Is New Zealand's housing market bullet-proof? Photo / 123RF
Is New Zealand's housing market bullet-proof? Photo / 123RF
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
News that house prices are rising again has prompted some entirely reasonable anger about the way traditional solutions to an economic crisis benefit the wealthy.
Westpac economists last week said they expect a 3.5 per cent increase in house prices between March and December 2020 - a 6.3 percent annual house price inflation for 2020.
That's nuts right?
We've just had the deepest recession in our history and face a long, painful recovery.
Instinctively that should lessen demand for property and cause prices to fall.
Perhaps the spike in returning Kiwis - around 4000 - between April and July are relatively more able or inclined to buy houses than the average immigrant of the past decade.
We don't know about them because as returning citizens they don't have to fill out so many forms.
House prices are on the rise again. Photo / Mark Mitchell
Some economists have suggested this may be creating some extra short-term demand in the market.
But the obvious culprit for the strength of housing is super-low interest rates.
They are also propping up sharemarkets around the world and making the KiwiSaver accounts of middle-class New Zealanders look good.
It's a familiar story.
Central banks slash interest rates - and even print money - in times of crisis to ensure that the financial system keeps working.
We saw that in the financial crisis. But we also saw that once markets get used to the looser monetary policy it is very hard to wean them off it.
Low rates make putting money in the bank less worthwhile and investing money in assets - like housing and shares - more lucrative.
The fact that this benefits those of us who already own property or have savings in equity market funds is unfair and is sometimes talked about as if it is an unfortunate side-effect.
But I don't think it is.
Whether we like it or not (and I don't) Kiwis who have wealth, overwhelmingly have it tied up in property.
Strong house-price growth creates a powerful wealth effect - even though economists and commentators bemoan the fact this does not drive productivity the way business investment does.
We missed the chance to deal with this issue over the past decade, while growth was good.
The trouble is we are now in a crisis where all the choices are bad.
The onus is on our leaders to make the least-bad choices.
Both Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr are highly conscious of inequality.
Finance Minister Grant Robertson during the unveiling of the Prefu at the Treasury in Wellington. Photo / Mark Mitchell
Robertson is a Labour Party man after all and Orr, while clearly still a banker and a monetarist, is perhaps the most socially liberal Governor we've ever had.
Both are prioritising stability in this crisis over social change right now.
It is not hard to see why.
If the housing market and share market had collapsed this year we would still be facing the same economic damage caused by lockdown and border closure.
But we'd also be seeing confidence sucked out of the economy.
Spending would have slumped and the economic contraction would have been much greater.
That would likely mean much higher unemployment and greater levels of poverty.
Would it be fairer?
Maybe, but you'd have to be of quite a revolutionary bent to see that as a viable option.
Does it sound like the last vestiges of the old trickle-down economics? Kind of.
I don't mean to defend neo-liberalism here.
Wealth never quite seems to trickle down without some sort of government policy intervention - poverty certainly does.
It is a "lesser of two evils" argument.
Using the tools you have in front of you in a crisis can't be easily dismissed.
But neither can the notion of not wasting a crisis.
Timing is key.
It may be that there is a narrow window for enacting transformative economic policy and that window is approaching.
Last week I wrote about the failure to implement transformative policies during the boom times.
People wrote and asked what I thought those policies should be.
I'm not an expert, but I am a fan of listening to the experts.
We had an expert Tax Working Group that came up with a plan to balance our tax system.
That plan was killed by coalition politics.
I believe we still need to take a deep look at our tax policy in the next few years - probably more so given the debt we are taking on.
Things like a capital gains tax might not be silver bullets but a more balanced tax policy is one of the fundamental issues.
Monetary policy is a more tricky proposition.
It does what it says on the box very well.
Inflation - which it controls - can also cause serious wealth equality too. So we should be careful not to throw the baby out with the bath water.
Within the current structure, I'd argue we should get rates back to more normal levels sooner than we did after GFC - even if that hits share markets and housing markets.
What else? I'm not sure.
I don't pretend to have all the answers but I do believe there are answers.
We need to start talking about them.
And we need to be ready to enact them when this economy gets out of intensive care.
