Prime Minister Christopher Luxon with his senior ministers. Photo / Alex Burton
Prime Minister Christopher Luxon with his senior ministers. Photo / Alex Burton
Opinion by Thomas Coughlan
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
The property market in Auckland and Wellington is experiencing one of its worst slumps, with values significantly below the 2022 peak.
Auckland home values are 19.7% below the peak, while Wellington’s are 27.3% lower.
As prices fell, MPs were divided on whether this was a good thing, with Housing Minister Chris Bishop saying the Government was trying to force prices down in the medium-term.
You’d expect MPs to take a break from embarrassing themselves during the parliamentary recess, stepping off the hamster wheel of national schadenfreude that characterises so many of their sitting weeks.
Not so.
The soft, savoury odour wafting from car radios and television sets could only meanone thing: someone had egg on their face.
On Monday, the Labour Party pointed an accusing finger at the funhouse mirror of National Party positions on the housing market.
Housing Minister Chris Bishop had gone on the radio to repeat his backwards rain dance for falling house prices - a plea he’s been making, with some success, for about a year.
“We’ve got to decouple the idea that the New Zealand economy is driven by house prices. Actually, it’s artificial wealth, and real productive wealth comes not from house prices, but from investments in manufacturing and technology and other things that actually drive productivity growth and drive higher wages,” he said, confirming the Government was “trying” to drive house prices and rents down over the medium to long-term.
Over the weekend, as the comments made their way through the intestinal tract of public discourse, they were mangled into a basic plea for house prices to continue dropping.
This was news to the embattled homeowners of Wellington and Auckland who have endured a vertiginous plunge in their property values since 2021, when the former Reserve Bank Governor was finally persuaded to turn off the money printer and call time on an unfortunate economic experiment in which the bank, underwritten by the Labour Government, turned the housing market into a weatherboard cryptocurrency.
Prices, by one measure, have since crashed 27.3% in the capital, and 19.7% in Auckland - quite the feat. During the Great Depression, house prices in the United States fell by about 22-35% depending on your source (in some places like Manhattan it was far higher — and higher still if you adjust for inflation). It’s thanks to the fact that we’re coming off such a high base and have much stricter banking rules that today’s collapse hasn’t put any real strain on the financial sector.
Fortunately, the Government isn’t doing anything to undermine those protections.
The changes will probably make lending cheaper, allowing homeowners breathing space and businesses and farmers to borrow more to invest in highly productive economy-growing plant and machinery — or so the Government hopes.
In all likelihood, the most productive plant most New Zealanders will ever invest in is a new lemon tree — everyone knows quarter-acre sections don’t grow on trees, but plenty of trees can fit on a quarter-acre section.
Prime Minister Christopher Luxon, seeing his political fortunes plunge lower than the value of a Newtown semi, tried to clear the air on Monday morning, telling RNZ he actually wanted to see “modest” and “consistent” house price rises.
Labour pounced, putting out a media release saying that Luxon’s remarks were in “direct contrast” to Bishop’s.
“National is so out of touch they don’t realise that flip-flopping around with ideas about market value is considerably alarming to homeowners,” said Labour’s acting housing spokeswoman, Arena Williams.
Pause to think how unusual it is that Labour is taking the side of alarmed homeowners against National and you’ll get a glimpse of how delicious the whole fiasco had become. On Monday evening, Nicola Willis leapt into the funhouse mirror, contorting her two colleagues’ quite clearly disparate positions into something of an alignment.
Everyone’s position is ridiculous, but, as Tolstoy (who famously came to the conclusion that property was evil only after acquiring an awful lot of it), might have said, each position is ridiculous in its own way.
Bishop’s position conveniently elides the “why” behind the housing collapse. Part of the reason prices are falling will be because he and his predecessor, Labour’s Phil Twyford, laudably deregulated land and planning rules, allowing more supply to enter the market.
This is, quite clearly, a “good” thing. The other reason is the economy has sputtered thanks to a combination of high interest rates, high costs, and plummeting confidence and the Government wielding the axe on public spending, most especially in Wellington. When the dole queue lengthens as house prices fall, it’s probably worth wondering whether what we’re experiencing is perhaps a good thing driven by rather not-so-good forces.
Labour leader Chris Hipkins pities those who bought at the top of the market. Photo / Mark Mitchell
Bishop is right that New Zealanders need to break up with the idea that a roaring housing market is a proxy for a good economy.
But he cannot hide from the fact that New Zealand’s plummeting housing market is, in part (not totally), symptomatic of a bad economy. Better economies than New Zealand have decoupled the way they think about the economy from house prices, but very few “good” economies have managed to post decent employment and growth statistics whilst observing plummeting house prices.
Bishop knows he has a challenge here. As prices fall, some developments fall through and still more get put on ice, meaning fewer houses brought into the market.
The Reserve Bank’s Monetary Policy Statement, published last week, bleakly revised down residential investment forecasts, money spent on building new homes and renovating existing ones (in part thanks to Stats NZ’s revisions). Since last November’s numbers, a cumulative $9.2 billion in today’s prices has evaporated from the bank’s forecasts for residential investment between mid-2024 and the end of 2027 - a staggering sum, equivalent to just under two-thirds of the $14.5b money Kāinga Ora spent building new homes during the 2018-24 boom years.
Revisions to residential investment forecasts. Graph / RBNZ
The Reserve Bank stated its reasons bluntly in the MPS text: “The larger‑than‑expected fall in residential investment is consistent with real house prices being weaker than we expected over the same period”.
All that - vanished, thanks to a forecast change driven by crashing prices.
Residential investment is trundling along at about $3.3b a quarter, a level not seen since 2020, when it briefly dropped just a tad lower, thanks to building being temporarily made illegal. Apart from that quarter, you need to go back to 2013 and 2014 to find residential investment levels as low as they are now.
If consented houses are ever to be built, at some point, somewhere along the property development pipeline, someone needs to make money. It is somewhat strange that a National Government appears to have forgotten this.
Plummeting prices do not mean no one is making money - reducing the cost of land, building, and increasing the number of units developers can build — all of which the Government is doing, will help, but it also helps if buyers have confidence that the most expensive thing they’ll ever buy isn’t about to halve in value.
Part of this problem is the Reserve Bank’s fault. Infometrics chief executive Brad Olsen, who helpfully checked, clarified and analysed those numbers (remaining errors are mine), noted other forecasters, including Infometrics itself, had been slightly less bullish about those investment forecasts to begin with, leading to slightly less dramatic revisions.
The bank, it seems, is just as in love with the interest rate-property bubble-capital gains, as everyone else.
If a National minister who has temporarily forgotten the doctrine of the profit motive isn’t strange enough, let’s call suspect two: the Labour Party itself.
Witness Labour’s rather unusual scramble to shore up support amongst alarmed homeowners, with leader Chris Hipkins declaring hewas “comfortable” with the still very high median national price of about $770,000 nationally and nearly $1m in Auckland (according to REINZ).
Labour leader Chris Hipkins told RNZ that “overall I’m comfortable with where house prices are at the moment”.
“I do realise that that causes hardship for those who bought at the peak of the market and they’ll want to see house prices at the very least stabilise,” he said.
His finance spokesperson, Barbara Edmonds, joined Bishop, Luxon, Willis and Hipkins in the funhouse mirror on Wednesday, when she said she wanted house prices “to be stable”, but she also wanted “young people, families to be able to buy their first home, so there is also a discussion to be had around wages”.
While it would be lovely to wage grow our way to affordability, the nation’s beleaguered businesses and the inflation-mandated Reserve Bank might have something to say about that.
Houses, despite the fall, are not affordable and it would take a lot of wage growth to make them so — growth that would not be an unmitigated good.
The challenge for Labour is that the biggest beneficiary of a pick-up in house prices would be the party itself. If it opts to run on a capital gains tax, as most expect (an announcement is possible as soon as next month or early October), then Labour is going to need there to be some capital gains to tax.
The economics of the predicament are debatable. Olsen reckoned some of the alarmism was overblown. Developers are still here and some are still making money, just not the stupid money of the boom time — their expectations may need to be adjusted. An alarming number of construction workers have disappeared, but this comes off a hiring boom of about 50,000 during the Labour years.
Our politicians are refusing to let-up. There’s plenty they could do to ignite a housing-led recovery, but much as Labour and National collectively force-fed the toughest economic medicine in the 1980s and 1990s, both sides are convinced the pain is worth it - if anything is left after the crash, we may reflect on this steel being as laudable as its political champions’ awkward public contradictions are laughable.
For all the silliness, they are in fact serious ones — the politicians unlucky enough to be caught on the dance floor when the music finally stopped. All of them are less popular than their predecessors, property market boosters John Key and Jacinda Ardern, but despite all their unpopularity, today’s MPs are nobly realistic about the nature of the challenge that confronts them.
Politics is the nation’s funhouse mirror, our poor MPs trapped contort themselves into ever more ridiculous positions for our amusement.
But the thing about funhouse mirrors - the biggest joke of all — is that eventually you realise the risible contorted figure is nothing more than your own reflection.
