Inside Economics: Is the housing wealth effect a mass delusion? Plus CGT debate unleashed

My first house in 1986 was three times my salary and there were plenty of jobs. Now it is around eight times salary and no jobs.

Best regards,

David Williams

A: Okay, this isn’t really a question, but it provides a good segue into a week where Labour’s new capital gains tax policy is putting the spotlight on property investment.

You raise the issue of a “wealth illusion”. This is the idea that elevated property prices can make people believe they are richer based on paper gains that may or may not ever be realised.

I touched on it in Inside Economics last week as an example of why rising property prices don’t create any real long-term value for the economy.

Higher prices mostly just mean bigger mortgages, which means interest payments bleeding into Australian bank profits and blowing out our current account deficit.

But I did make the case for the power of property prices to boost the economy in the short term.

In response to a reader question about New Zealand’s current doldrums, I referred to property as a missing piece of the puzzle.

I referred to some interesting research from economic think tank Motu.

It showed that between 2005 and 2021 house prices in Aotearoa New Zealand rose 142%.

I suggested that those years reflected a period where New Zealand seemed to have some kind of vibrancy or (to borrow the Prime Minister’s term) mojo.

The research (Impacts of macroeconomic policies on objective and subjective wellbeing: The role of housing tenure) also found this surge in prices had “deepened inequalities in New Zealanders’ wellbeing”.

“Our findings show rising property prices can make some people feel better off while leaving others struggling,” Motu senior fellow Arthur Grimes said.

That bit isn’t so surprising.

But economist Sam Warburton got in touch to point out that I missed the most significant finding in the research – one that significantly undercuts notions that property drives economic growth in this country.

By cross-referencing spending statistics from StatsNZ with housing data, the authors, Amelia Blamey, Grimes and Norman Gemmell, were able to show that rising property prices don’t actually boost spending for most people.

Here are some relevant extracts from the research:

“Our findings suggest that rising property prices have uneven effects on wellbeing, depending on housing tenure,” it said.

“For outright homeowners, a 10% increase in the regional House Price Index (HPI) is associated with a 1.3% rise in non-housing expenditure.”

“Relative to outright owners, mortgaged homeowners, private renters, and public renters reduce non-housing expenditure by 1.6%, 1.3%, and 3.9%, respectively.”

For the record, non-housing expenditure just refers to income not spent on mortgages or rent (so spending to spruce up the yard or redo the kitchen counts as non-housing related).

This suggests that the belief in the “wealth effect” of rising house prices – which I believe is deeply embedded in the Kiwi psyche – is much overplayed if it even exists at all.

There’s some obvious logic to that.

“For mortgaged owners, higher house prices likely demand larger mortgages with higher debt servicing costs while renters face higher rents,” the report said.

But despite that, the data challenges a notion that many of us feel intuitively, ie that households feel more confident about spending when property values are rising.

It might be paper wealth, but there seems to be some security that comes from the way higher valuations make debt levels look smaller.

Conversely (as per the current downturn), there is a widely held view that when property prices are down, people feel poorer and put their wallets away.

This wealth effect is widely discussed by economists, politicians and the media.

In international economics, we see a huge weight being put on the wealth effect in reference to Chinese consumer spending.

The property crash there is regularly cited by international economists and commentators as a headwind to economic growth.

New Zealand may be different to China.

It’s important to keep one piece of research in perspective.

But locally, at least, the Motu data effectively negates the last remaining argument for a housing market boom, even as a short-term economic panacea.

The dreaded capital gains tax debate

Speaking of property …

I have to say that years of circular debate about the pros and cons of a capital gains tax have left me somewhat weary (and wary) of the topic.

Like a lot of people who worry about New Zealand’s long-term economic future, I see it as inevitable that we will need to broaden our tax base.

Demographics are causing the working-age population to shrink and the retired population to grow.

That’s going to make it harder and harder for income tax alone to fund a level of service and social welfare that Kiwis expect.

The policy unveiled by Labour yesterday is much narrower than what was proposed in 2019 by Michael Cullen’s Tax Working Group.

Sir Michael Cullen at the Herald offices in Auckland. Photo / Doug Sherring

That was comprehensive and proposed taxing capital gains on all investments, including stocks and art and classic cars and so on.

This proposal will only target residential investment property (including baches) and commercial property.

That will probably make it politically more palatable and a lot easier to introduce.

But the flip side is that it will raise a lot less money.

Labour estimates it will start slowly, collecting just $100m in the first year, $385m in year two and $965m by year three.

From 2030 on, it would generate $1.35 billion a year ongoing.

This is, in itself, not a transformative amount of extra revenue.

The Cullen proposal was supposed to be revenue neutral, which meant it was possible it would have been offset by cuts to income tax or company tax rates.

This new Labour proposal is focused on funding a voter-friendly policy of free doctor’s visits.

That seems admirable in theory, but again, it seems to fail to deliver any transformational economic change.

It looks like a tough policy to sell for relatively little gain.

But perhaps the benefits will be broader, disincentivising property investment and pushing money into more productive areas – like local companies via the NZX.

It will be interesting to hear how Labour sells it … and how it lands with voters.

Counting the unemployed

Q: Hi Liam,

Just read your latest article [from October 19].

I think the main problem with unemployment stats is that (from my understanding) they still only reflect married/de facto relationships where both people are out of work. If one person in that couple is still doing enough work, then their income means the second person won’t qualify for the dole or jobseeker assistance if they lose their own job.

This might have worked 30 years ago when most households only had one breadwinner. Most now rely on two breadwinners, and, if one unexpectedly can’t work, it creates huge financial pressure that probably isn’t being accurately captured in official unemployment figures.

If all of the above is true, then surely it’s time to treat people as individuals, providing short-term emergency financial support whenever they lose their job through no fault of their own (for redundancy or illness – like how ACC works?). That support shouldn’t be tied to their partner’s income.

The same can be said for benefits like the pension. It should be per person, and not a reduced rate if you’re in a relationship.

I hope that gives some food for thought!

Julie T

A: Thanks, Julie,

You make some interesting points with regard to Jobseeker benefit numbers.

But one of the advantages of the official unemployment data (produced by Stats NZ from its Household Labour Force survey) is that it does count people on an individual basis.

We get new unemployment data next Wednesday, with a whole stack of other statistics such as employment numbers, the participation rate, wage growth and the under-utilisation rate.

I’ll put together a proper preview early next week. But early forecasts are for a slight rise in the topline rate of unemployment, but some stabilisation in the employment (job creation side of the equation).

Unemployment is currently sitting at 5.2%.

That’s historically not too bad, but is flattered by the record numbers of people leaving the labour market to either study or head overseas.

This shows up in the labour market data via the low participation rate.

The rise of contract and freelance work is also making the topline unemployment rate look better than it is.

There are large numbers of people who have some work (and so don’t officially qualify as unemployed) but who don’t have enough work to survive.

This is the under-utilisation rate (which captures underemployment and unemployment) was 12.8% in the year to June and much worse for younger age groups.

For those aged 20-24 (in the June 2025 quarter), the under-utilisation rate was 21.4%.

Over the past few years, there has been plenty of controversy about the discrepancy between Jobseeker benefit numbers and the official labour market data.

There are pros and cons to both. I think it’s important to consider both when we look at overall employment trends in New Zealand.

Big Thursday

While local economists await next week’s labour market data, there are some epic international headlines before this week, which could determine how the global economy tracks in the coming months.

First up, we have a US rate call coming from the Federal Reserve on Thursday morning. That will probably be another cut, which should make Wall Street happy but would also be an indicator that the US economy is still slowing.

There will be plenty riding on the commentary of Fed chairman Jerome Powell.

AI hype

Meta, Microsoft and Alphabet deliver much-anticipated, third-quarter results on Thursday morning (NZT).

Apple and Amazon are on Friday (NZT).

Markets will be watching closely to see if these stocks – which have surged as part of the AI boom – can deliver earnings that live up to the hype.

Why should we care? Well, if your KiwiSaver account has been looking pretty good lately, that AI boom on Wall Street probably has a lot to do with it.

There are plenty of sceptics who think we are in bubble territory and risk a big Wall Street correction. I’m sure we’ll get it one day. But for all our sanity, here’s hoping it’s not this week.

Trade war showdown

Finally, Thursday is also a big day for the global trade outlook with US President Donald Trump meeting his Chinese counterpart, Xi Jinping, in South Korea.

It is widely expected that they’ll reach a deal to resolve the current tariff standoff. The three-month deadline for Trump’s last delay to his plans for mega-tariffs on China ticks over on November 3.

I’m not sure where the optimism around these talks comes from.

Apparently, some promising frameworks for the discussions have been signed off on in advance by officials.

But when Trump enters the room, who knows which way things will go?

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.