The Wealth Ladder: House Prices and Wealth Inequality in New Zealand

For many New Zealanders buying a house has traditionally been the first rung on the wealth ladder. But there has been concern that recent house price growth has led to this first rung moving out of reach of first home buyers. This Analytical Note presents preliminary work on the relationship between house prices, the wealth distribution, and wealth inequality. We find that housing wealth is the largest and most widely held type of wealth in New Zealand and that, partly reflecting house price growth, wealth has been increasing over time. Overall, we find that wealth inequality slightly decreases when housing wealth increases, all else equal. However, we find an increase in wealth inequality between those already on the wealth ladder and those who have not reached the first rung. We also find that households who have not made it onto the wealth ladder are more likely to be living in material hardship or to have high housing costs. The most recent data on the wealth distribution is from 2018, so it is not yet possible to directly measure the impact of recent house price inflation. This Analytical Note thus takes a “scenario” approach - where the effect of scenarios for house price growth on the 2018 wealth distribution and, in turn, wealth inequality, is modelled while holding all else constant. Note that this is a highly stylised exercise and changes in the return to other assets (such as financial assets) will also have an important effect on inequality. It is thus useful to consider the findings of this work alongside other relevant research, such as RBNZ work on the household cash flow effects of low interest rates (Nolan, 2021). The methodology and data used are explained in an annex to this Analytical Note. We plan to do further work on this topic when new data become available in the first half of 2022.