• Solving the Housing Crisis – Facts or Ideology?

    The scale of the housing affordability crisis, particularly in Auckland, is now unmistakable. Not only do individual families suffer as home ownership increasingly moves beyond their reach, but the impact on social cohesion and on the fair distribution of resources is becoming more and more damaging.

    The rising cost of buying a house is without doubt the most powerful driver of inequality in our country. Those who already own their own homes can watch the rise and rise in house prices with equanimity – even satisfaction. They can comfort themselves with the knowledge that the increased price they would have to pay for a new house will be offset by the rise in value of their existing house and that, in the meantime, their wealth will – at least on paper – grow week by week without any effort of their own.

    Those who are not property-owners, however, can only watch helplessly as the inexorable rise in house prices leaves them further and further behind. They would feel an even greater sense of despair if they realised that, because the rate of increase in house prices far exceeds any percentage growth in national wealth, it does not represent real resources, and can therefore only come from a net transfer of wealth from non-home-owners in favour of those who own their own homes.

    Little wonder, then, that our policy-makers have at last been forced to confront the issue. Sadly, though, their response reflects political and ideological preoccupations, rather than the real reasons for the crisis.

    The government has seized the chance to offer yet another goodie to their friends in business. The Resource Management Act has long been a serious bugbear for property developers. Life would be so much simpler for them if they did not have to worry about environmental issues and the interests of neighbours. The government has duly obliged. The growth in house prices, they discover, is all the fault of the RMA and, for good measure, of local government bureaucracy, and they have promised action to discipline both of these supposed culprits.

    This diagnosis is also consistent with the government’s ideological preferences. The housing market in Auckland is obviously misbehaving. Since the market is, according to neo-classical economics, by definition infallible, its malfunctioning must be the result of “rigidities” that must be removed so as to allow supply to rise to meet demand.

    But this is completely to ignore the fact that the housing market is not like any other market. Not only do houses maintain their value as units of accommodation over a long period of time, but in what other market is it possible for those on ordinary incomes to meet the purchase price by borrowing many times their annual income? And where else do the lenders meet any increase in the purchase price by simply offering to lend more?

    And since we have now had confirmation from the Bank of England that bank lending on mortgage is created out of nothing (and that the notion that banks lend only what others lend to them is entirely false), we can now begin to see where the pressures for asset inflation in the housing market really come from.

    Bank credit-creation for the purposes of lending on mortgage is in fact the single greatest factor in increasing the money supply and is therefore the source of the most significant inflationary pressure in our economy. And since it is not matched in any way by a corresponding growth in real resources, it is not surprising that it manifests itself as asset inflation (or rapidly rising house prices) in the very market into which it is almost entirely directed.

    The most reliable statistics for bank lending on mortgage go back only as far 1998. In the period 1998 to 2014, the value of such lending rose fourfold, from $52 billion to $196 billion. Can we be surprised that Auckland house prices have risen over that same period at the same rate – that is, they are now four times higher than in 1998.

    The Auckland housing market, in other words, is a function of the cumulative effects of that $196 billion of new bank-created money. Where else could it have gone? And the herd mentality that is typical of markets means that rising asset values attract speculators and investors seeking capital gains, thereby making the problem worse.

    The Auckland housing market survives at its present level only for as long as the banks will go on lending. Each rise in prices in the Auckland housing market requires more lending to sustain it. Each new loan helps to create a new price structure which then provides the basis for yet more lending. But if, as some are beginning to realise, the bubble should burst, it is not just the housing market but the banks themselves that would be at risk.

    To its credit, our own Reserve Bank is one of the few central banks to begin to perceive the truth about the housing market – hence its initial and timid attempt through tighter loan-to-value ratios to restrain bank lending for housing purposes.

    There may well be measures – not just in housing but in areas such as transport – that could usefully be adopted to better align supply and demand in the Auckland housing market. But until the ideologues understand what is really driving the upwards price spiral, there is no real solution in sight.

    Bryan Gould

    26 January 2015

     

2 Comments

  1. Tuan Nguyen says: January 26, 2015 at 10:18 pmReply

    The lack of a comprehensive tax capital income provides the economic incentive for rational investors to invest in housing. Surely the first step in addressing housing asset inflation is to level the playing field by introducing a comprehensive tax on capital incomes.

  2. Brian says: February 16, 2015 at 7:58 amReply

    Its true that banks since being deregulated will lend money to the person who is prepared to pay the highest interest rate.One cannot tell with any certainty whether there is fraud going on.The tax system is biased in favour of speculators which also distorts the property market.A land tax on the unimproved value of all property would improve the situation.Better regulation on bank lending would also improve the situation.If fact overhauling the whole tax system using alnd tax as a basis for taxation would take a lot of the distortions which tend to favour those who already have assets.Educating the populace on how tax works in a modern monetary economy would be a good start.The purpose of taxes is to control aggregate demand[i.e. spending power],not to raise revenue per se.Taxation creates unemployment.That is unemployment occurs when the govt. fails to spend enough into the economy to cover any tax liabilities it imposes and any desires people have to save that are created by the tax.Said another way unemployment is evidence of over taxation.Thirdly tax gives value for our fiat currency because our tax obligations can be paid off with said currency.So a land tax would not only include land but everything provided to us by nature.It would also include things considered natural monopolies like band width etc.you could eliminate most other taxes.along with this people need to be paid a living wage tax free.