Housing Values

It comes down to a question of values: whether you want to live in a deeply-divided and unequal country, or one that provides fairness, opportunity, and economic success.

New Zealand is rapidly becoming a country of haves and have-nots.

The dividing line can be drawn most sharply between those who have a house (and maybe own a rental property or two) and those who don't.

The haves bought houses before 2001, when the really rapid upsurge in housing prices began. They belong to a cohort that has ridden the property escalator for 20 years or more, obtaining capital gains for no real effort.

I call this an escalator, not a ladder, because the original idea of a property ladder was that somebody could buy a house and then increase their housing investment, over time, by making smart investment decisions that involved renovating, redeveloping, or trading up.

The escalator does not require any real effort. It involves buying a house then passively waiting for the capital gain, driven by investor demand, to do all the work for you.

Source: https://www.economist.com/blogs/graphicdetail/2017/03/daily-chart-6

It's not a problem unique to New Zealand. There has been a long-term trend of rising real house prices in the ex-commonwealth countries and elsewhere in the world. A surge of property investment after 2001 peaked with the Global Financial Crisis in 2008, followed by a slump then a rebound to even higher levels.

The Economist magazine attributes these price rises to international capital, seeking safe havens for investment, most recently (but not exclusively) coming out of China.

It may be worse in New Zealand, than in other jurisdictions, because we have relatively weak controls on foreign ownership, a weaker capital gains tax, and other institutional features that favour property over other investment assets.

Choosing a Snake

The have-nots are now in a difficult spot. They will be unable to buy a house and, even if they do, unlikely to enjoy a similar ride up the property escalator.

In New Zealand, they will be consigned to an unhappy existence as tenants, mostly of amateur landlords, with weak legal protection of their rights and interests.

That situation is politically untenable, because the have-nots are now clearly in the majority. And that majority is going to increase over time, as wealth inevitably becomes concentrated in fewer and fewer hands.

Assuming we continue to be a well-informed democracy, the situation must change. And if it does, we will have to choose a "snake" - a way to descend from the top of the escalator.

And there are no really good choices to make: we either choose a fast snake, a slow snake, or no snake at all.

The "fast snake" is a rapid correction in the property market, which will almost inevitably bring about a deep and long-lasting recession, such as we have seen in the USA and Ireland, following the GFC in 2008.

The "slow snake" is more satisfactory, from the economic management perspective. But is it politically sustainable?  A large cohort of home-owners will see their most significant asset declining in real value, over a long period of time, watching their hopes for a secure retirement slowly but surely evaporate.

No snake at all means we accept a permanently high level of house prices, with rental yields at the same (or very slightly above) the government bond rate, and many people renting for a lifetime.

Housing values

This problem comes down to a question of values.

If we care about each other, and look after each other, we will find a way through this.  Because in looking after each other, we can also look after our separate interests.

But if we interests allow this problem to become a source of social, political and economic conflict, there will be no good outcome.

We can sustain a level of permanently high house prices, with low rental yields, if we make renting a secure, stable and economically neutral choice for people to meet their accomodation needs.

We can manage a rapid decline in nominal house prices, if we require banks to write-down the value of mortgage assets on their balance sheets, providing debt relief to mortgagees, and we also boosted money supply in the real economy, and provided economic stimulus through public investment, to avoid recession.

We can manage a longer, slower, decline in real house prices, if we could somehow absolutely guarantee that home-owners would have a secure and prosperous retirement by means other than real estate investment.

But in each of those cases we have to consider the needs of others, and of all of us, before the narrow self-interest of the group we belong to.

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