Housing costs dwarf ‘luxuries’

May 8, 2007

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Savings on food, clothing and home supplies have enabled New Zealanders to cover a huge increase in housing costs over the past 50 years.

A Weekend Herald analysis of long-term spending patterns confirms property investor Andrew King’s controversial statement last week that would-be home-buyers are spending more on “coffee and brand new cars and overseas trips”. Spending on cafes, private transport and overseas travel have all increased.

But this does not explain why today’s young adults can’t afford to buy the houses that previous generations bought, because spending on housing has increased even more than such “luxuries” – from just 7.6 per cent of the average household’s spending 50 years ago to 17.1 per cent 25 years ago and 24.3 per cent today.

Today’s young home-buyers, if they can afford to buy a house at all, can pay much higher house prices and interest rates than their parents or their grandparents did because the real prices of food, clothing and many other imported items have come down.

“Food prices have fallen because of increased productivity and, of course, lower returns in overseas markets,” says economist Brian Easton.

And prices of clothing, home appliances and virtually all other imported consumer items have dropped dramatically with the dismantling of import controls and the transfer of manufacturing from New Zealand and other high-wage countries to low-wage locations such as China.

Long-term comparisons such as this are not precise. All spending in the table has been quoted in “2003-04 dollars” using the overall consumers’ price index.

This means the figures for 1954-55, which were in pounds, were first doubled to equate to modern dollars and then multiplied by 19.8, because the consumers’ price index increased 19.8 times from 47.11 in 1954 to 935 in 2004.

However, this ignores the fact that the prices of various items rose or fell by varying amounts – bulk food prices, for example, rising much less than house prices. So the changes in spending reflect changes in both prices and lifestyle.

In the 1956 census, 61 per cent of households grew their own vegetables and Mr Easton, in his 1967 book Consumption in New Zealand 1954-55 to 1964-65, estimated that home gardens provided a fifth of the country’s total vegetable requirements.

By 1971, the last time this was a census question, the proportion growing their own produce was down to 51 per cent, and it’s a fair bet that now only a minority of the population do.

In 1961, a quarter of all households ran their own hens. By 1971 this was down to 11.5 per cent.

The size of the average household has also changed, down from 3.8 to 2.7 people over the past 50 years as family sizes have shrunk, marriage breakups have increased and more people are surviving into old age in one- or two-person households.

This change partly explains why total spending per household, when adjusted for inflation, has hardly moved at all over 50 years, rising only from $817 a week in 1954-55 to $888 a week in 2003-04.

Despite lifestyle changes like these, Mr Easton says there is no doubt that housing is taking a sharply growing share of household spending.

“There are two reasons for that,” he says.

“One is that interest rates are going up. Many people were borrowing on a 3 per cent mortgage back in 1955.” On State Advances loans the standard rate was 3 per cent, and the average mortgage rate overall in 1954-55 was 4.8 per cent.

Reserve Bank figures show that the average variable interest rate on new mortgages was 7.5 per cent in March 2004 and 9.8 per cent last month.

“The second thing,” Mr Easton says, “is that housing costs have gone up, and a major factor in that is the price of land. Mark Twain famously said, ‘Buy land, young man, they ain’t making any more of it’.”

Despite the cost of housing, the table also shows that people are spending far more than they used to on Mr King’s “luxuries”, reflecting the fact that real living standards have risen – at least in the upper income brackets.

The biggest single percentage increase over the past 50 years is on overseas travel – up 6.6 times in real terms from an average of $4.20 a week to $27.70. Interestingly, this item has actually slipped back a bit in the second half of the period as air fares have plunged from the heights induced by high oil prices 25 years ago.

Spending on private transport rose by 42 per cent in real terms from 1954-55 to 1981-82, as the number of motor vehicles rose from 31 to 55 for every 100 people. Spending on public transport dropped 61 per cent.

But private transport spending has dropped 5 per cent in the last 25 years as oil prices fell in real terms and car prices plunged after the collapse of local manufacturing, despite a further increase in the number of vehicles to 84 for every 100 people. The decline in public transport slowed down.

Perhaps surprisingly, spending on all the “vices” of alcohol, tobacco and gambling has dropped in real terms throughout the past 50 years, despite or perhaps because of big tax increases designed to discourage them.

This partly reflects the success of the public campaign against smoking. But Mr Easton warns that spending surveys are also “known to be unreliable in-so-far as people report less drink and smokes than they actually consume (which can be calculated from direct estimates, as I did)”.

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