Huge growth in bank deposits comes with warning

New Zealand households have increased their wealth by 85% over the past 10 years and there are signs that the composition of their balance sheet is changing.

Thursday, January 8th 2009, 7:32AM

“Despite the tales of gloom and doom we’ve been bombarded with over recent times, the light at the end of the tunnel could now be starting to appear in the form of a reduction in the pace of debt accumulation, the arrival of tax cuts and lower inflation pressures,” Spicers’ Aaron Hing says.

While wealth is up over the long-term, the latest Spicers Household Savings Index shows wealth has fallen in the past year.

The report shows the average household net worth was $355,516 at the end of September, nearly $40,000 lower than levels of a year earlier.

It shows the average New Zealand household fell $14,500 during the September 2008 quarter following a decline of $17,000 the previous quarter.

The latest quarter’s fall are due to a smaller rate of decline in household’s assets than the previous quarter and a further slowing in the rate of growth in household liabilities.

“The decline in household assets was driven almost entirely by declines in house prices and lower growth in the housing stock as building activity slows.”

The area of big growth on the asset side has been in bank deposits which are up 10% to $8.4 billion.

This movement is set to continue with one recent study showing one in three consumers are looking to save more than 20% of their income over the next 12 months.

Hing says “there’s no doubt that over recent months, cash in the bank has provided a great outcome for investors. Relatively high local interest rates have delivered a good rate of return, while many other investments have made losses.”

“Cash is a vital component of any investment portfolio because its stable nature allows access to funds when required, without the risk of it being an inopportune time to sell down assets.”

However, he warns that over the long-term, cash delivers the lowest return and investors should consider other assets like shares.

“The risk of holding too great a proportion of your funds in cash is that your long term investment growth will be poor, especially after the impact of inflation," he warns.

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