KEY POINTS:
Over the past week, the economists employed by our international bankers have been twittering on about whether Reserve Bank Governor Alan Bollard is going to increase interest rates by quarter of a per cent or not. Every three months Bollard threatens to raise interest rates but when he finally has to carry through on his threat, he leaves them as they are. He did the same again last week, but said he may very well raise them next quarter. Yawn.
But it doesn't prevent our economic gurus from whipping up a storm of conjecture.
According to our economy high priests, Bollard needs to increase our interest rates in order to halt the rise of inflation and stop our economy overheating. Apparently you lot buying homes and spending money in shops are causing all sorts of trouble. The reasoning is that if the interest on your credit card is raised, you will stop spending. And if enough of you stop spending, the economy will deflate and all will be well again. Of course, some workers will lose their jobs, but that's not a concern to our bankers.
But given that credit card interest varies from 12 to 23 per cent, I'm not sure that even if Bollard had increased the interest rates, as all the experts advised, it would have made one iota of difference. For example, if I had a credit card debt of $5000 and my interest increased by 0.25 per cent, the extra amount I'd have to pay back in a year would be a dollar extra a month. Do they really think that a $1 increase will prevent me from using it?
What it will probably do, of course, is make it harder for New Zealanders on modest incomes to buy their own home. You can't get a decent house in Auckland for less than around $500,000. Such a rise, if you were able to buy a house, would increase the weekly payments by $24, and that's where the problem of increasing interest rates is.
It will make little difference to property developers and speculators, as property prices increased by 12 per cent last year. That means that a wealthy person who already owns property could take out a loan and buy a half-million-dollar house. In 12 months, the capital value would have increased by $60,000 and the interest paid would be just over $36,000, a profit of $24,000. If Bollard had put up the interest rates he would have reduced this by little more than $1000.
The capital gain after interest on a modest Auckland home in one year is more than a worker on the minimum wage earns in an entire year. To rub salt into the wounds, the worker pays income tax and the property speculator - upon selling their property - pays no tax at all.
So-called experts argue that prices have been going up because of the lack of land released by local councils for new developments. That might have a ring of truth in a place like Auckland, but falls apart when prices have been moving up in most other towns in New Zealand. They're surely not suggesting that there isn't enough land in small towns to build houses.
The great secret is that the relentless rise of property prices is not driven by ordinary New Zealanders wanting to buy a home, but by the out-of-control speculation driven, in large part, by foreign investment.
Anyone in the property market will confirm that there is a massive buying spree, mainly led by Australian investment funds that are snapping up commercial and residential properties at an alarming rate.
In Australia, it is compulsory for both workers and employers to contribute 9 per cent of an employee's salary into investment funds. These funds have bought up so much property in Australia that their returns are diminishing rapidly. The average return on a commercial property in Australia is somewhere around 5 per cent. But in New Zealand it is around 9 per cent.
But, when you put that sort of money into New Zealand, it has a huge impact by driving up prices. What is so unnerving about such investments is that it is passive and doesn't do anything to create employment or economic activity. What it does is drive up property prices and interest rates for the rest of us. If our economic masters were serious about kerbing property prices and inflation, then they would put some restrictions on this property speculation by foreign investors.
And if we were really serious about helping New Zealanders own their own homes, instead of pushing up interest rates, we would put a tax on any capital gains of property which is not a family home.
You would soon see home prices drop so home ownership becomes quickly accessible to every New Zealander. Economies should serve the hopes and dreams of the people - not the avarice of the few. Just how many homes does a person need to live in?
Surely our societal goal should be to ensure every New Zealander has the opportunity to own their home and secure a stake in a stable society. The alarming drift of property accumulating in fewer and fewer hands while there is a growing pool of renters is of more concern to me than whether a few speculators make their fortunes.
That's the real discussion that needs to take place - not interest rates.
