The wealth of a nation:
The level & distribution of wealth in New Zealand
DAVID SKILLING | ARATI M WALDEGRAVE
Wealth holdings in New Zealand are highly concentrated, with the wealthiest 10% of the population holding over 50% of total wealth and the bottom half of the population holding less than 3%. Many New Zealanders are struggling to get ahead financially, with no significant wealth accumulation over their lifetime. Overall, New Zealand’s level of household wealth is considerably lower than in other countries and household financial wealth as a share of disposable income has reduced significantly over the past decade. There are also a series of emerging challenges that will make it more difficult for many New Zealanders – particularly young New Zealanders – to advance financially over their lifetimes and build an ownership stake in New Zealand. In particular, declining home ownership rates, student loan debt, and the emergence of a debt culture all make the wealth accumulation process more difficult.
Wealth holdings are highly concentrated, with many New Zealanders having no wealth – or negative wealth
The 2001 Household Savings Survey shows that the wealthiest 10% of the population hold over 50% of total wealth and the bottom half of the distribution holds less than 3%. Median wealth in New Zealand is $68,300, with only about 28% of the population holding wealth greater than $200,000 and 43% holding more than $100,000.
Over 800,000 New Zealanders have less than $20,000 in wealth. New Zealand is unusual in having a relatively high proportion of people with negative wealth (i.e. with more liabilities than assets); 16% of New Zealanders have negative wealth, compared with 4% in Australia and 8% in the US.
The prospects for wealth accumulation by New Zealanders are likely to worsen over the next several decades
New Zealand’s current level and distribution of wealth reflect the economic, social and policy environment that has prevailed over the past several decades. In general, this environment has been supportive of wealth accumulation. However, several trends that have emerged over the past decade and that look set to continue into the future suggest that the environment will not be as favourable for wealth accumulation by New Zealand households. In particular, sharply declining home ownership rates, high and rising levels of student loan debt, and rising household borrowing all suggest that many people will accumulate less wealth over their lifetime than has been the case historically in New Zealand.
It seems likely that the proportion of New Zealanders with limited wealth is likely to increase over time, and the overall level of household wealth will be under pressure. This has the potential to have a significant effect on the functioning of New Zealand society.
THE DISTRIBUTION OF WEALTH
The 2001 Household Savings Survey indicates that holdings of wealth in New Zealand are highly concentrated. In 2001, the wealthiest 10% of the population held over 50% of total household wealth, or $190 billion out of a total household wealth of $367 billion. In contrast, the bottom 10% held negative wealth of -$3.3 billion (where liabilities exceed assets), and the bottom half of the distribution held less than 3% of total household wealth.
This is obviously an uneven distribution of wealth.
It is also apparent that many New Zealanders do not have any meaningful assets in an absolute sense. 16% of the population has negative wealth, 39% of the population has less than $20,000, and about half the population has less than $60,000 in assets. This means that about 800,000 New Zealanders have less than $20,000 in wealth holdings.
The people in the bottom quartile of the wealth distribution tend to:
• be younger than the rest of the population. Almost half of those between 18 and 24 years old have negative wealth and almost 90% have less than $20,000. This is unsurprising because many in this group are studying, have student loan debt, and are only starting to accumulate wealth as they commence working life.
• be an individual rather a couple. The median net worth for individuals is $10,300 compared with $172,900 for couples. This is partly due todifferences in the age profiles of the two groups; almost 50% of individuals are under 35 (compared with 23% of couples) and 10% of individualsare older than 75 (compared with 5% of couples).
However, even after taking age into account, significant differences remain between wealth Over the past decade or so, wealth inequality has tended to increase across Anglo countries. The wealthiest people in the US, the UK and Canada have all become wealthier relative to the rest of the population.
However, although the New Zealand wealth distribution looks approximately similar to these other countries, it appears to differ in one importantrespect. The wealth holdings of the bottom two wealth deciles seem to be significantly lower in New Zealand than in other Anglo countries. The 16% of the New Zealand population who have negative wealth is a substantially higher proportion than is observed in other Anglo countries. Statistics New Zealand (2002) report that only 6% of Canadian households and 8% of US households had negative wealth. In 2002, only 4% of Australian households had negative wealth (Kohler et al. (2004)).
THE PROCESS OF WEALTH ACCUMULATION
As expected, people accumulate wealth over their working life and then tend to spend down this wealth during theirretirement years. Whereas the median wealth for 18-24 year olds is just $100, the median wealth for 60-64 year olds is over $200,000. Similarly, whereas 47% of 18 -24 year olds have negative wealth, only 2% of people aged over 65 have negative wealth.
However, given that the median house sale price in 2003 was $305,000 in Auckland and $231,500 in Wellington (DTZ (2004)), this suggests that there will be many people who do not own a mortgage-free house by retirement.
Indeed, Harris (2003) notes that 30% of 55-64 year olds still have a mortgage liability.
Moreover, not everyone accumulates wealth as they age and many New Zealanders never acquire assets. In addition to having little wealth through their lifetime, a large number of New Zealanders will be highly reliant on national superannuation as their major source of retirementincome.
THE LEVEL OF WEALTH
The amount of wealth accumulated by New Zealanders is substantially lower than in all other Anglo countries, and indeed most other OECD countries. At an individual level, New Zealanders accumulate significantly less wealth over a lifetime than people in other countries. For example, the median wealth holding of an Australian household just before retirement (55-64 years old) in Australia is A$448,000 and the average wealthfor households in this age cohort is A$702,000 (Kohler et al. (2004)). This compares to a median wealth holding of about $250,000 for 55-59 year olds in New Zealand. Overall, for every age cohort, the median wealth holding in Australia approximates the top quartile wealth holding in New Zealand.
Across the entire wealth distribution, the level of wealth is lower in New Zealand than it is in other countries. That is, the rich in New Zealand are less wealthy than their counterparts in other Anglo countries and the middle in New Zealand are less wealthy than the middle class overseas.
Whereas household financial wealth has increased – often quite strongly – in other developed countries, it has declined in New Zealand over the past decade. Indeed, New Zealand is the only country for which we have data where household financial wealth has declined over the past decade from about 100% to 50% of disposable income.
In New Zealand, the increase in household debt has been partly driven by increased mortgage financing as house values have appreciated; people are borrowing to invest in real estate and are not making investments in the form of financial assets. In addition, consumer credit has risen sharply over the past decade as households borrow to finance consumption spending.
The low level of household financial wealth is reflected in the macroeconomic data. New Zealand has low and declining household savings rates, has run large and persistent current account deficits for the past three decades, and has accumulated one of the largest stocks of external debt in the OECD in the process.
The existence of broad savings policies in other Anglo countries and their absence in New Zealand seems to provide a key reason for the lower level of overall household wealth and household financial wealth in New Zealand.
New Zealand households have a considerably lower level of wealth than most other developed countries. Moreover, this is trending in a differentdirection from most other countries with New Zealand household financial wealth moving lower while it has been increasing in other countries.
In general, the environment surrounding the wealth accumulation process in New Zealand has been supportive over the past few decades. Indications are, however, that the environment for wealth accumulation in New Zealand has become less encouraging over the past decade and is likely to move further in this direction over the next few decades.
The policy environment around wealth accumulation in New Zealand has changed substantially over the past two decades. In particular, many policies that successive governments had in place to assist and encourage people to accumulate wealth have been discontinued; for example, policies around assisted home ownership, free tertiary education, and other aspects of the formal and informal welfare system. Although some ofthese policy changes may have been necessary, no other policies have been introduced to provide alternative methods of wealth accumulation,such as policies to encourage private saving. These changes will make wealth accumulation more difficult for many New Zealanders.
We will now examine three major trends that will continue to affect the wealth accumulation process by New Zealanders over the next few decades, the declining rates of home ownership, the increasing student loan debt, and changes in consumption, saving and borrowing behaviour by households.
DECLINING HOME OWNERSHIP
Historically, home ownership has been the main form of wealth accumulation for most New Zealanders.
As Figure 13 illustrates, home ownership rates rose steadily from the early 1970s to the early 1990s, peaking at 73.8%. However, since 1991, home ownership rates have fallen by six percentage points, from 73.8% to 67.8%, reversing the increase over the previous 20 years.
This is a very significant fall over a short time period, albeit from a high level. The steep decline in home ownership rates has been particularly acute among younger age groups. Whereas overall home ownership rates dropped by six percentage points between 1991 and 2001, ownership rates fell by 12.7 percentage points for 25-29 year olds, 12.5 percentage points for 30-34 year olds, and 10.4 percentage points for 35-39 year olds. The decline in home ownership rates has also been acute among single parent households.
Delaying home ownership means that there is less opportunity to accumulate wealth through a lifetime.
The need to repay student loan debts is also likely to make it more difficult for many young New Zealanders to assemble the required deposit to break into the housing market.
The sharp decline in home ownership rates in New Zealand over the past decade contrasts with the experience of other Anglo countries over thisperiod, who presumably have roughly similar preferences around home ownership as New Zealand households.
Home ownership is rising in the UK, US and Canada even though affordability has worsened in the UK. New Zealand historically had the highest rates of home ownership among these countries, but this is no longer the case.
GROWING STUDENT DEBT
Student loan debt has become the largest non-housing debt category for households, and is growing rapidly. In 2001, student debt totalled $3.5 billion. But by March 2004 total student loan debt had increased to $6.2 billion, a very rapid increase (IRD (2004)). The Treasury (2003) projects that student loan debt will increase to $10 billion in the next 5 years, and the Ministry of Education (2003) project that total student loan debt will be $15 billion by 2020. The scheme is expected to mature at around this date, with growth in the overall stock of debt slowing. Currently the average student loan balance is $14,559 and the median loan balance is $9,838. Just under half of the outstanding loan balances are under$10,000 and about 75% of loan balances are less than $20,000. However, over 100,000 New Zealanders have student loan balances of $20,000 or more and about 25,000 have balances over$40,000 (IRD (2004)).
The Ministry of Education (2003) estimates that students take over 9 years on average to repay their student loan (and this varies significantly by ethnicity and gender). The length of time it takes to repay a student loan is also likely to increase through time, as average student debt increases.
It is likely that the growing number of young people with significant amounts of student debt will have a substantial social and economic impact. This debt is likely to significantly constrain their ability to accumulate wealth over a lifetime – certainly relative to their parents’ generation. As graduates repay theirstudent loans into their late twenties and early thirties, they are likely to delay asset accumulation. Statistics New Zealand notes that "The cumulative student loan debt held by this group could lead to an inability to save and accumulate assets when starting theirworking life" (2002, p. 102). Indeed, this is one likely reason why home ownership rates have been declining among the young. And student loan debt may also have broader effects in terms of delaying life decisions like marriage and children.
Many students graduate with large student debt and earning prospects that are not much improved – or working in jobs where the wage and salary structure does not seem to be consistent with repaying the student loan debt. Many of these people will spend the rest of their livesservicing their student debt, without ever being in a position to begin to accumulate wealth. One likely implication is that the number of people with negative wealth may increase further in the future.
In sum, the large and increasing number of New Zealanders with significant student loan debt is likely to reduce the wealth accumulated by many New Zealanders over their lifetime relative to previous generations. These effects will become increasingly apparent as the number of New Zealanders with student loans increase and on they move into the middle aged population in greater numbers. It may mean that many NewZealanders do not build an ownership stake in the New Zealand economy.
CHANGING ATTITUDES TOWARDS DEBT, CONSUMPTION & SAVING
New Zealand household saving dropped significantly in the mid-1980s as a result of the comprehensive deregulation of credit markets. Whereas borrowing for a house or for consumption used to be more demanding (in terms of deposit requirements, the amount available and so on), deregulation made it significantly easier to borrow money. And households responded by increasing borrowing. The removal of import protection also expanded consumption opportunities. Brash (2002) speculates that the cause for declining savings is that "our incomes haven’t been growing as rapidly as those in other comparable countries. But the range of goods and services available to us has increased dramatically… If our tastes (our demand for goods and services) are increasing faster than our income, savings inevitably fall".
In addition to borrowing for a house, borrowing to finance consumption has increased strongly. Between 1992 and 2002, the Reserve Bank estimate that the sum of hire purchase loans and credit card debt rose from $2 billion to about $7 billion.
One effect of the student loan scheme appears to have been to increase the debt tolerance of people with student debt. The March 2004 results of the Sovereign SaverPulse survey showed a five percentage point drop in the number of people saving for retirement to 52%, which is the lowestin the seven years that the survey has been conducted. This is despite 78% of respondents saying they did not believe that government superannuation would provide an adequate retirement income (New Zealand Herald, 2004).
Although these issues – housing affordability, student loans, debt culture and so on – tend to be discussed separately, it is worthwhile to consider their combined effect. These different pressures interact tohave a profound effect on the wealth accumulation process and theexpectations that New Zealanders – particularly young New Zealanders – have in terms of their ability to build a future in New Zealand and to getahead financially. Faced with these different pressures, many New Zealanders – even those who may be expected to be doing reasonably well – think that it will be hard to get ahead and find it difficult to see a clear pathway forward.
In particular, young New Zealanders are likely to find it considerably more difficult to accumulate wealth over their lifetime than previous generations of New Zealanders. A combination of student loan debt, worsening housing affordability for first home buyers, and the emergence of a debt culture, make it likely that many young New Zealanders will accumulate much less wealth than previous generations.
The full report may be downloaded at: http://www.nzinstitute.org/index.php/ownershipsociety/papers/
Part 2: It’s not just about the money: The benefits of asset ownership