Figures show we're saving more than we're spending

New Zealanders appear to be finally shaking off their borrow and spend mentality with household savings growing at nearly five times the rate of household debt last year.

Reserve Bank figures show that the value of household financial assets, which includes money invested in bank deposits, shares, superannuation schemes and managed funds, increased by $8.3 billion last year, while household debt, which includes mortgages, credit card spending and personal loans, grew by just $1.75b.

The increase in savings and unwillingness to take on extra debt, combined with the ongoing resilience of house prices, should lead to a steady improvement in New Zealanders' overall net worth.

The turnaround is especially welcome because figures compiled by the Sunday Star-Times show that average net worth per household has increased by just 2.4 per cent during the difficult economic conditions of the past five years.

The Star-Times has taken the Reserve Bank's household assets and liabilities figures and divided them by the estimated number of households in the country to produce a household balance sheet.

This shows that cash assets - bank deposits, superannuation, shares and managed funds - averaged $132,996 per household in March this year, an increase of $11,709 (9.7 per cent) on March 2006, before the onset of the global financial crisis and subsequent economic downturn.

However, this was almost matched by a $10,523 (10.4 per cent) increase in average debt per household over the same period.

When a small improvement in house values over the same period is factored in, this increased overall net worth (the amount by which the value of assets exceeds liabilities) to an average $404,302 per household, a negligible 2.4 per cent gain on 2006.

This suggests we've held our noses above water, but haven't been able to significantly improve our overall wealth. Indeed, when effects of inflation are factored in, we've probably gone backwards.

The figures show some major changes in our saving and spending habits over the same period. The average amount of money invested in superannuation schemes has increased by 35.5 per cent, while the amount of money held in bank deposits and other fixed interest investments such as bonds has increased by more than 25 per cent.

However, this appears to have come at the expense of the sharemarket and managed funds which are less popular, with the investment in shares declining by 22.5 per cent per household and managed funds declining by 17.6 per cent.

On the debt front, mortgages increased by an average 12.3 per cent per household and credit card debt by a whopping 19.6 per cent.

Other debt, such as hire purchase and personal loans, showed a sharp drop, declining by an average $1471 per household.

Housing, however, remains the country's main store of wealth, with residential property accounting for an average 74 per cent of household assets.

That could leave people susceptible to any substantial fall in house prices or increase in mortgage interest rates, although there appears little likelihood of either in the current market.

The shift in saving and borrowing patterns could start to become ingrained behaviour with many people, according to Retirement Commissioner Diana Crossan.

She said people who lived through the Great Depression developed thrifty habits that stayed with them throughout their lives. Even when their financial situation improved considerably later in their lives, their attitude to spending money did not change.

"The generation that came through the Great Depression never got over it really," she said. "People have moved out of shares and managed funds and into cash [deposits] and that's a flight to safety. So it will take a long time for people to see a boom again."

Poor advice given by many financial advisers in the past, the collapse of many finance companies and investment schemes and volatility on the sharemarket could make it difficult for fund managers to win back the public's confidence.

The losses many investors suffered meant the public's perceptions of fund managers and advisers had often been tainted by the actions of others, and the sector had a long way to go to win back people's trust, Crossan said.

The drop in personal loans and hire purchase and the corresponding rise in credit card debt was worrying, Crossan said, because it suggested people were financing many purchases on their credit cards, when they may be able to get a cheaper interest rate to fund the same purchases by taking out a personal loan.

Sunday Star Times