Bill English on housing and inequality

Bill English is quoted in the Herald today as saying, a propos of rising house prices and low house-building numbers:

It’s clear that the lowest-income households have been the most affected so our planning processes have probably done more to increase income inequality in New Zealand than most other policies and it does remain a challenge to make progress.

But while it is true that housing does have an impact on inequality, I’m not sure there’s evidence to justify that claim.

Rising housing costs are affecting people on low incomes, certainly. The international standard is that no one should spend more than 30% of their income on housing costs, otherwise there just isn’t enough left for other things. But the percentage of New Zealanders spending more than that on housing has risen from 11% in the 1980s to 27% now. Most of these will be the poorest New Zealanders.

So when you look at the figures on inequality produced every year by the Ministry of Social Development, it’s clear that housing costs do make inequality worse. But – and this is the real problem for English’s argument – inequality is already very high, and has risen hugely since the 1980s, even before housing costs are taken into account. It’s not at all the case that, if you took housing out of the equation, everything would be hunky-dory. In fact, the gaps caused by other things swamp the gaps caused by housing.

So it seems unlikely that New Zealand’s planning processes have “probably done more” to increase inequality than any other policies. Far more important factors, in my opinion, would include reduced taxes on top earners, lower benefits, weaker union bargaining power and the influence of globalisation and technology.

And, even if you think housing is driving inequality, it’s not clear that planning processes and councils are to blame. Well over 90% of resource consents are processed without any notification or anything else to slow them down. And council development charges make up a fraction of housing costs. The bigger problems are likely to be the fact that we have almost no firms that build more than 100 houses a year, so hardly anyone can get economies of scale to drive down prices; and local opposition (as I see locally in, say, Johnsonville) to building more in urban centres.

Wealth inequality

As a final note, English’s argument ironically points to facts that his opponents, notably Labour’s David Parker, want to stress.

One of the big things that has probably happened in the last decade is a major increase in wealth inequality, in terms of the assets that people own.

Fewer and fewer people own their own home; those who do have seen the value of those homes increase sharply. Since half of all our assets are held in the form of housing, this (along with other things) means that wealth inequality has almost certainly been increasing (although we haven’t been measuring, so it’s hard to be sure).

Anyway, this is the point that Parker makes every time English claims that inequality isn’t getting worse. Inequality of income may have been relatively flat in the last few years, but inequality of wealth probably hasn’t.

In other words, talking about housing as a contributor to inequality may not help English as much as he thinks it does.

New Zealand conforms to Piketty thesis, set for rising inequality

New Zealand is likely to face increased concentrations of wealth, inequality and power in the twenty-first century, according to newly assembled data.

Economist Geoff Bertram, in a lecture to the Institute for Governance and Policy Studies, where he is a senior associate, said data he had assembled showed New Zealand fitted the pattern of other countries set out in Thomas Piketty’s groundbreaking work Capital in the Twenty-First Century.

Noting that concentrated wealth and power among elites was the norm for non-capitalist societies, Bertram said Piketty’s work asked the question, ‘Are capitalist societies different?’ Piketty’s answer was an “essentially pessimistic” one, predicting the emergence and entrenchment of a wealthy capitalist elite across the major developed countries, though he did not present data for New Zealand.

Some wealth holders might originally have been entrepreneurs, but as their wealth accumulated, they rapidly became “rentiers”, earning profits simply by virtue of owning assets.

Piketty also showed that the level of wealth in a society, measured as a multiple of the income generated by that society in a given year, was determined by the economy’s savings rate divided by its growth rate.

This implied that the share of national income going to the wealthy was not determined by its “productive contribution” but was essentially fixed as a result of other variables.

Neo-classical economists had justified returns on assets by arguing that wealth contributed to productivity and economic growth, but Piketty’s data showed that wealth levels fluctuated hugely during the twentieth century without any apparent connection to growth rates. “The entire body of neo-classical growth theory has simply been parked out of the way,” Bertram said.

Piketty’s key insight was that standard savings and growth rates would tend to drive the level of wealth towards an equilibrium with a “very high” level of inequality. If the savings rate could be assumed to be 12% a year, and growth 2%, the level of wealth would stabilise at six times a country’s annual income – a figure similar to that seen in nineteenth-century Europe.

One key driver of this widening inequality was the fact that the rate of return on wealth was – with the exception of the mid-twentieth century – generally much higher than the growth of wages and salaries.

Neo-classical economists had argued that this effect would taper off, because as more wealth was amassed, the abundance of it would drive down its returns. However, this was not true if, as Piketty argued, accumulated wealth could displace labour “out of productive employment”, taking “a larger and larger piece of the action”.

And because so much wealth was held by “a subset of the population”, this would in turn drive widening income inequalities.

In New Zealand, income inequality had been relatively stable in the last decade, but this masked growing wealth inequality of the kind Piketty had identified, Bertram said.

A very large rise in income inequality from the mid-1980s to the early 2000s had translated into a concentration of wealth at the top, and Statistics New Zealand research showed poor households borrowed large amounts while wealthier households saved, exacerbating existing inequalities.

Data assembled by Bertram showed New Zealand’s stock of wealth following a similar pattern to the countries in Piketty’s work. In particular, it had risen sharply in the 2000s, as households had taken “a decade or so” after the sudden rise in income inequality to watch their balance sheets either improve or decline.

New Zealand’s wealth concentration was converging to the same level as those of the major world economies covered by Piketty, Bertram said. This was not surprising given that New Zealand’s economy was “as open as you can get” to foreign wealth, individuals and ideas. Also, the factors determining wealth inequality – such as the savings and growth rates – tended to become equalised in a globalised world.

This implied that local policymakers who had contributed to New Zealand’s increased inequality – including politicians such as Roger Douglas and Ruth Richardson – were merely “riding the wave” of growing world inequality. “[Local] institutions and policies matter, but they are countervailing forces, not the prime drivers.”