The Price of History

A few weeks back, a colleague shared a detailed report on the workings of the OCR (Official Cash Rate) and how it has been used to either promote or tame inflation, as measured by CPI (Consumer Price Index). 

Setting aside how the OCR works, I was intrigued to see in this report that there has been an 85% change in CPI these last 24 years (from year 2000 to 2024). When calculating CPI, Stats NZ includes changes in rents, the cost of maintaining houses, and changes in the price of new homes (but not the land they are built on). It also doesn’t include changes in the price of existing homes or what people shell out in mortgage payments.

This increase, if averaged, suggests cumulatively, that CPI has pushed prices higher by 2.6%pa. That seemed low to me, given we’re talking about a period of 24 years, but ok. If the price of consumer goods and services in the economy rose 85%, then what cost us $1.00 in the year 2000 now costs $1.85. But we could also assume that at some stage through this cycle “incomes” would have risen by a corresponding amount, or we’d all be underwater, as such. I acknowledge that not all incomes have risen the same but overall, one would imagine there will be a degree of relativity. 

Saying this another way, the purchasing power of one New Zealand dollar has diminished 46%; but that’s ok, because wages have gone up to meet the higher costs – so we’ve all been given more dollars. While wages have adjusted with consumer goods and services inflation, shelter inflation hasn’t been factored in (see earlier). So, what happened with shelter, or more specifically the cost of housing? There are stats galore, and we can usually find one to fit the argument. Instead, let me share a true story.    

Early in the year 2000 I purchased a house in Christchurch for $205,000. I was 35 years old. It was a four-bedroom single level, permanent material, separate double garage, one bathroom, two toilets, late 1960’s bungalow. It was in good condition. Yesterday I looked up HomesEstimate to see what this property is now said to be worth; $875,000. Wow - $670,000 more! I recall my mortgage was around $140,000 (and it was a stretch to service that then...). I now need $140,000 just as a deposit to buy the same house!

To the 35-year-old in 2024, there has been a 76% loss of purchasing power. Said another way, while CPI (inflation) is up 85% over 24 years (i.e. $1.00 to $1.85), housing inflation is up 327% over that same period ($205,000 to $875,000). Using this ‘average house’ as an example, it has risen by approximately 6.23%p.a, almost 2.5 times the CPI rate! 

I haven’t mentioned all the money we spent on the property, let alone what subsequent owners spent (rates, insurance, repairs, additions, upgrades etc). The market, of course, only sees the point-to-point gross gain of 6.23%p.a, which lulls us into a false sense of return. Even so, the return is not in dispute. It’s been an incredible journey, but can the economy sustain this trajectory? 

To stay with this example, if my house continues to go up at the same rate as the last 24 years for just the next 10 years, in 2034 it will be worth almost $1.6Million!! To acquire this “average” house in 2034, assuming a required 20% deposit – will need $320,000. Assuming a 30-year mortgage (at an average cost of 5%p.a) for the balance, payments would be $6,900 a month ($83,000 p.a., add to that ‘average’ rates and insurances, and you are going to need circa $100,000p.a after-tax to keep this home. Today, the average pre-tax full-time salary in NZ is $53,040 p.a. Good luck!

Average house prices in NZ are now 8.5 times household income, while average debt servicing is 50% of household income. Things have slowed but most still feel historical capital gains will continue. I think they may be disappointed, as this balloon can’t possibly inflate a whole lot more…

In summary, the price of shelter is one of this nation’s biggest risks, or rather, the demand to service ever increasing levels of debt to own the same asset – the consequence of this: that money cannot find its way into more productive assets and/or toward the enjoyment of time with family and recreation. We all continue to play the game because owning a house is in our DNA but as you can see above, the game has shifted.   

I stumbled across an article by Brian Gaynor, the man behind Milford Asset Management (now sadly deceased). Brian wrote back in 2021 about this very issue. It’s worth the read: https://businessdesk.co.nz/article/the-life/looking-back-the-nz-housing-boom-when-and-how-it-all-began

The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.