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House Prices Have Gone Crazy!

Who's to blame this time?

by Don Brash

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In the middle of November, the Real Institute reported that the median house price across New Zealand had risen by 19.8 percent over the year to the end of October. Across the country as a whole, the median price had risen to an astonishing $725,000, while in the Auckland region the median price had reached $1 million. In Auckland city the median reached $1.2 million, on the North Shore $1.15 million, and in Manukau $1 million.

These are obscene increases. They imply that the median house price in much of New Zealand rose by more in a single year than most New Zealanders earn, before tax, in a year.

These increases had the Prime Minister crying crocodile tears, and expressing her serious concern about what the increases meant for first home buyers trying to buy a house.

The reality is that both National- and Labour-led Governments have utterly failed to do anything significant to stop this nonsense. Over the 40 years to 2020, house prices rose faster in real inflation-adjusted terms than in virtually all other developed countries. As a result, the median house price in Auckland has gone from about three times the median household income 40 years ago to about nine times now, putting houses well beyond the reach of the great majority of ordinary New Zealanders unless they are able to get help from the “bank of Mum and Dad” – who are, of course, only able to help because they bought into the property market 30 years ago. We are seeing a whole generation of New Zealanders permanently locked out of home ownership – heaven help those who are still renting and trying to live on New Zealand Super: it cannot be done.

Those who already own a house are prone to go on about how “it has always been difficult to afford a house – but you can’t expect to buy a house and buy yourself a latte every day”. But those smug comments ignore the fact that house prices have increased hugely relative to incomes, so it is very much harder to buy a house today than it was 30 or even 20 years ago.

Quite apart from the awful social problem we are creating by having house prices go through the roof, this is significantly distorting entrepreneurial effort: why take a risk starting a new business when it is so much easier to make a fortune by buying property with money from the bank? And of course because we New Zealanders are such enthusiastic borrowers and lousy savers, our borrowing to buy more and more residential property drives the banks to borrow overseas to make up the shortfall between bank deposits and bank loans. The money which the banking system owes to foreign creditors makes up the biggest single chunk of the country’s net overseas indebtedness.

Once upon a time, it was fashionable in some quarters to blame the mad inflation of house prices on “buyers with Chinese-sounding names”. That was always a distortion of reality except in particular parts of Auckland, and I get the impression that at the moment the buyers are very largely New Zealanders.

It was also fashionable to blame a huge influx of immigrants. But in the six months to the end of September, there were only 27,700 visitor arrivals, down from 1.4 million compared to the same six months in 2019. Over the same period, there were just 20,300 New Zealand resident arrivals, down 1.6 million compared to the same six months in 2019. So no, we can’t blame the huge escalation of house prices on people arriving in large numbers from overseas.

Perhaps the problem is the ultra-low interest rates at present? Well, they certainly encourage borrowing, which is what the Reserve Bank intends, so to that extent monetary policy contributes to the upwards pressure on property prices. But the US, and indeed most of the developed world, also has ultra-low interest rates at the present time, and we don’t see the wild escalation in house prices in most of those markets.

To confirm my impression, I checked out some house prices in the US. I found a modern home in a very desirable suburb of Houston with four bedrooms, three bathrooms, a double-garage, central air-conditioning, 3,000 square feet (300 square metres), on an attractive section, for US$320,000 – or about NZ$475,000 at today’s exchange rate. I suspect that a house of that size and quality would cost at least four times that in Auckland, possibly more. And US incomes are higher than those in New Zealand.

The tragedy is that key people on both sides of Parliament know what the real problem is, and that is the tight constraint on the supply of land. I checked on line to see what bare sections are selling for in Flat Bush at the moment: a cool $800,000 for 400 square metres, or about $25 million per hectare. This is absolutely nuts: New Zealand has a vast abundance of land of course – just five million people in a country larger in area than the United Kingdom. But planning rules have strangled that supply in most of our major cities. (Christchurch is an honorable exception, with the result that the median house price in that city is well below that in, say, Auckland and Tauranga.)

The supreme irony is that it is often the politicians who profess to be most concerned about the social implications of our absurdly over-priced houses who are themselves responsible for houses being so over-priced.

Phil Twyford got blamed for the utter failure of KiwiBuild, but Mr Twyford understood what was driving the sky-high house prices, and got the Government of which he was a senior minister to commit to freeing up the supply of land in Auckland by scrapping the so-called Metropolitan Urban Limit. The Labour-led Government actually made a formal commitment to scrap that MUL in the so-called Speech from the Throne at the beginning of its term in 2017. It was obvious from the fact that the price of land in Auckland continued to rise that either nobody noticed that commitment or assumed, apparently correctly, that the left-leaning members of the Government – those who claim to be concerned about the plight of the homeless, those living in over-crowded conditions, and those unable to provide food and clothing for their kids after the rent is paid but who are actually obsessed with preventing what they disparagingly call “sprawl” – would prevent any such move.

And it is obvious from the fact that house prices are still rising well beyond the pace at which incomes are rising that nobody believes this Government has any serious intention of fixing the problem, any more than the Key-English National Government did.

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 2020 (#237)

elocal Digital Edition
December 2020 (#237)

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