Young pay for housing bonanza

Alan Bollard

The economy has been buoyed by people unlocking the wealth from rising house prices, but younger generations are paying the price, Reserve Bank Governor Alan Bollard says.

In a paper on household savings, co-written with Reserve Bank economists Bernard Hodgetts, Phil Briggs and Mark Smith, Bollard says households were apparently now consuming more than they earned in income.

The trend has accelerated over the past five years.

Although several factors bear on that, Bollard finds it telling that the decline in the savings rate has mirrored an equally steep rise in households' net worth, driven by the housing boom. Households' combined net worth rose by around $200 billion in the four years to 2005.

When mortgage borrowing by the household sector as a whole exceeds new involvement in housing, then the sector is withdrawing housing equity.

The bank estimates housing equity withdrawn over the past four years has been about $7 billion and has fuelled perhaps 15 per cent of the overall increase in consumption. "However, as in the case of Australia, much of the equity withdrawn appears to be accruing to older age groups who leave the housing market with a large nest egg, implicitly funded by borrowing by the younger buyer."

As evidence of that Bollard points to the rise in households' financial assets in recent years at the same time that mortgage debt has risen sharply.

"The housing equity extractions which have occurred in recent years have essentially involved a significant redistribution of wealth from one part of the household sector to another and from one generation to another, financed by borrowing," he said.

"Some households, particularly the older or more established ones, have benefited from a sustained period of house or farm price inflation paid for by increased borrowing by new buyers, which in turn has been largely financed from borrowing by banks overseas."

Younger generations were paying for the wealth transfer in the form of reduced housing affordability, higher debts, or by forgoing home ownership altogether, he said.

But ultimately there were limits to how much new borrowers and other home buyers were able to borrow, which meant that house prices were unlikely to rise indefinitely, he said.

There might also be limits to the inflow of new buyers into the housing market because of factors such as the ageing of the population.

And to the extent that a negative savings rate contributed to large current account deficits for the country as a whole, there might be practical limits to New Zealand Inc's ability to finance additional borrowing from overseas at favourable terms.