Another Reason Why Saving For A Home Has Become Harder

Houses take the high road, and wages take the low road

Since the start of inflation targeting in the late eighties, the prices of goods, services and wages have been very successfully controlled by central banks in major economies, including through the Reserve Bank in New Zealand. The RBNZ targets inflation by setting interest rates up or down depending on their best guess as to where inflation is going; they increase rates if they think inflation is headed higher and visa versa.

Inflation targeting has been beneficial for NZ in the sense that it makes it easier for businesses to plan ahead when the prices of goods, services and wages are stable. At the same time however, inflation targeting has had only a modest impact on house prices and other asset prices. These prices have sailed on, largely undeterred as to what level the RBNZ sets interest rates.

The graph below, included in a recent RBNZ publication shows the situation very clearly. Nominal house prices (ie not adjusting for inflation)  have slowed only slightly while the prices of goods and services have been convincingly flattened by inflation targeting.


This situation is fine if you’re on the property ladder or own other assets. If you don’t however, and plan to own a home in the future,  then it has been a case of falling further behind each year.  The graph below clearly shows the close relationship between general prices and labour costs with respect to house prices. The ability to save for a home is being kept at bay while houses prices run away.


Surging house prices?

The main reasons suggested for current surging house prices, seem to be the  lack of housing supply and pressure from immigration – and of course these arguments make sense. However, the bigger picture is that the current supply and demand imbalances are nothing new, as the first graph clearly shows over the last 50 years.  In nominal terms, the current cycle we are going through is not unusual. What is unusual is inflation adjusted house prices,  or more specifically, real house price growth over the long term.


Real house prices

Real house prices have experienced significant upswings in the past, as was the case in the early to mid 70’s, however prices reverted back relatively quickly to where they started (see graph below).

What has been different, since inflation targeting began is that we have not seen a significant pull-back. Real house prices have kept on climbing.


House prices continue to grow like they have in the past.

One reason it has become harder for people to save for their first home is that wages haven’t kept in step with house prices since inflation targeting began.  Our monetary policy’s inability to control asset prices, while at the same time successfully controlling general prices has meant  homeownership has become increasingly out of reach for more Kiwis.

Kurt Settle, Co-Founder at The Ownery

The Ownery is New Zealand’s first proptech company, established to help Kiwis save in houses from just $500. Enabling ownership in HouseShares means people can keep in step with house prices, rather than at the snail’s pace of interest rates.  

The Ownery’s first HouseShare offer will be announced soon.

Join the conversation with me over on Twitter @kurtpsettle


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