Wayne Brown ignores cumulative effects

Liam Hehir writes:

Wayne Brown’s claim that the Government’s proposed rates cap would save Auckland households “just $2.79 a month” is eye-catching, quotable, and deeply misleading. Not because the rates cap is necessarily a good idea, but because Brown’s framing badly understates its real effect. …

Rates are a compounding charge. What matters is not the first-year saving, but the rate base that is locked in and carried forward year after year. A slightly lower increase today permanently reduces every future increase that follows. This is basic arithmetic, familiar to anyone who understands mortgages, interest rates, or inflation.

If rates rise by 9% instead of 4% in a given year, the difference does not vanish after 12 months. It becomes the new starting point. Next year’s increase is applied to a higher number. And the year after that. Over time, modest differences at the margin turn into material differences in household budgets.

Take the current average Auckland rates bill of about $4,000. An extra 4% instead of 8% sounds trivial if you treat each year in isolation, as if the increase simply resets back to zero. On that mistaken view, the difference is about $160 a year, forever. But rates do not work like that. They compound. 

Each year’s increase is applied to a larger base created by the year before. Over 10 years, a 4% annual increase lifts the bill to around $5,900. An 8% path takes it to roughly $8,600. The gap is no longer $160. It is nearly $2,700 every year, locked in permanently.

In Wellington it may be even greater savings.

The average rates bill is around $6,000 and increases have been over 10%. A 10% annual increase vs 4% annual increase will be a difference of $6,680 within 10 years. That is $128 a week difference.