Blowing bubbles in the air

News and views from New Zealand – Dennis Dorney

My apparent obsession with housing is justified by the impact that housing has on the economy. When a housing boom is running, mortgages comprise up to 80% of the value of all loans issued. For banks it’s easy profits with little risk – until the bubble bursts.

Readers of my articles in ERA Review will know that a housing bubble has been building in NZ for some time and that authentic buyers have been pushed out of the market as houses become unaffordable.

The Reserve Bank has apparently run out of ideas and the government has been under intense pressure by a recent report on world housing afford- ability, to do something other than making excuses.

NZ’s unwanted gold medal

Demographia, an international survey business issued a report, showing New Zealand has the least affordable houses in the world. At present wages and prices it takes 18 years and six months of a household’s entire annual income to pay for a home, based on median house prices compared to median wages.

In the Government’s defence, Nick Smith, Minister for Building and Housing, has claimed that red tape associated with housing consent applications was the cause of high prices. The ‘red tape’ filled over 80,000 pages, he said, and was responsible for adding $15,000 to the cost of a new home, and $30,000 to an apartment.

This conveniently moved the blame to the city councils.

Problems with the argument were easy to see. The last time that a government hacked into ‘red tape’ was when the National government introduced the Building Act of 1991, which reduced ‘red tape’ on building and permitted self- regulation. The outcome was thousands of leaky homes. Replacement cost was estimated to be about $11.3 billion.

Furthermore, we have always had red tape but high house prices have only occurred under this government, so who do we blame? Changes will be made to the ‘red tape’ via the Resource Management Act but this doesn’t get the government off the hook, so what is the next move?

Firstly I would like to explain how NZ in the depths of the Depression fixed this problem.

State housing 80 years on

When the Labour Party won the 1935 Election it became the Government of a nation mired down in the Depression. The previous Government, like governments elsewhere, had failed to end the Depression by orthodox economics, which included balanced budgets and austerity measures.

Most members of the new government, in particular the Minister for Finance, Walter Nash, favoured continuing those policies. Among the minority was John Lee, a charismatic and articulate speaker, who was familiar with the Social Credit philosophy that was popular at the time, and he wanted to try out some of their ideas. He persuaded the government, despite strong opposition to use the Reserve Bank to fund a state housing program.

The program was a great success.

Tens of thousands of houses were built – I live in one at present. Thousands of skilled tradesmen whose skills were wasting away, were re-employed and NZ came out of the Depression quickly. The whole program was funded by Reserve Bank loans at 1% interest.

Despite its success, Lee’s controversial views made him enemies among the leadership and he was expelled from the party in 1940.

Today NZ finds itself in a rather similar situation to that in 1935. We have had 6 years of austerity measures and futile attempts to balance the budget. Vast numbers of houses need to be built, the opportunity presented by Christchurch having been botched. It is true that the $billions of mortgages have helped keep unemployment down but it is clear that much smaller amounts of money spent directly into the Christchurch rebuild by the Reserve Bank, would have been more effective.

So is the government going to use the 1935 model? No, Bill English, Minister for Finance is going to sell off the State housing stock of about 80,000, worth nominally $19 billion, if he can get away with it. In the coming year a modest 2000 will be sold but I am sure that if the average Kiwi shows his/her usual apathy then all the rest will follow in due course.

To soften the blow, these houses have been renamed “social housing” but the outcome is the same. The houses are at present owned by the state through Housing New Zealand.

Who will be the buyers? Private organisations such as the Salvation Army, which already have “social housing’ on a small scale, and also anyone else who thinks that they can make a profit while maintaining similar standards of service to the existing tenants (not that the present tenants have any promise of security of tenure). Making a profit is technically possible since Housing NZ makes a profit at present, if current rental subsidies are included.

However it will be difficult to persuade investors that a profit can be made from some of the poorest people in NZ. The price they are willing to pay for these properties will reflect their perceived risk, which sounds as though the selling price will be heavily discounted. So far as I can see the Government has no intention of ever building state housing again and the rental contract between tenant and landlord will be a private matter. Unless there is something in contracts to prevent it, I can foresee that existing tenants will be squeezed out, the houses will be spruced up and sold up-market. Where then will the former tenants go?

Dennis Dorney is an ERA member living in New Zealand