Convenient Fairy Stories

Bill English has made a sound start as Prime Minister.  He seems to be down-to-earth, and a straight-talker – a welcome change from his predecessor.  But, at the same time, he seems to be prone to making statements based on prejudice and anecdote; we have a right to expect better.

He was quick, for example, to rely on allegations apparently made informally to him by employers about their problems in employing young Kiwis on account of their supposed drug use; he preferred this prejudicial evidence rather than look to his own official statistics which tell a very different story.

His preference seems have been to explain away youth unemployment and to make the case for immigration, even at the expense of slandering a whole generation of young Kiwis, rather than to accept that immigrant labour is popular with employers because it is often cheaper as well as plentiful.

He was at it again when trying to explain away the housing crisis and the rising cost and unaffordability of housing.   The problem, according to the Prime Minister, is apparently due to the supposed fact that we have been “too keen on the environment.”

It would of course be nice if that were true – that we, and especially the government, had indeed been a little keener on the environment; think clean water and swimmable rivers.  His attempted explanation, however, seems to blame rising house prices on local authorities’ wish, quite reasonably, to avoid a free-for-all that creates a bonanza for property developers, but also an unlimited urban sprawl and attendant infrastructure problems.

Saddling local authorities with the blame may be politically convenient, but it is well wide of the mark as an explanation of why the cost of housing has risen so far and so fast.   An accurate answer to that question is, of course, of special importance to the Bay of Plenty, and Tauranga in particular, in view of the surge in property prices that has recently occurred here.

We get closer to the true explanation when we consider the recent report that shows that 40% of house purchases in Tauranga are now made by people who already own their own homes – in other words, who are making a speculative investment.  They enter the property market, not in order to find somewhere to live, but to make a quick speculative profit.

The problem is, in other words, at least as much one of excessive demand as of limited supply – a level of demand inflated by the speculative quest for profit opportunities so that the market is distorted.  And remember that demand is not just a matter of the number of prospective purchasers, but of their purchasing power as well – of how much money they are able to bring to the market.

It is at this point that the role of the banks becomes critical.  It is the banks’ willingness to lend virtually without limit that allows the speculators to bring large sums of money to the market so as to outbid the home-seekers.  The speculators will be happy to bid up prices in the certain knowledge that, for as long as the banks will continue to lend, the value of their “investments” will continue to rise.

This truth has been at least partially recognised by the Governor of the Reserve Bank.  Graeme Wheeler’s loan-to-value and debt-to-income ratios have already had some effect in cooling the housing market by restraining bank lending.  But he has more to do – and he needs government support to do it.  Prices will not stabilise for as long as the banks can make easy profits from the virtually risk-free and unlimited lending of money which they themselves create.

The banks are of course a less tempting and easy target for the politicians, including the Prime Minister, than are local authorities.  It will require real political courage to take on the banks – but it must be done.

We must hope that our new Prime Minister will not just take refuge in politically convenient “explanations” but, rather, face up to facts and to the need for the strong action that must be taken.  Our young job-seekers, and our young home-seekers, have a right to expect that their interests will be top of the government’s agenda.

Bryan Gould

3 March 2017