Households have more to spend, but the cost of a home is boosting inequality

So, the economy has been growing at a respectable pace - 3.6 per cent over the year to June, but how inclusive is that growth?

Is it a rising tide that lifts all boats, or an ebb tide leaving lots of people stranded, beached, going nowhere?

The best information we have on how national income is distributed is in the Ministry of Social Development's annual reports on household incomes, inequality and hardship.

The latest one, released last week, provides stark statistical evidence of the impact of housing costs on inequality.


One way of gauging inequality trends is to rank households by income and compare them with households at the same points in the distribution in previous surveys.

The incomes report uses disposable incomes - that is, incomes after tax and transfer payments. And it adjusts for consumer price inflation to enable more valid comparisons over time.

It also looks at incomes both before and after housing costs - that is, mortgage payments (interest and principal), rents and rates. It finds income inequality increasing, after housing costs (AHC).

If you compare real disposable incomes last year with those in 2007, on the eve of the Great Recession, growth is to be seen right across the distribution, both before and after housing costs.

That is a more cheerful picture than in the McKinsey report this column drew on two weeks ago, which found widespread income stagnation across advanced economies. In the United States, for example, the median real household disposable income in 2014 was just 1 per cent higher than a decade earlier, compared with a 15 per cent increase in the previous decade.

But even so, in New Zealand, incomes after housing costs have been growing faster in the higher deciles than the lower ones.

For a household a fifth of the way from the bottom of the range, for example, the increase between 2007 and 2015 was 12.1 per cent. Meanwhile, a fifth of the way down from the top, it was 18.3 per cent.

It is a longstanding trend. Real household disposable incomes after housing costs for those 10 per cent from the bottom of the range are no higher than they were 25 years ago. But at the median they are up 35 per cent and for households 10 per cent from the top, they are up 50 per cent.

This reflects the fact that housing costs devour a greater share of the income of lower-income households (and those incomes include any accommodation supplement).

What happens when interest rates have to rise? It is foolish to imagine they never will.

On average, housing costs take up about 45 per cent of the budget for working-age households in the lowest three income deciles, the incomes report says.

On average. "For many, of course, it is 50 per cent or more," it says.

One in every three children is in a household in which more than 30 per cent of the household income is pre-empted by housing costs.

So what does that mean for child poverty?

There is scope for endless debate about how to define poverty, and the incomes report provides a number of measures.

But let's take the most stringent definition. What proportion of children are in households whose disposable incomes, after housing costs, are less than 50 per cent of the median income, and not the median today but what the median was back in 2007?

Some 15 per cent of children fall into that grim category.

The incomes report points to another ticking time bomb as well. Among older (45 to 64-year-old) adults living on their own, the AHC income poverty rate trebled between 1984 and 2007 and has remained high ever since - 36 per cent on average in 2015 and the second highest of any group after sole parents (55 per cent).

"This points to an increasing number of vulnerable older New Zealanders in the future as these figures indicate that many in this age group have little freeboard to save," the report says.

Nor can we assume that increasing labour force participation among those over 65 will compensate for scant savings and declining home ownership rates.

The increasing proportion of older New Zealanders in paid employment has the potential to mitigate the impact of declining mortgage-free home ownership, provided these are the same people who need the extra income to pay the mortgage or the rent.

"The increasing proportion of older New Zealanders in paid employment has the potential to mitigate the impact of declining mortgage-free home ownership, provided these are the same people who need the extra income to pay the mortgage or the rent."

But will they be the same people? The incomes report is not so sure. "The chances are, though, that they will in the main be non-manual white-collar workers, who are more likely to be better off anyway."

The trend for housing costs to soak up a rising share of incomes has been in place for nearly 30 years.

That is despite the fact that interest rates have been on a downward trajectory over the same period.

Mortgage rates are at multi-decade lows and deposit interest rates have fallen to what one hopes are incompressible levels, given banks' need to attract deposits to fund most of their lending.

Measures of housing affordability like Massey University's are in tolerable territory because of those historically low mortgage rates, despite modest growth in incomes and rapid growth in house prices.

But the flipside of low interest rates has been rapid house price inflation, pushing prices and household debt levels to record highs, relative to incomes.

What happens when interests rate have to rise?

It is foolish to imagine they never will, that the beast of CPI inflation has been driven from the land with blows and curses, never to return.

From the Reserve Bank's point of view, these high levels of household debt mean more sensitivity to future interest rate hikes, more bang for the monetary policy buck on the upside, less risk of "spongy" brakes.

But if interest rates will not need to rise as much as in the past to cool the economy, that is bleak news for poor old savers.