Academic journal article The Reserve Bank of New Zealand Bulletin

Lessons from the Economics Department's Work on Household Balance Sheets and Related Issues

Academic journal article The Reserve Bank of New Zealand Bulletin

Lessons from the Economics Department's Work on Household Balance Sheets and Related Issues

Article excerpt

Over the last three years, the Economics Department has undertaken a range of research regarding the financial position of households. This article provides an overview of this research. The work was largely motivated by concerns about: rising household debt, an apparent decline in household saving, and rising house prices. Things that have been learned include the following:

* Data on financial assets and borrowing can be used to derive an alternative estimate of household saving. Like Statistics New Zealand's measure, the alternative measure suggests that the household saving rate is currently negative.

* The high levels of consumption associated with negative saving appear to have been sustained by equity withdrawal from housing and farms, which in recent years has been large. Most of this equity withdrawal has probably occurred as the result of property sales rather than refinancings. The high levels of equity withdrawal reflect the strong rises in property prices that have occurred since the early 2000s.

* Factors that are likely to have affected the demand for housing over recent years include: lower interest rates, financial deregulation, the surge in net migration in 2001-2002, rising household income, the taxation treatment of rental housing, and households' expectations of continuing house price growth.

* In the short term, housing supply has not been able to match demand and the result has been rising house prices. Furthermore, the rise in the house price-to-income ratio over the last two decades or so suggests that there may be some factors that have been constraining the supply of housing over the long term.

The article concludes with a look at likely future trends, and outlines areas for further work.

1 Introduction

Over the last three years, the Economics Department has undertaken a range of research on issues related to the financial position of households. This work has been motivated largely by concerns about:

* rising levels of household debt

* an apparent decline in household saving

* rising house prices.

Each of these issues can have consequences for financial stability and the economic cycle, and hence are of vital interest to the Reserve Bank.

Rising debt

The rise in household debt has long been evident from data that the Reserve Bank collects directly from the financial sector The debt-to-disposable income ratio showed a sustained rise through the whole of the 1990s, and it began an even sharper climb from around 2002 (figure 1). When would it end, and what would be the consequences of these higher debt levels? Would households be more likely to get into difficulties if economic growth were to falter? (1)

Declining household saving

Another issue of long-standing concern has been an apparent decline in saving by the household sector. Figures from Statistics New Zealand suggest that the household saving rate has been negative for most years since the mid-1990s and has been strongly negative since 2002 (figure 2). (2) With the government sector now having a high level of saving, and the business sector producing positive saving, the household sector appears to be the one that has been holding down the level of national saving. Clearly a low level of household saving can be a major factor in the emergence of macroeconomic imbalances. A low level of national saving, where saving is lower than the level of investment, results in a higher current account deficit and a higher net level of international debt.

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Rising house prices

A third issue, and the one that has probably been of the greatest concern in recent years, is the rise in house prices. House prices have risen sharply since the end of 2001, with both house prices and section prices essentially doubling since then. However, rising house prices, especially relative to household income, have not been a new phenomenon. …

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