One question households may increasingly start to consider is: am I happy with my rate of return?
A turbulent time over the past four years has had many opt for the relative security of bank deposits (or, in the case of KiwiSaver, conservative funds that are heavily weighted to cash or fixed income).
However, interest rates are low, and future lifts are likely to be gradual and still seemingly distant. Sharemarkets have delivered strong capital gains at times since the Global Financial Crisis started to abate, and some shares have been delivering high dividend yields. But share prices can get whipped around by global volatility, and Europe has plenty of potential to snatch market dislocation from the jaws of stability.
Households are increasingly getting their financial house in order and are in a position to build up cash. If a benign risk environment prevails, they may develop an appetite and greater understanding for a wider range of assets than past favourites of bank deposits and bricks and mortar.
Households have improved their savings since the recession ended. Recent household deposit growth within the banking system has touched 8-9 per cent per annum growth rates recently, after dipping to around 2 per cent in the immediate wake of the recession. The household measure of saving (income less expenditure) turned marginally positive in 2011 for the first time since 1993. Households have clearly been able and willing to accumulate spare cash, notwithstanding the modest nature of the economic recovery and low level of interest rates relative to the last boom.
That better savings performance has occurred while households have also been improving their debt ratios. In the last boom, household debt growth well exceeded household income growth, at its peak growing around 17 per cent per annum. Similarly, household spending growth also exceeded income growth. It was a virtuous circle of rising house prices, strong employment and wage growth that reinforced further growth in house prices and spending.
Behaviour changed markedly over 2008 and 2009 as first the housing market weakened in the face of high valuations and high interest rates, and then as recession bit harder in the midst of the Global Financial Crisis. Net debt growth slowed markedly from double-digit rates in early 2008 to a low of 1 per cent at the start of 2012.
Net debt growth is still occurring but is weak. Underlying loan demand is picking up slightly, illustrated by increased mortgage approvals by banks and the lift in house sales turnover. However, net debt growth is being muted by mortgage repayments in Christchurch following insurance/Red Zone settlements and, anecdotally, some borrowers still rolling off fixed rates onto lower floating rates but maintaining high repayments.
The overall trend in household indebtedness is a reduction in debts relative to income. The dollar value of collective household income has been growing around 5-6 per cent over the last couple of years after slowing markedly during the recession. With debt growth low, particularly over 2011, the ratio of debt to income has started to fall noticeably. Debt growth will lift over the next couple of years from the current pace of 1.3 per cent but is likely to remain weaker than income growth as New Zealanders continue to lift within their means. So the reduction in debt relative to income should continue over the next 2 to 3 years, though at slower pace than over 2011. Debt to income peaked at 154 per cent in mid 2008. By the end of 2011 it had fallen to 142 per cent. By the end of 2014 it could potentially fall to the 130-135 per cent range, assuming income growth continues to outstrip debt growth.
Debt servicing costs relative to income had fallen to 9.3 per cent as at the end of 2011, close to the 9 per cent average over 1995-2003, a period when debt servicing costs were relatively stable (and presumably comfortably sustainable). Further falls in debt relative to income would keep servicing costs comfortable once mortgage rates eventually rise to more normal levels.
So households are still in the process of reducing their collective debt ratios, and will likely continue to at a gradual pace over the next couple of years. But, happily, they are evidently still able to build up spare cash even as that adjustment takes place and consumer spending still grows.
Nick Tuffley is Chief Economist (Institutional Banking and Markets) ASB Institutional.