THE DISTRIBUTION OF WEALTH
The 2001
Household Savings Survey indicates
that holdings of wealth in New Zealand
are highly concentrated. In 2001, the
wealthiest 10% of the population held
over 50% of total household wealth, or
$190 billion out of a total household wealth
of $367 billion. In contrast, the bottom
10% held negative wealth of -$3.3
billion (where liabilities exceed assets),
and the bottom half of the distribution
held less than 3% of total household
wealth.
This is
obviously an uneven distribution of
wealth.
It is
also apparent that many New Zealanders
do not have any meaningful assets
in an absolute sense. 16% of the population has
negative wealth, 39% of the population
has less than $20,000, and about
half the population has less than
$60,000 in assets. This means that about
800,000 New Zealanders have less
than $20,000 in wealth holdings.
The
people in the bottom quartile of the
wealth distribution tend to:
• be
younger than the rest of the population.
Almost half of those between 18
and 24 years old have negative
wealth and almost 90% have less
than $20,000. This is unsurprising because
many in this group are studying,
have student loan debt, and are
only starting to accumulate wealth
as they commence working life.
• be
an individual rather a couple. The
median net worth for individuals is
$10,300 compared with $172,900 for
couples. This is partly due to differences
in the age profiles of the two
groups; almost 50% of individuals are
under 35 (compared with 23% of
couples) and 10% of individuals are
older than 75 (compared with 5%
of couples).
However,
even after taking age into
account, significant differences
remain between wealth Over the
past decade or so, wealth inequality
has tended to increase across
Anglo countries. The wealthiest people
in the US, the UK and Canada have
all become wealthier relative to the rest
of the population.
However,
although the New Zealand wealth
distribution looks approximately similar
to these other countries, it appears
to differ in one important respect.
The wealth holdings of the bottom
two wealth deciles seem to be significantly
lower in New Zealand than in
other Anglo countries. The 16% of the
New Zealand population who have negative
wealth is a substantially higher proportion
than is observed in other Anglo
countries. Statistics New Zealand (2002)
report that only 6% of Canadian households
and 8% of US households had
negative wealth. In 2002, only 4% of
Australian households had negative wealth
(Kohler et al. (2004)).
THE PROCESS OF WEALTH
ACCUMULATION
As
expected, people accumulate wealth over
their working life and then tend to spend
down this wealth during theirretirement years. Whereas the median wealth
for 18-24 year olds is just $100, the
median wealth for 60-64 year olds is
over $200,000. Similarly, whereas 47%
of 18 -24 year olds have negative wealth,
only 2% of people aged over 65
have negative wealth.
However,
given that the median house sale
price in 2003 was $305,000 in Auckland
and $231,500 in Wellington (DTZ
(2004)), this suggests that there will
be many people who do not own a
mortgage-free house by retirement.
Indeed,
Harris (2003) notes that 30% of
55-64 year olds still have a mortgage
liability.
Moreover,
not everyone accumulates wealth
as they age and many New Zealanders
never acquire assets. In
addition to having little wealth
through their lifetime, a large
number of New Zealanders will be highly
reliant on national superannuation as
their major source of retirement income.
THE LEVEL OF WEALTH
The
amount of wealth accumulated by
New Zealanders is substantially lower than in all other Anglo
countries, and indeed most other
OECD countries. At an individual
level, New Zealanders accumulate
significantly less wealth over a
lifetime than people in other countries. For
example, the median wealth holding of
an Australian household just before retirement
(55-64 years old) in Australia is
A$448,000 and the average wealth for
households in this age cohort is A$702,000
(Kohler et al. (2004)). This compares
to a median wealth holding of
about $250,000 for 55-59 year olds in
New Zealand. Overall, for every
age cohort, the median wealth
holding in Australia approximates
the top quartile wealth holding
in New Zealand.
Across
the entire wealth distribution, the level
of wealth is lower in New Zealand than
it is in other countries. That is, the rich
in New Zealand are less wealthy than
their counterparts in other Anglo countries
and the middle in New Zealand are
less wealthy than the middle class overseas.
Whereas
household financial wealth has
increased – often quite strongly – in
other developed countries, it has declined
in New Zealand over the past decade.
Indeed, New Zealand is the only country
for which we have data where household
financial wealth has declined over
the past decade from about 100%
to 50% of disposable income.
In New
Zealand, the increase in household
debt has been partly driven by
increased mortgage financing as house
values have appreciated; people are
borrowing to invest in real estate and are not making investments in the
form of financial assets. In addition,
consumer credit has risen sharply over
the past decade as households borrow
to finance consumption spending.
The low
level of household financial wealth is
reflected in the macroeconomic data. New
Zealand has low and declining household
savings rates, has run large and
persistent current account deficits for
the past three decades, and has accumulated
one of the largest stocks of external
debt in the OECD in the process.
The
existence of broad savings policies
in other Anglo countries and their
absence in New Zealand seems to provide
a key reason for the lower level of
overall household wealth and household financial
wealth in New Zealand.
New
Zealand households have a considerably
lower level of wealth than most
other developed countries. Moreover,
this is trending in a different direction
from most other countries with
New Zealand household financial wealth
moving lower while it has been increasing
in other countries.
LOOKING AHEAD
In
general, the environment surrounding the
wealth accumulation process in New
Zealand has been supportive over the
past few decades. Indications are, however,
that the environment for wealth
accumulation in New Zealand has
become less encouraging over the past
decade and is likely to move further in
this direction over the next few decades.
The
policy environment around wealth accumulation
in New Zealand has changed
substantially over the past two decades.
In particular, many policies that
successive governments had in place
to assist and encourage people to
accumulate wealth have been discontinued;
for example, policies around
assisted home ownership, free
tertiary education, and other aspects
of the formal and informal welfare
system. Although some of these
policy changes may have been necessary,
no other policies have been
introduced to provide alternative methods
of wealth accumulation, such as
policies to encourage private saving.
These changes will make wealth
accumulation more difficult for
many New Zealanders.
We will
now examine three major trends that
will continue to affect the wealth accumulation
process by New Zealanders over
the next few decades, the
declining rates of home ownership, the
increasing student loan debt, and changes
in consumption, saving and borrowing
behaviour by households.
DECLINING HOME
OWNERSHIP
Historically,
home ownership has been the main
form of wealth accumulation for
most New Zealanders.
As
Figure 13 illustrates, home
ownership rates rose steadily
from the early 1970s to the early
1990s, peaking at 73.8%. However,
since 1991, home ownership rates
have fallen by six percentage points,
from 73.8% to 67.8%, reversing the
increase over the previous 20 years.
This is
a very significant fall over a short time
period, albeit from a high level. The
steep decline in home ownership rates
has been particularly acute among
younger age groups. Whereas overall home ownership
rates dropped by six percentage
points between 1991 and 2001,
ownership rates fell by 12.7 percentage
points for 25-29 year olds, 12.5
percentage points for 30-34 year olds,
and 10.4 percentage points for 35-39
year olds. The decline in home ownership
rates has also been acute among
single parent households.
Delaying
home ownership means that there
is less opportunity to accumulate wealth
through a lifetime.
The need
to repay student loan debts is
also likely to make it more difficult for many
young New Zealanders to assemble the
required deposit to break into the housing
market.
The
sharp decline in home ownership rates
in New Zealand over the past decade
contrasts with the experience of
other Anglo countries over this period,
who presumably have roughly similar
preferences around home ownership
as New Zealand households.
Home
ownership is rising in the UK, US and
Canada even though affordability has
worsened in the UK. New Zealand historically
had the highest rates of home
ownership among these countries,
but this is no longer the case.
GROWING STUDENT DEBT
Student
loan debt has become the largest non-housing debt category for households,
and is growing rapidly. In 2001,
student debt totalled $3.5 billion. But
by March 2004 total student loan debt
had increased to $6.2 billion, a very
rapid increase (IRD (2004)). The Treasury
(2003) projects that student loan
debt will increase to $10 billion in the
next 5 years, and the Ministry of Education
(2003) project that total student
loan debt will be $15 billion by
2020. The scheme is expected to mature
at around this date, with growth in
the overall stock of debt slowing. Currently
the average student loan balance
is $14,559 and the median loan balance
is $9,838. Just under half of the
outstanding loan balances are under $10,000
and about 75% of loan balances are
less than $20,000. However, over 100,000
New Zealanders have student loan balances of $20,000 or more and about
25,000 have balances over$40,000 (IRD (2004)).
The
Ministry of Education (2003) estimates
that students take over 9 years on
average to repay their student loan (and
this varies significantly by ethnicity and
gender). The length of time it takes
to repay a student loan is also likely
to increase through time, as average
student debt increases.
It is
likely that the growing number of young
people with significant amounts of
student debt will have a substantial social
and economic impact. This debt is
likely to significantly constrain their ability
to accumulate wealth over a lifetime
– certainly relative to their parents’ generation.
As graduates repay theirstudent loans into their late twenties and early
thirties, they are likely to delay asset
accumulation. Statistics New Zealand
notes that "The cumulative student
loan debt held by this group could lead to an inability to save and
accumulate assets when starting their
working life" (2002, p. 102).
Indeed, this is one likely
reason why home ownership rates
have been declining among the young.
And student loan debt may also
have broader effects in terms of delaying
life decisions like marriage and
children.
Many
students graduate with large
student debt and earning prospects
that are not much improved –
or working in jobs where the wage and
salary structure does not seem to be
consistent with repaying the student
loan debt. Many of these people
will spend the rest of their lives servicing
their student debt, without ever
being in a position to begin to accumulate
wealth. One likely implication
is that the number of people
with negative wealth may increase
further in the future.
In sum,
the large and increasing number of
New Zealanders with significant student
loan debt is likely to reduce the wealth
accumulated by many New Zealanders
over their lifetime relative to previous
generations. These effects will become
increasingly apparent as the number
of New Zealanders with student loans
increase and on they move into the
middle aged population in greater numbers.
It may mean that many New Zealanders
do not build an ownership stake
in the New Zealand economy.
CHANGING ATTITUDES
TOWARDS DEBT, CONSUMPTION & SAVING
New
Zealand household saving dropped significantly
in the mid-1980s as a result of
the comprehensive deregulation of credit
markets. Whereas borrowing for a
house or for consumption used to be more
demanding (in terms of deposit requirements,
the amount available and so on),
deregulation made it significantly easier
to borrow money. And households
responded by increasing borrowing.
The removal of import protection
also expanded consumption opportunities.
Brash (2002) speculates that the
cause for declining savings is that
"our incomes haven’t been growing as
rapidly as those in other comparable countries.
But the range of goods and services
available to us has increased dramatically…
If our tastes (our demand for
goods and services) are increasing faster
than our income, savings inevitably fall".
In
addition to borrowing for a house, borrowing
to finance consumption has increased
strongly. Between 1992 and 2002,
the Reserve Bank estimate that the
sum of hire purchase loans and credit
card debt rose from $2 billion to
about $7 billion.
One
effect of the student loan scheme
appears to have been to increase
the debt tolerance of people with
student debt. The March 2004
results of the Sovereign SaverPulse
survey showed a five percentage point
drop in the number of people saving for
retirement to 52%, which is the lowest
in the seven years that the survey has
been conducted. This is despite 78% of
respondents saying they did not believe
that government superannuation would
provide an adequate retirement income
(New Zealand Herald, 2004).
CONCLUDING REMARKS
Although
these issues – housing affordability,
student loans, debt culture and
so on – tend to be discussed
separately, it is worthwhile to
consider their combined effect. These
different pressures interact tohave a profound effect on the wealth
accumulation process and the expectations
that New Zealanders – particularly
young New Zealanders – have in
terms of their ability to build a future
in New Zealand and to get ahead
financially. Faced with these different
pressures, many New Zealanders
– even those who may be expected
to be doing reasonably well –
think that it will be hard to get ahead and
find it difficult to see a clear pathway
forward.
In
particular, young New Zealanders are likely
to find it considerably more difficult to
accumulate wealth over their lifetime than
previous generations of New Zealanders.
A combination of student loan
debt, worsening housing affordability
for first home buyers, and the
emergence of a debt culture, make it
likely that many young New Zealanders will
accumulate much less wealth than previous generations.
The full report may be downloaded at: http://www.nzinstitute.org/index.php/ownershipsociety/papers/
1. Wealth in New Zealand
