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How tough is it for the middle class in New Zealand?

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Money worries have set off a wave of populist politics in most Western democracies, but not here. Is that because our middle class have been doing surprisingly well compared with those in other countries? Pattrick Smellie investigates.

Being middle class is meant to be pretty sweet, right? You can afford the stuff you need without too much worry. You can live somewhere nice enough and take the odd holiday. You have a decent-sized TV, you can get a loan from a bank without begging and that KiwiSaver account is swelling.

But if the US-based Pew Research Center is to be believed, being middle class in a Western democracy these days basically sucks.

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“America’s middle class reached a tipping point in early 2015 when it ceased to be in the majority after more than four decades,” says analysis of the Pew results published by the World Economic Forum. That’s the organisation that runs the annual billionaires’ bun fight in Davos, Switzerland, where Prime Minister Jacinda Ardern pitched her well-being and kindness politics in January.

“For the first time,” the Pew report concluded, “there were more [adult] people in lower- and upper-income households combined (121.3 million) than among the middle classes (120.8 million).”

Yet, last September, another equally respected US think tank, the Brookings Institution, published quite different, far more optimistic findings about the state of the middle class worldwide.

Homi Kharas. Photo/Supplied

“By our calculations, as of this month, just over 50% of the world’s population, or some 3.8 billion people, live in households with enough discretionary income to be considered ‘middle class’ or ‘rich’,” say researchers Homi Kharas and Kristofer Hamel, two recognised global experts on rising global affluence. “Those in the middle class have some discretionary income that can be used to buy consumer durables such as motorcycles, refrigerators, or washing machines.

“They can afford to go to movies or indulge in other forms of entertainment. They may take vacations and they are reasonably confident that they and their family can weather an economic shock – an illness or a spell of unemployment – without falling back into extreme poverty.”

The most-poor account for some 630 million of the world’s population, followed by a vast chunk of people classed as “vulnerable” – getting by, but with no resilience. Another 3.8 billion are classified as middle class and 200 million are classed as rich.

The apparent contradiction between the Pew and the Brookings findings is because the former looked at mature, Western societies only and the latter measured the massive rise of middle classes outside the traditional West, mainly in Asia, and boosted hugely by the rise of middle-class affluence in China.

Kristofer Hamel. Photo/Supplied

On that evidence, New Zealand would seem to be on the wrong side of history. Certainly, much of the country’s political narrative dwells on how difficult it is, not only for the poor but also for middle-income households, to make ends meet. Yet the hard statistical evidence on the state of New Zealand’s middle-income earners is not so cut and dried.

On one hand, the Nielsen research agency’s 2018 Quality of Life Survey finds that half of Auckland households earning between $70,000 and $100,000 a year struggle to pay the bills.

That certainly sounds like the “squeezed and angry middle” the Pew research identifies, particularly in the US, UK and parts of Europe, in the decade since the 2008 global financial crisis (GFC) wiped out trillions of dollars of wealth in many developed countries.

On the other hand, the same survey finds that 45% of households say they have enough or more than enough to live on, compared with just 16% who say they don’t have enough.

The squeezed middle

If there is a group in the middle feeling the pressure, it might be the 34% of households in the eight New Zealand cities covered by the Nielsen survey that say they have only just enough to come and go on. These, along with the poorest, are the households the Council of Trade Unions was advocating for when it released a survey from its membership last month in which 70% said their incomes “are not keeping up with the cost of living”.

That finding was intended to support the case for further employment-relations reform, embodied in the recommendations of the Fair Pay Agreement (FPA) working group, published on January 31. Yet the FPA report also shows that, compared with other countries, middle New Zealand hasn’t done too badly: “Since 2004, the change in New Zealand’s labour-capital income share has been flatter than in other countries that have continued to see a fall in the labour share of national income.” (see graph above.)

The FPA report also shows that, relative to returns on capital, wages and salaries fell steeply through the 1980s and 90s, though that reversed in the first decade of this century and has levelled out since.

Meanwhile, the most definitive and longest-running tally of New Zealand household income trends finds middle-income New Zealanders have done considerably better over the past 10 years than their international peers.

The 2018 report on the material well-being of New Zealand households, written by Ministry of Social Development (MSD) economist Bryan Perry, may come as a shock to anyone assuming New Zealand is going to hell in the same inequality handcart as the US.

Although New Zealanders’ incomes are not stellar by comparison with other rich countries, the MSD analysis shows that middle-New Zealand incomes have more than kept pace with inflation and risen more since the GFC than those in the US, UK and parts of Europe.

Illustration/Chris Slane

Worst in the US

Among Western nations with a squeezed middle, the “most severe” is the US.

“Median incomes in real terms are lower now than in 2000,” writes Perry, who will guide a journalist through his report but doesn’t give interviews (as a public servant, he will not be drawn into the heated political debate that his sprawling analysis of not only the income, but also the wealth, of New Zealand households can ignite).

In the US, wage growth has fallen behind productivity growth. Wages and salaries now account for 43% of American economic activity, compared with 47% at the turn of the century.

In that economy, improved returns for investors on new plant and technology are increasingly at the expense of the rewards for human labour. This in turn shows up in the share of all income received by the top 1% in the US, currently 23%, up from 15% in 2000, and 10% in the 1960s. By comparison, in New Zealand now, 1% lay claim to 7-8% of total income. In other words, our 1% looks like the American 1% did more than 50 years ago.

Where Brits, Americans and many Europeans experienced little household income growth after the financial meltdown, “New Zealand’s gain of about 15% in real terms to 2017 at the median is more like that of the top performers such as Finland and Canada”, Perry says.

With regard to New Zealand’s record on “inclusive growth” – increasing incomes while also reducing inequality – Perry’s research finds that, from the mid-1990s to 2016, “median disposable household incomes tracked very closely to gross national disposable income per capita”.

“In the post-GFC years, average wage growth (after tax) has been only a little less than the growth in median household incomes and GNDI [gross national disposable income] per capita.”

Decoded, that indicates New Zealand has been doing reasonably well at inclusive growth, and this success has been spread across both “higher and lower incomes”, says Perry.

No one’s suggesting it’s nirvana. The proportion of New Zealand households defined as middle-income is slightly smaller, at 59%, than the OECD average of 62%. The UK, Australia, Canada and Italy are all similar to us, at 60%.

Perry doesn’t discount the long tail of poverty – about a third of the population – nor the reality that income inequality widened sharply during the economic and welfare changes of the late 1980s and 1990s, and has become entrenched at those levels.

However, there has been little change in income inequality since the mid-2000s, around the time the Working for Families system was introduced by the Helen Clark-led Labour government and retained after the GFC by a National Party administration that had initially threatened to scrap it.

The spread of middle-class wealth also differs by ethnicity, although not in quite the way many might expect. The Perry analysis finds that, using a broad but widely accepted OECD definition of the term, 58% of Europeans or Pākehā are middle class, as against 63% of Māori or Pasifika, and 64% of people who identify as other ethnicities. That said, the Māori and Pasifika bourgeoisie cluster at the bottom of the OECD range, while Europeans/Pākehā cluster at the top.

Tim Hazledine. Photo/Rebekah Robinson/Listener

Disappointment and anger

In the US, the number of households defined as middle-income has fallen from 60% in the 1980s to 50% today, feeding the sense of disappointment and anger that propelled Donald Trump to the presidency.

The UK’s lesser version of the US slide, says Perry, has delivered incomes that outpaced inflation but left many people feeling less prosperous than they had anticipated. “Parents came to realise that unlike previous generations, there is little chance of their children doing better than they did.” The political result, among other things, was the Brexit referendum outcome.

In New Zealand, however, the hollowing out of middle-income households that occurred in the 1990s has been followed by “some recovery since 2007”, says Perry.

At the same time, New Zealand has seen record levels of immigration, reflecting skills shortages, the relative attractiveness of New Zealand compared with other countries and, crucially, a period of Australian economic weakness that brought many Kiwis home or discouraged them from leaving in the first place.

Immigration has kept a lid on wage growth, but incomes have still risen faster than inflation. Still, Perry is reluctant to express a view on whether New Zealand is part of the Western “squeezed-middle” phenomenon.

“Defining middle-income is challenging enough,” his report says. “‘Middle class’ is an even more fluid concept, with no commonly agreed definition. Income is part of it; so are aspirations, education level and type of employment.

“The question of whether the ‘middle class’ is squeezed or not is beyond the scope of this report.”

University of Auckland economics professor Tim Hazledine is willing to chance his arm. “I don’t see that middle-class New Zealanders have been squeezed, with the important exception of the housing situation,” he says. “Certainly, there hasn’t been an income squeeze. Looking at the past 20 years, the middle classes have done reasonably well.”

Even in Auckland, with its unaffordable housing, Hazledine is optimistic for people in the middle.

“Auckland is a high-amenity city – you can go for a picnic and swim for free, take a Lime scooter rather than having to own a car. You get your money’s worth if you live in Auckland. Economically, I can’t see anything in particular that will mean that the middle classes don’t do okay.”

Jim McAloon. Photo/Supplied

Housing affordability

Making sweeping judgments about middle New Zealand households’ financial well-being is particularly complicated by the effect of housing costs.

“The housing issue is one of the most significant factors that might make things more difficult for the next generation,” says Jim McAloon, a professor of history at Victoria University of Wellington. McAloon, 56, lived through the Rogernomics reforms of the 1980s and Ruth Richardson’s early 1990s welfare cuts. He disagreed with those policies, but has personally had a comfortable middle-class existence through his career.

“There’s a good deal of emphasis on extremes of wealth, but in a sense, that’s a narrative of the 1990s, not the narrative of the past 10 years,” he says. “I would say we are better off than I expected 20 years ago. I didn’t expect difficulties, but at this well-off level, we have maintained and perhaps improved our position.

“Perry’s paper makes the point that the real issue about being comfortable is not having to worry. There’s a good percentage of the population that don’t have to worry.”

However, that doesn’t include people either trying to buy a home in a major city for the first time or facing rents that have moved as aggressively as house prices in many regions.

Severely unaffordable

Last year, a survey of English-speaking world cities by Demographia, a St Louis-based consultancy that collaborates with Christchurch-based urban housing affordability activist Hugh Pavletich, showed New Zealand housing to be unaffordable in almost every city. The annual survey, Demographia’s 15th, was published in January and found Auckland and Tauranga to be “severely unaffordable”. Accordingly, the Perry analysis does show quite different outcomes for households depending on whether housing costs are factored in.

Low-income households have been particularly hard-hit. Household incomes after housing costs for the poorest 10% have only recently returned to late 1980s levels in real terms. However, the middle has again done all right. Perry: “The median returned to 1980s levels in the early 2000s and is now 25% higher than in 1988.”

Housing costs also make it almost essential for both parents in families with a mortgage to go to work. However, that can’t entirely explain the rise of two-parent working households when, for more than a generation, large numbers of women have chosen to work whereas, previously, they would have been expected to stay home.

That has happened across the OECD and New Zealand’s proportion of households with two parents in work, at about 68%, is also only slightly above the OECD average of 65%.

For middle New Zealanders already on the housing ladder, booming property prices have been a source of wealth and confidence. New-car registrations have boomed, peaking in 2017 at more than 108,000, while New Zealand short-term departures for international destinations – a rough proxy for overseas holidays – have been rising strongly since 2014 after a flat patch following the GFC (see graph above).

Boat-trailer registrations, another telltale sign of middle-class confidence, have climbed strongly over the same period. In 2009, straight after the GFC, fewer than 2000 new boat trailers were registered. In 2017, a record 3116 were registered, mostly in Auckland (see graph above).

Very low interest rates have played a part in this burst of confidence among sometimes heavily indebted property owners. ANZ’s head of retail and business banking in New Zealand, Antonia Watson, says that while house prices have roughly doubled since 2008, interest rates have halved.

“So as long as incomes are keeping up, [mortgage] serviceability has been reasonably steady in New Zealand in the past 10 to 20 years. That’s quite an important point.”

There is an obvious risk that interest rates will rise or borrowers will lose their jobs, she says. Likewise, a house-price collapse could leave heavily mortgaged borrowers with negative equity – owing more than their houses are worth.

However, the prospects for such a collapse in New Zealand are judged to be low because market conditions are being driven by an acute housing shortage. Although new immigration estimates show less growth than previously believed and that inward migration is falling, net migration remains high by historical standards.

Statistics New Zealand’s 2018 Household Economic Survey shows how dramatic the effect of rising house prices on the net wealth of households has been. The median value of household assets increased by nearly a quarter (24%) in just three years, from 2014, but “household debt remained unchanged”.

Household net worth – a measure of assets minus debt rather than income – rose 18% to a median worth of $340,000.

Antonia Watson. Photo/Supplied

Boomers v millennials

Of course, these are bald numbers. They mask the fact that, as Statistics New Zealand puts it, “people tend to build net worth throughout their lives”.

That’s why the median net worth of households made up of 18- to 24-year-olds – typically in a flatting situation – is just $2000, while the median net worth among 65- to 74-year-olds is $416,000.

There, laid bare, is the battleground for millennials and baby boomers. The boomers accuse millennials of spending up on smashed avocado and failing to save, while millennials accuse boomers of consuming wealth now that their generation needs in the future.

On balance, millennials would appear to have the edge in this argument. Young people are not only less likely to own a home but also spend and borrow less.

Millennials are much less likely to have credit cards than other segments of the population, says ANZ’s Watson. “They don’t want them. They don’t like them and they’re so in control of how much money they’ve got because they’ve got their phone out three times a day looking at their bank balance. “I used to have to go and balance my chequebook manually and get the calculator out. They’ve got it in the palm of their hand and are constantly looking at it.”

This is promoting the return of old buying habits among young people. New apps are cropping up for lay-by and instalment payment, mimicking the retail habits that the post-war generation swore by but which had all but disappeared until recently.

Meanwhile, those younger people who are withdrawing funds from their KiwiSaver accounts today are, according to Watson, likely to be able to access $20,000 because they’ve been in the 10-year-old scheme since its inception. A few years ago, first-home buyers had smaller KiwiSaver balances and were typically able to withdraw only about $10,000.

Intuitively, these trends make sense. A middle-class 23-year-old with a student loan, working part-time in hospitality or relying on the bank of mum and dad, inevitably experiences different financial security from, say, a middle-class couple with three school-age children, both working, and a big Auckland mortgage to pay. And the latter couple’s middle-class parents, who own their own home, are semi-retired and have ample life savings, will feel different again.

The point is that income is not a definitive guide to financial well-being. A pensioner living in a large house in an Auckland inner suburb could be a millionaire. A high-income household with no assets or too much debt could be struggling. Add in a serious illness, job loss, death or financial disaster and no one will feel protected by a statistical definition that says they are middle class.

Illustration/Chris Slane

Still better off here

However, even with housing costs included, the evidence is that middle New Zealand has done relatively well since the GFC. Middle-income households’ net gains over the decade since 2008 “are better overall than [those in] many OECD countries”, says Perry. “The negative effect was more muted here and the recovery has been stronger than for many.”

Other research, using 15-year-olds as a global proxy for household living standards, has found that New Zealand 15-year-olds have, on average, the third-highest material standard of living among 44 countries measured for the OECD’s educational attainment Programme for International Student Assessment (PISA) statistics (behind the US and Canada and ahead of Australia).

Taking information collected from  800,000 households around the world with a 15-year-old at home, economic think-tank Motu discovered in 2015 that the average New Zealand adolescent’s trove of gadgetry was among the best. This access to top technology drove the ranking, along with an unusually large number of bathrooms (we ranked seventh) compared with global peers, though teenagers here ranked poorly for number of bedrooms per household and a quiet place to do their homework.

The inequality picture was not so great: New Zealand ranked 20th of the 40 countries in the PISA survey. Nonetheless, Motu economists Arthur Grimes and Sean Hyland concluded that “New Zealand’s very high level of material well-being levels for households that have a 15-year-old child calls into question the oft-cited negative impression of material living standards in New Zealand compared with other developed countries". If economists were going to write “we don’t know how lucky we are”, that’s probably how they’d write it.

Grimes, who is chair of well-being and public policy in Victoria University’s  school of government, suggests that “the majority of people here have been doing fairly well”, partly because of strong job growth: some 2.6 million of us have jobs, compared with 1.8 million in 2000.

“If you keep creating huge numbers of jobs, that’s bound to make people better off,” says the former chief economist and later chairman of the Reserve Bank.

The statistics for unemployment and skills shortages tell a similar story. Around 70% of New Zealanders say they’re active in the workforce – a high proportion by OECD standards – and unemployment, at about 4%, is low and concentrated among low-income, low-skilled groups.

“Most people don’t find it hard to get a job if they have skills, and middle-class people are doing well because employers can’t get enough workers in almost any trade or profession, or able administrators,” says Grimes. “It’s an extraordinary time to be even moderately well qualified in New Zealand.”

Defining the middle class

On paper, middle New Zealand looks to be doing all right by world standards. But is the concept of the middle class outdated or too slippery to be helpful? Is it an expression too freighted with competing meanings and varying definitions?

The Brookings Institution’s Kharas defines a member of the global middle class as anyone who has between US$11 and US$110 ($16 to $160) a day to spend, which is a pretty wide range.

The rich countries’ club, the OECD, concentrates on household rather than individual personal incomes and talks about people with “middle-income status” rather than whether they’re middle class. It defines middle-income as any household that earns between three-quarters and two times a country’s median wage.

In New Zealand, that means a household that has between $63,780.75 and $170,082 in annual income before tax, based on a median household income in 2018 of $85,041, according to Statistics NZ (see graph above).

Expressed like that, the problem with the definition becomes clear. A household on $170,000 a year might do okay, but one on $63,780 a year and having to pay housing costs would be likely to struggle. At that level, they are only just above the median annual income for an individual New Zealander last year, at $51,844 ($997 a week before tax).

On top of that, such a measure says nothing about different life stages. Here, what matters most is whether the banking system works.

“Income varies considerably over an individual’s life cycle, and standard models show that it is desirable to dampen life-cycle fluctuations in consumption through borrowing and savings,” says Perry.

In other words, if the banking system is working, then households will typically be able to “have consumption that better reflects their lifetime income rather than their current income”.

Arthur Grimes. Photo/Stephen A'Court/Supplied

It may be that financial well-being is a more useful way to measure the financial health of middle New Zealand. People’s stage of life, personal circumstances, facility with money, expectations and disappointments are as important to the way they feel about their position in life as any income, let alone middle income, says Elaine Kempson, an emeritus professor at the University of Bristol.

An international authority on consumer finance, financial inclusion and well-being, she has conducted extensive research in New Zealand and Australia, along with several other OECD countries.

“If you’re in your thirties and you’ve just bought a house, you are probably really strapped for cash. You have no equity and in another decade, you may have made a lot of equity withdrawal.”

But borrowing against future expectations of income and the value of your home to meet current family needs is not hardship. It’s basic financial planning.

“Income varies considerably over an individual’s life cycle,” say Grimes and Hyland in their paper on our teenagers’ relative riches. “Countries with efficient financial systems enable families with children (our sample) to have consumption that better reflects their lifetime income rather than their current income, thus raising lifetime well-being.”

So, in part, middle-class status depends on the ability to borrow successfully and pay down debt over the course of an adult life.

In this equation, falling rates of home ownership only matter if failing to own a home is a measure of financial failure.

For the next generation of middle-income earners, it may not be, says Kempson, noting that home ownership does not turn up in her research as a major factor in feelings of financial well-being among younger people.

Michelle Commandeur. Photo/Supplied

“It’s interesting to think about the elders of today versus the elders of the future,” says ANZ Bank’s Melbourne-based head of financial inclusion, Michelle Commandeur. “The elders of today have come through a system where they tend to be asset-rich. Some might be cash-poor. The younger generation coming through may have a wholly different profile by the time they get to age 65-plus.”

Unlikely to change, however, are the determinants of financial well-being, which appear to be universally applicable, according to Kempson, who mapped the concept by conducting discussions with groups in 80 mainly South American and African countries.

“People generally agreed about what a financially capable person achieves and what they need to do that.”

Perhaps surprisingly, home ownership was not among them, whereas the ability to meet all current financial commitments and not fall behind was a fundamental measure.

After that, having “a bit of money for things you want and the things you need” were determinants of financial well-being, with increased well-being associated with having at least some savings to weather the unexpected.

Kempson, who surveyed Australians and New Zealanders for the ANZ, found a third of people in both countries had no savings at all, 40% were doing okay and 23% had no financial worries.

In other words, nearly two-thirds of the population was confident about its current financial circumstances, although there was a big divide between homeowners and renters. Homeowners were far more confident about their ability to manage their financial future, more likely to be saving, and felt they had the personal skills to manage their money well.

Also important are levels of education – both financial and general – since educational qualifications often dictate lifetime income and higher income tends usually – but not always – to correlate with high levels of financial well-being.

“The only way we can fundamentally change financial capability is to start as early as possible in schools,” the Commission for Financial Capability’s director of learning, Nick Thomson, said last year in comments about the trouble the commission had getting an effective schools programme in place.

The commission began delivering a $10.2 million “Sorted in Schools” programme in 2017 and assumed its existing financial-education material could be easily adapted for schools. It underachieved in its first year, although the commission says it is now “well on track” after a strategic reset following the change of government in 2017.

Nick Thomson. Photo/Supplied

Mum-and-dad consultants

Parental advice on money management may be just as important as formal education on finances, Kempson’s research has found.

“People whose parents did not provide them with advice on money matters when they were growing up had lower levels of financial well-being on average than those whose parents did provide such advice,” the ANZ study found.

That said, debts amassed while gaining tertiary qualifications contribute to reduced financial well-being, and the ANZ’s 2018 survey warned against seeing financial literacy education as a panacea, as was assumed some 15 to 20 years ago when research in this area began to mature.

The awareness of a need for greater financial literacy initially focused on the “dominant but flawed belief that more knowledge would or should result in more effective financial behaviour”.

That presumption neglected other crucial determinants of financial well-being, such as general economic conditions, household circumstances and levels of income and employment.

“Literacy or knowledge is important, but it is not sufficient for well-being.”

Fresh research by Kempson’s team is allowing New Zealanders’ sense of financial well-being to be tested against those of four other similar countries: Australia, Ireland, Canada and Norway. It found the lowest levels of overall financial well-being in New Zealand and Australia. People in Ireland, with similar income levels to New Zealand, were significantly more financially confident.

Key to financial well-being, says Kempson, is whether a person has an internal or external “locus of control” for their financial circumstances.

People with an internal locus of control are able to control their spending, plan their expenses, tend to save and feel more financially secure. People who struggle to make ends meet often have an external locus of control: they feel that life happens to them and that their financial circumstances are dictated by factors they cannot change.

That could as much be the pressure on a spendthrift middle-income household to buy a boat as the pressure on a low-income household to pay the rent.

Social class does play a role in these outcomes, she says. So do social norms. But the biggest difference she sees between New Zealanders, Australians and the other countries where financial well-being is studied isn’t income level or class. It’s the prevalence here of “she’ll be right”.

“You don’t save. That’s very noticeable. Australia and New Zealand are 10 percentage points lower than Norway for internal locus of control. What I love about you is your ‘she’ll be right’ attitude. But it’s an Achilles heel.”

This article was first published in the April 20, 2019 issue of the New Zealand Listener.