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Inflation and the Measurement of Saving and Housing Affordability

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  • Andrew Coleman

    (Motu Economic and Public Policy Research)

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.

Suggested Citation

  • Andrew Coleman, 2008. "Inflation and the Measurement of Saving and Housing Affordability," Working Papers 08_09, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:08_09
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    File URL: https://motu-www.motu.org.nz/wpapers/08_09.pdf
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    References listed on IDEAS

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    1. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    2. Andrew Coleman, 2007. "Credit constraints and housing markets in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2007/11, Reserve Bank of New Zealand.
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    Cited by:

    1. Steven C. Bourassa & Donald R. Haurin, 2017. "A Dynamic Housing Affordability Index," International Real Estate Review, Global Social Science Institute, vol. 20(3), pages 251-286.

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    More about this item

    Keywords

    inflation; real interest rates; housing affordability;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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