January’s North & South magazine is headed “Is the Housing Market Rigged”? The article goes into depth on the resurgent property market and whether the take-off in prices is like constructing castles of sand.
It compares New Zealand with the US and all those economies in Europe that have had property booms and an almighty bust as a result. As we all know New Zealand has had the booms but nothing like a bust – there’s been a “gentle settling” we could say. As a result, property prices here remain massive compared to household incomes on any international comparison.
The two questions of course are whether our property prices should or will fall (or in economics parlance, “correct”)?
One thing the North & South article – which is otherwise excellent and comprehensive – doesn’t cover is the consequence for New Zealand of our ingrained over-investment in property. I have pointed this out before – it is a misallocation of investment on a national scale where the investment pattern is driven more by tax and finance availability than by economic or market fundamentals.
Everybody agrees that it is a major distortion. The consequence of this investment misallocation is that the economy is not as large as it otherwise would be, incomes not as high and jobs not as bountiful. You would think then it would be a no-brainer to fix the distortion, to remove the shackles from economic growth and employment – and for that matter, the tax base of government. Oh we could be so lucky.
Perhaps the most frustrating aspect of the North & South opinion survey is that everybody is agreed about the disease, even on the causes of the disease. But we are either too intellectually lazy or politically cowardly to fix it. It will persist until this crisis manifests itself in a form that cannot be avoided.
An economy that continually performs below its potential either ends up generating an inflation, balance of payments, or unemployment crisis – or all three as we saw in the 1970′s. Once one or any of these get serious enough adjustment occurs for sure – even if it doesn’t involve correcting the actual cause of the distortion.
For example a general outburst in inflation will spark the Reserve Bank into action raising interest rates and crushing economic activity across the board as inflation is brought back; a balance of payments blow out will see the currency fall and produce inflation or a recession (if the Reserve Bank reacts to the inflation) and will move resources into the export and import substituting sectors, which could well be irrelevant to the fundamental distortion, and a rise in unemployment is generally met by a raft of part fixes to stimulate the demand for labour. In summary all these policy reactions address the symptom not the cancer.
So the obvious question is why don’t we address the drivers of the property market distortion – the tax break and the preference for mortgage lending that the Reserve Bank requires the commercial banks to have?
The tax question scares the bejesus out of the politicians who are terrified their careers would be terminated by taxing the benefit property ownership confers on owner-occupiers. When in Opposition the politicians are more prone to advocate the tax loopholes on capital ownership be closed, but when in power their conviction evaporates. So the real answer on tax then is that New Zealanders will not support a change in tax on property until the crisis gets a lot more serious than it is currently is – most people have jobs, enjoy life, so who cares? How far away could such a cliff lie? No idea – the overseas precedents suggest we need the equivalent of a local “Global Financial Crisis (GFC)” until any commitment would emerge. Meanwhile we’re more than happy to see the disparity between rich and poor keep growing – another outcome from the favours conferred property owners.
And on the Reserve Bank’s preference for mortgage lending over any other form of loans? The Reserve Bank is at least talking post-GFC more about its responsibilities around prudential supervision and managing better the exposure of the banking system to sector risk. But it still doesn’t get it – there is no acknowledgement that the systemic over-investment in property that has been with us now since financial deregulation is a direct result of its risk-weightings, that the resultant mis-allocation of investment around the economy inhibits incomes and jobs. The Reserve Bank doesn’t care about that – unless there’s a crisis in the banking system there is no problem. It’s a depressingly sterile central banker view on life to ignore the fact that the arbitrary numbers it imposes on risk-weightings to mortgages is distorting the economy. Why successive Governors have not got off their butts and corrected it is a direct result of a lack of accountability for the outcomes its policy settings fosters.
So in summary N&S are on the button – they record that those in positions to make change recognise the enormity of the problem and they identify the causes. Small beginnings I suppose. N&S adequately summarise the political and bureaucrat resistance to correcting it. But we should be in no doubt over the ongoing damage such negligence by those in a position to do something, is imparting on the lives of all New Zealanders. It’s inexcusable.
Image included by Tim Sheerman-Chase