The correlation between New Zealand’s residential property boom and consumer spending in the past decade wasn’t as close as commonly assumed, according to a report in the Reserve Bank’s latest bulletin.
The article by central bank researchers Emmanuel De Veirman and Michael Reddell concludes that consumption as a share of income “did nothing very unusual during an unprecedented housing boom” that ended in 2007.
“It is likely that higher asset prices (and higher house prices in particular) will have altered the distribution of consumption more than they raised the total private consumption,” the researchers say.
“If house prices had directly influenced total private consumption, we might also have expected to see net household debt (relative to income) rising faster than usual during such a large house price boom."
"Slightly surprisingly in New Zealand data there is no sign of that.”
Historically, there appears to be a positive relationship between consumer spending and the value of the housing stock, but unexpected changes in house prices probably have more of an effect on the distribution of wealth (and consumption possibilities) than on the overall level, the report says.
If people do generally increase their spending based on perceived increases in their housing wealth that would probably involve some of them increasing their debt for a time, they said.
“Restrictions on borrowing make it harder for a household to spend out of future income, they weaken the relationship between consumption and expected future resources, but they strengthen the relation between consumption and currently available resources,” they said.