• 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

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