Why Are Houses So Expensive?
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for 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 through a 100% mortgage either with the State Advances Corporation at 3% interest or with a 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. It is hard to know why that was possible 50 years ago but is said to be beyond our reach today.
The damage done by the shortage of affordable housing today does not need emphasis. Young families with children are growing up in conditions that threaten their health, handicap their education prospects and destroy their life chances. The benefits to those who already own their homes of the rapid, unearned and untaxed growth in the value of their housing equity, by contrast, represent a huge transfer of wealth from the poor to the well-off. We cannot be surprised that New Zealand today is disfigured by growing inequality.
The contrast between 1960 and today in terms of housing affordability is the result of a fundamental shift in policy. In 1960, decent housing for all was seen as a social responsibility to be discharged by the community through its government or through cooperative arrangements. Today, confidence is reposed in the market to achieve this same outcome.
The evidence as to which is the better approach is surely conclusive; the market has – in this respect at least – failed. But, says the government, that is not the fault of the “free market” (which ideology asserts is infallible), but rather the consequence of “rigidities” which stop the market from operating as it should.
The argument is the same as that used to explain why the market has produced an historically high rate of unemployment. The reason for this, we are told, is that “labour market rigidities” preclude a low enough price of labour to clear the market.
In the case of unemployment, in other words, the fault is said to lie with the trade unions, notwithstanding their “small influence” – described by the Prime Minister as a principal reason (together with a tax gift of $67 million) for Warner Bros deigning to come here to make The Hobbits.
In the case of affordable housing, the villains are supposedly the local authorities. Again, the government – and “free-market” theory – cannot, it seems, be blamed. In both cases, not only does the government deny responsibility but they have conveniently found a scapegoat in those who do not share their political view.
Abandoning the effective planning of land usage, however, so that developers were free to go wherever and do whatever they liked, might stimulate a short burst in property development and building activity, but is unlikely to bring down the cost of housing in the long term. Much more likely would be a surge in the profits made by both property developers and banks – both significant elements in pushing up the cost of housing.
The very term “property development” gives the game away. The development value of land, 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; they thereby apply in effect a huge pair of bellows to the housing market.
The huge increase in the money supply caused by inflated bank lending for non-productive housing, moreover, seriously skews the whole economy. It diverts investment away from productive investment and into housing and creates an asset inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and housing yet more expensive.
It is encouraging to note the first glimmers of recognition of this issue in the Reserve Bank’s contemplation of “macro-prudential” measures to restrain bank lending; but their emphasis is still on the health of the banks’ balance sheets rather than on the distortion of the macro-economy. And, as on so many issues, the government’s loyalties seem to lie with its big business and corporate backers, rather than with families and children in need.
Bryan Gould
29 January 2013
This article was published in the NZ Herald on 31 January
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
Re-opening the Debate
Something important has happened in New Zealand politics. After two and a half decades in which economic policy has been a no-go area for political discussion, we have at last seen the beginnings of a debate about what is potentially the central issue of our politics.
“There is no alternative” was very much Mrs Thatcher’s mantra, but it held equal sway in New Zealand. Indeed, it has been even more significant here, because the aggressive free-market orthodoxy first introduced by a Labour government was then reinforced by their National successors. As a consequence, the major parties chose not to engage each other over the basic principles of economic policy, and the whole question of how our economy should be run was consigned to the sidelines.
The reluctance to discuss economic policy was nevertheless surprising, given the constantly expressed concern and disappointment at our poor economic performance. As the gap between New Zealand and Australia widened, and our productivity figures remained stubbornly unimpressive, the finger was pointed at every conceivable explanation – bar the obvious one. It is only now that the realisation seems at last to have dawned that our comparative economic decline might – just might – have something to do with the economic policy settings we have faithfully followed for twenty five years.
For most of that period, we have slavishly adhered to the view that government’s involvement in the economy should be limited to regulating monetary conditions and that even that limited function should be delegated to unelected bankers charged with the equally limited goal of controlling inflation. Beyond that, the rest of the economy could safely be left, it was thought, to look after itself.
It turned out that things were not so simple. The apparently simple and technical question of controlling inflation through interest rates and exchange rates proved to have important and unfortunate consequences for the real economy. The productive sectors of our economy were constantly handicapped by high interest rates and an overvalued dollar, and by secondary consequences like the relative attractiveness of investing in property as opposed to productive capacity and of bingeing on cheap imports as opposed to saving. There was, in other words, a price to pay for using instruments like the exchange rate for purposes they were not meant for.
Government over this period, of course, was let off the hook, disclaiming any responsibility for managing the economy as a whole. It was content to dabble in micro-economics, and in balancing its own books, but showed no interest in issues of competitiveness or demand management. Macro-economics simply did not exist.
So, what has changed? The Labour opposition has been thinking. They seem to have grasped that there is no upside in either electoral or practical terms in simply agreeing with the government, and that the evidence before our eyes demands that New Zealand should strike out in a new direction.
So, the two-party consensus on economic policy is at an end. It is proposed that the purpose and techniques of government’s involvement in economic policy should change. Macro-economic policy is back.
What are the chances of the debate taking off? They are better than one might imagine. The current government continues to stick to orthodoxy, but they are led by a pragmatist. Sooner or later, and hopefully sooner, John Key is going to realise that he and his government will get nowhere near the goals they have set themselves if they continue to slog along the same road that has led nowhere for so long. That would mean just watching the Australian tail lights disappearing into the distance.
There is also reason to hope that the official mind might be less rigid than it has seemed for so long. The regime at the Reserve Bank under Alan Bollard is clearly less doctrinaire than it was under Don Brash. Even the Treasury cannot be entirely immune from common sense.
To get the debate under way is not of course to win the argument. But whatever the outcome, our public life will be stronger for re-opening a real discussion about the role of government in achieving economic success. And not for the first time, we might even lead a world-wide trend.
The voters may or may not reward Labour for its courage in challenging an orthodoxy that has prevailed for so long. But we all owe Labour a debt of gratitude for starting a debate that is long overdue.
Bryan Gould
25 October 2010
This article was published in the NZ Herald on 27 October.