KEY POINTS:
Housing affordability and KiwiSaver, two of the major business issues this year, are interrelated.
The latter was introduced to encourage individuals to save and acquire more financial assets. This should make New Zealanders far less reliant on residential property, take the steam out of the housing market, generate
badly needed funds to invest in companies that will create better paying jobs and make dwellings more affordable for young families.
To understand why KiwiSaver was introduced we need to compare New Zealand with Australia in a number of specific areas.
There has been a dramatic increase in personal debt in both countries with New Zealand's household debt to Gross Domestic Product (GDP) ratio surging from 34.5 per cent to 97.7 per cent since 1990 and Australia's from 46.4 per cent to 110 per cent over the same period.
These figures are consistent with many other developed countries where baby boomers have taken advantage of aggressive lending policies by financial institutions. Much of this debt has been invested in residential housing or borrowed for general consumption against the increased value of the family home.
The massive increase in lending has flowed through to the housing market with prices and values surging dramatically, particularly since 2000. The total value of residential property in New Zealand has risen from 173.6 per cent of GDP to 327.5 per cent since 1990 while the increase in Australia has been similar, from 190.5 per cent to 328.6 per cent of GDP.
The similarities between New Zealand and Australia end at this point because we are almost totally dependent on a "borrow and invest in residential property" strategy whereas our Tasman neighbours have far more diversified investment strategies.
The managed funds and sharemarket capitalisation figures clearly demonstrate the benefits of Australia's compulsory superannuation scheme and the extent to which individuals across the Tasman have diversified into financial assets.
The Australian managed funds to GDP ratio has risen from 50 per cent to 129.6 per cent since 1990 whereas the New Zealand ratio has remained static at around 38 per cent. In other words Australians have A$1378.9 billion of managed funds invested in shares, fixed interest securities, cash and other relatively liquid assets whereas New Zealanders have only $65.2 billion of managed funds.
As a consequence the New Zealand sharemarket is one of the smallest in the developed world with its total capitalisation representing just 38.1 per cent of GDP whereas the ASX capitalisation/GDP ratio is an impressive 139 per cent. In simple terms we are infatuated by residential housing and are borrowing huge sums of money offshore to finance this obsession.
As a consequence the productive sector, particularly up-and-coming entrepreneurs, find it extremely difficult to raise equity in New Zealand.
The NZX is relatively minuscule and our exports/GDP ratio has fallen from 21.3 per cent to 19.4 per cent since 1990 where Australia has raised its exports/GDP ratio from 12.4 per cent to 16 per cent over the same period. Agriculture, horticulture, fish and forestry commodities still represent in excess of 60 per cent of our total exports.
Housing affordability has become a major problem because far too much capital has been invested in residential property, which has pushed up prices, and far too little has been invested in productive companies that have the ability to create more exciting and highly paid jobs.
For example, the average wage in Australia, in New Zealand dollar terms, is 51 per cent higher than ours but a house costs only 25 per cent more across the Tasman. Meanwhile the median sale price of an existing home in the United States was 23 per cent lower than New Zealand in December yet wages are higher in the US.
Mortgage interest rates are also much higher in New Zealand then Australia and the United States.
The solution to the housing affordability issue is to take some heat out of the residential housing market but, more importantly, encourage investment in productive and export oriented companies that will create higher paying jobs.
The KiwiSaver scheme is an important step in that direction yet it has been subject to unwarranted and short-sighted public criticism in the Business Herald by Gary Osborne, a former economics teacher at Kelston Boys High School, and in a research paper by Professor John Gibson of Waikato University.
Osborne claimed that individuals would be better to stay out of KiwiSaver because of the downturn in sharemarkets in its first quarter of operation.
This was a ridiculous comment because the scheme is a long-term solution to our under-investment in financial assets and investors actually had a very good December quarter when the Government contribution of $1000 per individual is taken into account.
Gibson argues that KiwiSaver will only benefit the wealthy and will increase inequality in New Zealand. There is no doubt that the scheme will directly benefit contributors more than non-contributors but if KiwiSaver funds are invested in companies that can create better employment opportunities then the lower paid should benefit. In addition there are a large number of government transfer schemes, including Working for Families, which assist the less well off.
The other important issue in relation to our over-investment in residential housing is the aging of the baby boomer generation
Baby boomers were born between 1948 and 1964 and they will reach the age of 65 between 2011 and 2029.
This generation, which began to purchase residential property in the 1970s, has been the main catalyst behind the recent housing bubble.
As boomers entered middle age, and reached their maximum earnings and borrowing capabilities, they invested huge sums of money in the housing sector.
But individuals become net sellers of residential property when they get older and this characteristic is expected to have a significant impact on the housing market from 2011 onwards when the ratio of senior citizens to working adults will surge to unprecedented levels.
This adverse situation, as far as the housing sector is concerned, could be magnified in New Zealand if younger people continue to cross the Tasman in search of higher paying jobs and the huge expansion in the retirement village sector continues.
Investors are putting big valuations on retirement village companies because they believe that their current rate of growth will be maintained.
But if there is a mass movement of baby boomers to Metlifecare and Ryman villages who is going to buy their homes?
To fill the gap there will have to be a massive increase in immigration but how will we attract new migrants if we don't have growth-oriented companies creating exciting and well-paid jobs?
KiwiSaver is not perfect but it is the first major attempt to reduce our over-dependence on residential property.
Hopefully, a reasonable proportion of KiwiSaver funds will be invested in New Zealand companies that have the ability to create high-paying jobs.
This is the best solution to our housing affordability problem.
* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
