Old habits die hard as boom mode kicks in

Watching the housing market flip back into boom mode is like watching a car crash all over again. You want to stop it, but you can't without serious road straightening and guardrails.

This week Finance Minister Bill English said he was worried about consumers returning to old borrow-and-spend habits, fuelled by a rising housing market and more foreign borrowing.

"In the long run the economy needs to shift away from spending and borrowing on housing to more exporting," English told reporters. "We need to look at whether there's any policy mix that might make the right shift," he said, hinting at significant tax reform.

A national debate is welcome, although I worry that English and Prime Minister John Key are either impotent or unwilling to make the serious reforms needed. That would include a land or capital gains tax, a flatter and simpler income and corporate tax system, and a higher GST.

Reserve Bank Governor Alan Bollard also worried aloud about a new boom last month, but appears equally powerless. Dr Bollard could raise the official cash rate from its current record lows to send the ultimate signal.

He is reluctant to do that because of what it might do to the New Zealand dollar and has even threatened to cut the OCR if the currency didn't fall. Bollard could also force the banks to put aside more capital for home loans, but has steered away from such intervention.

If Bollard and Mr English needed any more encouragement to turn worry into action they should look at a research report published this week by Westpac's economists.

It looked at how much equity New Zealanders have withdrawn or injected over the years. Not surprisingly, it showed New Zealanders used the pumped-up equity in their houses to withdraw $5.6 billion in the year to June 2007 just as the boom was peaking.

That was eventually spent on holidays, restaurants, clothes, electronics and even the necessities of life for those simply unable to service their debts from income.

However, there was a turnaround as many homeowners started depositing money in their household ATM through 2008 and early 2009, repaying debts and using income to invest in their house through renovations.

But it's clear from Westpac's research the withdrawal slot at the housing ATM is opening up again as the market stabilises and homeowners warm to the prospect of prices rising in the spring.

An Infometrics report forecasting an 11 per cent rise in the year to June next year and 24 per cent growth in the next three years will bring joy to the hearts of retailers, home builders and importers.

It's clear now that New Zealand has evolved into a housing-driven economy that sucks in foreign debt when it fires up. This is great as long as foreign investors have confidence we can service and repay the debt.

That confidence will eventually evaporate once foreign investors and their ratings agency scouts work out every time we suck in foreign debt we boost our currency and kill the export sector. It's why we haven't created a single net new job in the export sector in the last decade.

When is someone in charge of this economy going to act to prevent this crash?