• The Real Reason for Housing Unaffordability

    The news that the number of houses being sold is falling and that prices are rising more slowly has been greeted in some quarters with responses that are – sadly – all too predictable.

    The consensus is that these shifts have been brought about by the Reserve Bank’s introduction of restraints on lending by the commercial banks.  The real estate agents have been the first to complain at this threat to their rising profits, but have no doubt been supported by all those others – speculators, landlords, banks – who have prospered by virtue of the crisis of affordability that has afflicted so many of our fellow-citizens.

    The Reserve Bank has been urged to relax the loan-to-value ratios that have restrained bank lending on mortgage and, as a result, have cooled the housing market – and even the government, in the person of the Prime Minister, has weighed in with advice that the Reserve Bank should back off a bit.

    This is a bit rich coming from politicians who have not themselves had the courage to do anything at all to grapple with unaffordability, and who – now that the Reserve Bank has at last taken a few first steps – choose to snipe from the sidelines when those steps prove effective.

    The critics have camouflaged their obvious self-interest in a housing market that continues to inflate – a self-interest, in the case of the property industry, in profits, and in the case of the government, in votes – by shedding crocodile tears for first-time buyers who find it difficult to raise the deposit that is now necessary.

    There may well be a case for relaxing the constraints specifically for first-time buyers trying to buy a (comparatively) inexpensive house in which they intend to live; but the case would be even stronger if the critics showed some awareness that the problems for first-time buyers – and for many others – have been caused by the very failure to act on excessive bank lending that has made it inevitable that housing prices would soar.

    A failure to act now – and, now that we can see how effective the Reserve Bank’s measures can be, to continue to act – can only mean that the housing market would become even more unbalanced and top-heavy, and future first-time buyers and others would be even more priced out of the housing market.

    We can at least celebrate one significant step forward.  The debate about what has really caused house prices to rise so fast can now be assessed in the light of these latest developments.  The conventional view, shared by opposition as well as government politicians, is that the problem is one of market failure – the failure of supply to keep pace with demand.

    But that is to ignore the fact that the housing market is not like other markets.  What makes it different is that, for as long as bank lending on mortgage is unconstrained and the banks can find people to lend to, there is virtually unlimited purchasing power in the hands of purchasers.

    It is that tidal wave of unlimited new money created by the banks washing into the housing market every day that makes it inevitable that house prices will rise and rise.  The only way of slowing it down is to restrict the amount of bank lending, and that is what the Reserve Bank has now done.

    It is to the credit of the Bank and its governor that they have acted on their understanding of what is really happening, and that they have been able, with the effectiveness of the measures they have introduced, to demonstrate the correctness of their analysis.

    But why should we continue to allow our politicians to disclaim rather than accept the responsibility that is truly theirs?  How refreshing and wonderful it would be if Labour’s new leader were to emulate the great Michael Joseph Savage who, in the late 1930s, used “quantitative easing” – not to bail out the banks – but to build thousands of new state houses.  He thereby not only created a long-term and income-producing asset for his government, but provided low-rent, good quality housing for young families.

    I know about this from first-hand experience.  My parents married as the Second World War was about to break out.  When I was born, they moved with their new baby from private rented accommodation into a new state house, which is where I grew up and enjoyed a happy and secure childhood – to which every child is surely entitled.

    Bryan Gould

    16 August 2017

2 Comments

  1. Patricia says: August 17, 2017 at 2:57 amReply

    Quantative easing can be used for good causes rather than just for Banks; for improving existing social housing as well as building new ones; for an UBI. There are just so many things that could be done to improve its citizens’ lives but there doesn’t seem to be any politicians with the calibre of Michael Joseph Savage. All we have is a cacophony from the media telling us how all hell will break lose it it is done to help the people with the politicians dancing to that tune. I too, was born prewar and we lived in a state house for the first ten years of my life. My generation had a much better life than our parents and that was due solely to the policies of the 1935 Labour government. My children’s generation are tied up with debt and that is solely due to Government policies.

  2. Bryan Gould says: August 17, 2017 at 7:26 amReply

    Glad to know that our shared life experience leads to similar conclusions. Bryan