The property bubble of the early 21st century is one of the great economic and social catastrophes of modern New Zealand history, comparable in scale with the carnage wrought by Robert Muldoon and Roger Douglas. It’s not often seen in those terms. Rising house values created the illusion of middle-class wealth, which generated a mirage of political competence that voters rewarded in the polls.
The sustained outward migration of young, skilled workers locked out of the housing market was less visible than closed factories or sharemarket crashes. Blame for the disaster is distributed across left- and right-wing governments, yet Helen Clark, John Key and Jacinda Ardern are still considered icons within their own parties. At least Muldoon and Douglas believed in what they were doing: Clark, Key and Ardern sabotaged their nation’s economic development because they wanted to be popular.
We’re three agonising years into the slow and still-partial unwinding of the great property bubble. It was the engine that drove much of the domestic economy. People borrowed against their untaxed capital gains to buy new kitchens, cars, boats, trips to Queenstown – and more properties. Without that engine we’re a population that works long hours for comparatively low wages, subsidised by a large middle-class welfare system – Working for Families, the accommodation supplement – that the government can’t really afford, but can’t cut back on because they’re unpopular enough as it is.
“It’s not what you say, it’s what people hear” is a pithy little adage that some communications professionals tape above their monitors, and it sits alongside the stagnant housing market as an explanation for the coalition government’s persistent unpopularity. A succession of post-Budget polls saw Labour pulling ahead of National; Christopher Luxon’s popularity continues to decline; 49% of respondents told the Post-Freshwater poll they think the country is heading in the wrong direction.
But from the coalition’s perspective the economy looks pretty good. Obviously there’s international instability: Trump’s Liberation Day tariffs, the slow economy in China, war in the Middle East. But that’s hardly their fault. In New Zealand, the consumer price index (CPI) is back in the target range; the official cash rate is down, as are mortgage rates. Growth was 0.8% in the first quarter ‒ very respectable ‒ and the export sector is booming. Why are voters so miserable?
Voters’ hearing
When the Prime Minister talks about economic growth he’s saying that he’ll boost GDP, the measure of goods and services produced in the domestic economy. But for much of middle New Zealand, growth means property values, and what they hear is the assurance that house prices will go up. The opposite has happened.
The government has a similar problem with the cost of living. The economic metrics are moving in the right direction – they have been for more than a year – but the Ipsos Issues Monitor for June found that voters are increasingly concerned about the cost of living and they trust Labour over National to solve it. Imagine the coalition strategists peering close to their phones to inspect the numbers and then stumbling back, their faces contorted in disgust. Why do people still think this is the top issue, and how could they trust Labour on it over them?
A closer examination of those CPI numbers reveals increases in petrol, dairy foods and local government rates. These are offset by falls in international airfares and games, toys and hobbies. Non-discretionary costs are still going up; the nice-to-haves are going down. If we look at real wages over the pandemic period and set them alongside what’s happening in the housing market, we get a picture of a large cohort of homeowners paying million-dollar mortgages on houses that are now worth only $800,000, and living on salaries that still don’t buy as much as they did eight years ago. The government says it’ll lower interest rates (in fact, the Reserve Bank does that), but the voters hear them pledge that families won’t be underwater on the mortgage and paying for groceries on credit or coughing up $11 for half a kilo of butter – yet they still are.
Reorienting the ship
These are hard problems to fix because, from an economic perspective, a shrinking property market isn’t a problem at all. It’s a good thing. Even better, at the start of this year New Zealand grew its economy without high migration or reflating the property bubble. Instead we made stuff and sold it internationally (and that is why butter is so expensive – prices here match US prices).
That’s what a functional economy looks like but it’s a novel experience for many New Zealanders, who’ve spent decades orienting their financial decisions around property, not because they were stupid or greedy, but because that was the incentive our politicians created. People would have been foolish to do otherwise. The good ship New Zealand Inc has been run aground by three successive governments, and the unhappiness we’re seeing in the polls is the hull tearing itself open on the jagged rocks as we try to reverse direction.
