing assets, which are predominantly financial assets such as superannuation, equities and deposits. This contrasts with growth in household wealth over the 2002-06 and 2006-10 periods, which was primarily driven by growth in the value of housing assets.”
Growth in household wealth through financial assets, particularly KiwiSaver, is far better for wealth equality because anyone can become a KiwiSaver member whereas individuals need a large deposit, and the ability to borrow, to purchase their first home.
Superannuation, particularly KiwiSaver, should benefit wealth equality whereas housing driven wealth will lead to more and more inequality because only 51 per cent of the country’s households own their own home. As well, a booming housing market has the potential to implode with disastrous consequences for the economy and borrowers.
Meanwhile, the residential property market continues to rocket higher and higher, due to a combination of aggressive bank lending and record immigration.
Barfoot & Thompson reported an average Auckland house price of $908,300 in June compared with $826,500 a year ago and $629,900 in June 2013.
In the past 12 months registered banks and non-bank lending institutions have advanced $4.1b to agriculture, $5.4b to business and a whopping $17.6b to households, mainly residential mortgages.
Lending has accelerated in recent months, with households borrowing an additional $2.1b in May compared to $1.8b in April and an average of $1.5b per month in the year ended May 31.
The strong housing market is sustainable as long as the banks continue to lend aggressively and the annual net migration figure remains around the current 68,400 level.
However, a buoyant residential property market will contribute to growing wealth inequality because 49 per cent of New Zealand households don’t own their own homes.
Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.