I like the political advertisement showing the teams rowing their boats down the river. "It's the economy, stupid" helped win Bill Clinton the US presidency in 1992. It is important that the team in charge of the economy is paddling in the right direction.
Our rock star economy of this year has been the result of record export prices, the Christchurch rebuild and buoyant house prices, particularly in Auckland.
Export prices have tumbled in recent months. We have ridden a positive wave in world commodity prices in recent years, particularly for dairy products, but this appears to be changing rapidly. There is not much a government can do about this because we are price takers on world markets.
The Christchurch rebuild is a major stimulus for our economy but no country in history has been able to build a vibrant economy based on natural disasters. We will also pay a price for the rebuild in higher insurance premiums.
The buoyant Auckland housing market resembles a turkey being fattened for Thanksgiving. It is not a recipe for sustainable national prosperity.
The ASB recently announced record profits for its owner, the Commonwealth Bank of Australia. Such announcements have become common in recent years for the major banks. These announcements are usually couched in sombre tones. It would be a rare, and soon to be rarer, bank chief executive who shouted "Hey guys, we are creaming it!".
Lending in New Zealand is a very profitable activity given our penchant for owning houses. An overriding factor that affects prices in the housing market is the willingness of banks to lend. This was clearly illustrated following the global financial crisis (GFC), when the banks took fright and dramatically curbed their lending. House prices fell in all areas.
In recent years the banks have regained their lending mojo, particularly in the Auckland market. They are aware that if things turn ugly, like in 2008, the Government will likely back them again as it did with the deposit guarantee scheme following the GFC. So the banks keep lending and house prices in Auckland keep climbing. This allows further lending as the collateral rises in value. The turkey keeps fattening. The rest of the country looks on with bemused interest.
This Government laments the rise in Auckland house prices because of the burden on young first-home buyers. It makes bold announcements about housing accords and various other measures to increase supply. Yet the buoyant housing market is a bonanza for any incumbent government as it was for the Labour Government prior to the GFC. If people feel wealthier they tend to vote for the status quo. This helps explain the unwillingness of this Government to collect any hard data on what and who is actually driving housing inflation in Auckland. This information might require confronting some unpleasant truths.
The Auckland Council has stated that the 33 per cent rise in rateable house values over the past three years will not lead to large rate rises. Past evidence suggests otherwise. It is attempting to address housing affordability through its Unitary Plan. It is encountering stiff resistance from property owners. They usually agree that something must be done, but not if it impacts on their property values. So the turkey continues to fatten.
Economics 101 teaches that a country's economic prosperity comes from how it uses its resources to produce saleable goods and services. This is measured by gross domestic product. The buying and selling of existing houses produces no new output or real wealth for a nation. It leads to increased debt levels, particularly for young home buyers. It means that a larger share of our national income goes to overseas lenders and bank shareholders. Unfortunately, there are too many vested interests ensuring the turkey keeps getting fatter.
Kiwis are a modest bunch, even us Aucklanders. Dinner conversations are often about the house down the road that sold for way above CV. It only has three bedrooms and a much smaller section. The inference is clear.
But there are a few unsettling statistics to ponder. Average house prices in Auckland have apparently risen 33 per cent over the past three years. Wages rose about 10 per cent. Auckland's population grew by 8 per cent from 2009. Something doesn't add up. Meanwhile, banks continue to make record profits. Gross rental yields have fallen to around 3-4 per cent. Either Auckland landlords are the most generous in the Western world or the housing shortage is not as severe as house price inflation would suggest. To use some badly mangled metaphors, the turkey is getting fatter as we continue to paddle down the creek.
Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.