House prices in Auckland are high and rising, which is causing concern in many quarters. But do we know what sort of effects high house prices may have on New Zealand society, now and in the future?
Politicians and commentators from all quarters have argued that they are undermining the equity of New Zealand society by making it harder for young people to buy houses and squeezing household budgets. Here, for example, are some recent comments from Finance Minister Bill English:
The Finance Minister agrees rising house prices in Auckland are making inequality worse by shutting low and middle-income earners out of the property market.
Opposition parties say rising inequality is not only hurting those who cannot afford to buy a home, but is also bad for the economy.
Bill English said house prices were making life tougher for low and middle income earners in Auckland and said inequality was a problem.
“We’ve been concerned about that for some time, that there’s parts of Auckland where there’s been really no new supply of lower value houses that low and middle-income families can afford.”
I’ve seen Minister English making similar comments elsewhere – saying that limited housing supply is worsening poverty and inequality. How true is this?
First, here’s a graph showing indexed house prices, rents, and consumer price levels over the last two decades. While housing prices have been rising faster than the CPI throughout this period, house prices have really only taken off dramatically since 2002. Meanwhile, rents have risen at a more consistent pace:
Keep that timing in mind. Most of the increase in Auckland’s house prices has occurred between 2002 and 2008, and again since 2012.
So now, let’s take a look at what’s been happening to inequality over the same time period. Here’s a useful chart from a Stuff article on the topic. It looks at the 80-20 ratio – i.e. the ratio of incomes for a household near the top of the earning distribution (80th percentile) to one near the bottom (20th percentile). While it’s not a perfect measure, as it misses outcomes at the upper and lower tails, it does seem to track with the Gini coefficient, another common measure.
Essentially, what this measure is telling us is that income inequality rose during the late 1980s and early 1990s, during NZ’s painful economic restructuring, flattened, and then trended down slightly since the mid-2000s. Importantly, the same basic trends hold true even after taking housing costs into account, which suggests that rising Auckland house prices haven’t altered the underlying dynamics of income inequality:
In other words, recent increases in Auckland house prices have not coincided with rising income inequality. Minister English is well aware of this. For example, in May 2014 he answered a few questions on inequality in Parliament:
Hon BILL ENGLISH: Well, the facts as laid out in the annual report issued by the Government agency initiated by the previous Labour Government, and now backed up by the OECD, show that income inequality in New Zealand has been flat to falling in recent years, and, on average, it has remained unchanged for the last 15 years.
This does not necessarily mean that we can be sanguine about the impact of housing costs on New Zealand society. For one thing, statistics published in the Ministry of Social Development’s most recent (2014) Household Incomes in New Zealand report suggest that the share of households paying more than 30% of their income for housing has risen since the early 2000s. These changes seem to have affected households across all five quintiles of income, albeit to varying degrees. However, from an equity perspective they’re dwarfed by the impact of early-1990s changes to social welfare and housing policy:
Another issue is that rising house prices may be causing inequality of wealth to increase. The distribution of household wealth has received more attention in recent years, e.g. in Thomas Piketty’s Capital in the 21st Century, which analysed trends in wealth and income distributions over the past two centuries.
There are reasons to believe that higher house prices may increase wealth inequality. For example, 2013 Census data shows that upper-income households are much more likely to own, partly own, or hold in a family trust their primary residence. 80% of households earning over $100,000 per annum own their houses, compared with only 52% of households earning less than $30,000.
However, we simply don’t have enough recent data to form robust conclusions about the impact of rising house prices on wealth inequality. During the 2000s, the Survey of Family, Income, and Employment (SoFIE) did collect some data on household wealth. An analysis of the 2003/2004 data showed that wealth was much more unevenly distributed than income – 51.8% of all net wealth was held by the richest 10% of New Zealanders.
As SoFIE was discontinued in 2010, we have no way of knowing whether or not wealth inequality has increased during the most recent run-up in Auckland house prices. Consequently, I’d say that a hypothesised link between house prices and wealth inequality is potentially concerning, but unproven. If the Finance Minister is concerned about that issue, I’d recommend that he re-start SoFIE so we can get a better idea of whether rising house prices have coincided with rising wealth inequality.
Finally, commentators should note that this post isn’t arguing for or against any particular policy directed at inequality or the housing market. It’s just taking a look at the data (or lack of data) on the topic. With that in mind, what’s your perspective on the link between housing and inequality?