Economy, house values lift wealth

By JIM EAGLES

A buoyant economy and a strengthening housing market increased New Zealand household wealth last year for the first time in 2 1/2 years.

The WestpacTrust Household Savings Indicator for the final quarter of last year shows that our net worth rose $3.7 billion to just under $207 billion.

That was up on both the $203 billion estimated at the end of the previous quarter and the $204 billion recorded a year before.

Although this is the first annual increase in household wealth since September 1999, it is still below the levels recorded in 1997.

The biggest rise occurred in cash and term deposits, which jumped $1.6 billion over the quarter. Managed funds also grew by $900 million, although that was more to do with a rebound in share prices than increased savings.

WestpacTrust economist Donna Purdue said the figures confirmed that "cash and term deposits have remained the preferred investment choice as volatility in international markets continues".

The other big increase came in the form of a $2.1 billion rise in the value of housing nationwide in the quarter.

That was largely driven by a rise in house prices, which climbed 1.2 per cent in the quarter and are now 2.5 per cent higher than they were a year ago.

On the other side of the ledger, New Zealanders continued to borrow more.

Households borrowed an extra $1.6 billion during the December quarter and household liabilities ended the year 7.1 per cent higher than 12 months previously.

In the last few years the increase in debt levels has generally outpaced any rise in asset prices, with the result that debt stands at 111 per cent of household disposable income.

But last year the increase in borrowing was more than balanced by the rise in asset values, producing a slight improvement in the debt-to-wealth ratio.

Mrs Purdue said the improvement in household net worth had been fuelled by strong growth in the domestic economy.

"The recent hard-earned fortunes are now filtering through the New Zealand economy, bringing higher household incomes, low unemployment and positive net migration. All of these factors have helped to underpin a rise in asset prices, particularly for housing."

The bank says house prices will continue to rise - driven by low interest rates and immigration - underpinning further improvements in household net worth.

"However, the economy remains sufficiently different in 2002 to ensure that we do not see a repeat of the mid-1990s, when asset prices soared," said Mrs Purdue.

Over the past year low interest rates had allowed households to take on more debt without increasing their servicing costs, she said. "But with better economic prospects ahead, we are likely to see higher interest rates as inflationary pressures begin to appear.

"Higher debt-servicing costs will cause households to either reduce their debt or at least stop accumulating debt as rapidly ...

"This will act to constrain household consumption and hence economic growth over the coming year as consumption growth, at best, matches income growth."