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House Prices, Again!

by Dr Don Brash

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Regular readers of “elocal” will think I have a fixation about house prices. I’ve written on the subject twice already this year, most recently just two months ago. But several things have prompted me to write on the subject again.

First, despite all the hand-wringing about the unaffordability of housing, and the political commitments to make housing more affordable, house prices continue to go up at a much faster rate than incomes. Just hours before I started writing this article in mid-November, media reports announced that the median house price across the country had risen by 7.6% to $607,500 in the year to October. In Auckland, the rise was smaller, but to a median house price of an astonishing $868,000.

Second, there continues to be widespread public anguish about rising inequality in New Zealand, with the suggestion that income inequality has risen sharply in New Zealand in recent years. But in fact, according to official data income inequality has barely changed in New Zealand over the last two decades. What has changed is wealth inequality, and the primary reason for that increase in wealth inequality is the huge rise in house prices over the last 20 years: those lucky enough to have bought a house 20 or more years ago have become vastly wealthier relative to the rest of the population.

And third, I spent a couple of weeks in Michigan in October and among other places I visited Ann Arbor. Ann Arbor is a pleasant university city with a population of some 350,000, about the same as Christchurch. I met somebody there who had just purchased a near-new home in a very pleasant sub-division. The home has four bedrooms, four bathrooms, a three-car garage, a fully-lined basement, with central heating and air-conditioning. The price? A little over US$500,000 – say NZ$780,000 in round figures. I have not the slightest doubt that a house of that size and quality would cost at least twice that in a pleasant part of Christchurch, and at least three times that in a pleasant part of Auckland. And American incomes are appreciably higher than those in New Zealand.

The New Zealand media regale us with endless stories about homelessness and waiting lists for subsidized government-provided housing. There are stories about people who are putting up with sub-standard rental accommodation, or rental accommodation which is almost beyond their ability to afford.

At baby-boomer dinner parties, home-owning middle-aged people make self-congratulatory comments about how hard they worked to buy a home 30 years ago – not for them the self-indulgent luxuries of regular trips to Starbucks for a coffee, or the occasional overseas trips, which later generations seem to regard as they right. “We saved hard to buy our first home, so the younger generation should do so also” is the common refrain.

What they fail to recognize is that 30 years ago the median house price was little over three times the median household income in Auckland. Now it is nine times. In other words, house prices have not only increased hugely in absolute dollar terms since baby boomers were in the market for a home, they have increased hugely in relation to average incomes.

Given the utter impossibility of affording a half-decent home in Auckland for the average wage and salary earner – unless substantially helped by the bank of Mum and Dad – it is little wonder that those who can see no prospect of ever owning the roof over their head retreat to Starbucks for consolation.

The Government tinkers with the problem, as the National Government before it did, and offers little sweeteners to ease the pain slightly for some.

The irony is that at least some members of the Government know exactly what the problem is: they just don’t have the political courage to do something about it.

In the Speech from the Throne setting out the new Government’s plans for the following three-year term after the 2017 election, the Government committed to the abolition of the Rural Urban Boundary around Auckland – sometimes called the Metropolitan Urban Limit. That commitment reflected their recognition that the biggest single factor causing home prices to be outrageously expensive in Auckland is that Boundary: it is not house prices which are outrageous in Auckland (and in many other New Zealand cities) but land prices, and land prices are outrageous because of a deliberate decision by bureaucrats to limit the availability of land on which houses are allowed to be built.

Of course, the bureaucrats justify their decision by reference to the need to “protect” rural land, despite the fact that only about 1% of New Zealand’s land area is urbanized. They are utterly indifferent to the enormous social cost of their decision.

That social cost gets greater with every passing year.

Dr Don Brash is an economist and former Member of Parliament. He served as the Governor of the Reserve Bank of New Zealand from 1988 to 2002.

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elocal Digital Edition – December 2019 (#225)

elocal Digital Edition
December 2019 (#225)

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