By Bernard Hickey
The 'new normal' is beginning to dawn on consumers and borrowers before it dawns on policymakers and the media. Figures out this week show New Zealanders have begun the long and painful process of changing their ways and restructuring the economy.
Treasury and Reserve Bank statistics show New Zealanders are now 'injecting' equity into their homes at a rate of around NZ$3 billion a year, which is a massive turnaround from equity 'withdrawal' of more than NZ$4 billion a year from 2004 to 2008.
Finance Minister Bill English trumpeted this move as a sign New Zealanders were saving more and the economy had begun the long-awaited and hoped-for restructuring away from consumption and importing to saving and exporting. But have New Zealanders really started saving and investing rather than spending and borrowing? And what might it mean for the economy if it really had started?
Firstly the figures are worth a closer look because they don't actually show increased saving. All they show is that people have stopped using their houses as ATMs to go on holiday or buy a new car or a really big flat screen television.
What is portrayed as increased saving is actually the difference between the amount that is being spent on new housing and renovations and the amount raised in new debt. As a nation we continue to spend more than we earn because we have a current account deficit.
Until that is reversed we are nowhere near saving again. A closer look at what is happening with saving and borrowing show that New Zealanders may have stopped borrowing more to spend on cars, holidays and flat screen televisions. But they have yet to really start repaying debt and then saving.
Bank lending to housing has actually risen NZ$8 billion to NZ$181.3 billion in the last two years. Lending to business has actually fallen NZ$5 billion to NZ$72.3 billion over the same period while lending to farmers has risen more than NZ$6 billion to NZ$47.8 billion.
What this shows is that New Zealanders borrowed another NZ$14 billion against the value of their land and property in the last two years. This doesn't show up as an equity withdrawal because the money was put into more land and property rather than cars and boats. But it still doesn't lessen our reliance on property investing. We need to be lending more and investing more in businesses, particularly exporting businesses, to really drive the transformation.
That's not happening yet. In fact the only part of the economy that is really saving more and repaying debt is business. But this is only the beginning. Household debt as a percentage of disposable income, which is a better measure of whether consumers are really deleveraging, shows an improvement to 154% from 158% over the last two years. But New Zealand needs to get back to closer to the 100% seen in 2000 to be anywhere near normal.
Retailers and bankers are beginning to sense the scale of what this coming and what real deleveraging might mean. The housing market has gone deathly quiet this Spring as first home buyers and investors refuse to add to their debts. Retail sales in August were flat, despite expectations of a pick-up before the GST hike. Retailers are being forced into permanent sales mode or are just plain being forced out of business.
Bankers, including KiwiBank, have even started pleading for people to borrow more.
'A lot further to go'
Once New Zealanders really start saving our bloated retail, consumption and importing sectors will feel much more pain. But this deleveraging is inevitable and can't be stopped. We are best off trying to embrace this new age of austerity and the drive for balance in budgets, current account deficits and international trade flows.
That means reducing spending, switching from consuming to exporting, and learning to live without debt. It means living simpler lives focused more on helping each other rather than trying to outspend each other. It won't be easy, but we'll be better off in the end.
Our government should help us do this by balancing its own budget and encouraging production, exporting and saving.
A tax break on bank savings, increased capital requirements for bank lending on land, a higher Core Funding Ratio to discourage foreign borrowing by our banks, local content requirements for government procurement, a land tax and a capital gains tax would be a good start.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.