Household Debt in New Zealand

In recent years, the total debt of the household sector has risen appreciably. This has led to concerns about “excessive” borrowing, and to the possibility that some households may have become unduly vulnerable in the event of unexpected shocks. This paper draws on both aggregate and household level data to assess the extent and composition of household debt; to analyse the distribution of debt in relation to income; to examine the factors associated with high ratios of debt servicing relative to income and consider the extent to which individuals and households are vulnerable to unexpected shocks. Between 1982 and 2007, household debt grew from 33% to 149% of household disposable incomes. However due to the faster growth of assets, net wealth grew from 319% of disposable income in 1982 to 430% by 2002 and 604% by 2007; ie, even before the sharp rise in house prices, the overall balance sheet of households was stronger in 2002 than any time in the previous two decades, despite the increase in debt levels. Mortgages represented about 85% of total liabilities, the balance made up of credit card debt and student loans. Higher absolute debt levels amongst couples were associated with home ownership and higher levels of assets and income. Maori and Pacific Island couples recorded liabilities some $6,500 greater than European couples. The paper defines those as vulnerable as having debt servicing obligations exceeding 30 percent of their gross income. It is estimated that in 6.2% of non-partnered individuals and 8.1% of couples fell into this category in 2004. When the underlying levels of income, asset values and mortgage interest rates were adjusted to correspond to values in 2008, it is estimated that these proportions doubled. Those at risk were defined as having debt servicing obligations exceeding 30 percent of their gross income and, at the same time, recording negative net wealth. In part, negative net wealth arises because of lack of any assets that match the liability of student loans. Some 1.9% of individuals were deemed at risk, falling to 1.5% when student loans were excluded. Student loans distort the net wealth estimates of those holding them as only the liability with no corresponding asset is recorded. When this is allowed for, the share of nonpartnered individuals at risk drops further. The unit record data ended in 2004. However the paper makes projections to 2008. For non-partnered individuals; there was little or no change in our estimate of the proportion with negative net wealth who also had debt servicing costs exceeding 30% of their income (ie, at risk). However for couples our estimate of the proportion at risk rose from 0.8% to 1.1%, corresponding to an increase from about 6,000 to 8,000 families.Household debt; New Zealand; vulnerability

A Simple Model of Housing Rental and Ownership with Policy Simulations

The housing market is both large and complex. This paper develops a simple model that captures the essential features of the supply and demand for housing, and which is used to evaluate the impact of a range of policy interventions. Increases in the stock of housing would reduce rents and house prices. A reduction in tax concessions for landlords would raise rents and moderate house prices. Additional subsidies for owner-occupancy would tend to reduce rents and raise house prices. Significant reductions in rents and house prices would follow a fall in the cost of housing, through, for example lower regulatory and consent costs. Falling real interest rates result in lower rents, higher house prices and lower owner-occupancy rates. Despite the widespread attention owner-occupancy rates have attracted, the paper concludes that they are not a particularly helpful guide to the state of the housing market. Typically they are quite insensitive to policy interventions, a result that follows from the integrated view of both the rental and ownership market, adopted in this study.Housing markets; New Zealand; rental and owner-occupancy; elasticities; rents; house prices; policy simulations

Population Ageing and Social Expenditure in New Zealand: Stochastic Projections

It is widely recognised that as the population ages there will be potentially significant implications for a wide range of economic variables, including in particular the fiscal costs of social expenditures. Long term fiscal planning requires estimates of the possible future path of public spending. This paper presents projections for 14 categories of social spending. These projections are based on detailed demographic estimates covering fertility, migration and mortality disaggregated by single year of age and gender. Distributional parameters are incorporated for all of the major variables, and are used to build up probabilistic projections for social expenditure as a share of GDP using simulation. Attention is focussed on health expenditures which are disaggregated into seven broad classes. In addition we explore the impacts of alternative hypothesis about future health costs. While it can be predicted with some confidence that overall social expenditures will rise, the results suggest that long term planning would be enriched by recognising the distributions about point estimates of projected social costs.Population, projections, stochastic simulation, social expenditure, fiscal costs, New Zealand

Saving Rates of New Zealanders: A Net Wealth Approach

Reliable estimates of actual household saving rates in New Zealand have proved elusive as existing sources of data have in the past given disparate estimates, making it difficult to reach a consensus of the real rate of household saving. For the first time in New Zealand, however, longitudinal data on the assets and liabilities of households at the unit record level are becoming available from Statistics New Zealand’s multi-year national longitudinal Survey of Family Income and Employment (SoFIE). In this paper we first update estimates from the Reserve Bank’s aggregate data on the household sector (a stock approach) and those from Statistics New Zealand’s national accounts (a flow approach). These continue to give widely different estimates of the overall household saving rate, although both were negative in 2008 and both below their long-run trend values. We then present initial estimates derived from SoFIE by comparing individuals’ net wealth in 2004 with that in 2006 and computing the implied real saving rate on an annual basis. This yielded an overall median estimate of 16%. This is virtually the same as the long-run average annual saving rate measured from the aggregate household balance sheet from RBNZ. Furthermore, the estimated saving rates between 2004 and 2006 for the whole household sector in total are almost identical using RBNZ and SoFIE data. However, it must be stressed that median estimates should be complemented with a measure of dispersion. There is a strikingly wide distribution of saving rates. For example across many categories of individuals around 40% are estimated to have had a decline in net wealth, implying a negative rate of saving. Initial explorations into the reasons for this are undertaken in the paper, but as yet are not fully understood. Measurement errors in the data can account for some of the disparities but much remains for further research. Finally we demonstrate that over the period 2004 to 2006, passive saving in the form of the revaluation of house prices constituted a major part of the total change in net wealth. After removing owner-occupied property as an asset, the median saving rate remained positive at 5%, close to the long run average rate from the aggregate RBNZ data after correcting for changes in house prices.Net wealth; saving; saving rates; unit records; permanent wealth; transitory components; New Zealand

The Role of R&D in Productivity Growth: The Case of Agriculture in New Zealand: 1927 to 2001

Productivity growth is a key determinant of rising living standards. The agricultural sector has been an important contributor to the overall growth of productivity in New Zealand. The average rate of multifactor productivity growth in agriculture from 1926-27 to 2000-01 was 1.8%. We find evidence that this rate has been increasing especially since the reforms of the 1980s. This paper estimates the contribution that R&D has made to agricultural productivity. It develops a theoretical framework based on the stock of knowledge available to producers. This model incorporates foreign stocks of knowledge and the spill-in effect for New Zealand. The estimation allows for extended lag effects of research spending on productivity. We find that foreign knowledge is consistently an important factor in explaining the growth of productivity. It appears that the agricultural sector relies heavily on drawing on the foreign stock of knowledge generated off-shore. The contribution of domestic knowledge generated by New Zealand’s investment in R&D is less clear cut. However, there is typically a significant positive relation between domestic knowledge and the growth of productivity. We find a wide range of estimates of the return to domestic R&D. The results are sensitive to the type of model used and the specification of the variables. Based on our preferred model we estimate that investment in domestic R&D has generated an annual rate of return of 17%. The results underscore the importance of foreign knowledge in a small open economy. The very existence of foreign knowledge may be a necessary condition for achieving productivity growth in a small open economy. However in no way could it be argued that this was sufficient. Having a domestic capability that can receive and process the spill-ins from foreign knowledge is vital to capturing the benefits. The challenge is to be able to isolate those effects from aggregate data for the agricultural sector. In that task we claim only modest success.New Zealand; technological change; R&D; productivity; economics of knowledge; spillovers; rates of return; agriculture

A DIFFERENTIATED GOODS MODEL OF THE EFFECTS OF EUROPEAN POLICIES IN INTERNATIONAL POULTRY MARKETS

The Common Agricultural Policy increases European poultry production costs, prohibits imports, increases domestic prices, and subsidizes exports. This policy has displaced some U.S. exports. However, the net impact in the U.S. has been quite modest, even assuming poultry is homogeneous, independent of source country. Costs to U.S. producers are almost entirely offset by gains to U.S. consumers. Effects in the U.S. are even smaller when imperfect substitutability between poultry from different countries is accounted for. A retaliatory U.S. export subsidy would have more dramatic effects in U.S. markets.International Relations/Trade,

The Impact of Workplace and Personal Superannuation Schemes on Net Worth: Evidence from the Household Savings Survey

The central question addressed in this paper is: does having a workplace or personal superannuation scheme result in a higher level of accumulation for retirement? The paper presents a range of information about the participation and level of holdings in workplace and personal superannuation schemes based on data from the Household Saving Survey (HSS). While the proportion of people holding a scheme is small (around 10%), the value of a scheme for those enrolled represents about one third their total net worth. There is evidence that being enrolled in a workplace scheme is associated with higher levels of total net worth, yet this is not true of personal schemes, once several personal characteristics have been controlled for. Nevertheless, it is evident that those in either workplace schemes or personal have not fully substituted this form of saving for other vehicles. In fact in all cases there appears to be complementarity, whereby higher holdings in a scheme are associated with higher holdings in other forms of savings. Typically, an additional dollar invested in a workplace scheme is associated with higher total net worth of between one and two dollars, while for personal schemes the figure typically exceeds two dollars. Two possible explanations for this arise. The first is that by enrolling in a scheme an individual acquires heightened awareness of the importance of retirement saving and saves additional amounts in other vehicles. An alternative hypothesis is that there may be some self-selection bias; those who have enrolled might be more inclined to save than the population as a whole. There is no direct way to use the data to discriminate between these two possibilities. However holding constant a wide range of other factors (including age, income, ethnicity, residence, etc) it is reasonable to suppose that the more likely sources of selection bias may have been controlled for. If this is the case then the finding that more holdings of workplace superannuation are associated with greater total retirement wealth may well have arisen from an "awareness" or "recognition" effect of belonging to a scheme. In this event, policies which foster enrolment might lead to greater retirement accumulation by those in a scheme.Superannuation; Retirement; New Zealand; Net Worth: Saving; Household Behaviour

Household Saving Behaviour in New Zealand: A Cohort Analysis

This paper seeks to improve our understanding of household saving behaviour. It is based on an analysis of unit record data from March years 1984 to 1998 taken from the Household Economic Survey (HES). There are limitations of the data set but it provides the only available estimates of income and expenditure, from which saving is estimated as a residual. The HES is a series of cross-sectional surveys rather than a true panel, so we construct synthetic cohorts rather than tracking individual households. We use a range of regression models to separate out the effect of age, birth-year cohort and year on saving rates. The typical age profile for savings is hump-shaped, peaks around age 57 and does not become negative at older ages. Such a profile appears to have shifted down for the cohorts born between 1920 and 1939 relative to the younger and older cohorts studied. This pattern of cohort effects is robust to the inclusion of conditioning variables and to the trimming from the sample of households with either negative or very large ratios of savings to consumption. Preliminary investigation supports the hypothesis that changes in the economic and policy environment help explain the different saving behaviour of different birth cohorts. Tentative results suggest that more favourable environments are associated with lower rates of lifetime saving, although more research is needed to confirm this finding.Household saving, lifecycle, age, cohorts

Household Saving Behaviour in New Zealand: Why do Cohorts Behave Differently?

The aim of this paper is to add to the understanding of saving decisions by households. The saving behaviour of households is found to differ depending on the birth cohort of the household head. This paper seeks to explain why this pattern might exist. It is based on an analysis of synthetic cohorts derived from unit record data taken from the Household Economic Survey (HES) for the March years 1984 to 1998. The need to use synthetic cohorts arises as the HES is not a longitudinal panel survey, but rather a time series of independent cross-sectional samples. We use a range of regression models to separate out the effect of age, birth-year cohort and year on saving rates. The typical saving rates for the cohorts born between 1920 and 1939 are found to be significantly lower relative to the younger and older cohorts studied. This pattern of cohort effects is robust to the inclusion of conditioning variables; to the trimming from the sample of households with either negative or very large ratios of savings to consumption, and to different definitions of saving. Some exploratory investigation supports the hypothesis that changes in the economic and policy environment help explain the different saving behaviour of different birth cohorts. Tentative results suggest that more ?favourable environments are associated with lower rates of lifetime saving.Household saving rates; cohort effects; New Zealand; economic and social policies

Affordability of Housing: Concepts, Measurement and Evidence

There has recently been widespread public debate and media attention around housing affordability. This paper discusses the concept of affordability as it applies to housing, examines the approaches used to measure affordability, and then documents the aggregate evidence for New Zealand over the last twenty years. We largely use the Household Economic Survey conducted by Statistics New Zealand to obtain our data. We conclude that affordability is difficult to define and that there is no consensus as to the best way to measure it. Using a range of measures, we examine the trends over time. Our data reveals no long-term trend in affordability when considering all measures. Different measures show different movements over time. Affordability has appeared to move in cycles over the last twenty years.housing; affordability; New Zealand