The New Zealand Treasury has released one of the most bizarre pieces of economic modelling I have ever seen: claiming that house price growth actually reduced inequality:
The research “surprisingly” found a 10% increase in house prices decreases wealth inequality across the population.
This is because the wealth of the wealthiest is mostly comprised of non-housing assets. For most other homeowners, housing makes up most their wealth (see graph below).
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So, a house price rise gives the homeowning middle class a chance to catch up with the wealthy.
Because the majority of households (around 64%) are homeowners, the narrowing of wealth inequality within this group is large enough for inequality across the population to fall a little.
But, when house prices rise, the wealth gap between homeowners and non-homeowners widens…
A 10% rise in house prices saw the Gini coefficient across the population fall by 0.7 percentage points from 70.8% to 70.1%. Whereas it saw the Gini coefficient between owners and non-owners rise by 0.3 percentages points from 86.4% to 86.7%…
[However] they noted the generational divide between homeowners and non-homeowners, and the fact older people have become proportionally wealthier than younger people in recent years…
So according to the NZ Treasury, inequality is measured by comparing the uber rich against to moderately rich!
The modelling also only measures house price growth in isolation when in reality financial assets are also driven by the same fundamental monetary policies. Thus, the uber wealthy’s assets rise just as fast (if not faster) than the home owning ‘middle class’.
While I don’t have direct data for New Zealand, the data for Australia is clear.
Younger Aussies have experienced a sharp fall in home ownership over decades, whereas the older generations have experienced no decline:
Meanwhile, Australians aged over 55 experienced by far the biggest increases in wealth between 2002 and 2018 on the back of rising property prices:
The situation has likely worsened since then given the 20% rise in Australian property prices over the past year (NZ property prices have grown even more strongly).
In short, non-home owners are being left behind by the soaring property prices and surging rents. And this is unambiguously increasing inequality.
The NZ Treasury’s modelling doesn’t pass the pub test. Like most modelling, it’s garbage in, garbage out.