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Inflation and the Measurement of Saving and Housing Affordability

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  • Andrew Coleman

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    (Motu Economic and Public Policy Research)

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    Abstract

    This paper analyses the effect of inflation on the measurement of saving and housing affordability in New Zealand. When the inflation rate is positive, the income and saving of lenders is overstated and the saving of borrowers is understated because a portion of the interest earnings on capital are not true earnings but merely compensation for inflation. Because New Zealand has a large international debt position, this distortion means aggregate saving is understated, possibly by 2 percent of gross domestic product per year. In addition, a standard measure of the cost of financing the purchase of a house is overstated by approximately fifty percent, as a large part of mortgage payments are actually saving. Nevertheless, at the end of 2007 the cost of financing house purchase in New Zealand was at a cyclical high, approximately 40 percent higher than its average level since 1990.

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    File URL: http://motu-www.motu.org.nz/wpapers/08_09.pdf
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    Bibliographic Info

    Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 08_09.

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    Length: 21 pages
    Date of creation: Jun 2008
    Date of revision:
    Handle: RePEc:mtu:wpaper:08_09

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    Keywords: inflation; real interest rates; housing affordability;

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    1. John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management And Optimal Mortgage Choice," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1449-1494, November.
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