Inflation and the Measurement of Saving and Housing Affordability

Andrew Coleman

No 292648, Motu Working Papers from 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.

Keywords: Public; Economics (search for similar items in EconPapers)
Pages: 21
Date: 2008-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:motuwp:292648

DOI: 10.22004/ag.econ.292648

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