PensionReforms' summary and comments
House ownership is an important part of any country's economy.  For a household, the financial commitment to buy a home is probably the single biggest decision a household makes.  Multiplied across a country, the impact on the economy can be significant, particularly when major changes are under way.

"Housing is an important sector of the economy.  It has widespread implications for investment, banking, saving and employment.  Home ownership has been linked to building social capital and a sense of community.  Furthermore housing equity is a significant element of retirement accumulation for many New Zealanders."

A new longitudinal panel survey, the Survey of Family Income and Employment (SoFIE), is starting to produce data on the financial behaviour of New Zealand households over time.

This report studies housing wealth in household portfolios and estimates the impact on rates of saving that would be needed to smooth consumption between pre- and post-retirement. It also looks at the effect of some home equity withdrawal on the required saving rates.

"The main findings of this study are:
. 60% of households are recorded as owning a home;
. Almost half of home-owning households have no mortgage debt [and about half of those with debt have gearing of less than 50%];
. One in six households own residential investment property;
. One in twelve households own a rental property;
. Patterns of property ownership in New Zealand are similar to those in selected comparator countries;
. Housing represents a major share of household wealth [the value of equity being about 56% of the value of the median household's assets], and this share has risen in line with the increase in house prices;
. The composition of household portfolios is comparable to other selected countries except for the USA;
. Empirical results indicate that even if households planned to draw down half of housing equity to support retirement income, the impact on the saving rate needed to smooth consumption would be modest."

Widening the definition of assets for couples and including the value of the Tier 1 pension ("New Zealand Superannuation") changes the numbers - now, housing comprises 38% of average total wealth (mean housing wealth to mean total wealth) though the change for the median household is likely to be less significant.

The report uses a similar technique to assessing required saving rates to smooth consumption as the authors used here on an earlier (2001) set of different household asset data.  The results are broadly consistent though more households than before need to save to meet a relatively stiff retirement income target.

As noted, the report downplays the potential of housing equity withdrawal to help finance retirees' income needs:
"In addressing the role of home equity in retirement income we adopt a life cycle model of consumption smoothing.  We find that even if half of housing equity is converted to retirement income, the reduction in the prescribed saving rate is still modest.  The prospect of reverse equity mortgages may well play a precautionary role in that housing equity represents a store of value that could be drawn on to meet unanticipated expenditures (such as health and extended life expectancy).  However, the results given in this paper suggest that it should not be viewed as a substitute for `adequate' levels of retirement saving." 

PensionReforms thinks that the report gives further evidence that citizens as a whole tend to behave rationally when making what seem like complex decisions.  As further data are released from the longitudinal SoFIE over the next few years, it will be interesting to track households' responses to the recent run-up in house prices and the current softening.  PensionReforms will be surprised if New Zealanders became suddenly irrational.  206 (file size 435KB)