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