We might all have feelgood pheromones but - where has the money gone?

Over the past decade the NZ Economy has been rolling along just fine.

The annual rate of growth is recorded at 3.75% and gross domestic product (GDP) outpacing the OECD 10 year average. Every where you look the news has been good. Interest rates are stable, wages rising modestly, the NZ dollar has been great for consumers (not so for exporters, sorry), stock markets have performed well and employment is at 20 year highs.

But the dark cloud amongst this sunny picture is that many New Zealanders have not turned this period of plenty into real, accessible wealth. Despite rising wages and strong employment we are deeply in debt.

The Reserve Bank of NZ (RBNZ) suggests household debt has rocketed as a percentage of income from 50% in the 1980’s to now 140%. New Zealand’s net savings ratio is now negative 12.30% of income (in 2004) down from a peak in 1980 of 5.80%.

How could this be so? We have enjoyed a prolonged period of prosperity and we have been making good money. We are a hard working nation.  How have we got so deeply in deep – easy; we are not good at managing cashflow for long term wealth creation.

Our high debt carry and low levels of savings means few of us are prepared for the down times of our economy. NZ will spend time in the economic gloom with higher unemployment and maybe higher interest rates, and many will have little to carry them through the bad times – which might be just around the corner!

Rainy day money is not in the vocabulary of many, they have never lived in bad times. Much of the money NZ’ers earned in the last 10 or 20 years has gone into residential property.  Many home owners would argue that their ‘retirement saving’ is into their property and they will sell and downsize when they are ready.

In reality this is not as easy as it sounds, emotional attachment and convenience make it a difficult move. Transaction costs, both selling and buying and the state of the market also need to be factored into this thinking.

The long upward trend in housing values may make it difficult to believe that busts do happen in property as well as other assets. House prices can decline for long periods and the most recent long period maybe in Japan which saw massive upswings in the 1980’s only to see prices drop in the 13 consecutive years from 1991 to 2004.

Despite years of improving employment and a strong economy, many NZ’ers have insufficient savings and massive debt. They also rely far too heavily upon their residential property to fund their future retirement – we see it most every week.

Get your hands on a copy of ‘ Cashflow Matters – How managing your cash could change your life’ on which much of this article was based.

Original Article published June 2006