The Housing Racket Goes On


Once again, I feel compelled to write about house prices. Why? Because it is the most important cause of social distress in New Zealand today, and that by a large margin. There would still be social problems if house prices were half their present level, but they would be vastly more manageable – child poverty would be much reduced, mental health would be better, there would be less homelessness, there would be fewer suicides, and educational progress would be better if kids didn’t have to move between one over-crowded home and another at too frequent intervals.

Am I exaggerating? The latest data released by REINZ two days before I wrote this column in mid-August revealed that on average New Zealand house prices rose an astonishing 30.6% in the year to July. Prices in Auckland rose by “only” 27.7% over that period, which meant that prices outside Auckland rose even more rapidly, by 32.9%.

At the end of May, it was reported that median house prices in Mangere Bridge had reached $1.32 million, up $375,000 in 12 months, while Onehunga prices hit $1.3 million, up $385,000, and Glen Innes prices were $1.27 million, up $315,000. At those levels, the median house prices in those three suburbs – far from the most expensive in Auckland – were more expensive than the average price of a home in London, the equivalent of $1.25 million.

Oliver Hartwich of the New Zealand Initiative has pointed out that New Zealand house prices rose by 372% between 1970 and the present, compared with just a 35% rise over the same period in Germany.

At the beginning of July it was reported that house prices nationally were 12.4 times the average wage. Unsurprisingly, home ownership is lower than it has been at any time in the last 70 years.

These huge price increases not only put enormous pressure on a large fraction of the population – certainly those who can’t find accommodation they can afford of course, those struggling to meet the rental payments which are a reflection of the high prices, and also those who have mortgaged themselves to their eyeballs to get on the so-called property ladder for fear that within a matter of months prices will have moved still further out of reach.

But in addition, the huge escalation of residential property prices has also produced a radical redistribution of wealth. Those who could not afford to get a foothold on the “property ladder” – probably more accurately called the property escalator – or were too risk-averse to do so, keeping their money in fixed interest investments instead, have seen those who bought property with large dollops of borrowed money become millionaires through virtually no effort on their part. Recent international comparisons suggest that New Zealanders are among the wealthiest people on the planet, in large part because our housing stock has escalated at such a prodigious rate.

The Government pretends to be concerned about the situation. The number of staff at Kainga Ora, the government housing agency, has increased by more than 1,000 since Labour took office in October 2017, nearly doubling in size. The Government has radically changed the tax laws to discourage investment in housing by denying the deductibility of interest on money borrowed for property investment. The Government has offered a modest amount to local governments to cover the cost of the infrastructure often required before new housing can be built. Tight restrictions have been placed on the ability of foreigners to buy residential property. A combination of Government policy and the pandemic has virtually halted the strong net immigration which had been blamed as one of the causes of unaffordable housing. The Reserve Bank has required banks to require larger deposits from those investing in residential property, and is understood to be considering the introduction of a limit to how much a bank can lend relative to the borrower’s income. But so far at least, none of these policies seem to have had the slightest effect on slowing the juggernaut.

And there is no sign of the Government attacking what the Productivity Commission concluded back in 2010 was the biggest single cause of the price escalation, namely the tight restraint on the availability of land. Phil Twyford, the first Minister of Housing in the Ardern-Peters Government, also understood this issue: he was almost certainly the person responsible for including a commitment to scrap the Metropolitan Urban Limit around Auckland in the Government’s so-called Speech from the Throne in 2017. But that was a step too far for the Prime Minister perhaps because, as she has reiterated in public on many occasions, she doesn’t actually want house prices to come down – just to rise more slowly.

One thing I can say with confidence, however, is that house prices will not return to more affordable levels until land becomes available at more reasonable prices.

I occasionally see comments, sometimes in letters to the editor, claiming that unaffordable house prices represent a “market failure”, the implication being that more government intervention is required. The truth is exactly the reverse. It is government policy – central and local government – which restricts the supply of land available for housing. As a result, one of the least populated countries in the world has absurdly expensive section prices – my favourite example is the 400 square metre bare section selling for $800,000 in Flat Bush! It is quite literally impossible to build an affordable house on a small $800,000 section.

And the Government is about to make the situation worse. Yes, the Resource Management Act is part of the problem but what the Government proposes to replace it with will be several times worse. As David Seymour has said: “the Government’s proposed changes to the RMA risk creating a regulatory nightmare… The proposal focuses on central planning and its first priority is to honour the Treaty. That won’t get things built.”

Those who oppose so-called “urban sprawl”, or support so-called Smart Growth, must accept the fact that they are quite directly supporting the continuation of unaffordable housing.

As I write, there is a widespread expectation that the Reserve Bank is about to increase the Official Cash Rate for the first time in a considerable period. If this happens, it will lead to a gradual increase in mortgage interest rates. Might this finally slow the growth in house prices? I’d certainly like to hope so.

Interestingly, a survey published in the New Zealand Herald in early June suggested that 64% of New Zealanders surveyed believed that house prices needed to fall and a further 28% felt that they should “stay about the same”. On the face of it, that seems like a pretty strong constituency for at very least seeking to stabilize house prices, and perhaps ease them back ever so gently.

Of course, property markets rarely lend themselves to fine tuning. At some point there will be a correction: house prices can’t rise faster than incomes indefinitely and, as somebody much wiser than I am once remarked, things that can’t go on forever will eventually stop.

This piece first appeared at eLocal Magazine.

Don Brash has been one of New Zealand's leading economic and financial policy advisers, and over the years he has provided advice to governments in many parts of the world – in New Zealand most obviously, but also in recent years in Indonesia, Cambodia, the Bahamas, Saudi Arabia, and the Pacific Islands.

He was Governor of the Reserve Bank of New Zealand (the nation’s central bank) for 14 years. During his tenure inflation in New Zealand was reduced to its lowest level for several decades (1988-2002). Don led the Bank through the passage of the Reserve Bank Act of 1989, pioneering legislation which both established a relationship between government and central bank which was internationally unique at that time and made the objective of monetary policy unambiguously clear – achieving and maintaining stability in the general level of prices.

Don then served in Parliament from 2002 to 2007, and led the National Party into the 2005 election, nearly doubling its share of votes, though not winning the election.

Photo: Mr. Thinktank, via Flickr under CC 2.0 License.