The housing inflation of the mid-2000s represented a giant
game of pass-the-parcel happily hosted by the banking and
real estate sectors. Photo by ODT Files.
The last thing New Zealand needs is a resurgent housing
market, writes Peter Lyons.
There are early signs of a housing market resurgence,
particularly in parts of Auckland and Christchurch. Real
estate pundits are suggesting this is a sign of the elusive
economic recovery. Surging house prices are the last thing we
need for a sustainable recovery. We appear to have learnt
nothing from the past few years.
A renewal of housing inflation in certain areas is due to a
convergence of events affecting both the demand and supply
sides of the housing market. The Christchurch earthquake has
depleted the housing stock in that city and contributed to
increased migration to Auckland. Low interest rates due to
the long downturn has made mortgage finance more attractive
for the moment. Banks are also relaxing their lending
criteria after the scare of 2008.
On the supply side, construction of new housing has been
dismal over the past few years. Many construction firms have
downsized or disappeared.
The availability of mezzanine finance for property
development dried up following the finance company collapses.
Restrictive council bylaws, zoning and consent requirements
also hinder the supply of new houses.
There are key reasons why resurgence in house price inflation
is the last thing our economy needs.
Reason 1: Countries become wealthier by increasing
their ability to produce saleable goods and services. No
country in history has become wealthy by bidding up the
prices of its existing housing stock. If this is a real
economic recovery, where are the new industries?
Reason 2: A large portion of our mortgage finance
comes from overseas. The banking system borrows cheaply
overseas and pumps this into our mortgage market. The net
effect is to increase New Zealand's indebtedness to the rest
of the world. Unfortunately there is no corresponding
increase in our ability to repay this debt. That villa in
Ponsonby or Fendalton is still the same house it was 10 years
ago but now it has a large debt against it owed to overseas
Reason 3: The funds tied up in our inflated housing
market could have been used to start new businesses or buy
back shares in existing businesses such as the banks that we
used to own.
Reason 4: House price inflation will further harm
those people whose homes were destroyed by the Christchurch
earthquake. It will make it harder for them to buy back into
Reason 5: House price inflation will continue to
magnify generational inequalities in this country. Young New
Zealanders will be less able to own their own homes. Those
able to buy into the market will be paying back massive
mortgages over many years. This reduces their ability to save
and invest in enterprises that increase New Zealand's
productive capacity and earnings potential.
Reason 6: As banks and other financial institutions
borrow from overseas to fund our mortgages, this drives up
the value of the New Zealand dollar. This makes our export
sector less competitive.
Reason 7: As we sink deeper into debt with the rest of
the world, more of our productive assets such as dairy farms
will be sold. Ironically, in seeking to own the expensive
roofs over our heads we increase the risk of becoming tenants
in our own country.
Reason 8: If house price inflation surges again, the
Reserve Bank will eventually push up interest rates. As
people struggle to service their mortgages this will reduce
demand in other parts of the economy, leading to less
employment and output.
Reason 9: The housing inflation of the mid-2000s
represented a giant game of pass-the-parcel happily hosted by
the banking and real estate sectors. Bidding up our existing
housing stock with borrowed money does not create sustained
employment or output or tax revenue or export earnings. It is
an illusionary and ultimately destructive road to riches for
Reason 10: There is ample historical evidence of
nations that declined because they failed to set their
economic parameters correctly. Unless we sort this problem,
our children and grandchildren will look back at this period
in our history and reflect on how badly we got it wrong.
• Peter Lyons teaches economics at Saint Peters College
in Epsom and has written several economic texts.