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Inside Economics: Is the housing wealth effect a mass delusion?

  //humor-quirks.news-articles.net/content/2025/10 .. s-the-housing-wealth-effect-a-mass-delusion.html
  Published in Humor and Quirks on Tuesday, October 28th 2025 at 14:16 GMT by The New Zealand Herald
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The housing‑wealth effect in New Zealand

The article begins by explaining the core of the housing‑wealth hypothesis. The idea is simple: when property values climb, homeowners feel richer, their perceived net worth goes up, and they tend to spend more. This “wealth effect” has been invoked as a justification for fiscal stimulus or for maintaining a low‑interest‑rate environment. In New Zealand, the rise in the Residential Property Price Index over the last decade has been dramatic, especially in Auckland, where prices have more than tripled since the mid‑2000s. The question is whether this wealth bump has translated into a sustained increase in consumer spending.

To answer that, the article cites a recent study by the Reserve Bank of New Zealand (RBNZ) which examined the relationship between house‑price movements and household consumption. The RBNZ report, which was released earlier in the year, found a modest correlation between house‑price growth and household spending, but the effect was statistically weak and varied considerably across income brackets. High‑income households, who typically own their own homes, were found to have a stronger wealth effect, while lower‑income households—many of whom rent—experienced little or no increase in spending in response to price hikes.

The Herald also draws on a research paper by the University of Otago’s Economics Department. This paper used longitudinal data from the Household, Income and Labour Dynamics in Australia (HILDA) survey, adapted for the New Zealand context, and concluded that while homeowners may feel wealthier, this does not necessarily translate into higher consumption because much of the increased net worth is locked in illiquid assets. Instead, the researchers suggest that the wealth effect is largely a psychological phenomenon that can influence asset‑allocation decisions, such as the choice to purchase a second home or invest in a diversified portfolio, rather than directly boosting spending.

The evidence of a delusion

The article’s headline suggests that the author is skeptical of the housing‑wealth effect. The Herald writer recounts a conversation with Dr. James Henderson, an economist at the Reserve Bank. Henderson notes that the evidence points to a much smaller role for house‑price appreciation in driving economic growth than policy narratives have often suggested. He highlights that the RBNZ’s own “Housing Market Review” found that, even during periods of rapid price growth, the increase in spending was largely offset by higher mortgage repayments and interest payments. Essentially, homeowners were simply paying more for their existing mortgages rather than buying new goods or services.

An additional piece of evidence comes from the New Zealand Treasury’s “Household Finance Report”. According to the Treasury, households in the top quintile of net worth grew their consumption by only 1.3 % annually during the 2006‑2016 period, whereas the general consumer price index rose by 2.5 % in the same timeframe. The Treasury’s analysis implies that the perceived wealth boost did not substantially alter consumption patterns when adjusted for inflation.

Policy proposals that rely on the wealth effect

The Herald article notes that some politicians and policymakers have leveraged the housing‑wealth argument to support low‑interest rates or targeted tax cuts. For example, the recently passed “Housing for Growth” bill included provisions to reduce the effective marginal tax rate on capital gains, arguing that it would stimulate investment and spending. Critics, however, claim that such measures would simply benefit those already owning property, exacerbating inequality rather than stimulating real economic activity.

The article references a policy brief by the New Zealand Institute of Economic Research (NIER), which argues that instead of focusing on housing‑wealth, the government should target more direct drivers of consumption such as wage growth and debt‑to‑income ratios. The brief points out that the average household debt‑to‑income ratio in New Zealand was 1.7 in 2023, indicating that many families may be constrained from spending regardless of any perceived wealth increase.

The resurgence of the CGT debate

The second half of the piece shifts focus to the capital gains tax debate, a topic that has resurfaced amid rising political pressure to address the housing affordability crisis. The Herald outlines several arguments for and against a CGT:

1. For a CGT: The main argument is that it would capture a portion of the gains homeowners have realized from the massive price increases, generating revenue that could be redirected into affordable housing or social welfare. Supporters also argue that a CGT would reduce the incentive for speculative property investment, potentially dampening the asset‑price bubble.

2. Against a CGT: Critics contend that a CGT would disincentivise property investment and hurt the construction sector. They argue that it would primarily benefit the affluent, who are more likely to own property, thereby exacerbating wealth inequality. Moreover, the tax could be administratively complex, especially when trying to differentiate between primary residence and investment properties.

The Herald includes an interview with Dr. Sarah Patel, an economist at the University of Auckland, who points out that New Zealand’s current tax structure already taxes the net income from property rental and capital losses. She suggests that a CGT could be integrated into the existing framework, but warns that any misstep could destabilise the housing market.

Other sources cited

The article also follows a link to a recent piece by the New Zealand Economic Association titled “The Psychological Impact of Housing Wealth”. The piece examines how perception of wealth can influence spending patterns beyond the actual increase in liquidity. It also references the OECD’s comparative analysis on house‑price effects, which found that in countries with high savings rates, the wealth effect on consumption is markedly muted.

Conclusion

In sum, the Herald article challenges the conventional wisdom that rising house prices automatically translate into a robust housing‑wealth effect that fuels consumer spending. By drawing on research from the RBNZ, the Treasury, academic studies, and policy briefs, it presents a nuanced view: the wealth effect exists, but its magnitude is limited and heavily mediated by factors such as income level, debt burden, and the liquidity of assets. The piece then links this discussion to the broader debate over a capital gains tax, framing the tax as a potential tool for redistributing wealth and stabilising the housing market, but also highlighting the risks of dampening investment and increasing inequality. The article closes with a call for evidence‑based policy that focuses on the underlying drivers of consumption—particularly wage growth and debt sustainability—rather than on the perceived gains from a fluctuating asset market.