Brian Gaynor: The rise and rise of Kiwi household wealth

Deregulation of the financial sector by the 1984-90 Roger Douglas/David Lange-led Labour Government dramatically changed bank lending policies, with a stronger bias towards residential property. Photo / File

COMMENT:

New Zealand household or individual wealth has increased massively over the past two decades, as demonstrated by the figures in the accompanying table.

According to Reserve Bank of New Zealand (RBNZ) figures, total net household wealth has soared by $1166 billion, from just $414b in 1999 to $1580b at present.

Over the past decade net worth has expanded by $738b, compared with $428b in 1999-2009.

Average wealth has expanded more slowly because the country's population has increased from 3.8 million in 1999 to 4.3 million in 2009 and nearly 5 million at present. Consequently, average net wealth has grown from $108,000 in 1999 to $198,000 in 2009 and $319,000 this year.

However, we shouldn't get carried away with these figures as the 10 wealthiest individuals on the US based Forbes rich list had total worth of $1211b (US$759b) at the end of September.

Thus, the total time-adjusted wealth of these 10 richest individuals is equal to almost 77 per cent of New Zealand's total net household wealth.

Forbes' top 10 include Amazon's Jeff Bezos, with total wealth of $172b at the end of September; Microsoft's Bill Gates with $168b; Berkshire Hathaway's Warren Buffett, $131b; Oracle's Larry Ellison, $105b; Facebook's Mark Zuckerberg, $105b; and Google's Larry Page, $90b.

According to Forbes, several of these have made huge donations, with Gates and Buffett having given a combined $113b to various causes.

The RBNZ, which compiles household balance sheet data on a quarterly basis, made an important adjustment to its calculations in the September 2014 quarter. This included a wider coverage of currency holdings, equity in unincorporated businesses and some unfunded superannuation benefits.

It also narrowed its definition of residential rental property assets by removing these assets and liabilities from the household balance sheet. Instead, RBNZ now includes only the equity of these residential rental property assets in this data.

These September 2014 changes resulted in an additional $213b of net household wealth, comprising a $322b increase in total financial assets and decreases of $182b and $73b in housing/land values and housing loans respectively.

It is clear from these figures that housing and land have been the major wealth creators, particularly as residential rental property assets are included in the 1999 and 2009 figures but not in the 2019 data.

Housing and land assets now total $845b compared with $437b a decade ago and $178b in 1999.

Title Here

The main reason for the surge in house values has been the deregulation of the banking sector in the 1980s and the major banks' decision to focus on residential mortgage lending since then.

The New Zealand banking system was heavily regulated in the pre-1984 period with many restrictions including:

• Banks were required to hold a percentage of their assets in government securities

• The government directed the banks to lend to certain favoured sectors, particularly farming

• Interest rates on deposits and loans were often regulated.

These regulations restricted the ability of banks to lend to the residential property sector, with private mortgage lending, via solicitors' trust accounts, representing a significant source of housing loans in the pre-1984 period.

According to the RBNZ: "Because of the lending and interest rate restrictions placed on saving banks and other financial institutions, housing credit was normally rationed ... prior to 1984".

This led to the development of solicitor lending, with the RBNZ noting that "some 25 per cent of all mortgages registered in the year to March 1981 were directly from private sources without the use of any intermediary other than the legal firm involved".

The deregulation of the financial sector by the 1984-90 Labour Government dramatically changed bank lending policies, with a stronger bias towards residential property. The following figures illustrate this trend:

• In 1999, the banks had $55b of housing loans to individuals and other entities, representing 97.7 per cent of New Zealand's total housing loans

• In 2009, the banks had $156b of housing loans representing 96.3 per cent of these loans

• In March 2019, the banks had $260b of housing loans representing 98.7 per cent of housing loans.

These figures clearly show that the banks have dramatically increased their lending to the housing market and they now almost completely dominate this activity.

The $225b of 2019 household financial liabilities in the accompanying table comprises 85.3 per cent of housing loans, 7.5 per cent of consumer loans and 7.2 per cent of student loans.

Individuals who purchased residential property in the 1980s and 1990s have benefited enormously from banking deregulation and the huge increase in housing loans and values since then.

Meanwhile, bank lending growth to the business sector has been much more modest, going from $34b in 1999 to $78b in 2009 and $111b earlier this year.

The second most important household asset is equity in unincorporated NZ businesses, which has grown from $89b two decades ago to $379b this year. This sector includes sole traders, partnerships and trusts, with non-corporate farms and rental properties being the most important.

As estimates are book value, except rental properties which are market value, these unincorporated business figures are probably understated.

The next largest item is the cash, deposits and loans which also includes debt securities, foreign currency and cash management funds. These household assets have also increased dramatically over the past two decades.

It is clear from industry figures that housing and land have been the major wealth creators. Photo / Duncan Brown

The following largest item is the direct holding of shares listed on the NZX, which the RBNZ estimates at $104b as at the end of March this year.

This figure is inconsistent with broker assessments that more than 50 per cent of the NZX market, which had a total value of only $142b at the end of the first quarter, is overseas owned.

Consequently, this RBNZ $104b figure is too high because of the high overseas ownership of the NZX.

The next two items are superannuation funds and investment fund shares.

Superannuation funds include KiwiSaver and other superannuation funds, but it doesn't include the New Zealand Superannuation Fund. Investment fund shares include household investments in retail unit trusts, wholesale trusts, mortgage income trusts, property syndicates and private wealth funds held with fund managers.

The last major item is NZ unlisted shares, which is the household holdings in businesses that are not listed on the NZX.

This figure may also be undervalued because it is assessed on a book value, rather than a market value, basis.

These household balance sheet figures clearly show that there has been a significant increase in individual wealth over the past two decades.

However, this has been mainly captured by individuals who own property, have equity holdings in businesses and have superannuation and investment funds.

KiwiSaver may have slightly compensated for this wealth inequality as there are 3 million KiwiSaver members compared with 1.9m houses in New Zealand. Unfortunately, many KiwiSaver members have taken a contribution holiday or are contributing small amounts.

It is difficult to forecast how household wealth will track in the years ahead, although the housing and financial markets will be important contributors.

The banking sector's willingness and ability to continue to lend to the housing sector will obviously be an important variable, as will sharemarket and bond market performances.

NZ households have dramatically increased their borrowings over the past two decades but on the flip side there has also been a massive increase in their cash and deposit holdings.

The household debt situation doesn't look too bad when it is considered that these liabilities have expanded by $175b over the past two decades while household deposits and loans have increased by $153b, only $22b less.