A woman confronted me recently about an article I had written. She said: "My husband says you are wrong. Housing is the best investment because you can leverage it, they are not making any more land and people always need a place to live."
He is correct on all counts. So why are some economists prattling on about the rampant housing market in Auckland with medium sale prices nudging $600,000. Here is why:
A country becomes richer by increasing its production of actual goods and services. This is measured by Gross Domestic Product. This ultimately determines average incomes in a country. New Zealand's GDP is increasing at the pace of a three-legged turtle.
The sale of an existing house represents a transfer of assets between the buyer and seller. There is no new physical output or incomes or employment generated except for real estate agents and bankers.
Housing inflation in New Zealand over the past decade has largely been matched by increases in private debt, much of it borrowed from overseas. We have used overseas money to bid up our own house prices. There is no increase in New Zealand's ability to service this debt through this process. Individual landlords may be able to generate income from rent but those paying the rent still have to earn an income from somewhere. The process of debt-fuelled housing inflation has not generated any well-paying jobs to service the debt. This lack of output and income growth must eventually bite. The billion dollar question is when?
