Good news — for some people
Incomes are up — despite Simon Bridges’ claims — but Govt’s record on poverty is not so rosy
Data out this week on household incomes and housing costs make uncomfortable reading for both the Government and the Opposition. A centre-left Government should not be happy that in the year to June 2019 — its first full year in office — it has not moved the dial on income inequality at all.
A standard measure of inequality, called the Gini coefficient, at 33.9 is as bad as it has been at any time in National’s last nine years in power and higher than it was before the global financial crisis.
Another indicator of inequality is the 80/20 ratio. When households are ranked by disposable (after-tax) income, a household at the 80th percentile (20 per cent down from the top) has an income 2.7 times that of one 20 per cent up from the bottom. That ratio is unchanged from the previous two years. It has been in the 2.6-2.8 range for at least the past 12 years.
And to complete the trifecta, 17.5 per cent of households fall below a standard poverty line, where their incomes after tax and housing costs are less than half the national median income by that measure. That is not much of an improvement on the average 18 per cent over the previous nine years.
Given the abundant evidence from elsewhere in the world that neglecting inequality leads to some pretty toxic and stupid politics, these results should focus the minds of a Government approaching an election-year Budget with a low level of public debt and the ability to borrow at little more than 1 per cent interest.
Other results from the latest household economic survey are more positive for the Government, and conversely at odds with the gloom-mongering Opposition leader Simon Bridges in his speech on Monday.
That speech was dedicated to the proposition that the Prime Minister has her fingers deep in the average Kiwi’s back pocket.
“Back pockets are shrinking”, Bridges declared. “It’s harder to get ahead under Jacinda Ardern.” In fact, in the year ended last June, average household incomes after tax and housing costs were 4.9 per cent higher than the year before. Housing costs are rents, mortgage payments, rates and house insurance.
For the median household the increase was 3.3 per cent. Both measures are better than they averaged (on a compound annual growth rate basis) over the previous nine years: 3.1 and 2.9 per cent respectively.
Auckland households recorded the highest gross and disposable incomes among the 12 regions the statisticians recognise, but housing costs gobble up the highest proportion of those incomes, 24 per cent on average.
So for the bottom-line measure — household equivalised (don’t ask) disposable income after housing costs — Auckland ranks third, after Wellington and Canterbury.
The 4.9 per cent rise in average incomes by this measure owes more to the Reserve Bank than the Government, however.
Things got worse for households paying rent and better for those with mortgages.
Just over 35 per cent of all households pay rent. On average, rental payments rose 10.8 per cent in the June 2019 year.
For 28 per cent of renting households, rent pre-empted 40 per cent or more of their disposable income.
By contrast, for the 28 per cent of all households which have a mortgage, mortgage interest payments fell 9.6 per cent.
When other housing costs — mainly rates and insurance — are included, the net effect for all households, which includes owneroccupiers who are mortgage-free, was a statistically insignificant 0.6 per cent rise in housing costs from the year before.
Reflecting back in June on the state of the housing market — following the first third of what would be 75 basis points of official cash rate cuts by the Reserve Bank — Westpac chief economist Dominick Stephens noted that two-year fixed mortgage rates were 60 basis points lower than a year earlier and five-year rates 120 basis points lower.
The Reserve Bank publishes an indicative debt servicing ratio which is its estimate of what percentage of gross income would be required to service the loan for a new buyer at the average house price with a 20 per cent deposit. Over the year to June 2019, it fell from 35.1 per cent to 32.8 per cent.
That is for New Zealand as whole. For Auckland the drop was from 48.4 to 43.9 per cent — still painfully high, but lower.
The problem for the mortgage belt, however, is that the relief from lower mortgage rates is liable to prove relatively short-lived.
That is because lower interest rates flow through to higher house prices and therefore to higher debt levels.
We are already seeing evidence of this effect in the latest Real Estate Institute data. Its house price index rose 7 per cent in the year to January 2020 nationwide and 9.1 per cent for New Zealand excluding Auckland.
Fuelling house price inflation, and with it the wealth effect, where people are comfortable spending some of the increase in their housing equity, is one of the main channels the Reserve Bank relies on when it cuts interest rates to stimulate consumption and ultimately raise consumer prices.
Stephens sees the market’s behaviour over the past year as an example of how financial factors can trump physical supply and demand in the housing market. Construction has ramped up while the net inflow of migrants has slowed, but house prices have still climbed.
“We think that has been due to a big reduction in interest rates, combined with the cancellation of earlier plans to introduce a capital gains tax.” The tax would not have applied to the family home and under the current bright line test, if rental properties are sold within five years the profit is counted as taxable income.
But there is no question that the tax system continues to say to people: If you want to provide for your old age, don’t save money — they will tax you every step of the way. Borrow money, use it to bid up the price of housing, then sit back and enjoy all the benefits of leverage in a rising market, plus your imputed rents if you are an owneroccupier or your interest deductions if you are an investor, until you sell and pocket your untaxed capital gain.
Neither the Government nor the Opposition is offering any plan to change that.
A centre-left Government should not be happy that in . . . its first full year in office, it has not moved the dial on income inequality at all