This love affair should end

The romance in our love affair with property may be over, but we remain locked in to a marriage of necessity for now. A quickie divorce would be too financially painful in the short term, but we do need to plan for an eventual parting of the ways if our economy is to grow and thrive in the new world of lending constraint.

Reserve Bank figures out this week show that 97 per cent of household net worth is still tied up in housing, despite the financial crisis and house prices remaining below their peaks from three years ago. That 97 per cent figure is unchanged from the end of 2007. The sheer scale of the wealth in our houses and the importance of it in our economy and our personal financial lives cannot be understated.

The value of our houses is just over NZ$600 billion, which is more than 40 times the NZ$15 billion invested directly by households in the stock market. Households have around NZ$180 billion of debt, including around NZ$168 billion of mortgages and NZ$12 billion worth of personal loans and credit card debt. See more charts here.

That means the equity tied up in housing is around NZ$420 billion. It is the reason so many New Zealanders, particularly older New Zealanders, feel wealthy and relatively relaxed about their retirements...for now.

Many have, until now, decided to rely on that housing wealth as a top-up for their retirement, either by owning retirement properties that generate a regular cash return or downsizing upon retirement to turn that equity into cash.

New Zealand really does have all its eggs in the one basket. The trick for the government, policymakers and voters is to gently take some of the housing eggs out and replace them with other types of eggs over the next couple of decades without creating an almighty mess.

The pressures are immense. As our population ages many of the retirees will be looking to extract some of their equity from their houses to supplement their retirement incomes or to pass it on to the next generations. That will press down on prices.

Secondly, the banks have stopped pumping easy, cheap and foreign money into the housing market because of the global financial crisis. That means there is less cash support for current prices and it is also making other savings choices more attractive. The banks are being forced by both their own shareholders and the Reserve Bank to raise money from local and longer term sources. That means they are lifting term deposit rates relative to the Official Cash Rate.

The banks are also having to compete against companies and governments for those term deposits. In coming years many elderly home owners will face the relatively attractive option of taking some cash out of their houses and saving in government or corporate bonds.

New Zealand companies will also want to compete hard for those savings when they issue new shares. New Zealand needs a much more liquid and robust stock market to fund the growth of its companies.

The big picture then is that New Zealand's households need to reduce their over-reliance on housing. So does our economy. We'll find out more in Thursday's budget about how committed John Key and Bill English are to fostering that reorienting of our economy.

* Bernard Hickey