Households' Attitudes to Saving, Investment and Wealth

By Burns, Janice; Dwyer, Maire | The Reserve Bank of New Zealand Bulletin, December 2007 | Go to article overview

Households' Attitudes to Saving, Investment and Wealth


Burns, Janice, Dwyer, Maire, The Reserve Bank of New Zealand Bulletin


Household saving--the difference between household disposable income and household consumption--has declined over the last two decades and now appears to be negative. On the other hand, household wealth has risen. This has been due to rises in house prices, which have pushed up the equity held by households in residential property.

While a downward trend in household saving is evident across many developed countries, New Zealand's household saving rate has been among the lowest, or the lowest, for much of the last 20 years. Also, New Zealand households have lower levels of wealth than households in Australia, Canada, the UK and the US. While New Zealanders' wealth in housing, as a proportion of disposable income, is around the same as for these other countries, it seems that on average New Zealand households own less financial wealth (e.g. shares and bonds).

In view of this pattern, the Economics Department of the Reserve Bank decided to undertake a small-scale exploratory study of households' attitudes to various forms of investment. The idea behind this work was to get a view, from a sociological perspective rather than an economic perspective, on why wealth in New Zealand is held in the way it is. This perspective contributes to the Economic Department's ongoing programme of work on the financial position of households.

Two consultants, Janice Burns and Maire Dwyer, undertook the initial study. The study was designed to provide an overview of:

* what is known about investment attitudes and behaviour in New Zealand; and

* factors that are likely to influence saving and investment attitudes and behaviour.

The study drew on three sources of information:

* a review of policy settings and published studies on saving;

* interviews with individuals knowledgeable about investment and saving behaviour and attitudes ('key informants'); and

* background interviews with a small number of 'consumers' aged between 30 to 50 years. It was felt that people in this age group were more likely to be turning their attention to investment issues than people in other age groups.

The report notes that wealth is more unevenly distributed than income. Financial skills are also unevenly distributed. People with high financial knowledge generally have higher education, higher incomes and their own homes. A recent survey showed that only 15 percent of the population had advanced financial knowledge, in that they understood basic and advanced financial concepts, were in control of their borrowing and debt, and were financially confident.

The report looks at the role of property and financial investments. According to the report, the decline in the share of wealth held as financial assets has been driven by a number of factors, including the following:

* a valuation effect from house prices, which rose strongly relative to prices of financial assets;

* a continuing desire by New Zealanders to own their own home;

* a rise in average dwelling size;

* historically high returns from rental property compared to shares;

* the absence of price crashes for housing in recent decades, in contrast to shares;

* the ability of owners to use their house as collateral in order to buy additional property;

* perceptions that there are tax advantages regarding property;

* perceptions that there are lower risks in 'what you know', which for many people is residential property;

* unease by investors regarding the recent performance of financial assets (eg managed funds), the level of fees, and the complexity of products;

* a decline in recent years of employer-based superannuation schemes; and

* the lack of any compulsory retirement saving.

The advantages of being in property--especially in recent years when house prices have shown such strong growth--appear to be widely acknowledged. …

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