Average wealth soars but it's a house of cards

Quotable Value figures showed house prices rose 4.8 per cent for the quarter.

Kiwis' wealth surged in the first three months of the year as house prices put on one last growth spurt.

But economists are warning of downsides to households' concentration of assets in property, including the risk their wealth could be eroded again should the housing market soften as predicted.

Spicers' Household Savings Indicators puts the average household net worth at $341,500. It rose at its fastest pace for two years, by 4.9 per cent or $14,800, in the three months to March as house prices continued to rise. In the year to March, net wealth - assets minus debts - rose by $42,250 or 15.9 per cent, driven mainly by another strong quarter for house prices.

"Rather than reducing, as has been widely forecast for some time, house price growth accelerated during the March 2006 quarter to its fastest pace in a year," said Rozanna Wozniak, chief economist for Spicers, a funds manager.

Quotable Value figures showed house prices rose 4.8 per cent for the quarter and an increase in the number of houses over the period lifted the total value of house assets by 5.2 per cent. Nevertheless, Wozniak pointed to more recent data indicating the market was now starting to slow.

Wozniak believed the "huge" increases in wealth, averaging about $125,000 per household over the past three years, had boosted confidence and spending behaviour.

However, although the gains in wealth due to housing were real, they were not money in the bank. "It's not like we can sell our house and spend because we still have to live somewhere," she said.

People had been living beyond their means for some time. "We've actually been spending more than we earn and we've been relying on increases in the value of our home to generate perceived savings. It does provide us with a false sense of security, particularly if we believe it's going to solve all our problems in retirement, which I don't think it is."

Many people had not felt the need to save because of the value accumulating in rapidly appreciating homes.

"We can't continue that over the long term, especially if we're entering into a period now where house prices aren't going to be rising at the same pace and debt levels are continuing to rise at a pretty rapid clip," she said.

"A huge chunk of our wealth is tied up in property ... so we're pretty poorly diversified."

While any improvement in wealth was encouraging, ANZ head of market economics Cameron Bagrie was also concerned at the concentration of assets in property.

With about 70 per cent of peoples' wealth in housing assets "that's a very heavily undiversified portfolio and runs counter to classic finance theory", he said.

Bagrie said that, if house prices remained flat while incomes continued to grow at 4-5 per cent, "your wealth to income is dropping.

"In many ways, it is a house of cards - it's lovely to make a lot of money on property and sell out of your house but then you've got to buy in exactly the same market."

Standard property cycles tended to last 10 years, with five years of boom times and five years of doing nothing.

"At the moment, we're just starting year six," he said.