Why are houses so expensive in New Zealand?

Just now the New Zealand property market has gone into turbo mode. It’s been hot for the past few years. Now it’s gone mad – and this in the middle of the deepest recession the country has seen since the 1930s.

The country has long had a tradition of home ownership. Back in the nineteenth century, poor settlers arrived wanting to make good, and escape the tyranny of a landlord. Owning their own section – ideally, a quarter-acre – was the holy grail of the settlement. And many did. Early towns – dubbed ‘cities’ in his nineteenth century world of town boosters – were laid out in careful grids with quarter- and eighth-acre sections for those who could afford them. That’s why many New Zealand cities are so sprawling. As time went on and prosperity allowed more people to buy their homes, cities grew sideways, not vertically.

The ideal was never reached; money never stretched far enough for everybody, and there were periods of housing shortages. One of the more serious came in the 1930s, by which time housing stock had not kept pace with population growth. Into the mix slammed the Great Depression. One outcome was that families found themselves living together in extended ‘Milly Molly Mandy’ arrangements – extended generations of grandparents, aunts and uncles, all jammed into the same house cheek-by-jowl.

Fixing that was one of the goals of the first Labour government that came to power in 1935, with policies eventually dubbed ‘applied Christianity’ by the Prime Minister, Michael Joseph Savage. What followed was an extraordinary surge of construction: new suburbs were developed, state-owned housing constructed to house those who could not afford property of their own, and other areas made available for a burgeoning population. The effort was, paradoxically, made possible by the Second World War. The government intentionally took advantage of the crisis – with its draconian ‘manpower’ regulations – to cut through red tape, direct labour where it was needed, and get the job done. By the mid-1940s, New Zealand was well on the way to housing much of its urban population in classic free-standing, three-bedroom homes.

Suburban sprawl in Napier, New Zealand

That initiative set the country up for the rest of the twentieth century. There were more suburban developments into 1970s to smaller scale. Not everybody could afford a home, but getting into your own place was an ideal to which everybody aspired. House prices usually rose, but there were also periods where it didn’t, such as the 1960s through to the 1980s. What economist call ‘real’ house prices, prices with inflation taken out of the picture, fell. But that was masked by the inflation rate, which produced ever-larger dollar figures.

Then all that changed. The main housing problem since the 1980s has been lack of supply coupled with a deregulation of the finance industry. This has had a double effect. The so-called ‘new right’ revolution essentially transferred the development of new housing areas over to private enterprise, which hasn’t matched the sharp increases in population – in large part through migration. Nor has land been made available in which to expand urban areas. And yet the ideal of the family home on its own section has been paramount. Terrace housing and higher-density developments exist, but have been slow to arrive in number.

Into this mix has come something else: a change in the way houses are financed. In the mid-twentieth century world of government regulation, it was often difficult to get a mortgage. After 1985, it became far easier, and mortgages were one way banks could make a guaranteed profit, usually with little risk because the borrower’s property was collateral on the loan.

That combination of reduced supply and increased money had only one outcome: prices began climbing. It was compounded by increasing population. And not one government from the 1990s onwards did anything substantial about it. Instead, economic policy was focused on fiscal restraint – balancing government books – and a light-handed ‘three-pillar’ regime of control over the banks one of which was ‘market discipline’, meaning each bank would keep the others in line through ‘market forces’. This enabled the major banks, all of which became Australian owned, to begin turning massive profits on the back of their mortgage portfolios, most of which then went across the Tasman to the parent company. Meanwhile the central bank, the Reserve Bank, was tasked with crushing consumer price inflation. House price increases didn’t enter that calculation.

New Zealand’s Parliament.

New Zealand was not alone. However, the global neo-liberal economic bubble burst in 2007-08 with the ‘general financial crisis’. At the time there was significant concern that a new Great Depression would unfold. It was deferred – not stopped – by massive ‘stimulus’ packages. One government after another poured vast quantities of money into the world’s financial systems. Suddenly the world was awash with cash.

There was only one problem. Instead of expanding the global economic production base, this money was funnelled into ways of improving profit for corporates such as banks. Much ended up being ploughed into fixed assets, notably the property market: both commercial and domestic, sending prices skyrocketing.

In New Zealand it was made worse by a chronic shortage of housing supply, as the National government of the 2009-2017 period opened the country up to its largest surge of immigration since the 1870s but did virtually nothing to develop infrastructure to support it. The result was inevitable: house prices began climbing sharply, buoyed by the fact that the banks were awash with money – and could create more, if needed, to lend and so increase their profits. The Reserve Bank introduced constraints, the ‘Loan to Value Ratios’ among other tools, to try and hold it back, and to prevent a systemic crash if house prices fell sharply. These had a significant effect, but did nothing to fix the fundamental systemic issues driving the problem.

Meanwhile the huge imbalances in world economic systems continued to intensify. Even as fixed asset price inflation spiralled out of control, consumer price inflation vanished – replaced by the more serious spectre of deflation, which is virtually guaranteed to crash an economy. Available wealth was increasingly concentrated in the hands of a few, while even the middle-income earners began having trouble making ends meet. New Zealand shared these issues. By 2018-19, economists I knew were openly talking about a second Great Depression, this time lasting a generation.

Then, early this year, the Covid-19 virus crashed the party; and the fact that things were already on the precipice gives proportion to scare-mongering over the economic effects. The lock-downs associated with the virus are a trigger and contributor, not a base cause, of a downturn that was already looming on the back of longer-standing systemic imbalances.

So why has the New Zealand housing market taken off in the past few months? Specifically, the issues associated with housing supply haven’t been fixed – nor can that be done quickly, even if government had the inclination. Meanwhile, the fear of a massive economic crash on the back of the lockdowns prompted a further sharp drop in wholesale interest rates (set, in New Zealand, by the Reserve Bank through its Official Cash Rate). And then the Reserve Bank – predicting a house-price crash, which has implications for the banking system if it’s widespread enough – lifted the loan-to-value ratio system.

This entered a New Zealand society conditioned to home ownership – where renters are treated as second-class citizens without real rights – at a time when everybody was scared. But suddenly anybody could borrow for a house. The government Covid-19 support packages also meant many families had ongoing cash-flow. It was also possible to borrow money in vast quantities at very low rates. And in a situation where there’s plenty of money, but the supply of goods to buy with it is limited, there’s only one outcome. Prices go up. Wildly.

That is why the housing market has suddenly gone mad in New Zealand.

Are there are answers? Sure. They won’t be quick. The issue, fundamentally, is systemic. The first step is to get the right foundation, and that means altering the neo-liberal philosophy that has led to this calamitous end-point. This is not the sole definition ‘capitalism’. It is merely a version, one that has fostered uncontrolled greed, selfishness, corporate power and a concentration of wealth to the point where the system risks breaking. Another form of capitalism is clearly needed to bring New Zealand – and the world – prosperously into the twenty-first century. Unfortunately the current government, elected in a landslide just a few weeks ago, is firmly centre-right and has shown no signs of the necessary paradigm shift. Damn.

That shift doesn’t mean going back to older versions of capitalism. Society has moved on and what worked once won’t work again. Something new has to be found. And it will require a government able to take bold steps, even at risk of alienating entrenched interests who have profited so thoroughly over the past couple of generations.

History, of course, tells me that New Zealand had such a person once. When will Mickey Savage come back to save us?  

Copyright © Matthew Wright 2020

15 thoughts on “Why are houses so expensive in New Zealand?

  1. Our current Government Wallahs (Wallies, Wasters) are pushing for “Affordable Homes” to be built with minimal planning requirements and regulations – even in so-called ‘Green Areas’ which are supposed to be protected.
    HOWEVER, at least two (so far) Cabinet Members (who help Boris Johnson make decisions … allegedly) have vetoed any such work in or near their particular domiciles – we call such folks NIMBYs (Not In My Back Yard).
    So much for tackling the housing shortage in UK…

    Liked by 3 people

    1. Yeah, NZ is far from alone in this general issue – it’s a world phenomenon with a common cause. The issue here, fundamentally, is that after the landslide election victory the government’s in a unique position to introduce a paradigm shift, a luxury of place that few western governments share just now. It’s needed. But I very much doubt they will.

      Liked by 2 people

  2. Interesting post, Matthew. Many parallels in UK, although our house prices only went up when there was a suspension of ‘stamp duty’, and it seems the covid impact will eventually drive them down, but maybe not.
    It’s a shame your Jacinda is not apparently willing to drive paradigm shift, which must eventually happen, driven by covid and climate.

    Liked by 1 person

    1. Ardern has introduced a paradigm shift to the extent of shaking up the image of personal conduct by politicians, and embracing the social ideals of diversity (evidenced in her latest cabinet lineup). But none of this has properly questioned the fundamental frameworks of the economy, which were set up by the monetarists in the mid-1980s and haven’t shifted since. The problem is that this framework is past its ‘use-by’ date – just as the older social-democratic framework reached an end point in the 1970s – and something new is needed. Part of the problem is that, by contrast with the social-democratic system many western governments used for a generation or two after the Second World War, no compelling alternative to neo-liberalism has been proposed. To me it’s a demonstration of the greatest success of that version of capitalism: the fact that its proponents so thoroughly embedded their ideals into government and economic structures and then crushed debate. What they missed is the fact that there is no such thing as a ‘permanent future’, still less an ‘end’ to history. Human societies always change over generations, and philosophies have to change with it.


  3. I have no idea who Mickey Savage was, but the housing market in Australia is very similar to that of New Zealand, probably for the same reasons.

    I’m interested in the next version of capitalism you talk about. If you had your druthers, what would it look like?

    Liked by 1 person

    1. Michael Joseph Savage was the first Labour Prime Minister from 1935 until his death in 1940. He sacrificed himself in order to save New Zealanders. Seriously. In 1938, ahead of the election that year, he was diagnosed with cancer. He deferred surgery so he could keep campaigning and so ensure that his Social Welfare Bill – which he called ‘applied Christianity’ – was passed. Only then did he get treatment, but it was too late. As a result, however, every New Zealander since has been eligible for free healthcare, support when beset with a misfortune not of their own making, and helped when needed. There were reasons why Savage’s portrait hung on the walls of many NZ homes at the time, alongside that of Christ.

      I am still working up my thoughts on a different version of capitalism. More soon.

      Liked by 1 person

      1. Applied Christianity. I’m a non-believer, but my Catholic upbringing left me with a deep conviction that a good person did unto others…

        Your Michael Savage was a very special person. I think we should all learn more of New Zealand’s history.

        Waiting on that new capitalism. The old one has turned into a zombie!

        Liked by 1 person

        1. Savage coined the phrase during parliamentary debate over his welfare bill. He was brought up as a Catholic, and when his bill was decried as ‘applied madness’ he retorted that it wasn’t, it was ‘applied Christianity’. He also ‘walked the talk’ when it came to being kind to others.

          Liked by 1 person

          1. That’s the bottom line, isn’t it? Walking the talk? Otherwise it’s all just hot air. I think we’ve forgotten that once upon a time, politicians believed their role was to /serve/. Whatever new capitalism turns out to be, there are some cultural evils that will have to be mended.

            Liked by 1 person

  4. It’s the norm England now, 11 years of austerity alongside the housing crisis has us younger folks called “generation rent”. My main issue with renting is we can’t have pets, which is a bit of an insult. Otherwise I don’t mind the freedom it provides. It’s just, again, pretty insulting to lose a vast amount of your monthly wage to renting a boxy flat.

    But also estate agents pull off disgusting tactics to rake more off of us, on top of ridiculous rental costs. Kind of the main reason why I’ve been trying to leave England really. Coronavirus sort of stalled that.

    I’d heard NZ has a housing crisis at any rate. But then it’s springing up all over the world. If I was cynical I’d have a go at capitalism on this one. But then I love me some mindless individualism.

    Liked by 1 person

    1. Yes, housing is an issue worldwide, and for the same reasons – the dereliction of new construction because it’s been left to ‘thuh markit’, coupled with apocalyptically low interest rates that encourage borrowing by people who can’t pay it back, coupled with the infusion of money by central governments (‘quantitative easing’) – all of which is pouring into fixed assets. In NZ it’s been made worse because there is no capital gains tax, which means there’s an active incentive to get into debt to buy houses. It’s also been made very clear that it’d be electoral suicide for any government to introduce one. The only people laughing are the real estate agents, as they head to the nearest bank in their chauffeur-driven Bentleys before retiring to their luxury mansions for an austere dinner of champagne and caviar. Every so often one or another of them ends up in court for insider trading, misrepresentation, conflict of interest and all the rest. But not very often.

      Liked by 1 person

      1. The odd thing is I see a lot of older generations effing and blinding about this, as in complaining about younger people complaining. “They just need to work harder! Back in my day, I had tuppence and lived out of me shed for a living and…” And it’s, yeah, it’s not 1971 anymore, John from Leeds.

        I can’t say I understand economics particularly well, but all I see is a situation where most people are getting screwed out of a good living standard. And then they get accused of being lazy for it.

        Liked by 1 person

        1. But – but – if the rich WANT to take all the money off the poor and then blame the poor for it, surely they are ENTITLED to do so! The problem is that after a while a torch-waving mob turns up at the gates of the local parliament. Happened in Europe in 1789, 1793, 1830, 1848 (six times), 1871, 1905 and 1917. Of course today’s methods by which the rich siphon money off everybody else are more sophisticated… (as far as the rich will tell you) so there’s no danger of the poor getting uppity.

          I spent most of my working life, before going full-time writing, working with economists – I actually wrote a few economic-focused papers myself for a peer-reviewed journal, including one outlining an economic forecasting computer from the late 1940s (cool device – runs on water & was lampooned by Terry Pratchett. The one in NZ is the only working example in the southern hemisphere). It was interesting to watch the shift of philosophy over the years – the 1980s with its infantile mechanistic certainties and simplistic declarations gave way to a return to the older understanding that economics is a branch of sociology and attempts to ‘harden’ it mathematically only go so far.


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