The Penny Is Beginning to Drop

A government that has sat on its hands for far too long has at last woken up to the fact that the housing crisis is not only upon us but is rapidly getting worse.  Yet – even with house prices averaging nearly $1 million in Auckland and rising there at 14% a year and even faster elsewhere – the Prime Minister still cannot seem to think straight.   As the Herald has pointed out, his responses – now coming at virtually one a day – contribute little to a coherent analysis of what is needed.

The first point that must be grasped is that “the housing crisis” encompasses two linked but actually quite separate issues.  There is, first, the plight of the homeless – those who, by any standards, have nowhere adequate to live.  For them, an average price of $1 million for a home represents a fantasy world; it matters little to them whether that average is rising at 4% or 400%.  They simply do not have the resources to buy a house at any price or even, at the current level of rents, to rent.

The market has simply failed them.  There is no way that market-based provision can meet their needs.  If they are to be decently housed, some mechanism other than the market is needed – and that means publicly provided housing at affordable rents.  The idea is not exactly new in our country; it is just that it has dropped out of favour and been lost sight of in today’s meaner, harder-nosed, free-market economy.

A government that is serious about homelessness would swallow its ideological objections and would provide the finance for a house-building programme directed specifically at housing those who have nowhere else to go.  The Prime Minister’s concerns, sadly, do not yet extend that far.

The second major housing crisis is the one of affordability.  This arises, not because the market overlooks the needs of some, but because it serves the needs of others to an excessive and irresponsible degree and, as a consequence, threatens the stability of the whole economy.

It is this crisis that commands the Prime Minister’s attention, and is forcing him to do some new thinking.  So far, he and his Housing Minister have insisted that the market’s malfunctioning arises because the supply of new houses is artificially constrained by local government bureaucracy and their refusal to release yet more land.  Increase the supply, the argument goes, by inducing or forcing local authorities to release land, and prices would fall or at least rise more slowly and the problem would go away.

The $1 billion loan to selected local authorities announced last week was designed to encourage them to do just that.  Another round of property development, further profits for speculators, and lending without limits by the banks would, it was somehow thought, correct the market imbalance and bring some sanity to the house price bubble.

But the Prime Minister’s latest initiative, just a few days later, suggests that even he is beginning to doubt whether that can quite be right.  He has now – apparently prepared to step across the line that supposedly protects the independence of the Reserve Bank – urged the Governor to restrain the ability of investors to borrow from the banks vast sums for the purposes of speculative investment in housing.

So, it seems, the Prime Minister has come to realise that – as I have been arguing for years, and as the Herald has identified in a recent editorial – the problem is not primarily one of supply but of demand.  And the level of “demand” that is at issue is not just the numbers of those wanting to buy a house, but the purchasing power at the disposal, not just of would-be owner-occupiers wanting a home for themselves, but of those looking to make fortunes from speculative investment.

And what determines the level of that purchasing power and therefore of demand?  It is the willingness of the banks to go on lending, however high the prices go.  As long as they lend in ever-increasing volumes, as they are doing, prices will go on rising.  And, as long as prices go on rising, the banks will go on lending – a virtuous circle in terms of their profits but not so beneficial for the rest of us.

The fact that the Prime Minister has urged the Reserve Bank to act to restrain bank lending shows that he has belatedly (and no doubt reluctantly) been forced to recognise that his earlier insistence that it was an exclusively supply-side problem was wrong.  The question now is – how committed is he to the necessary action?

He has, presumably, gone as far as he dare in telling the Governor of the Reserve Bank what to do.  The independence of the Reserve Bank is, after all, said to be sacrosanct.  But if the Reserve Bank, which is of course a bank itself, and understands the issue only too well, will not act to restrain bank lending, should we not be demanding that our government should meet its own responsibilities – those responsibilities it was elected to discharge – rather than shuffling them off to the Reserve Bank?  And don’t those responsibilities include ensuring that adequate affordable housing is available to all of our fellow-citizens?

Bryan Gould

6 July 2016