Editorial: Risky property cycle needs to be broken

Opinion

With signs of a recovery getting stronger, the worry is growing that nothing is going to change. Banks that would have collapsed but for big government bail-outs are liable to come through with renewed confidence that taxpayers will always cover their mistakes. Governments owe it to taxpayers to reduce that risk with closer supervision of banking. Most are devising new regulations for that purpose.

In this country the recession has had less to do with poisonous financial products than with excessive property investment but nothing has been done to change that. Economists, noting a recovery in house prices, suspect they have not fallen far enough to deter renewed household borrowing and consumption. The Reserve Bank governor, Alan Bollard, saw a clear risk that households resume their "borrow and spend" habits too soon. "This could be triggered by renewed moderate house price inflation and needs to be avoided," he said.

Speaking at the Herald's Mood of the Boardroom breakfast on Tuesday, Finance Minister Bill English pointed out that the tradeable sector of the economy has been shrinking for the past five years, much longer than the 18 months of the overall recession. In fact, the contraction of exports was a direct consequence of the high dollar that resulted from the interest rates that had to be set to counter the inflationary consequences of rising house prices.

Unless something is done to discourage a resumption of property price inflation we are all too likely to climb back on the merry-go-round of borrowing to invest in second or third homes. Confident of untaxed capital gains we will again feel wealthy enough to splurge on imports and travel made cheaper by the dollar's export-punishing exchange rates.

The Government knows it ought to break this cycle before a recovery gathers pace. But its strategy, outlined by Mr English and again by Prime Minister John Key yesterday, is fuzzy. Rather than simply attacking the problem with its most effective weapon, taxation, it talks about six solutions.

These are: regulatory reform, infrastructure investment, public sector savings, better education and skill training, assistance for business innovation and taxes. All of these could be helpful to export industries but only the last is capable of quickly tackling the fundamental misalignment of national investment.

Even with taxation, however, the Government sounds more willing to boost external competitiveness than fix internal distortions. It rightly aims to lower the top personal and company rates to 30 per cent when it can find compensating sources of revenue. The Treasury favours property and consumption taxes over taxes on more mobile forms of wealth. But Mr English says he wants to see what Australia does.

He is meeting the Australian Federal Treasurer, Wayne Swan, today and might form an idea of what that Government will do, probably after an election next year. To broaden our tax base Mr English should not need a cue from Canberra, where in any case housing is not the tax haven that it is here.

About $5 billion of Uridashi and Eurokiwi bonds are maturing this month with no sign of a sell-off. Despite having one of the deepest external earnings deficits in the developed world, foreign savers seem content to retain our dollar. We continue to live well on their confidence without investing enough in products that might improve our earnings.

It is anyone's guess how long this can continue but it would be safer to make better use of funds while we still can get them. If the recession has improved investment patterns in comparable countries we may need to act soon.