Why Housing Isn’t Affordable
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for a number of young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house on the section through a low-interest 100% mortgage with the State Advances Corporation or the non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. But I suppose we must have been doing something wrong, because that system was changed for what was supposedly something better.
We know that the changes have achieved their purpose because of the huge fortunes made out of the housing sector by property developers over recent decades and the even greater profits from lending on mortgage made by our Australian banks and repatriated to Australia. In that respect, the changed policies have been a roaring success.
What a pity, though, that the impact on the availability of affordable housing was not so positive. By the time I returned to New Zealand in 1994, home ownership had passed beyond the reach of many young families; and housing is even less affordable today, with the result that home ownership rates have slumped and we are rapidly approaching a housing crisis.
The government is of course concerned. It would like to do something to help, as witness their response this week to the recommendations of the Productivity Commission on the subject. True to form, however, they look everywhere for solutions rather than where the real responsibility lies.
The government prefers to avert its gaze from what has really happened to create the housing crisis. The fortunes made from property development by some of our most successful business leaders have come from somewhere – and that “somewhere” is an important element in the hugely inflated prices now being asked and paid for houses. The very term “property development” gives the game away. The development value of property, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more, whatever the consequences for individual borrowers or for the housing market or for the economy as a whole.
The banks have in effect applied a huge pair of bellows to the housing market and have accordingly inflated house prices to their current – and, for many, unaffordable – levels. They are about to start all over again, as the Auckland market already demonstrates. The increased prices being paid by house purchasers will in effect disappear westwards across the Tasman as bank profits. If we want an explanation of the huge rise in housing prices, that is where we should look first.
It is hard to exaggerate the price we pay for these excesses. Not only have we generated a quite unnecessary housing crisis, but we have also created a powerful mechanism for creating ever-widening inequality, as the untaxed capital gains as a result of house price inflation mean that wealth is in effect transferred to those who own homes and away from those who cannot afford them.
The huge increase in the money supply caused by inflated bank lending for non-productive housing purposes, moreover, seriously skews the whole economy. It diverts resources from productive investment and creates an inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and bank profits grow even larger.
The government’s response to all of this? More of the same. Their “remedy” is to remove remaining restrictions on property developers – even to the extent of displacing families from their homes to allow private “redevelopment” to occur – and to bypass elected authorities so that the community interest or environmental concern can no longer inhibit the drive for profit. And they set their face against any change in the monetary policy that conveniently overlooks the damaging role played by excessive bank lending.
As on so many issues, the government’s loyalties seem to lie with its big business and corporate backers. As we assess the government’s plans, let us remember that families without decent homes, and children being brought up in unsafe and unhealthy conditions, need and deserve more than crocodile tears.
Bryan Gould
29 October 2012
Holding Banks to Account
The dramatic and damaging collapse of the New Zealand finance company sector over the last three or four years has attracted a good deal of attention, largely because of the multi-billion losses that investors have suffered. One of the consequences has been a boost to the confidence felt in banks which have reinforced their reputation as the best place to put one’s money.
It is certainly true that, while overseas banks are up to their necks in scandal, our largely Australian-owned banks have maintained an enviable stability and reliability. But the tribulations of banks worldwide make it inevitable that the role of banks in the global economy should increasingly come under the spotlight.
The revelations that many of the world’s leading banks have been guilty of dishonestly rigging markets and misleading investors have already claimed one victim, in Barclay’s Bank, and seem certain to involve many more. And that comes on top of the role – dubious at best, irresponsible and dishonest at worst – that the banks played in bringing about the global financial crisis in 2008.
Not surprisingly, the British government is establishing a full-scale review of the banking sector, and few would now bet against the pressing of criminal charges. But it could be argued that these scandals are not just a reflection of the criminality of a handful of bank leaders but arise inevitably from the role that banks in general have been allowed to play.
Most people still see banks as institutions that provide a safe repository for our savings and that from time to time lend us money either on overdraft or on mortgage. But this is seriously to underestimate the power that banks wield in our economy and the extraordinary nature of the concessions that allow them to do so.
The central feature of banks, which seems only dimly understood even within the banking sector itself, is that they are private commercial enterprises which have been granted a unique and virtual monopoly over the creation of money. By far the largest proportion of the money in our economy (and in the economies of all advanced countries) is not notes and coins but bank-created credit. That credit represents no more than bank entries by bank officials; its status as money rests entirely on the suspension of disbelief – or, to put it another way, on our willingness to accept that it is money because the banks say it is money.
The failure to understand this fundamental aspect of our economy leads to serious errors in formulating economic policy. The overwhelming role of credit-creation by the banks in inflating the money supply should be our central concern in controlling inflation, particularly when the vast majority of that credit is created and lent for non-productive purposes like house purchase.
Because we don’t understand this inflation-engendering phenomenon, we grapple with inflation using seriously inadequate and inappropriate instruments like interest rates, which are not only slow-acting and poorly focused but do great damage to the rest of the economy. A more accurate analysis of inflation-producing pressures in our economy would lead to more effective measures to restrain them and at the same time encourage a more productive and competitive economy.
We can see how privileged and unaccountable banks are from the fact that their unique capacity to create and lend vast quantities of “money” for private profit passes under the radar, whereas a democratically accountable government that occasionally “prints money” in the public interest draws screams of blue murder.
But it is not only this aspect of the banks’ operations that should cause concern. Over the last two or three decades, the banks have used their ability to create money to invent a whole range of new financial instruments of dubious value which they are then able to sell to gullible investors; so profitable was this trade that it became much more important to banks than their traditional role.
It was this prospect of unlimited profits created out of nothing (to say nothing of the huge rewards and bonuses paid to individual bankers) that led in due course to the global financial crisis. And when that irresponsibility inevitably ended in collapse, it was that same mentality that led bankers into the realms of fraud and criminality. In a world where anything goes, the rules are made to be broken, and personal fortunes are there for the taking, who can wonder that bankers could not accept that the ordinary rules applied to them? We have reaped what we have sown.
In case we should assume that none of these problems afflict us, let us not forget that our own banks, pillars of propriety as they may seem by comparison with their overseas counterparts, have made strenuous attempts to avoid their tax liabilities and have only been made to pay up by court action.
And in our case, the banks have not only made huge profits by exploiting their unique capacity to create money, but have then exported those billions across the Tasman, thereby placing a huge burden on our already beleaguered balance of payments. Isn’t it time to establish a banking system that supports the economy rather than places it at risk?
Bryan Gould
8 July 2010
This article was published in the NZ Herald on 12 July.