NZ Herald business editor at large

Liam Dann: Serious disconnect in housing boom

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Property prices and inflation are worlds apart but we seem to lack the political will to address the issue.
Last week we found out Auckland's house price boom was back from the dead like the monster in a B-grade horror movie. Photo / Michael Craig
Last week we found out Auckland's house price boom was back from the dead like the monster in a B-grade horror movie. Photo / Michael Craig

Last week we found out Auckland's house price boom was back from the dead like the monster in a B-grade horror movie. The Real Estate Institute (Reinz) data was big news but it told us just half of the story. Inflation data due today will tell the other half.

These are weird economic times but not because Auckland property prices are soaring. They have done that with little let up for the past three decades. These are weird times because house prices are soaring when the price of everything else, including labour, is static.

Economists are picking inflation for the first quarter of 2016 is going to come in about 0.1 per cent. The Reserve Bank was hoping for 0.2 but with a big dip in oil prices at the start of the year that may be overly optimistic. Regardless, it is going to be low.

New Zealand's annual inflation rate for the year to March 31 is going to come in at around 0.4 per cent. As ANZ's inflation preview points out, this will be the seventh consecutive quarter where it is below 1 per cent.

The Reserve Bank is officially mandated to keep inflation near a mid-point of 2 per cent. That means as much as the Governor is worried about housing bubbles and long term financial stability risk, his bias is still towards cutting interest rates.

Rampant inflation can be a terrible wealth-destroying thing. But inflation tends to take wages along for the ride and it also eats away at the value of debt. When house price rises are in sync with inflation there is at least a kind of equity to things. The tide is lifting all boats.


Right now there is an enormous disconnect between house prices and everything else. That's actually a wonderful scenario for established home owners. But it is exacerbating social inequality.

Right now there is an enormous disconnect between house prices and everything else. That's actually a wonderful scenario for established home owners. But it is exacerbating social inequality.

The suppressing effect of low inflation on wages is easily compensated for by the wealth effect of knowing your house is worth hundreds of thousands of dollars more than when you bought it.

It creates a wealth effect that, especially now it is spreading down the country, could effectively stimulate our economy through the dairy price slump.

Look at Hamilton, now basking in what some economists call the "halo effect" of the Auckland boom. In the year to March, Hamilton's median house price rose to $472,000 from $350,000 - a 34 per cent increase.

This couldn't be better timed for a regional economy that is about to feel the brunt of a massive earnings slump to its primary productive sector - dairy.

The problem is that letting property prices come to the rescue now is good for us in the way a P addict might say one last hit, to get him through a bad patch, will be good for him.

We know that there is a come down to be had with property but as long as it remains at some ill defined future point we seem to lack the political will to address it.

The scary economic arguments just don't get much political traction even though we all talk about the problem. A capital gains tax, for example, might be a worthwhile tool to try, but even Labour admits it is a policy that would make them unelectable at this point.

Fixing supply alone is a painfully slow solution, meanwhile the widening of the inequality gap is accelerating thanks to the low inflation/soaring house price combo.

For many homeowners in this politically powerful sweet spot the economic comfort is tinged with concern about how our children will afford to live in the city we call home.

And the rise of homelessness and stress that housing costs are putting on low wage earners is clearly unfair.

It puts a generation of New Zealand children at risk. When we debate housing affordability we need to let fairness and equity be our drivers for change because if we rely solely on the economic case there is always an argument to let things roll on.

Debate on this article is now closed.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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