Opinion: Why New Zealanders' investment in housing appears rational

By Michael Littlewood Some commentators still misunderstand the Reserve Bank’s annual survey on New Zealanders’ assets and liabilities that have just been released – see, for example, Brian Gaynor’s column last Saturday. Brian Gaynor, and others, seem not to appreciate what that survey misses out. The RPRC has just released a PensionBriefing “What do New Zealanders own and owe? News from SoFIE (Survey of Family Income and Expenditure) 2004-2006”. The full paper is available here and is reproduced below. It shows that, of all New Zealand households’ assets, less than 50% in total was in housing of all kinds (homes, holiday homes and rentals). The source for this finding comes from three separate, large gatherings of data in 2001 Household Savings Survey (HSS), 2004 (SoFIE) and 2006 (SoFIE). The next tranches of financial data from SoFIE in 2008 and 2010 will probably show much the same aggregate results. Whether 45-50% of all assets in housing is too much is another question; as is the distribution of assets and liabilities amongst different groups but the aggregate numbers discussed in the attached PensionBriefing are rather different from those normally used in discussions on what New Zealanders own and owe. New Zealand numbers on this are broadly similar to data from other equivalent countries. Overall, the composition of New Zealanders’ assets and liabilities seem rational, despite claims to the contrary. New Zealanders are frequently castigated for their financial behaviour. For example, Gareth Morgan and the retiring chief executive of AgResearch, Andy West, claim New Zealanders have too much invested in property, particularly in their homes and other residential real estate; and they have borrowed too much and don't have much invested in financial or business assets. These claims do not appear to be supported by the most recent results from the government's longitudinal survey (SoFIE), as discussed in the Treasury‟s December 2009 report (Scobie & Henderson, 2009). That 2009 report looks at, among other things, New Zealanders‟ assets and liabilities over the 2004-2006 period. By way of a snapshot as of 2006, and for all New Zealand households: - Total assets were worth $846 billion. - Total debt was $117.6 billion (13.9% of total assets). - Gross housing assets were 49.6% of total assets. - Financial assets were 18.1% of total assets. - Business assets were worth 17.1% of total assets. Over the two years between 2004 and 2006, for the same survey group, total assets for all households rose 21.1%; total debt grew by 11.9%; gross housing assets fell slightly as a proportion of the total (-0.3%) while financial and business assets in total grew by 59.7%. The Treasury's report puts a number of caveats on some of the SoFIE results, but the total numbers for all households seem relatively consistent with earlier data. That is not to say that every household has an appropriate asset/liability mix; only that overall, households' balance sheets seem more conservative than many commentators suggest. SoFIE is a longitudinal survey conducted by Statistics New Zealand over an eight year period, 2002-2010. It collects financial data about individual New Zealanders every two years during that period, starting in 2004. Because the same individuals supply information during the whole period, the collection of „snapshots at each collection date can be "joined together‟ to give a picture of how participants change their position over the period. The usual surveys, like the Household Saving Survey 2002, take only a snapshot of what participants are doing at the time of the survey. Longitudinal surveys like SoFIE are complex to organise and analyse but can give rich insights into behaviour. For example, although SoFIE was not planned around KiwiSaver, the eight years straddles the periods prior to KiwiSaver, during its introduction, and the first three years after its introduction in 2007. Scobie and Henderson's (2009) report takes a net wealth approach to New Zealanders' savings over the period 2004-2006. The net assets of participants are added for 2004 and for 2006 and the difference, adjusted for inflation, represents the increase in net wealth, or "savings‟, over the period. This is the "stock approach". The alternative "flow approach" tries to see what individuals earn, what they spend and what, therefore, they have left over. This measure tends to assume that this difference is "savings", and much of their report analyses the results of the "savings" calculations. This PensionBriefing looks at one aspect of the Scobie and Henderson (2009) report: the financial condition of households' balance sheets in 2004 and 2006: how much did all New Zealanders own and owe? The PensionBriefing compares the data provided in the 2009 report with the Household Saving Survey (HSS) data. The last time there was a full look at this was with the HSS conducted by Statistics New Zealand and the Retirement Commission in 2002 (Statistics New Zealand, 2002). How does SoFIE work? SoFIE started in 2002 with a quite large sample of New Zealanders. “The survey began in October 2002 with an original sample size of about 11,500 households, amounting to over 22,000 individuals 15 and over. Children younger than 15 who were living in households selected for the survey will also be tracked and will be surveyed from age 15. The survey will be run for a total of 8 years. The core survey collects information on family characteristics and labour market and income spells. An assets and liabilities module and a health module are included in alternate years.” (Scobie & Henderson, 2009, p. 20) For the assets and liabilities module, SoFIE asks participants to list everything they own and owe at two-yearly intervals. The first and second of these (2004 and 2006) have been analysed by Scobie and Henderson. They encountered difficulties with some of the data with assets "appearing" unexplained in Wave 4 (2006) and other assets disappearing, unexplained, from Wave 2 (2004). Also, superannuation assets are not valued properly: survey participants were asked the value of their entitlements. By contrast, the 2002 HSS asked the Government Actuary to value particpants‟ superannuation entitlements. Finally, SoFIE largely ignored family trusts' asset holdings. The survey's results for the sample group are then scaled up from the sample group to reflect the population as a whole. The complexity of the analysis explains why, only now, we are seeing the 2006 results. It will probably take another year before the 2008 financial data are available. The report‟s core conclusion was: “…. this paper presents initial estimates derived from SoFIE. … The estimates were made by comparing net wealth in 2004 with that in 2006 at the individual level and computing the implied real saving rate on an annual basis. This yielded an overall median estimate of 16% of gross income. This is of the same order of magnitude as the long run average annual saving rate measured from the aggregate household balance sheet from [the Reserve Bank of New Zealand], which was 16% of disposable income, equivalent to about 12% of gross income.” (Scobie & Henderson, 2009, p. 55) However, the report also found that, taking housing out of the equation, the annual saving rate of 16% rate fell to 5%. As the 2009 report noted “Asset revaluations are therefore a potentially large contributor to changes in household net wealth.” Overall assets and liabilities The report also looked at all the assets and liabilities of all New Zealand‟s households as a group. In part, this was to allow comparisons with the RBNZ's annual survey. That analysis allows an overall (or "aggregate') look at what all New Zealanders were doing at 2004 and 2006. This approach was also used in the HSS 2002. New Zealanders have a high proportion of their total assets in housing of all kinds: home, rental investments, bach, timeshare, but probably less than most might expect. Across the three sources of data, the proportion of gross total assets that comprised gross (before debt) housing did not exceed 50%. Over the five year period covered by the three sets of data, the total value of housing (before debt) grew spectacularly (+125%). Because housing debt grew at a slower rate (+73%), net housing grew at an even greater rate (+146%). Despite this, net housing assets remained at less than half of all net assets over the period because those also grew substantially. The growth in net housing assets (+$193 billion) contributed about half (55%) of the growth in total net assets (+$352 billion). Financial assets: New Zealanders also have steadily increasing amounts held in "financial assets‟. These must be reduced by "financial debt" that covers credit card debit balances, student loans, finance company debt etc. Scobie & Henderson (2009) look in more detail at the assets and debt position for different types and groups of households at both 2004 and 2006; also how they had changed between those years. In fact, they had difficulties even with reconciling changes between 2004 and 2006 as their analysis moved too far away from numbers at the median. Some of those difficulties derive from inconsistent answers given by respondents; others from design difficulties in the SoFIE survey. For example, the way in which assets held by family trusts and the ownership relationships between the family and the family trust appear not to have been thought through by SoFIE‟s designers. Despite these misgivings, the "helicopter view‟ of New Zealanders‟ assets and liabilities is useful because that is how the annual analysis carried out by the RBNZ compiles its results. Scobie & Henderson (2009) analyse the differences between their top-down look and the RBNZ surveys' results for both 2004 and 2006 and concluded: “However, it is striking that the initial estimates of the aggregate household saving rate between 2004 and 2006 are remarkably similar when using the stock method applied to two totally independent data sources: one at the sector level [RBNZ]; and the other based on unit record data [SoFIE] from a large national survey.” (Scobie & Henderson , 2009, p.23) Reserve Bank’s annual survey The RBNZ compiles its annual summary of household assets and liabilities as of 31December. The RPRC has looked at the 2007 results. PensionBriefing 04/084 concluded that the gaps in the RBNZ‟s data meant it was not possible to measure what proportion of New Zealanders‟ total assets were held in housing-related assets. However, many commentators use the RBNZ data for just that purpose.  Any suggestion that New Zealanders have, say, 75% or more of their assets in housing, probably has its ultimate source with the RBNZ survey. Scobie & Henderson‟s (2009) report on SoFIE sheds some light on the main set of data missing from the RBNZ‟s financial numbers: the value of business assets5. The RBNZ acknowledges the information gap but has not so far estimated its scale. Because Scobie & Henderson roughly reconciled SoFIE's data with equivalent RBNZ numbers, the SoFIE numbers on business assets can, with considerable caution, conditionally fill the RBNZ's information gap. Business assets comprise direct ownership of businesses that are not listed shares (listed shares are included in SoFIE‟s and the RBNZ's "financial assets". Business assets also include the direct ownership of commercial property, farms, horticultural ventures and forestry investments. These rural assets are significant in New Zealand. However, any debt that has been incurred by households to acquire or provide working capital for those businesses is included in the RBNZ numbers. It would be helpful to know what proportion of "household debt" is, in fact, "business debt" but that breakdown is not available: even the lenders themselves may not know a loan's purpose. New Zealanders as a whole owned business assets in 2006 valued at $144 billion. That figure exceeds the total of all household debt in the same year ($118 billion according to SoFIE) and is slightly less that the total of all debt noted by the RBNZ survey: $152 billion for 2006. Over the five years covered by the HSS and SoFIE surveys, business assets comprised between 16% to 19% of all household assets. This analysis is not a criticism of the RBNZ‟s annual survey. The RBNZ collects the aggregate information presented in the summaries for its own regulatory purposes. However, the RPRC suggests that the users of the RBNZ data should be alert to the limitations of that data. Conclusion Based on the three sets of data covered here, it is difficult to conclude that all New Zealanders have overly distorted balance sheets during the five year period between 2001-2006. Whether 45-50% of assets in all types of housing is suitable may be another question but New Zealand is apparently not very different in this regard from other countries' experiences. For example, during 2003-04, Australians had about 55% of their assets in housing. The RBNZ analysis also misses what SoFIE categorises as "durables", including vehicles, machinery, home contents, leisure equipment etc. In 2006 as measured by SoFIE, durables were in aggregate 15.2% of total assets, down from 17.1% in 2004. (Scobie & Henderson, 2009 p.24) As the report points out, however, there are some significant differences between SoFIE and the RBNZ‟s numbers. Most significantly, because of their "top down" nature, the RBNZ effectively includes all assets in family trusts (business assets aside) and ignores any debt between the family and the trust. SoFIE counts only the debt as a family asset and ignores the assets held by the trust. Although housing assets increased markedly in New Zealand over the five year period (+125%) and debt by a somewhat lesser proportion (+74%), net financial assets grew by 49% and business assets by 71%. What will really matter eventually is whether the incomes of New Zealanders grew by a sufficient extent to service the increased debt of $13 billion over the 2004-2006 period covered by SoFIE (+12%). The RBNZ surveys show an increase in incomes between 2004 and 2006 of only 6.7%. It will matter to the sustainability of debt servicing if that gap persists. Pension Briefing 2010-2 - What New Zealanders Own and Owe - SoFIE 2006 - Final