David Skilling: Give young a stake in country's future

Despite positive recent economic conditions, many people do not have a meaningful ownership stake in the economy, such as ownership of a house or financial assets.

Indeed, the levels of home ownership and household financial wealth have reduced significantly during the past decade or so and compare poorly with those in countries like Australia.

These trends are particularly acute among the young, say those under their mid-30s.

Whereas home ownership rates declined by a substantial six percentage points from 74 per cent to 68 per cent - for the general population between 1991 and 2001, they declined by more than 12 percentage points for 25- to 34-year-olds. And in Auckland, home ownership rates among the young dropped by almost 20 percentage points over this period. The data suggest that this decline is due largely to affordability problems rather than just changing preferences for home ownership.

Student loan debt is also an increasingly significant financial issue for young people. More than 413,000 have a student loan, with an average debt of about $14,400, and over 100,000 have student loan debt of more than $20,000.

Young people are also likely to have participated in the strong increase in household borrowing during the past decade, which has reduced household financial wealth.

Statistics New Zealand estimates that 47 per cent of the 18-24-year-old population and 31 per cent of the 25-34-year-old population have negative wealth, where debts exceed assets.

These recent developments have compromised the ability of young people to build wealth and get ahead financially in the same way as previous generations were able to by buying a home when young, paying off the mortgage and benefiting from capital gains.

Asset ownership provides income returns and capital gains that supplement wage and salary income. Indeed, returns to assets have consistently outstripped wage growth. Many of the benefits from economic growth accrue to asset owners, as their assets such as houses or shares gain in value. As a result, those with assets tend to get ahead.

And if people observe better prospects for getting ahead financially in Australia and elsewhere, this provides an incentive for them to leave.

Improving asset ownership, particularly for the young, will generate profound financial and non-financial benefits.

For individuals, asset ownership enables people to exert more control over their lives, managing risks and taking advantage of opportunities, and thereby to participate more meaningfully in society. They can plan ahead with more confidence.

Asset ownership also provides people with a stake in the social and economic prosperity of the country - if it moves ahead, they are likely to do so as well. This is why communities with widespread asset ownership in which most people have a stake tend to function better.

Conversely, a society in which many of its young people do not have confidence that they will be able to get ahead and build a stake is likely to experience pressures.

As an example of some of these broader pressures, Australian Reserve Bank Governor Ian McFarlane recently identified potential tensions associated with asset-poor younger people being required to pay higher taxes to finance the healthcare and superannuation costs of asset-rich seniors as the population ages over the next few decades. The same potential tension exists here and we need to be proactive in addressing this and other related tensions.

Promoting asset ownership will generate benefits for all people, but is a particular priority for the young. So what to do?

A key reason that ownership outcomes for young people have deteriorated, and why this country's outcomes compare poorly with countries like Australia, is the lack of policies designed to help people get ahead, particularly policies to encourage savings and home ownership.

Such assistance makes it much more likely that people will have sufficient money in the bank for a deposit on a first home, to repay student loans or to start a small business. These policies benefit everyone, but have powerfully beneficial effects on young people.

This focus on promoting asset ownership needs to be deliberate. Simply relying on income growth is insufficient, as the past decade has shown clearly where relatively high economic growth rates have been generated and yet home ownership rates and household financial wealth have declined sharply. All other Anglo countries have savings policies that deliberately convert income growth into wealth and this country needs to follow suit.

New Zealand used to have these policies to assist and encourage asset ownership. We need to develop a 21st century version of these policies to ensure that the young today can make a start in life. The New Zealand Institute will be making specific recommendations on what these policies might look like.

Asset ownership matters for all, people but giving young people a start is particularly important. We need to ensure that many more young people have a stake in the future success of New Zealand.

* Dr David Skilling is the chief executive of the New Zealand Institute, a policy think-tank that has released a series of reports on creating an ownership society.