Productivity the key to bridging the gap between incomes and house prices

Because Productivity has been flat in New Zealand, wages haven’t kept pace with house price inflation. And its not just NZ. It’s a phenomenon across the Western world

Luckily New Zealand’s economy has been enjoying strong growth in GDP in recent years – helped by record migration population growth, record low interest rates, and a construction boom.

However, outside the construction and engineering sector and professional services and finance sector, there has been sluggish growth in hourly wage growth. Partly, our productivity has not increased much. People are working longer hours to get work done, which means total pay is increasing but the hourly rate has not changed much.

There is a direct relationship between Productivity and Wage growth and a nation’s living standards.

Productivity is measured as output divided by number of workers. Economists measure productivity by dividing the GDP by the number of people in the labour force to get the GDP per worker (in economics, this is called GDP per capita). New Zealand’s present GDP per-capita level still lags OECD average levels by around 15 percent, Australian levels by around 20 percent, and US levels by around 40 percent, which explains why Australia’s wages are higher than that of NZ.

What does it mean that Australia’s GDP per worker is around 20 percent than NZ’s GDP per worker? Think of it like this.

Assume in NZ, 1 worker could produce 100 units of output working 40 hours in a week.

If Australia’s productivity is 20% higher, a worker in Australia could produce 120 units of output working the same 40 hours in a week. Because they can produce more in the same amount of time, the employer can afford to pay them higher wages.

So how to increase productivity? Historically education and better technology has contributed to increases in productivity. You have to make your own judgment about the education system. As for technology: Now the flood of emails, down time wasted on youtube and Facebook has possibly slowed or decreased productivity. VR and robotics may provide hope to increase productivity in the future.

Even the Reserve Bank governor has said that We’ve seen good output and employment growth over the last five years, but we’ve  also seen weak productivity growth.

Instead of income growth driving property prices, low interest rates and borrowing more money has been driving the real estate markets. People are relying on using debt to fund their consumption. Arguably, people are not creating Real wealth for a country when they drive up the house prices of the existing housing stock. Instead real wealth comes creating more housing stock as many apartment and housing developers are doing. But because NZ has a smaller pool of skilled construction workers, supply can’t keep up with demand, forcing the existing house prices to rise significantly partly fuelled by migration, and partly fuelled by cheap credit.

To avoid a housing market correction, by putting brakes on lending and restrictions on investors, governments need to encourage and increase the country’s construction labour, encourage more development, and look for ways to increase labour productivity so wages grow and outpace house price inflation.

 

 

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