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House in an Auckland SuburbSusan Guthrie

Labour’s latest housing policy a useful reminder

House in an Auckland SuburbDon’t get me wrong, I think far more radical changes are needed to get the housing market on a sustainable footing than Labour’s new policy on restricting foreign buyers.

As long as we leave housing out of the tax system it’s going to be a cancer to the rest of the economy.

But that important point is not the subject of today’s blog.

What is frustrating about the debate over Labour’s latest policy is how banal the criticism has been.

Critics say we don’t know if foreigners are buying up large so therefore we don’t have a problem – we simply have a “solution in search of a problem” (See House policy ‘reeks of xenophobia’ – Stuff)

It’s crazy to say that because we don’t have data about the extent to which foreign buyers are snapping up New Zealand houses, we don’t have a problem.

We may or may not have a problem, we don’t know.

But we certainly have the risk of one.

If New Zealand’s housing market is getting swamped by foreign money, depending on the type of investor we are dealing with, that could be bad news for the economy.

Having an effective pre-emptive policy in place to reduce this risk is justifiable (but that’s not to say Labour’s particular policy is likely to be effective).

The alternative of doing nothing until we’re certain we have a problem is a classic example of bolting the gate once the horse has bolted.

If in fact foreign money isn’t flooding in to New Zealand housing, at worst the pre-emptive policy will be redundant and the costs involved in implementing it wasted – hardly an excessive price for reducing potentially serious economic risks.

Central to all of this are foreign speculators.

Not all foreign investment is born equal.

Foreign investment committed for the long term is generally good for an economy, but speculative investment is not.

Speculative investment is money that is invested into a sector for short term gains.

It tends to leave as quickly as it arrives.

Speculative investment by foreigners brings added risks to the economy because, not only does it tend to leave as quickly as it arrives, it can involve very large amounts of money relative to the size of the market it is invested in.

Large volatile flows of foreign money can cause mayhem to a small economy like New Zealand.

Foreign speculation in New Zealand’s housing market would be bad news because in New Zealand housing is the predominant way people save.

When house prices fall people feel poorer and cut back sharply on their spending – which has repercussions throughout the economy.

Speculators would push house prices higher than otherwise and when they leave house prices would fall more sharply too – so the boom – bust housing cycle and economic repercussions that followed would be more severe than they needed to be.

In other countries the effect of a fall in house prices on the economy would be cushioned by the other investments people hold, but that is less true in New Zealand.

If foreign speculators are playing a part in the Auckland housing market (and we don’t know if they are) we should want to know about it and the absence of local data is no excuse for not investigating the issue.

Nor is it an excuse for ignoring the risk.

Let’s take as a given that we don’t have any decent data about New Zealand house sales to foreign speculators.

Is there anything we can learn from overseas?

What we find is that the housing market in China has been running hot, prompting the government there to clamp down in 2010, curtailing speculation in Chinese housing by both Chinese nationals and foreigners.

The measures have only been partially successful.

In the past 12 months house prices in mainland China have risen 24% and in Hong Kong by 28%, and in the past 6 months alone gains have been 11% and 12% respectively.

It looks as if this speculative fever might have spread in a contagion effect to other markets Chinese investors are familiar with (for example, having considered them for education or emigration) and have confidence in.

Is it a coincidence that Canada, Australia and New Zealand are all on the education and migration radar in China and have all at various times over the past year or two had anecdotal reports of high levels of foreign buying in their housing markets?

Pressure in Australia led to the introduction of restrictions on foreign ownership in 2010 (permitted investment is limited to new builds with a few exceptions), something akin to what Labour is proposing now.

It’s possible that Labour hasn’t done the hard yards and has just delivered a sop to public concerns without much research.

It also seems unlikely that their policy will be able to slow speculative foreign investment in New Zealand housing if it is in fact occurring (there are ways around rules like this).

But none of that should distract from the fact that foreign speculation in New Zealand housing is a risk we should be alert to.

Labour’s policy announcement is a healthy reminder that we should be continually looking at external risks to the economy and designing pre-emptive policies to reduce those risks.

Sticking one’s head in the sand simply isn’t an option.

  • NZ_Seaweed

    I guess it’s based on the same premise as poverty, Gareth. No data, no problem, no wurries

  • Paul King

    I am not a fan of speculation, foreign or local, but surely if we ban overseas residents from investing here, we have no right to expect other countries to allow NZ citizens to diversify with offshore investments either.

    Where does banning the choices made by willing buyers and willing sellers ultimately lead us?

    We surely do not want a return to a fortress economy?

    Surely rising house prices are a useful prompt to trigger more new house construction?

    • jh

      We surely do not want a return to a fortress economy?

      When it comes to real estate speak for yourself. I don’t see why foreigners have to invest in land – land doesn’t need their investment as it is already there.

      • Paul King

        I am speaking for myself. I believe we surely do not want a return to a fortress economy.
        So are you saying we should not be able to purchase land overseas, or just that overseas people should not be able to purchase anything that already exists?
        Not sure who you purchased your last property from, but I can do you a great deal on a non-existent bridge.
        That said, land DOES need investment if it is to be converted from economically less productive to economically more productive use. A run down cottage on a quarter acre section in the suburbs contributes fewer $/m2 to the economy that the same land with upmarket townhouse complex – but the complex cannot stack up unless land is sufficiently expensive = scarce = desirable to justify the higher costs of construction

        • rcarterbrown

          These sorts or restrictions on foreigners buying residential property are already relatively common overseas, including China. I don’t know why everyone is sorry worried about pissing China off and risking the FTA if they alreay have similar policies themselves.

          • Paul King

            I for one don’t care about offending the Chinese or anyone else – though I would like their money as much as anyone else’s, and so would like the right to sell my land to the highest bidder.
            Opposition to overseas buyers is more about protectionism than anything else (protect the ‘right’ of people like me to buy land cheaply by denying owners other alternatives) – which philosophy generally doesn’t seem to work out for the best long term…
            If overseas owners want to get burned by paying too much, while freeing up unproductive local capital for investment into more productive activity (e.g. into businesses, or even cheaper overseas land that we think we can make a higher profit on than our own), good on them, surely?

        • jh

          You talk about the economic value of a piece of land being increased. By that measure you could look at Queenstown before and after. A Boston Globe travel writer said it “serves only as a warning to the dangers of over development”. There are always places for the people who made the money to escape to so they don’t feel the burn.

          When you have an open property market (NZ/ China you have a gazillion wealthy people with money to pick the eyes out of the realestate market (“NZr’s can’t afford these prices” Harcourts Shanghai”). People want to leave China to “escape the pollution and lack of personal space”. So those who don’t benefit (property investors aside) get either density or sprawl. We already have a run down housing stock.

          Cities like Auckland grow on growth but when (if) growth stops they have a problem. The “world class city” meme is suspect. Places like Toronto are looking at alley houses.

          so where is it all leading… no where.

          The Savings Working group said the policy choice of increased immigration appears to have worked directly against the economic adjustment NZ needed to make as the housing stock and infrastructure requirements has soaked up business investment which could have lead to higher productivity per worker and higher wages. They also pointed out the strong correlation between house prices and immigration (something denied by the PC productivity commission).

  • David Meredith


  • cosmopolite

    It should be a matter of public record if a house is occupied by its owner or a tenant. If the latter, the postal address of the owner should also be a matter of public record. Given this, a week of database massaging should suffice to determine the extent of foreign ownership of New Zealand urban houses.

    Since 2010, “permitted foreign investment in Australian houses has been been limited to new builds, with a few exceptions”. I have never heard before of a nation going down that path; will have to think about it.

  • John Pearce

    I noted Tony Alexanders “research”, that Asian buyers are only a few % of residential sales. He concluded that therefore they couldn’t affect the market prices. Which seemed a surprising conclusion to me, since its the second highest bidder who sets the price, so its only takes a very small proportion of wealthy bidders to bid up the market price level. Secondly it looks to that the biggest “speculators” driving up the NZ property market are the Aussie Banks, who are pushing lending, enabling more buyers to borrow more and bid up prices more, and effectively gaining low cost, self funding options on most of NZ residential property, exercisable when the market crashes.