Banks putting their eggs in one basket

With historically low interest rates, bank deposits have very little return, and after inflation, often no real return at all. The Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr says savers need to “put their money to work” to generate a return for their savings. The intention of putting money to work is to stimulate investment, creating a boost for the New Zealand economy. Banks don’t seem very interested in increasing investment in businesses, and seem to stick to lending for housing.

As savers take their money out of banks to put it to work, they have a range of options that fall into two categories. They can invest in new things by starting a new business, or investing in an existing business to allow an increase in productivity or production. Secondly, they can buy things that already exist, classic cars, art, gold, a stock index fund or existing houses. Obviously, the impact of investing in a business is significantly different from investing in another classic car, on the New Zealand economy.

Investing in a business, would be expected to do exactly what the RBNZ wants, with the additional investment allowing New Zealand to provide more goods and services, perhaps even increasing our stubbornly slow productivity growth. Whereas investing in cars, stock, art etc. does not really add value to our economy, although paper values increase, but nothing new is created. Some theorists suggest asset holders spend more as their wealth increases, but the primary investment isn’t adding value.

When making an investment decision, there are two key components, the level of risk, and the expected rate of return. Saving in a bank is low risk, with barely any return. While more risky options include shares or houses, both of which have done very well in the ultra-low interest rate period. Stocks and property have done so well that there is hardly any incentive to risking your money growing a small business.

When investing, credit is a common way to increase the “bang for your buck”. Purchasing an asset with 50 percent debt means the investor can get double the income from increases in value. This makes available credit an important factor when deciding on how to invest money.

In total, New Zealand has $477 billion of debt, about $100,000 per person in New Zealand. Of this debt, $277 billion is for residential housing. This share of lending for houses hasn’t always been this large. Figure 1 shows the total debt in New Zealand based on the type of borrowing over time. While debt has grown substantially over the years, (partly due to inflation), the structure of the debt has changed substantially. In June 1998, housing made up 49.5 percent of the total debt in New Zealand. By June 2008, it was 54 percent,¹ and by the end of 2019, it was 58 percent. 

The changing profile of debt is on only an eight-percentage-point shift, but this represents a large amount of business investment if this growth had occurred evenly. The share of lending to business has fallen from just 34 percent debt to just 25.3 percent. Had the business share debt grown at the rate of total debt over the past 20 years, businesses would have $41 billion more available credit to support growth and increased productivity.