They should be known as the lucky generation. Anyone owning property in the mid 1980s could never have imagined what would happen in the next 30 years.

Inflation fell from regularly above 10 per cent to consistently around 2 per cent. Mortgage rates more than halved to under 8 per cent. House prices quadrupled and rents doubled.

It was like manna from heaven and it was all driven by a fall in inflation. It wasn't accidental. The Reserve Bank Act of 1989 was focused on dragging inflation down to around 2 per cent and it worked.

It took a while to sink into the national psyche and to flow through the bank accounts and balance sheets into asset prices in the real economy, but when it did it was enormously powerful.


It made owning property much easier because interest rates fell. That was then built into the value of property and land in particular. The value of any investment that produces a regular income stream, such as a rental property or bond, will rise whenever interest rates fall.

For rental property investors at auctions, lower interest rates allow a buyer to offer more.

A structural shift lower in interest rates and inflation powered a massive one-off increase in the capital values of assets with reliable income streams that could be used to pay those lower interest rates.

The scale of this accidental benefit to whomever was owning property before this shift is enormous. The value of New Zealand's houses rose from $100 billion in 1987 to $725b this year.

Meanwhile, mortgage debt rose only from less than $20b to $192b, which means the equity in this property has risen from $80b to $533b. This $453b windfall was possible only because of a fall in interest rates and this is the story of asset prices around the world over the past 30 years.

But it was a one-off. It can't easily happen again. There's only so far inflation can fall before it can't fall any more. The point that yields on rental property and bonds can't fall much more is clear in research this week from ANZ on yields on rental property over the past 20 years. Auckland's yields are approaching 3.5 per cent, down from 7.4 per cent in 1992.

The brutal truth is the generation buying into property now can never hope to repeat the gains captured by the generations who owned or bought property from 1987 onwards.

They would require inflation to turn into deflation and for the Reserve Bank to cut interest rates to 0 per cent, as has happened in the rest of the developed world. Or they would have to take on 120 per cent-plus loans over 50 years or more. The Reserve Bank is in no mood to help them out, and nor should it.


But the landless generations looking in on the more than half a trillion dollars worth of equity tied up in housing will eventually look for ways to tax that wealth and start transferring it to the unlucky generations.

A land tax, as advocated by many serious policy-makers, would help change that 30-year relationship between falling yields and rising values. And not a moment too soon.

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