Decline in Household Savings Rate Remains a Concern: 7 September 2006

The Reserve Bank of New Zealand Bulletin, December 2006 | Go to article overview

Decline in Household Savings Rate Remains a Concern: 7 September 2006


The Reserve Bank today released a paper entitled Household Savings and Wealth in New Zealand. The paper was prepared as background for a presentation by Reserve Bank Governor, Alan Bollard, to the New Zealand Institute of Finance Professionals in Wellington.

Despite much discussion on the subject of household savings and wealth in recent years, and a raft of data from recent surveys, there are still unanswered questions around this important topic. A key issue is why the household savings rate, as measured by Statistics New Zealand, has declined markedly over the past 20 years. This is an issue that the Reserve Bank has been devoting much of its research effort to recently.

The paper discusses a range of factors that may account for the decline in saving. There is the possibility that the measure of household income used to calculate savings is understated. Other factors include the influence of financial liberalisation in the 1980s, the strong labour market, demographic factors, the effects of various cash injections (such as migrant transfers) on the household sector, and the influence of sizeable increases in asset prices on spending.

While saving has declined, the net worth of the household sector--the value of household assets less liabilities--has increased dramatically, almost doubling since 2001. This increase in net worth has been dominated by large increases in the market value of the housing stock, which in turn have been driven by rising house prices. Many households appear to be relying on capital appreciation in order to accumulate wealth.

For many homeowners, the wealth associated with rising house prices is unrealised. However the evidence suggests that many households may view this increase in wealth as 'in the bag' and may have lowered their savings from current income as a result.

The paper notes that some households appear to have been actively withdrawing equity from housing either by selling properties or by borrowing more on properties that they own. This housing equity withdrawal may have fuelled consumption spending. …

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