A toxic mix of low wage growth and fast-rising rents
This article was first published 26 July, 2017.
Two reports released within 24 hours of each other neatly summarise the state of New Zealand right now. They showed the wealth of the richest sprinting ahead with property values, while the poorest are struggling with stubbornly low wages and fast-rising housing costs. Bernard Hickey reports on a tale of two New Zealands.
NBR's Rich List out on Monday found the wealth of New Zealanders worth more than $50 million each rose by 10 percent over the last year to $80 billion. It detailed the growing fortunes of a rarified group of 207 households. But the bigger increase in wealth happened for those owning their own and other homes.
The value of New Zealand's homes rose $141 billion or 16 percent in 2016 to $1.014 trillion. This wider group of asset owners (about 60 percent of households) are doing very well.
Meanwhile, the official report on household incomes and inequality found the poorest renters and their children are struggling to cope with rents for their mouldy and cold private homes, that are rising much faster than wages.
It portrays a group of New Zealanders in the bottom 10 percent who can barely pay the rent and are no better in real terms after paying the rent than they were nearly 30 years ago. It finds real incomes for beneficiaries have been flat to falling between 2008 and 2015, although the data doesn't include last year's real benefit increase or the Government's family incomes package announced in the Budget in May that begins on April 1 next year.
The Ministry of Social Development's report on "Household Incomes in New Zealand: trends and indicators of inequality and hardship 1982 to 2016" found income inequality before housing costs has been broadly unchanged for the last 20 years, having worsened substantially between the mid 1980s and the early 1990s.
However, it found that inequality after housing costs was significantly worse than before housing costs, and has risen over the last five years versus the early 2000s.
Real incomes for the bottom decile of income earners were still a little lower in 2016 after housing costs than they were in the late 1980s.
The report, known around Wellington as the Perry report after its author Bryan Perry, found that over the last 10 years around 15 percent of households have been spending more than 40 percent of their incomes on housing costs. That's up from five percent of households having to spend that high a proportion on housing in the late 1980s.
75,000 kids in damp, mouldy and cold homes
The poorest rental households with children are in the worst position. The Perry report found that the bottom 10 percent of income earners under the age of 65 now spend around half of their income on housing costs. That's up from an average of 29 percent in the 1980s. That's because real incomes for beneficiaries are adjusted for Consumer Price Inflation, which has risen much slower than housing costs.
Incomes for superannuitants rise much faster than for beneficiaries because New Zealand Superannuation is indexed to average wages, which have risen faster than inflation since the mid 1980s.
The combination of low income growth for poor working families and beneficiaries, and high rent growth, particularly of private rentals, has proven toxic, as has the poor quality of rentals.
The Perry report found 10 percent of households with children reported a major problem with dampness and mould, while 13 percent of households with children reported problems keeping their homes warm in winter. Around 75,000 children were in households reporting problems with damp, mouldy and cold homes. About 70 percent of those reporting major problems with housing quality were in rental properties, with 45 percent in private rentals, 25 percent in Housing New Zealand houses and the rest living in their own homes.
About half of the children living in such homes and in rental stress live in families with one working parent, while the other half live in beneficiary households.
So why aren't wages rising much?
One feature of the Perry report highlighted by the Government was the relative strength of real incomes for most in recent years before inflation was lower than wage growth for most workers. The median household income before housing costs rose three percent per year on average in real terms over the five years to 2016. Across the income spectrum, real incomes before housing costs rose 11-13 percent in real terms over the full five years.
But that doesn't take into account the rise in rents and that real income growth is set to slow dramatically. Treasury forecast in the May Budget that real wages would rise just 0.6 percent in total over the five years from 2017 to 2021 because of slow wage growth and a rebound in inflation to around 2.1 percent.
Strangely, the Government continues to point to strong real wage growth when arguing that its policies are not suppressing wages. Yet Treasury has forecast that real wage growth will end.
What about low skilled migration?
Meanwhile, this week the Government looked set to row back on an initial attempt to slow down the growth of lower skilled temporary migrants that the Reserve Bank and opposition parties say are depressing wage growth and keeping interest rates lower for longer than expected.
Ironically perhaps, the Government cited falling interest rates for the rise in wealth inequality. It also rejected the suggestion that high migration of lower skilled migrants was suppressing wage growth.
Immigration and Workplace Relations Minister Michael Woodhouse said wages were still growing strongly relative to inflation, despite the Treasury forecasts in the May Budget.
"We’ve got wages growing strongly," he told reporters on Tuesday.
Treasury forecast nominal wage growth of 1.2 percent in the year to June 2017, while CPI inflation was 1.7 percent, meaning real wages fell 0.5 percent in the last year. Treasury forecast real wage inflation of 1.0 percent, 0.2 percent, 0.0 percent and 0.0 percent in the following four years.
Woodhouse said the Government was listening to concerns from employers that they could not find workers at their current wage rates within New Zealand, and needed to recruit from overseas.
"My concern is to make sure that we have an appropriate supply of labour in the right places with the right skills and the right time and that’s what these policies will do," he said.
"The reality is it is a mathematical certainty that unless we have some labour coming in from overseas the 10,000 jobs (per month) that are being created by this growing economy simply won’t be filled, and I don’t think this Government wants to leave business out in the lurch like that."
The issue remains, however, that Treasury is forecasting real wages are set to be flat over the next four years despite the creation of 150,000 jobs. Treasury is also forecasting net migration of 212,000 over the next four years.