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 Photo by Tim Sheerman-ChaseGareth Morgan

Rigging of Housing Market Is Deliberate Policy

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”)?

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

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


  • Damian Sugrue


  • Geoff Walker

    Well said and yet another example of the apathy that pervades our country especially by the would be”s. They don’t understand that they are supporting those who have most and they will never bridge the gap from where they are! A generalisation on my part of course.

  • Liam Grattan

    Right on the money Gareth, our leaders have been paticularly spineless on this issue.

  • opuspaul

    I am not from NZ but lived here 6 years. I am constantly blown away by my NZ friends who think the only investment they can possibly make is in real estate. When you add in maintenance costs, fees, property taxes, mortgage interest and lost opportunity, buying a house is probably one of the worst investments I have ever made. I would have been much better to stay living cheap on a boat and bought some gold. Everyone needs a place to live but when the new generations can’t afford a house without mortgaging themselves to the hilt, prices need to come down.

    • jb

      Except why “maintain” a property? You’re only going to flick it on in a couple of years anyway. And investing in solar water heating or efficient insulation? Anything with an ROI >5 years is a waste of money – won’t affect the sale price.

      I live in a late 70s property in Central Europe. We’re doing an energy-efficiency upgrade which will cut our power consumption by 50%. Will it amortise? Given that the transaction costs of moving are high, the market moves with inflation and we bought the place because the location has a good infrastructure, yes, it WILL amortise for us over the next 12 years. Will the upgrade make a difference if we sell before then?
      Yes, it will – you have to provide the buyer with an energy consumption profile created by an expert and most buyers demand an infrared analysis And if you look at new properties coming onto the market, you’ll see “KfW 55” as a USP writ large in the advertising, indicating that they use only 55% of the energy that a house complying with minimum energy standards would use.

  • jh

    John Key’s beach house is on Success Ct Omaha just around the Corner from Capital Gains Cr and Richmastery way. They have barbies where they cook skewerd suckers and laugh.

  • CG

    Blame the politicians yes, but the “intellectually lazy” (read “dumb”) public are to blame too. Any policy to tax the residential home would be unacceptable to the public just as the part sale of state assets is. Most voters just don’t understand our economy, the state it is in and what is needed to fix it. Their answer is always just “take more from the haves” and from someone else, not me.

  • Susan St John


    Thanks for the continual reminder of how badly we have got it wrong. The excessive capital gains in Auckland as non-residenti buyers push up prices and the exchange rate, alongside abysmal housing for poor families makes us not a very clever country, nor a happy one. The McLeod Review in 2001 had the right idea- a tax on the deemed return on equity in housing so that investment in housing is treated the same as investment in a bank deposit earning interest makes sense– greatly simplifies taxing rental properties and with an individual equity exemption of say $500,000- $1m, can be a very fair tax.

    • Philip Meguire

      Capital gains on real property that is the taxpayer’s primary residence should be taxed in some fashion.

      As for taxing the deemed return on owner-occupied housing, an individual exemption of 500K would mean keep the average tax rate gentle for us in Christchurch. Getting a majority of Aucklanders to accept a tax on the deemed return could require a higher exemption level.

  • Vickie Ferns

    A few weeks back I read an article in a Uk newspaper that blamed the investment in property over the last 15 years and the lack of manufacturing industries for a lot of the countries econmic problems. They do have capital gains tax but it makes no difference to people who invest. We met a pair of business men while on holiday, who said they owned 17 houses.

  • John O’Neill

    Housing unaffordable – studio apartment the solution – children intolerable – exit the population crisis – problem solved – until the next cycle. History is made by those who never read of all the previous civilizations who never read. The house: the great empty space we all die for, is dying.

  • wikiriwhi

    Anyone read UN Agenda 21 because the UN is devoted to stripping
    individuals of housing and every nation with a Reserve Bank has become
    heavily indebted. Except Iceland which jailed its bankers and corrected
    its economy. Something the MSM is strangely silent over. There really
    is no integrity in the media. That’s why we can’t listen to journalists like John Campbell who maintain their longevity in the media yet skim over extraordinary relevance.


    fabulous gareth