Why the “tight middle” is actually quite plump
The opposition and some commentators point to what they call the “narrow middle” to buttress their case for middle to high income tax cuts and when they warn against government or Reserve Bank that could cause a “housing crash”.
In fact, the ‘tight middle’ is pretty plump and not risking some kind of forced rush to the exits that would turn an expected 15% drop in house prices into something more like a 30% ‘crash’. at 50%. %. Middle-income households are doing well, especially if they own their own homes, according to the latest statistics on income, mortgage costs, cash savings and household net worth.
National Chief Christopher Luxon has done much of what he calls the ‘tight middle’ in his cost-of-living attacks on the government in recent months, arguing that this group of ‘hard-working average Kiwis’ was missing government assistance. in the face of rising fuel, food and mortgage prices. Those calls convinced the government to pull a last-minute ‘rabbit’ from the hat in the 2022 budget of a one-time $350 cash payment this winter for those earning less than $70,000 a year and not receiving the payment. for winter energy (which cut those on NZ Super and all households on prime benefit).
But is the “tight middle” really that tight?
Looks like they’re running out of money because the headlines are a daily howling drumbeat of higher grocery prices, higher fuel prices, higher airfares and even (prepare) a tasty cheese costing nearly $20 per 1 kg block. It seems ‘obvious’ to say that households with average incomes are falling behind and may even struggle to afford food, fuel and housing. Some commentators have even worried aloud about the risk of massive mortgage sales caused by higher interest rates causing house prices to plummet by 30% to 50%.
But is it really true? Is there so much financial stress for homeowners that it could turn into a housing market rout, or force the government to step in with even more ‘rabbits’ to feed the current accounts of the ‘middle in a hurry’ . It depends on what the opposition means by ‘middle’ (they never gave a definition), but it’s fair to assume they’re referring to middle-income, home-owning households. It is perhaps not too surprising that the “tight middle” is around the median cohort of about 20% of voters who determine election results.
Look for the real environment
Since we don’t have a clear definition from the opposition, let’s take a look at the official range of measures. Firstly, gross average gross income was $110,451 per year up to June 2021, as shown by Stats NZ’s latest Household Income and Cost of Housing report. statistics for the year to June 2021, up 4.5% year-on-year. Median gross household income was $89,127, up 5.4% from a year earlier. But this is crude in that higher incomes generally drive the average higher. It also does not take into account the various taxes and ‘transfer payments’ (Working For Families, NZ Super, Accommodation Supplement and various benefits) which determine how much a household has to spend.
In the year ending June 2021, average annual household disposable income (after taxes and transfer payments) increased by 4.5%, from $84,648 in 2019-20 to $88,454. Median household disposable income rose 4.3% to $74,563.
But there is another measure, which is the most widely accepted among experts. This is the “equivalent” household disposable income, which removes the effect of different household sizes and compositions on the estimates, and removes taxes and benefits. For example, if there had suddenly been an increase in the size of households with workers or non-workers, this would skew the “apples for apples” measures of household income.
The median equivalised household disposable income before shelter costs was $43,125 for the year ending June 2021, up 5.1% from the previous year.
So the “loose” measure would be household income of $110,451, while the more nuanced and “tight” measure is $43,125.
It’s a useful starting point as a range, but it’s also outdated, given what we’ve seen with income and expenses over the past year.
Lots of cash and equity for the “tight middle” of homeowners
Stats NZ released National Accounts Data for the March quarter of this year this week, which showed what happened to total household disposable income, savings and net worth during this period.
It shows total household disposable income in the year to the end of March rose 6% from a year earlier to $217 billion, and rose 12.1% the year just before Covid hit. Since Covid, households have collectively saved an additional $20 billion and increased cash and term deposit balances in their bank accounts from $31.4 billion to $227 billion. They may have kept some money aside from the sale of certain assets, including houses.
Household net worth increased $621 billion or 34% since Covid to $2.421 billion at the end of the March quarter. This, of course, measures all households, but the vast majority are owned by owners. Tenants haven’t been able to save money since Covid and they haven’t taken advantage of the rise in asset prices caused by central banks printing $9,000,000,000 of money from around the world since Covid.
So the bottom line here is that owner households have seen their incomes increase by at least 12% since Covid, have amassed an additional $31.4 billion in cash, and have seen the equity in their assets, including property , stocks, companies and cash, increased by more than $620 billion to $2.421 billion.
Higher mortgage rates not at all stressful for almost all homeowners
These households are also not stressed by an increase in mortgage and other debt from about $40 billion to $276 billion and an increase in effective mortgage rates (the average being paid) currently from about 2.75% to about 3.1%.
This is because their total assets increased by $655 billion to $2.698 billion. Households have a collective loan-to-value ratio of 10.2% and the collective LVR on their home is 20.4%. Their group mortgage service fees represent just 6% of disposable income, well below the peak of September 2008, when mortgage rates were above 10%.
Many fixed rate mortgage borrowers still have to move to higher interest rates of 5.5% to 6.0% for new mortgages, but even then the collective cost is unlikely to reach the two digits.
Of course, these totals mask a wide range of situations, from those with no mortgage debt to those first-time homebuyer couples who took out mortgages over 80% with debt at multiples of income. more than six to seven times the income to buy houses. at the end of last year just before the peak.
But even if they are unlikely to be in enough trouble to not be able to pay the mortgage or if they would be so underwater they would make the bank nervous. This is because the Reserve Bank has made it very difficult for first-time home buyers to prepare for nearly 100% home value and banks have used utility test ratios well above of their actual mortgage rates. This means that the bank would not have loaned the money to first-time home buyers unless they could pay the interest with a 6% mortgage rate.
Further, less than 10% of first-time homebuyers were in the difficult position of having a mortgage worth more than six times their income and a loan worth more than 80% of the value of the home when they took out their mortgage.
The real concern for banks is whether there is widespread and high unemployment and/or some kind of wage deflation. Nor is it the case, with an unemployment rate of 3.2% and any young home-buying couple more than likely to have high and rapidly growing incomes.
Even a 30% drop in house prices wouldn’t stress them out as much. The Reserve Bank estimated that only 1% of banks’ mortgage portfolios would be in trouble.
Banks are also much, much more capitalized than they were in 2008/09, which the Reserve Bank has estimated from its stress test exercises, meaning they have buffers to manage even a 40% drop in house prices in tandem with a 13% unemployment rate. .
Only a few are tech-savvy, but their incomes are growing fast
It’s true that potential first-time home buyers will struggle to afford a home at current prices and interest rates, even if they have a deposit, as the Reserve Bank has pointed out.
However, these people are also in the situation of having rapidly rising incomes because they are able to take advantage of larger salary increases and work longer hours.
As the Reserve Bank also pointed out, households have actually increased their total incomes faster than prices have risen over the past two years. Even though inflation is higher than increases in hourly wages, growth in total income is stronger.
The key, as always, is whether the “restricted middle” household is an owner or a tenant. Homeowners will overwhelmingly have large cash reserves, much lower housing costs, strong income growth even after inflation, and plenty of equity to help them sleep at night. . They don’t need the help of National’s proposed tax threshold change that would provide most dollars to high-income earners, or the government’s one-time cost-of-living payment.
It is tenants who are struggling, but they are unlikely to be the median votes targeted by the opposition. Nor are they, by definition, homeowners who are in so much trouble that they bail out their homes in a way that stresses the housing market or the banks.
They’re the most stressed right now, but they’re much more likely to be well below the “not in a hurry” middle. These are working poor and beneficiary households who were not actually eligible for the 2022 budget bunny and who would get virtually none of the National’s tax cuts.