Times right now aren’t easy. The culmination of a global pandemic, the war in Ukraine, and political instability have collided to create a cost-of-living crisis that is leaving the middle class strapped for cash.

Kiwis are shelling out more than many can afford to pay for daily goods, with annual inflation rising 7.2% in the September quarter of 2022 according to Stats NZ.

For context, inflation reached a peak of 5.1% during the 2008 Global Financial Crisis which caused economic havoc across the globe.

In recent years, lockdowns in many countries caused a supply-chain crisis, with considerable delays in goods and an increase in shipping costs. Printing money (‘quantitative easing’) to prop up economies during the pandemic – with no productivity as many people sat at home during lockdowns - caused inflation to spike. New Zealand’s fiscal policy encouraged spending, as middle to upper-class Kiwis found themselves unable to jet off to Fiji or Europe, and the travel piggybank was emptied on everything from pools to cavoodles to self-contained vans. Our spending surged and so did inflation as a reaction. Then, with New Zealand inflation already over 6%, Russia’s invasion of Ukraine saw the cost of oil skyrocket.

Food prices rose a whopping 10.7% in one year, with Consumer Price Manager James Mitchell putting the blame on “cheddar cheese, yoghurt, and standard two-litre milk” as the culprits for the hike in grocery prices.

The Working Poor

There’s a growing concept of the ‘working poor’ or ‘work poor’. Many of these people are ones who may be at the lower end of the middle class.

There is no one accepted definition of the ‘working poor’ though it might broadly include those who are working long hours but being well-taxed on their earnings, perhaps paying a mortgage at mortgage interest rates much higher than they first signed up for, and seeing the cost of everything they need (food, transport, and so on) rise to the point they’re struggling to get by. Some in this category might have even seen the value of their home or KiwiSaver Scheme rise over the years, but that means little if they feel like they’re battling to make ends meet from month to month!

A Global Tightening of the Coffers

The New Zealand middle class are unlikely to be alone in feeling the pinch. A recent Bloomberg article identifies a stretched middle class in the United States. “The average wealth of adults in what the Berkeley economists call the “middle 40%” — the population whose wealth falls in the 50th to 90th percentile — had… fallen about 7%, or by more than $27,000 to $366,100, since that March peak, they estimate. That’s already the biggest hit seen since the 2007-09 global financial crisis.”

In layman’s terms, most signs indicate the middle class are losing money in real terms. The Harris poll of American middle-class voters found that although 86% said their personal financial situation was good at present, one in five expected it to worsen in the next year. “Twice as many said they felt either stressed or anxious about the current state of the US economy as those who felt calm. Only 26% said they felt optimistic.” In fact, 80% of middle-class respondents to The Harris Poll said they were cutting back spending. While this is US data, it is reasonable to conclude the data would be the same in New Zealand.

The Problem With Property

Inflation is eating up the middle classes’ salaries, leaving a huge proportion of the population with simply less surplus cash to spend. What complicates this situation is the housing market. Around the globe, the majority of the middle class has its wealth tied up in property (real estate). In New Zealand (and Australia for that matter!), the value of real estate is falling significantly, mainly thanks to rising interest rates spurred by increasing OCRs to rein in inflation.

Interest rates have already risen from around 2.3% in 2020 to 7.5% in 2022. People are scrambling to find an additional few hundred dollars a week to cover this interest hike, and for most families that money comes at the cost of cutting another expense. Newsroom predicts an additional $300 to $400 a week will be required to cover new mortgage rates for homeowners across the nation.

Just a third of New Zealand homes are mortgage free. Hamilton, the Waikato District, Wellington, and Selwyn (in Canterbury) have the lowest percentage of mortgage-free homes in the country– only 27%. It is a harsh reality that many Kiwis are asset rich but struggling to get by. The good news is that paying a mortgage rather than paying rent allows one to be accumulating wealth slowly, rather than pouring money down the drain, yet holding on to a house by the skin of one’s teeth is not a nice place to be in.

As the middle class is squeezed, the blame is often placed on “the rich”.

Are the Rich Getting Richer in New Zealand?

Fact check: despite what many think, or what you might read in the mainstream media, the rich aren’t getting richer. At least according to the most widely used measure of wealth distribution: the Gini coefficient over the most recent seven years as measured by Stats NZ.

The perception of “the rich getting richer” probably comes as NZ’s middle class are squeezed by a combination of higher living costs, more taxes (including tax bracket creep), regulation disproportionately impacting small- to mid-sized-enterprises (SMEs), and low New Zealand productivity reducing individual earning potential.

So, next time you hear “the rich are getting richer” take a moment to reflect that actually, the data doesn’t support this. But most data does indicate that the middle class are being squeezed!

Solutions?

Unfortunately, there is no quick fix to a recession – no individual can curb inflation and reset interest rates. In dire times there is a more important need than ever for good financial planning and goal setting. Budgets can be life savers; the key is to make them realistic.

Learn more:

• ‍High income skills
• Top sources of passive income
• Jobs for a bad economy
• The best office jobs in a recession

Aside from boosting income, for those in the middle class with enough equity in their property that cash is not so strapped, it may be time to consider diversifying one’s investments. The share market has taken a hit over the last year, and property is increasingly attractive for those who can afford it.

Engaging a financial adviser who can take a calm, rational and unemotional look at one's finances is perhaps a great idea. Get in touch to book a complimentary initial consultation.