KEY POINTS:
New Zealanders' preference for investing in houses rather than shares will condemn them to low returns and the country to weak economic growth, Reserve Bank Governor Alan Bollard has warned.
In a speech to PricewaterhouseCoopers' annual tax conference in Auckland yesterday, Bollard returned to a familiar theme - the heavy concentration of household wealth in housing and the risks in this.
But his focus was more on the flipside of this preference - the low levels of investment in shares, and the implications of that for the development of new businesses and the widening gap between what New Zealand produces as an economy and what it keeps.
Direct ownership of shares in New Zealand is very low by OECD standards, making up 4 per cent of household assets, against 17 per cent in the United States.
Indirect ownership of shares through superannuation schemes and managed funds is also low by international standards and only about half the level of direct shareholdings.
"Those may reflect our DIY investment culture, also a disdain for advisers, fund managers and their fees," Bollard said.
The household savings survey in 2001 found 70 per cent of households owned no shares directly.
The median value of the median holding for the 30 per cent which did was $6000.
Bollard acknowledged that some better-known listed companies had delivered poorly to investors or had disappeared from the stock exchange.
But since 1993, overall pretax returns from the sharemarket and real estate had been quite similar.
From the tax standpoint, housing-heavy investors might seem to be acting rationally, he said.
"In particular, capital gains on housing assets are usually tax exempt, while those on financial assets are often not," he said.
As well, households could "negatively gear" investment properties to create a loss which could be deducted from other income when calculating income tax purposes.
One consequence of investors' lack of interest in local shares was that only just over half of the equity in listed companies was held by New Zealanders.
"We are seeing a phenomenon where considerable private equity is roving the world looking for investment opportunities," Bollard said. "Close to home one source of this is Australian pension schemes."
Overseas, some investment funds had helped develop the more sophisticated parts of capital markets such as venture capital.
"But in New Zealand, the relatively small scale and low risk appetite of institutional funds means this market has had to rely on a small number of high-wealth individuals, and has developed much less.
"This limits high-growth, high-risk firms' access to growth capital - particularly important in a market where home bias is strong because of the uncertainties in assessing start-up firms."
The cumulative effect of a long reliance on foreign capital was that there was now a $10 billion gap between gross domestic product (what the country produced) and national income (the share that belonged to New Zealanders).
"This pattern of household investment also impacts on economic performance," Bollard said.
"If New Zealanders fail to identify and invest in higher-yielding equity, we condemn ourselves and the country to lower returns, and economic growth will be lower."
And a high level of reliance on foreign capital left the country vulnerable if overseas investors' preferences suddenly shifted.
