Taking the rise out of housing

News and views from New Zealand

Dennis Dorney

I have mentioned before that housing is one of the most important topics on any party manifesto because of its impact on each of the three main areas in which any political issue must fall, namely financial, social and environmental. The social implications of being homeless are obvious enough, and our tendency to build new homes on precious farming land is deplorable given how extravagant of land is the Kiwi dream of a house on a quarter acre. The effect on the economy of borrowing to fund that house is apparently not so obvious – at least judging by the attitude of the main NZ political parties.

Bearing in mind that a mortgage is the largest single financial commitment that a family or individual will undertake and that it will dominate their budget for more than half their working life, you might think that the question of mortgage debt weighs heavily on the minds of our politicians. Apparently not.

When an economy is working ‘normally’ (and the inverted commas are justified because we will probably never again see this ‘normality’) all debt will fall due to the government, the commercial sector or as the private debt of the average Kiwi. In practice all debt must be paid by the man in the street, who increasingly in these days of austerity, both lives and sleeps there. He pays government debt through higher taxes and commercial debt through higher prices, though to be fair if commercial debt is invested wisely prices may be kept within the bounds of inflation. In a world of scarcer and dearer raw materials, that outcome is becoming rare. Nevertheless, of all the options commercial debt is the least objectionable.

However following the collapse of the housing boom in 2008 the commercial sector is not taking on debt because the economy is stagnant and the public has no appetite for more debt. To the contrary, with interest rates at the lowest in a long time and inflation at 1% many people are choosing to pay down debt. It is true that the Government itself is taking on new debt at the rate of about $350 million per week, but not to stimulate the economy. It looks as though the Government is also taking advantage of cheap interest rates to pay down existing debt. Whether this is a sound long term policy remains to be seen but the short term effect is that we have a shrinking economy, that looks set to be in recession for a long time.

Unbelievably house prices are rising again, admittedly mainly in Auckland, which is almost the only growing city in NZ, and Christchurch, where the earthquake has created an acute housing shortage. It takes a government of rare genius to organise a house-price boom during a recession. Naturally the natives are getting restless. This has given the Labour Party the chance to show that it is a credible opposition and still loves the worker, something that has not been very conspicuous in the past.

Having scratched around for any policy that might make it relevant, it has stumbled on the fact that there is nation-wide a housing deficit of about 100,000 homes. This was no surprise to many but an utter shock to the politicians. Without drawing attention to the fact that most of this shortage occurred on their watch, Labour has promised to build houses at the rate of 10,000 a year and although I don’t trust them, this is a promise that they must keep or be consigned to the dustbin of history.

Instead of the boring pseudo-debates between two parties, essentially both neo-liberal, we now have a point of real divergence between the two. The position of the Government, conservative to its bones, is to leave it to the market to provide the required houses. The fact that this has not happened in the last 20 years doesn’t matter. That it is actually more profitable to sit on vacant land in a rising market rather than build houses, because speculation raises the land price not the house price, doesn’t matter. And that the wrong houses are being built in the wrong places, because that is what profit dictates, also doesn’t matter – or didn’t until the polls showed a distinct drop in the Government’s popularity.

The Labour position is that it will borrow money for the required houses, presumably as required and that the fall in unemployment will generate the extra taxes to enable the government to pay off those debts. To my mind this is pure Keynesian economics and, although this is to be preferred to the free market alternative, the assumptions that the debt will be repaid in full must have failed often enough or we would be Keynes supporters still.

The first and best NZ Labour Government faced exactly the same situation when it came to power in 1935 during the Great Depression and solved the problem by borrowing from its own Reserve Bank at 1% interest to embark on a massive rebuilding program. The idea itself was borrowed from the Social Credit movement, popular at the time, and it worked. What a pity that the present Labour party cannot detach itself from the present monetary system to do something truly revolutionary.