Is NZ's Housing Market a "Human Rights "Issue or just Bad Economics?
Updated: Apr 26, 2020
It's official. The situation in the New Zealand housing market has been labelled " a human rights issue" by a United Nations' official. This suggests there are victims and perpetuators. There is good and evil going on. My interpretation it is just very distorted economic activity. There are people acting in their own self interest and they are responding to bad incentives.
Adam Smith , the father of classical economics, stated that enlightened self interest could benefit society. He believed that people should be left to pursue their own business interests largely free from government control or excessive taxation. This would ultimately benefit everyone in society. He was an advocate of economic freedom. But he was aware of its limitations. Smith believed That entrepreneurs, motivated by profit, would create more output , jobs and incomes in society. Yet Smith also said, " there is much ruin in a nation." Smith was aware of the power of vested interests to subvert the economic well being of a nation.
There are some key vested interests that affect the housing market in New Zealand. They include the banking sector, the real estate industry, the media and landlords. There is only one of these groups I have much sympathy for.
Economics 101 teaches that the economic prosperity of a nation depends on how well it uses its resources to make stuff. It's output is measured by a statistic called Gross domestic product. The output per person largely determines the average income in a society. New Zealand's average output per person is about $US 40000 per person. Australia's is about $US 52000.
Houses are for workers to live in. Rising house prices have little effect on GDP or average incomes in a society. We have spent several decades deluding ourselves that higher house prices generated by higher debt levels have made us wealthier as a nation. This has been profitably facilitated by these vested interests.
From the 1980s our banking sector was deregulated. Direct controls on bank lending were removed. Controls on bank borrowing from overseas were also removed. The banks were given carte blance to lend as much as they wanted. It was largely up to them to decide how much they could lend based on their assessment of collateral and the ability of people to service their debts. There were few rules on bank lending.
The deregulation turbo charged our housing market. As the average value of houses increased this allowed the banks to lend more, because their collateral had increased. A giant ponzi scheme emerged.
Since the GFC the Reserve bank has reduced interest rates to record levels to keep our economy afloat. This has helped further inflate house prices.
There is a bizarre aspect to this. Interest rates are largely determined by the Reserve bank, which is a quasi government body. Yet interest rates are a fundamental price in a market economy. A dirty secret of macro economics is that lower interest rates largely work through two channels. They can drive down the exchange rate which assists exporters. But They can also kindle housing inflation which encourages people to borrow and spend more. It's little wonder our housing market has had a recent resurgence.
Meanwhile the real estate sector has happily facilitated this process. In a buoyant market the most profitable form of selling has been auctions. This encourages desperate buyers to compete to get on the property ladder or advance up it. Vendor pricing is deliberately vague or non existent. Auctions encourage quick sales and faster commissions.
The mainstream media also facilitates the process. The banking and real estate sectors are core advertisers in a time of declining advertising revenue. There are endless articles and TV programs about the buoyant property market. Those who have made quick gains are well reported . Those who have gone through a messy divorce and been forced to sell and pay huge amounts to break their mortgage are seldom mentioned. The positives reported in the media hugely outweigh the negatives.
Sadly landlords are often stigmatised as grasping " get rich quick" exploiters. They are the meat in the sandwich. But It is unfair to treat landlords any differently from other business owners. Those who speculate should be taxed for the income their speculation generates. But those who are genuine long term landlords should not have the rules suddenly changed on them.There is a hoary myth about the exploitative nature of landlords. A Bad tenant can inflict much damage on a property in a short period of time, or create significant financial distress by not paying their rent. There must be a fair balance between the rights and obligations of landlords and tenants.
The New Zealand housing market has become grossly distorted over many decades. But It's not about good versus evil. It's about vested interests responding to really bad incentives.
Peter Lyons (M.Comm) teaches scholarship-level Economics and has authored several New Zealand curriculum economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.
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