Past governments have done little as house prices climbed, but the current one has caused a crisis to become a catastrophe – exacerbating wealth inequality and hardship. By Arthur Grimes.
In September 2017, New Zealand faced a "housing crisis", which the new Government vowed to fix. Since that time, house prices have risen by nearly 50 per cent.
The owner of a median-priced house will now be more than $250,000 richer; a well-off household also with a beach house will be at least $500,000 to the good; a landlord with four properties will be about $1 million better off – in less than four years.
If you were yet to get on the property ladder – say you were young or low-paid – you would be no better off. In fact, tenancy bond data shows that rents have risen by 20 per cent since the 2017 election on average nationwide, so you would now be worse off than before the house-price explosion.
Stats NZ reports that the average home-ownership rate for Europeans was about 70 per cent in 2018. The ownership rate was less than 50 per cent for Māori and less than 40 per cent for Pacific peoples.
As a result, since Labour's 2017 victory, we have seen possibly the greatest and fastest widening in wealth inequality in our history. That increase in inequality penalises Māori and Pacific peoples the most.
Similarly, it penalises the young, especially those who do not have parents who can assist them into home ownership. This situation exacerbates the intergenerational transmission of inequality.
I teach undergraduate commerce students who tell me they have given up hope of ever owning a house in this country. They will go overseas to try their luck. And if this group has given up hope, then what of other young people without the same income prospects?
History and causes
House-price rises are unfortunately not new. From January 1992 to September 2017, house prices rose by an average of 6.8 per cent per year. Since September 2017, the annual rate has risen to 11 per cent, and the increase has kept accelerating. House prices have risen at an annual rate of 15.2 per cent since December 2018, and the annual rate has skyrocketed to 21.8 per cent since March 2020.
Published research shows that over recent decades, house prices have risen as a result of two key factors: constraints in building new houses and high net migration. Net migration is the difference between new immigrants arriving and people leaving.
Strong net migration continued right through to the start of the pandemic. From 2014 to 2019, net immigration averaged 4800 people a month.
When new migrants arrive, we need to build extra houses and apartments to ensure everyone has a home. However, it is not easy to build new dwellings in this country.
Councils (and central government) have, for a long time, placed barriers in the way of new development – for instance, through zoning, height restrictions and delays in consenting. One study showed that council-induced costs could add up to $110,000 per new apartment.
Labour shortages have also proved problematic, in part because of the "stop-go" nature of construction here. When we "stop", builders leave for Australia and most do not come back. Successive governments have been at fault for failing to use the slow periods to ramp up building of social housing, despite the huge need for it. The last Government was particularly at fault.
From 2000 to 2017, consents for new dwellings averaged less than 2000 a month. Recently, the regulatory climate has improved and more houses are being built. From 2018 onwards, the monthly average has risen to more than 3000 a month.
These new houses are sufficient to accommodate an extra 8700 people each month (at the average number of occupants per dwelling). The building boom makes the current house-price explosion even more extraordinary.
Compounding this extraordinary situation is the collapse in migration. Since the pandemic, from April 2020, net immigration has averaged just 495 people a month – one tenth of the pre-pandemic rate. We have built large numbers of houses and apartments and yet we have few people arriving to fill them. So what explains the housing catastrophe of the past four years if it is not the traditional issues of high migration and low rates of building?
Here, the Government takes centre stage. In 1989, the then Labour Government changed the Reserve Bank Act to focus monetary policy on keeping prices stable. It recognised that previous monetary policies under Robert Muldoon had made property speculators rich through borrowing to buy property in times of high inflation.
The current Labour Government, then in coalition with NZ First, decided to revert to a formulation of the act similar to that under Muldoon. After receiving advice from Treasury – and, indirectly, from Treasury's advisers – it widened the act to include a new task for the Reserve Bank: to achieve "maximum sustainable employment" in addition to its price-stability mandate. The amended act came into force in December 2018.
I have seen no record that Treasury warned the Government that this change would lead to asset-price rises, including house prices. This is despite existing studies, including one of my own, showing that setting a "dual mandate" would lead to a ratcheting up of asset prices. The advice also ignored the Muldoon-period experience of property owners getting rich as a result of monetary policy settings that benefit those owning property.
Monetary policy under the amended Reserve Bank Act has lived up to the predictions: it has sparked huge increases in the wealth of property owners at the expense of Māori and Pacific peoples and at the expense of the young. House prices have risen by a staggering 44 per cent in less than three years since the amended act came into force.
Even more unbelievably, house prices have risen by 30 per cent in just 16 months since the pandemic lockdown started, despite rampant house building and virtually zero net migration. Housing supply constraints and high migration – which traditionally push up house prices – have not been the culprits on this occasion.
The central culprit has been monetary policy that has flooded the economy with liquidity. This liquidity in turn has found its way into the housing market.
Biting the political bullet
Equality of opportunity is fundamental to a country with a well-being agenda. As a professor of well-being and public policy, I place great store on the promotion of well-being as the overriding goal of government policy. Consequently, I also place great emphasis on promoting equality of opportunity. As a former Reserve Bank official, I was proud that we replaced a regime that acted in the interests of property owners at the expense of people who did not own property.
Now, we have reverted to a policy regime that favours the wealthy, especially those who own multiple properties. Monetary policy – driven by the change in the Reserve Bank Act – has boosted the wealth of the property-owning class.
Just as extraordinary is the attitude of both this Government and the last to ensure that the huge increases in wealth are not taxed. A landlord who owned the same four houses throughout the period will have made a million dollars gain in less than five years and will have been required to pay zero tax on that.
By contrast, imagine a low-income working family trying to save for a $120,000 deposit to afford a $600,000 home (a price that today is less than three-quarters of the median price). How are they ever going to save that deposit?
The last Government promised to contain house prices, but failed to do so. When I called publicly for them to enact policies that would return prices to the levels when they took office – requiring a price fall of 40 per cent – they refused to contemplate house prices falling from their new higher levels. The current Government has failed even more spectacularly. It, also, has publicly refused to contemplate house prices falling from even more unaffordable levels.
At some stage, a politician who genuinely advocates for affordable housing will have to bite the political bullet. He or she will have to state the obvious: house prices must fall, and policy settings need to hasten that fall.
Monetary policy under the amended Reserve Bank Act has left the young and many Māori and Pacific peoples with increased housing costs and erased their dream of owning a home. At the same time, it has made people like me wealthier without requiring an extra cent in tax on that unearned wealth gain.
In well-being terms, the country is immeasurably poorer as a result of the vast wealth gulf that has emerged since 2018. And no politician seems to care enough to do anything about it.
Arthur Grimes is professor of well-being and public policy at Victoria University of Wellington and a senior fellow at economic think tank Motu Research.