A cost we must address

A view of suburban housing south of Auckland. Photo by The New Zealand Herald.

I came back to Auckland from Dunedin in 2006 to look after my elderly father. I began my weekly trudge up to Pak'nSave to buy the household groceries. I generally buy a similar basket of groceries each week. I avoid the lamb chops because they appear to have been force-fed a diet of cream buns before their untimely demise and repackaging.

On the homeward leg I often purchase a bottle of Teacher's whisky. Anyone of mature years who hasn't acquired one decent vice is surely living a life of real poverty. In 2006, my basket of groceries, less the whisky, cost approximately $100. They now cost around $130. During this period, the official inflation rate was 18%.

Over the past few years, the official inflation rate has been very low by historical standards, hovering around 1%. This is indicative of major weaknesses in our economy, particularly on the demand side. Most households are finding it harder and harder to make ends meet. Something doesn't quite add up. Many people are aware there seems to be a strange discrepancy between what's happening to their bills and the official inflation rate. This perception is real and it is worth exploring some of the reasons why.

The Reserve Bank operates a website that allows easy calculation of price-level changes since 2000. This is based on the prices of a basket of goods and services purchased by an average household. Each category is weighted according to its share of an average household's spending.

Since 2000, the official inflation rate has been 41%. During this period, housing inflation has been 136%. Food prices have risen by 48%. Clothing prices have risen by a paltry 2%.

Over the same period, the average hourly wage rate has risen by 54%. Given inflation has risen by 41%, this means the real hourly wage rate has risen by 13% over 13 years.

There are a number of implications in these bald statistics that tend to support various economic trends at both national and international levels.

The first inference is that the prices of necessities such as shelter and food are rising at a faster rate than non-essential items, particularly manufactured goods.

This makes sense, given the emergence of major exporters such as China and India and the resulting glut of manufactured goods on world markets. Items such as clothing, electronics and consumer durables are becoming cheaper in real terms. This is helping reduce the overall inflation rate in countries like New Zealand. So although prices for many manufactured items are coming down, the essentials are generally rising, often faster than the official inflation rate.

The prices of basic foodstuffs are also subject to the vagaries of international markets. New Zealand consumers are competing with consumers overseas for these items. As the living standards for consumers in emerging economies rise, their demand for what we export increases, so the domestic prices that New Zealand consumers pay also rise. The higher prices that we pay for milk, meat, cheese and butter are the flip side of cheaper TVs, SUVs, computers and cellphones. Unfortunately, the latter are difficult to eat.

The biggest inference from these cost-of-living statistics relates to housing inflation. The housing inflation since 2000 has been a whopping 136%. During this period, New Zealand's population rose by 18%. The hourly wage rate rose by 54%. The difference would appear to be made up by our willingness to take on more and more mortgage debt. We have used debt to bid up the prices of our existing housing stock.

The need to address housing affordability should be at the heart of current economic debate. We are plugged into the global economy in terms of trade and finance. This means we are subject to international prices for tradeables such as the foodstuffs we produce. If we are paying exorbitant prices for the roofs over our heads, this ultimately makes us less competitive on world markets.

For far too long, politicians have ignored the distortions in our housing market. Yet, many of these distortions represent government failure as much as market failure. Housing is the one key living cost that we should be able to address if the political will exists. Severely distorted house prices in regions such as Auckland affect all New Zealanders. Ultimately, they lead to higher interest rates and a less competitive economy, so we all lose.

- Peter Lyons teaches economics at Saint Peter's College in Epsom, Auckland, and has written several economics texts.