House Prices Falling at Last?

Don Brash
bassettbrashandhide.com

Don Brash was Reserve Bank Governor from 1988 to 2002, and National Party Leader from 2003 to 2006

Warning

Long read. 1348 words.

In recent weeks, more and more commentators are suggesting that house prices in New Zealand have started to fall, and are expected to fall further.

For many homeowners, especially those who have bought within the last year or two, this news will be terrifying, and for them I have a great deal of sympathy. They were sold the lie that house prices would always and everywhere rise much faster than incomes, and that therefore the best way to financial independence was to borrow to the maximum extent possible and buy a house – better still, several houses, the more the better.

The lie was aggressively promoted by the mainstream media, with constant references to the importance of “getting on the property ladder”, the implication being that once on “the ladder”, you would be carried onward and upward indefinitely.

And, for a great many people, following that advice has to date been a highly successful strategy, creating financial independence for many and financial fortunes for some. While I myself have never owned more than one home, the fact that I have always owned that one home has made a huge difference to my financial well-being – certainly a much bigger impact on my own financial position than any saving I have been able to do from the well-above-average salary I have been fortunate enough to earn throughout my career.

When I was Governor of the Reserve Bank I used to talk about the contrasting fortunes of my uncle and me, to illustrate the effect of inflation. In 1971, my uncle sold an apple orchard he had spent a life-time developing and, being of a cautious disposition, invested the proceeds in 18-year government bonds at 5.5% interest. Perhaps fortunately, by the time those bonds matured my uncle and his wife were dead, because the $30,000 for which he had sold his orchard was by then worth only a small fraction of what it had been worth in 1971. In 1971, $30,000 would have bought my uncle 11 Toyota Corolla cars. By 1989, $30,000 would have bought him just one Corolla, with a small amount of change left over.

By coincidence, in 1971 my wife and I returned from the United States to a very well-paying job in Auckland. We bought a five-bedroom home with a great sea view for $43,000, which was almost exactly three times my substantial salary. By the late eighties, the house was worth more than ten times what we had paid for it, and I have no doubt that today it would be worth several million dollars (I have had no financial interest in the house for more than 30 years).

This is surely a crazy situation – one where people can get extremely wealthy by borrowing a truck-load of money and waiting. (OK, there are some tenant management issues, though these can be, and often are, contracted out.)

The result of this situation is an enormous increase in wealth inequality in New Zealand. Contrary to popular myth, income inequality has not increased materially over the last 30 years, but wealth inequality certainly has done. And the main reason for that increase in wealth inequality must surely be the huge escalation in house prices.

The annual survey of the house prices in English-speaking countries, Demographia, describes any city where the median house price exceeds the median household income in that city by 5 or more as “severely unaffordable”. In Auckland, the median house price in late 2021 was more than 11 times the median household income. And the IMF has recently noted that New Zealand house prices have increased by almost four times the average increase across OECD countries since 1998.

Successive governments have been responsible for this appalling situation. When John Key was campaigning to win election in 2008, the median house price in Auckland was six times the median household income in this city. By the time he left office in 2016, it was almost nine times. Now, as noted, it is more than 11 times. The Economist magazine noted early in May that the average property in New Zealand had increased in price by 46% since 2019.

Not only has this had a disastrous social consequence, with a substantial proportion of the total population simply unable to ever own their own home, it is likely that it has also contributed to our extremely low household saving rate (and resultant very large balance of payments deficit) – with those who don’t own their own home struggling to pay very high rent and therefore quite unable to save, while property owners feel no need to save given that their wealth increases exponentially without saving.

Well, what of the future? As noted, several bank economists are now forecasting house prices to decline somewhat from currently ridiculous levels, some forecasts even suggesting prices could fall by 20% – which would take them back only to about where they were at the beginning of last year – still very substantially over-valued. The Economist surveyed the housing market in 20 developed countries and concluded that only the Swedish housing market was more vulnerable to the rise in interest rates which is widely expected to occur over the next year or two than New Zealand’s.

The only thing standing in the way of making housing more affordable in New Zealand is politics. Politicians love it when house prices are rising, even though they pledge with great fanfare to make housing “more affordable”. The current Government is a classic example of this: both the Prime Minister and the Deputy Prime Minister are on record as wanting house prices to keep rising, though “more slowly”. They are understandably terrified of the political consequences of millions of homeowners discovering that the home they thought was worth in excess of a million dollars is actually worth only half that.

Technically, if politics were not a problem, housing could be made more affordable by the simple expedient of completely removing the urban boundary around Auckland. I have noted in previous columns that new houses can be built, and are being built, for between $180,000 and $350,000 in Auckland. The problem is that tiny slivers of land cost a fortune (400 square metres of bare land in Papakura for $977,000 for example). Those absurd land prices in a country which is larger than the United Kingdom are the direct result of political decisions.

Some of those political decisions are rationalized by concern for the environmental impact of what is disparagingly called “urban sprawl”. But we know from US research that the environmental benefits of dense cities are greatly over-rated: high rise buildings require vastly more energy to build because they are made of steel and concrete, whereas standard-alone houses are made primarily of wood; and high-rise buildings require more energy to operate – think elevators, 24-hour lighting and air-conditioning, and clothes dryers.

Surprisingly, dense cities don’t even save much in terms of Vehicle Miles Travelled. A 2009 survey of the literature by the US National Research Council found that doubling residential density in an urban area – which in fact has never happened for any major city in modern history – would reduce Vehicle Miles Travelled by only 5 to 12 per cent. And a mile travelled in a densely packed city, with typically high congestion, produces a great deal more greenhouse gas emissions than the same mile travelled at reasonable speed on a suburban road.

There are simply no good reasons why an under-populated country like New Zealand should tolerate the ridiculous “house prices” (really, ridiculous land prices) that we currently have. Blame central and local government politicians, not greedy speculators, people with Chinese-sounding names, or the purveyors of building materials.