It's Time to Resist the Gadgets

But a recent article brings it all down to a personal level in a rather scary way.

In his weekly newsletter, BNZ chief economist Tony Alexander notes our increasing tendency to save in the form of housing rather than financial assets - bonds, shares and so on.

This wouldn't matter quite so much if our total savings were the same as in other developed countries but with a housing bias, he says.

But that's not the way it is. The value of our houses, relative to our incomes or the size or our economy, is not a lot higher than in other developed countries.

It's simply that our financial assets are extraordinarily low.

In a good example of the complicated ratios I was talking about, then Reserve Bank Governor Don Brash said last year that the New Zealand ratio of financial assets to disposable income was 70 per cent.

Forget about the words and concentrate on the number, 70 per cent.

For other countries, the equivalent number is: Japan 357 per cent; United States 333 per cent; United Kingdom also 333 per cent; Australia 266 per cent; France 264 per cent; Italy 250 per cent; and Germany 150 per cent.

The Japanese have five times as many financial assets as we do, after allowing for income differences. Even the Aussies have almost four times as many.

And we can't explain away the difference by saying we have withdrawn from shares in recent years because shares have done badly. The New Zealand share market has performed better than most others.

In any case, that argument applies to shares only. We could have - and indeed many people have - moved money from shares to fixed interest investments. But those are still financial assets.

"Our deficiency of financial assets reflects the lack of saving by NZ households for an extended period of time," says Alexander.

Why? "It may be myopia about the future. It may be inability to stop buying the latest gadgets," he says.

More important than the reason is what it all means. "As a nation," says Alexander "we are very vulnerable to anything that shocks the incomes of households, and in particular an employment shock."

And in this case, what applies to the nation directly applies to individuals and families.

If there were large layoffs - perhaps from something like an outbreak of foot and mouth disease - household incomes would be cut more severely than if we had strong dividend and interest income as well as wages, or investments we could easily sell.

Even without a foot and mouth crisis, employment levels fluctuate. We won't always have as full employment as we have now.

There's a follow-on effect, too. If household incomes fall, that's got to pull down house prices, or at least stop them from rising as much.

And that will be particularly hard for those of us who have all or most of our wealth tied up in housing.

It all comes back to a favourite old theme: diversification. Those with their savings invested in various types of assets take less risk than those who concentrate on one or a few types of assets - which often in New Zealand means too much property.

Tony Alexander's scenario simply illustrates that.

What should you do about it? Perhaps prove Alexander wrong. Stop buying gadgets, and start saving.