Peter Lyons: Housing at heart of our cost of living conundrum

Housing inflation since 2000 has been 136 per cent. Photo / Michael Craig
Housing inflation since 2000 has been 136 per cent. Photo / Michael Craig

I came back to Auckland in 2006 to look after my elderly father. I began my weekly trudge to Pak'nSave to buy the household groceries. I generally buy a similar basket of groceries each week.

In 2006, my basket of groceries cost about $100. It now costs around $130. During this period, the official inflation rate was 18 per cent

Over the past few years the official inflation rate has been very low, hovering around 1 per cent This indicates major weaknesses in our economy, particularly on the demand side. Most households are finding it harder to make ends meet.

Many people are aware that there seems to be a discrepancy between what's happening to their bills and the official inflation rate. This perception is real and it is worth exploring some of the reasons.

The Reserve Bank has a website that enables easy calculation of price changes since 2000. This is based on the prices of a basket of goods and services purchased by an average household.

Each category is weighted according to its share of an average household's spending.

Since 2000, the official inflation rate has been 41 per cent. During this period, housing inflation has been 136 per cent. Food prices have risen by 48 per cent. Clothing prices have risen by 2 per cent.

Over the same period, the average hourly wage has risen by 54 per cent. As inflation has risen by 41 per cent, this means the real hourly wage rate has risen by a miserly 13 per cent over 13 years.

There are a number of implications in these bald statistics that tend to support economic trends at national and international levels.

The first inference is that the prices of necessities such as shelter and food are rising at a faster rate than non-essential items, particularly manufactured goods. This makes sense given the emergence of major exporters such as China and India and the resulting glut of manufactured goods on world markets.

Items such as clothing, electronics and consumer durables are becoming cheaper. This is helping reduce the inflation rate in countries such as New Zealand. So although prices for many manufactured items are coming down, the essentials are rising, often more quickly than the official inflation rate.

The prices of basic foodstuffs are also subject to the vagaries of international markets. New Zealand consumers are competing with consumers overseas for these items. As the living standards in emerging economies rise, their demand for what we export increases, so the prices NZ consumers pay also rise.

The biggest inference from these cost of living statistics relates to housing inflation. Housing inflation since 2000 has been 136 per cent. During this period New Zealand's population rose by 18 per cent. The hourly wage rate rose by 54 per cent. The difference would appear to be made up by our willingness to take on more and more mortgage debt. We have used debt to bid up the prices of our housing stock.

The need to address housing affordability should be at the heart of the economic debate. We are plugged into the global economy in terms of trade and finance. This means we are subject to international prices for tradeables such as the foodstuff we produce. If we are paying exorbitant prices for the roofs over our heads this ultimately makes us less competitive on world markets.

For far too long politicians have ignored the distortions in our housing market. Yet many of these distortions represent government failure as much as market failure. Housing is the one key living cost that we should be able to address if the political will exists.

Severely distorted house prices in regions such as Auckland ultimately lead to higher interest rates and a less competitive economy - so we all lose.

Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.

- NZ Herald

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