Not too long ago some people were complaining about rising house prices and demanding that the Government take action to bring them under control. Now, house prices are declining, and some are demanding, equally strongly, that the Government should step in and do something to stop them from dropping further.
But is that even possible?
Can the Government, or anyone else, really control the levers of the housing market in a way that determines whether house prices go up or down?
Not if you look at the history of the market over the past forty years.
Despite repeated attempts by successive Governments, to get it under control – the property market has done, pretty much, its own thing, shrugging off various interventions like a giant plucking out irritating, but harmless, lilliputian arrows.
To understand why, you need to understand something of this country’s recent economic history – and, to do that, you need to go all the way back to 1982 when, following almost a decade of economic upheaval, then Prime Minister, Robert Muldoon, decided to introduce a Wage and Price Freeze. The freeze failed, with mortgage interest rates peaking at over 20%. The impact was devastating, and it led to the passing of the Reserve Bank Act in 1989. This meant that the central bank was responsible for keeping the annual rate of inflation within an agreed range and its success over the past 30+ years has become the stuff of legend. As a result, kiwis have benefitted from a level of price stability which has improved their standard of living and gradually increased our national wealth.
That was the year in which Jacinda Ardern and her Government came to power and embarked upon, a concerted campaign to turn back the economy by 40 years.
Attempts to control the productive economy in a kind of Soviet ‘central planning’ fashion; the reversal of measures designed to help young kiwis get into work – replaced with incentives to rely more and more on Government support; a hugely excessive multi-billion dollar spending spree; and an obsession with extracting more and more tax from every conceivable activity – driven, apparently, not by a desire to reduce public debt, but rather to satiate an ideological belief in the need to punish any household earning over $100,000.
And there are new, equally pernicious measures proposed or recently enacted. A return to the bad old days of centralised wage bargaining; a new tax on businesses to lock in incentives to remain unemployed for longer; and talk of a ‘wealth tax’ on those who have had the audacity to provide for themselves.
Even Muldoon would never have dreamed of going to these lengths in the pursuit of the elusive goal of absolute control of the economy. Indeed, history teaches us that such attempts invariably lead to perverse impacts on the economy – almost always resulting in worse circumstances than before.
We can see this, right now, playing out in the form of extreme social division; increasing welfare reliance; the collapse of small businesses; a huge increase in state bureaucracy; and, of course, a massive jump in domestic inflation and public debt.
Which brings me back to the property sector.
The idea that the Government can influence house prices by pulling a couple of levers is incredibly naïve and we are now starting to pay the price for over four years of misguided intervention.. Legislation that heavily favours tenants; the imposition of new and expensive requirements on landlords; and draconian changes to the tax treatment of property investors, which fly in the face of international tax practice, have all created a perfect storm in which the cost of renting increased dramatically between 2017 and 2021 and led to a stall in the pace at which new rentals came to the market – something which will lead to an inevitable shortage over the next couple of years.
The Labour Government has also overturned the independence of the Reserve Bank. As recently as 2020, Finance Minister Grant Robertson wrote to the Governor of the Reserve Bank instructing him to include house prices in his decision-making process by dampening investor demand for existing housing stock to improve affordability for first-home buyers. This move played absolutely no part in the current price downturn – but is definitely having an impact on the availability of rentals I mentioned earlier.
And here’s the thing: ALL of these measures have been based on an assumption that house price inflation has been bad and that house prices needed to come down. But is that really true?
For the 65% of kiwis who live in an owner-occupied home, the gradual increase in the value of our homes has given us choices we could never have otherwise imagined. If you’ve owned your home for a while, the increase in its value has probably allowed you to improve the quality of life for you and your family, to educate your kids, to provide for loved ones and perhaps even to start a business. Indeed, according to a recent international survey, New Zealand is now the fifth wealthiest nation on earth, mostly due to our strong attachment to real estate.
But what about the 35% of kiwis who don’t own a home? Don’t they deserve the same opportunity?
Of course! But instead of penalizing the majority, a wise Government would measure its success by its ability to ‘move the needle’ on first home ownership – getting even more people into homes by putting in place innovative policies like deposit guarantees, dumping the LVR restrictions for first home buyers and working hand in hand with the private sector to develop ‘shared equity’ and ‘lease to own’ programs.
Focusing on these ideas, rather than engaging in an ultimately futile attempt to control house prices, is how we’ll solve the elusive housing crisis.
Meanwhile – smart investors are biding their time because they know that a rental shortage is coming, and many more homes will be needed.
DISCLAIMER: The opinions expressed in this article are the author’s and shouldn’t be taken as financial advice, or a recommendation of any financial product.