There has been a lot of discussion about whether surnames can tell us about the extent of overseas Chinese investment in the Auckland housing market. But forget about the Chens, Wangs and Lis. If you need a surname to attribute Auckland's incipient housing bubble to, it is Deng.

Deng Xiaoping, the so-called "paramount leader" of China from 1978 to 1992, is the politician most often credited with orchestrating the Chinese growth miracle over the past three decades. While those policies can rightly be credited with lifting millions out of poverty, those same policies now inflate and distort asset prices around the world, including here in New Zealand.

The Chinese Government deliberately keeps the Chinese currency undervalued in order to keep Chinese exports cheap and competitive. This is what lies behind China's massive export surpluses and its phenomenal export-led growth over the past three decades.

If a small economy fixes its currency it is no big deal for the rest of the world. But when the world's second largest economy does it, it is sure to have a harmful impact.


The flipside of any trade surplus is foreign investment. By virtue of its artificially low currency, China has been supplying the world with manufactured products, and the world has been paying for those products by selling its assets to China, whether it be the Chinese Government purchasing US Treasury bonds or Chinese citizens buying houses in Auckland.

Those trillions of dollars have to be parked somewhere. It is foolish to think that some do not end up in Auckland.

Those of us in the economics profession generally prefer markets to set prices in most situations. Market prices are an efficient mechanism for allocating an economy's resources to where they are most productive. Or at least we produce more than if a government bureaucrat was in charge of allocating land, capital and labour in the economy.

Deng Xiaoping is the politician most often credited with orchestrating the Chinese growth miracle over the past three decades. Photo / Getty Images
Deng Xiaoping is the politician most often credited with orchestrating the Chinese growth miracle over the past three decades. Photo / Getty Images

But make no mistake: The eye-watering price of housing in Auckland is not the result of free markets. The prices are part of a broader global asset inflation, spanning assets from Vancouver real estate to US Treasuries, driven by a market distortion emanating from the second largest economy in the world.

Market distortions generate problems. Unaffordable housing gives our best and brightest citizens one more incentive to build their lives elsewhere in New Zealand, or worse, overseas. Many climbing on to the property ladder are committing themselves to large mortgages, putting their finances at risk of recessions and interest rate increases.

Were a large recession to hit, the combination of job losses and falling property prices could see many households out of work with mortgages underwater. It would be catastrophic for many Kiwi families.

Clearly it would be impossible for New Zealand on its own to address China's currency manipulation in any meaningful way.

But that does not and should not prevent the Government from reigning in the distortions in our property market.


At the same time, our local government must persevere with changes in urban regulation to permit the housing supply to increase. Not only must the Auckland Council approve the Auckland Unitary Plan next year, it must communicate the likely effect it will have on housing supply over the coming decades.

A stamp duty on foreign investment, earmarked for infrastructure development, would work on both the supply and demand sides of the equation. The tax would remove some of the froth from housing demand and the revenue would directly fund the increase in infrastructure capacity necessary to accommodate higher urban density under the unitary plan.

• Ryan Greenaway-McGrevy is a senior lecturer and Ananish Chaudhuri a professor in the department of economics at the University of Auckland Business School.