Why Housing Isn’t Affordable
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for a number of young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house on the section through a low-interest 100% mortgage with the State Advances Corporation or the non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. But I suppose we must have been doing something wrong, because that system was changed for what was supposedly something better.
We know that the changes have achieved their purpose because of the huge fortunes made out of the housing sector by property developers over recent decades and the even greater profits from lending on mortgage made by our Australian banks and repatriated to Australia. In that respect, the changed policies have been a roaring success.
What a pity, though, that the impact on the availability of affordable housing was not so positive. By the time I returned to New Zealand in 1994, home ownership had passed beyond the reach of many young families; and housing is even less affordable today, with the result that home ownership rates have slumped and we are rapidly approaching a housing crisis.
The government is of course concerned. It would like to do something to help, as witness their response this week to the recommendations of the Productivity Commission on the subject. True to form, however, they look everywhere for solutions rather than where the real responsibility lies.
The government prefers to avert its gaze from what has really happened to create the housing crisis. The fortunes made from property development by some of our most successful business leaders have come from somewhere – and that “somewhere” is an important element in the hugely inflated prices now being asked and paid for houses. The very term “property development” gives the game away. The development value of property, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more, whatever the consequences for individual borrowers or for the housing market or for the economy as a whole.
The banks have in effect applied a huge pair of bellows to the housing market and have accordingly inflated house prices to their current – and, for many, unaffordable – levels. They are about to start all over again, as the Auckland market already demonstrates. The increased prices being paid by house purchasers will in effect disappear westwards across the Tasman as bank profits. If we want an explanation of the huge rise in housing prices, that is where we should look first.
It is hard to exaggerate the price we pay for these excesses. Not only have we generated a quite unnecessary housing crisis, but we have also created a powerful mechanism for creating ever-widening inequality, as the untaxed capital gains as a result of house price inflation mean that wealth is in effect transferred to those who own homes and away from those who cannot afford them.
The huge increase in the money supply caused by inflated bank lending for non-productive housing purposes, moreover, seriously skews the whole economy. It diverts resources from productive investment and creates an inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and bank profits grow even larger.
The government’s response to all of this? More of the same. Their “remedy” is to remove remaining restrictions on property developers – even to the extent of displacing families from their homes to allow private “redevelopment” to occur – and to bypass elected authorities so that the community interest or environmental concern can no longer inhibit the drive for profit. And they set their face against any change in the monetary policy that conveniently overlooks the damaging role played by excessive bank lending.
As on so many issues, the government’s loyalties seem to lie with its big business and corporate backers. As we assess the government’s plans, let us remember that families without decent homes, and children being brought up in unsafe and unhealthy conditions, need and deserve more than crocodile tears.
Bryan Gould
29 October 2012
Crisis? What Crisis?
In January 1979, the British Prime Minister, Jim Callaghan, returned from a Summit meeting in the Caribbean to a Britain suffering the serious industrial unrest that became known as the “winter of discontent”. Interviewed at Heathrow airport, Callaghan’s relaxed attitude to talk of chaos was translated by The Sun the following morning into a headline reporting the Prime Minister as saying “Crisis? What Crisis?” The electorate’s reaction led directly to Mrs Thatcher’s election victory later that year.
John Key, returning from Hollywood this week, was equally dismissive of talk of a crisis in manufacturing. Our Prime Minister was in some ways even more insouciant than Callaghan; faced with Statistics New Zealand figures showing 40,000 manufacturing jobs lost in the last four years, he airily asserted that our expert official statisticians had simply got it wrong.
But the Prime Minister’s denial of the facts reveals more than just a surprising and mistaken reliance on his own expertise in handling statistics and a confidence that he will be believed, however improbable his assertions. It reflects a deliberately relaxed attitude by the government to the whole issue of unemployment.
The Prime Minister resists talk of crisis because he believes that people are out of work because that is what free-market theory dictates. That theory takes a very simple view. If the supply of a particular commodity exceeds the demand, the price of that commodity will fall – which is certainly true for most commodities, such as, say, sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.
Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.
The first objection to this view is that the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.
The demand for labour could easily be raised, but that would require a change in policy – and that won’t happen for as long as the government insists that wages must come down, since lower wages and lost jobs mean lower spending, and therefore no stimulus to demand in general and demand for labour in particular.
True to the theory, the government continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. After four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred.
Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.
It may be hard to credit that our government wants to bring wages down, yet that is what they have set out to do. How else to explain why workers’ rights at work have been significantly weakened, so that workers can be taken on, and then thrown back on the scrap heap without any redress? Why else are young workers to be paid less than the minimum wage, if not to remove the floor placed under wage levels? Why was a modest rise in the minimum wage voted down while top salaries zoom upwards?
Why have benefits been removed and reduced so that even solo mums with young children are forced back into the labour market, whether or not there are jobs? Why is covert support lent to big employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees?
These measures are explicable only if the intention is to force the lowest wages lower, so that downward pressure will increase on wages across the board. We can now see that “closing the gap with Australia” was only ever so much pie in the sky; far from encouraging New Zealand wages to match Australian levels, the government is intent on using high unemployment to force them lower.
While Bill English occasionally lets the mask slip by touting lower New Zealand wages as a competitive advantage, the government is unwilling even to engage in debate about improving our competitiveness through changes in exchange rate policy. A lower exchange rate would at least give us a fair way of reducing our costs across the board, and provide a platform from which we could begin to grow the economy again. The government, though, would rather see the whole burden of reducing our costs in international terms borne by working people. Little wonder that the share of national income accounted for by wages has fallen.
Bryan Gould
9 October 2012
This article was published in the NZ Herald on 11 October.
What the Hekia Doing?
John Key enjoyed his first term as Prime Minister. It all seemed so easy. But now, in his second term, it’s not so much fun.
The rot began to set in even before the last election, with the ill-fated storm in the John Banks teacup, and the Epsom MP has continued to give him nightmares ever since. But it is not just the Prime Minister’s inability to take decisive action to purge his government of a toxic element that has hurt him; the perception is growing that he is not as good as he should be at running an effective government.
Too many of his ministers seem to lack proper direction; too many do and say things that surely cannot have been approved by Cabinet. When he looks at his education minister’s recent record, for example, with ill-judged initiatives followed by embarrassing backdowns on class sizes and Canterbury school closures, he could be excused for exclaiming “What the Hekia doing?”
And how close an eye does he keep on his Foreign Minister, who used his speech to the UN General Assembly to promote New Zealand’s candidature for a seat on the Security Council in 2014, but at the same time has virtually destroyed our proud record as an active member of UNESCO, of whose founding document we were the second country to step up to sign in 1946? Is that the way to demonstrate that we are a good UN citizen?
Even his most senior ministers seem to be laws unto themselves. Bill English, with whom he seems to have an increasingly tetchy relationship, seems not to have bothered to keep the Prime Minister in the loop over one of his main responsibilities while acting as PM during John Key’s absence overseas. And the Prime Minister himself seems to have a pretty cavalier attitude to those same responsibilities, declaring that a barely believable mistake by the spy agencies for which he is responsible minister – and one that was absolutely central to the performance of their prime functions – was nothing to do with him.
Little wonder, then, that the Prime Minister now displays the unmistakable symptoms of a familiar second-term syndrome. Prime Ministers often get tired of the continued pressure and criticism they encounter on a daily basis in domestic politics. They begin to yearn, and then actively to look for, the respite they gain from overseas trips, whether necessary or manufactured.
How pleasant it must be – after all the trials and tribulations of dealing with an ungrateful public – to go abroad to be feted and flattered, to be treated as an honoured guest, to enjoy the attention of uncritical media. But it is always a bad sign when, in any walk of life, someone doing an important job is happier away from it than actually doing it.
The Prime Minister enjoys – and why not – overseas travel. The opportunities to travel – particularly to the United States, whether to watch his son play baseball or to tour Hollywood studios – seem, however, to be coming with increasing frequency.
His latest foray to Hollywood is not just to collect a couple of autographs from some minor Hollywood celebrities. It has, we are assured, a serious purpose; but that serious purpose does not necessarily make us feel any happier about it.
His latest engagement with the major film moguls, after all, calls to mind his last involvement with them, when a handful of Warner Bros executives rolled into town, told the Prime Minister what they wanted, and left shortly afterwards with major tax concessions (that is, gifts) in their pockets and having forced a change in our labour laws that reduced the rights of New Zealand workers. And we must bear in mind that John Key’s usual response to powerful overseas corporations, from mining interests to purchasers of our assets, is “The answer’s yes, now, what’s the question?”
The Prime Minister assures us that he does not intend to make any further offers on this occasion – and short of handing over our powers of self-government, it is hard to know what more he could do to ingratiate himself with them. But what is the Prime Minister doing there at all?
According to his own account, he is there as a salesman – and that raises another set of questions. The Prime Minister’s special expertise, as a foreign exchange dealer, was as a deal-maker; but, given the whole range of responsibilities he has to shoulder and the many pressing problems demanding his attention, is this the best way he can find to spend four days in his busy schedule? And, if the government really does need to softsoap Hollywood, does he not have a trade minister to do that?
Do we really want or need a Prime Minister whose first and perhaps only thought is sell off whatever he can lay his hands on? And should those assets he seems so ready to sell include his – and our – self-respect as well?
Bryan Gould
2 October 2012
This article was published in the NZ Herald on 4 October.
John Banks – Guilty Twice Over
Politicians rapidly become accustomed to being pilloried as a matter of course by sizeable numbers of the population. Their customary ranking in the trustworthiness stakes alongside second-hand car salesmen and real estate agents is the penalty they must pay for putting themselves out there and having their thoughts, words and actions publicly judged on a daily basis.
My own experience, paradoxically, is that while politicians as a class are slated, individual politicians are often treated – on those many occasions when they meet the public – with exaggerated respect. But it remains the case that many politicians seem to try with some success to give their profession a bad name.
Politicians face two kinds of moral hazard; on the one hand, they face the same tests as the rest of us in meeting the standards that are normally required of everyone in their interaction with each other; but in addition they are required to make the correct responses to the demands that arise from the particular and public responsibilities they must discharge.
First, then, politicians cannot – or at least should not – seek any form of dispensation from the ordinary ethical requirements of honesty and straight dealing that are required of everyone in their normal dealings with others. There is nevertheless a temptation in some quarters – and it is a temptation to which some politicians fall victim – to believe that the assertion that “all’s fair in love and war” can be extended to politics.
I have never accepted that lying and cheating are acceptable because “it’s just politics”. If anything, the normal standards of behaviour should be higher for those who claim that they should be trusted with the power to make important decisions on behalf of all citizens.
Secondly, politicians also face the additional burden of ensuring that they use their special powers and responsibilities to the advantage of their constituents and not their own. These matters are not always easy to judge or regulate, and can often depend on culturally different assessments of what is or is not acceptable.
In my years as a British MP, I lost count of the number of times on which, in return for help that I felt it my duty to give, I would be offered a gift (sometimes quite valuable) by a constituent – often from another culture – and have to explain politely that I could not accept it. But there are of course those politicians who are less concerned with such niceties – and that way lie “pork barrel” politics and corruption.
New Zealand is consistently rated as one of the countries where such behaviour is least prevalent. But we should be alert to instances where one or other or both of these moral traps seems to have ensnared one of our politicians, which is why the John Banks affair should ring alarm bells.
There are two aspects of the case that worry me but which have attracted little attention so far. First, we are told, in Kim Dotcom’s sworn evidence, that he was asked by John Banks for anonymous donations because that would allow him to “help” Dotcom more effectively. This seems perilously close to an overt proposition that the mayoral candidate was willing to use his power, if elected, to offer differential “help” to a particular interest, and that this exercise would be aided if the financial help being solicited could be kept secret.
I am surprised that so few seem to have grasped the unacceptable nature of this proposed arrangement. The sale of favours by politicians should be anathema to any system of fair and open democracy.
The second issue is a mystery at the heart of the Prime Minister’s continued defence of his ministerial colleague. Whatever one may think of John Banks, there will be surprise that the Prime Minister has maintained such indifference to the compelling evidence that his minister was less than truthful in his treatment of supposedly “anonymous” donations.
The explanation usually offered for the “see no evil” stance by the Prime Minister is that he needs John Banks’ vote if he is to get his legislation through the House. But this doesn’t wash. John Key could easily dismiss Banks from his government and avoid further damage to his own standing without jeopardising his wafer-thin parliamentary majority; Banks would still be an MP and able to vote for the government’s legislation.
The fact that the Prime Minister has not taken this obvious course suggests strongly that there is an element in the situation of which we are not aware. That element can only be an implied threat from John Banks, along the lines of “as a minister, I’m obliged to vote for the government, but if I were reduced to the back benches, I could not guarantee to support any particular piece of legislation”.
If this is the case, as I think it must be, John Banks has compounded his slipperiness with the truth by, in effect, making an implied threat to the Prime Minister. We must hope that, in the interests of good government, the Prime Minister will have the courage to call his bluff.
Bryan Gould
20 September 2012
This article was published in the NZ Herald on 24 September 2012.
The Same Tired Old Excuses
As job losses reach crisis proportions, and many point the finger at an overvalued exchange rate, we have to put up with the same old tired and ill-informed assertions to the effect that overvaluation is not the culprit.
Those who say this usually make two assertions; first, the exchange rate is irrelevant and secondly, there’s nothing we can do about it anyway. Neither assertion is remotely accurate.
As to the first, the usual line is that factors other than price matter in international markets; yet only a moment’s thought will produce the commonsense conclusion that it would be very surprising if we could charge whatever we like. If we ask more for our products than the market says they are worth, we will have trouble selling them, or at least selling them at a profit. To argue otherwise is to deny simple reality.
The one sure way of ensuring that we have to charge more than we should is to allow the exchange rate to rise too high. The exchange rate, after all, converts all our domestic costs of production – for labour, energy, raw materials and so on – into the prices we charge in international markets, and that includes our own, where we compete with imports. As the rate rises, it ensures that those prices are artificially inflated, and are no longer competitive. Even on those sales we do make, it cuts the profit margin – just ask the dairy farmers; the whole economy suffers as the cream is blown off the top of our dairy exports by the overvalued dollar.
That is why, in a nutshell, we can’t pay our way in the world, and have to borrow excessively to cover the gap between what we can sell and what we want to buy. That is why we dare not grow our economy fast enough to bring down unemployment; it’s because we know that if we do, we’ll run into balance of payments constraints and will have to borrow even more.
We’ve been doing this for so long that we think it is natural and unavoidable. That’s why ministers in successive governments over three decades have believed that solemn lectures about improving productivity, and promising that new research – always “soon” – will generate new “sunrise” industries, will do the trick. As any manufacturer will tell you, if the profit on your exports is decimated by the exchange rate, you have no money to re-invest in improving productivity, funding new research and technology, or taking any of the other steps needed to close the gap on better-resourced international rivals.
The second argument is the fallback position always adopted by those who have run out of other arguments. All this may be true, they say, but there is nothing to be done about it. The dollar’s value is established by the market and reflects the fortunes of other currencies, like the US dollar. If that means a high New Zealand dollar, we just have to live with it.
But this is nonsense. There is no such thing as a clean float. The view that the markets take of the Kiwi dollar is strongly influenced by what they know to be government policy, especially if that policy has a direct bearing on the dollar’s value and has been maintained for decades so that there is little prospect of it changing.
What determines the value of the dollar, so that it is higher than it should be in terms of balancing our trade, is quite simple; it is the fact that we have for many years offered investors – especially overseas investors, the legendary Japanese housewife or Belgian dentist – an interest rate premium for buying New Zealand dollars. That premium has been so high for so long that short-term investors find it worthwhile to borrow money they don’t have at low interest rates in their own countries so that they can buy New Zealand securities at a high rate of return; and because so many do this, the demand for and therefore the price of the New Zealand dollar rises, and the investors make a capital gain into the bargain.
The only people who lose from this are the people and businesses of New Zealand. Why does our government go on allowing this to happen? Because we insist on using high interest rates as our main, indeed only, counter-inflation tool; and since those high rates destroy our competiveness by pushing up the value of the dollar, we are then forced to borrow even more at even higher rates.
Quite apart from other factors – like commodity prices and the terms of trade – that influence the value of the dollar, the main element of over-valuation is, in other words, a direct consequence of government policy. We could change that tomorrow if we wished. We need to understand that high interest rates and the overvalued dollar are not only damaging our economy but are not even appropriate as counter-inflationary tools. If we addressed the real reasons for inflation – excessive bank lending and credit creation for non-productive purposes – we could stop the insane process of deliberately pricing ourselves out of world markets.
Bryan Gould
12 September 2012
This article was published in the NZ Herald on 14 September.