Hi Greg,

Thanks for the comment. I promise to respond at some point – I am, however, currently very tied down with urgent work and don’t have the opportunity have the time to respond adequately.

If domestic savings is less than domestic investment, then the difference is made up by foreign investors. This (at least) risks transfer of ownership. Key has previously expressed concern about “Kiwis becoming tenants in their own country”.

Economically, foreign investors are likely to demand a risk premium (that domestic savers do not). This increases the required marginal productivity of capital, which (per Solow-Swan) decreases the balanced-growth capital-labour ratio, and therefore output and income level. And again politically, there goes Key’s mantra, “catching up to Australia”.

Further thoughts:

Your post asserts that people have been talking about a “level of investment” problem. I’ve not heard that; rather, the talk was of a “savings problem” and a “housing bubble” — i.e., investment misallocation.

I’d agree with both the “savings problem”, as above, and the misallocation.

On the bubble, ISTM that in advanced economies there has been a structural shift over the last few decades increasing the relative returns to higher education. If this is also the case in NZ, then rational households would be increasing their investment in human capital relative to real estate — unless the investment environment pushed them the other way.

A second line of argument is reversion to the mean. Tradition has it that the median house is about three times median earnings; it’s now more than eight times. I can see a transient demographic cause for the change (the age of the baby boomers) but not a fundamental one.

“mums and dads” is a very silly not to mention discriminatory term. I cringe every time I hear it.

and the point i made is that all money is debt so it follows you cannot save it. i do agree though that paying down debt (for individual investors) is likely to be the best return you can get and its guaranteed at the point of “investment”. of course you could pay lots of a nice big salaries to fund managers instead.

Hi Raf,

I think in this case, when they talk about savings they are also talking about paying down debt.

With mum and dad investors, if they are going to remove the tax on the inflation component of debt it will make term deposits more attractive – something that is surely pretty good for people who are a bit nervous about getting involved in the stock market right.

and another one (whilst I am on the subject) is what about investors who are single or childless couples? are only “mum and dad” investors going to share in this brave new investment world?

The Reserve Bank refers to residential investment as well when discussing private consumption for sure – although to be fair the consumption component of housing is imputed rent, which is already in the consumption stats … and housing investment should provide a stream of consumption over time and so should be treated like investment anyways.

I mean, if we treat housing investment as consumption, why not just call all other private investment consumption as well – after all, it ultimately just provides a stream of consumption in the future anyways.

When you break up the data it is residential investment (in terms of building and upgrading houses) that is the factor that seemed to move out of whack – and given the tax status of housing, and the “housing bubble”, an explanation of a rising current account deficit off the back of this is appealing.

However, this is completely different to the language that the government keeps using – as you say, bemoaning the purchase of flat screen tv’s misses what the underlying point is, and leads to a highly different set of “policy recommendations.