It is always interesting how politics always provide plenty of fresh fodder that I can feast on for my blog – just when you think that a politician has ceased saying something silly I am reminded that they have the capacity of saying something even sillier. The most recent one has been about ACT complaining about The Opportunities Party (TOP) blocking first home buyers from using their Kiwisaver. Maybe my expectations are too high but at the very least I would have expected David Seymour to understand how we ended up in the mess of unaffordable housing in New Zealand and the recent slow correction. Here is the press conference the ACT Party leader just gave.
We’re in this situation because of over 30 years of bad policies compounded by further bad policies because politicians engage in populist responses to complex issues then with the responses they make resulting in the situation being made even worse. It reminds me of what an advisor said about Nixon after Nixon said “today I am a Keynesian” – “politicians want to appear to be doing something even if the right thing to do is nothing”.
If we go back 30 years we can chat the ‘beginning of the end’ when the Reserve Bank Act changed the inflation target rate from 0-2% to 0-3% which was based off two flawed arguments. The first argument is that looser monetary policy would result in lower interest rates, businesses able to borrow, expand their business, employ more people and kick start a virtuous cycle – the reality? money takes the path of least resistance which is to speculative assets such as property (any economic benefit from the lower interest rates came as a result of an artificial feeling of being wealthier off the back of inflated asset prices rather than actual wealth being created). The second argument was the theory that economies needed to be a healthy amount of inflation or there was a risk of falling into a Japan style deflationary spiral which would difficult to get out of – the problem with that? it completely ignores the cultural element (economics after all is about studying the psychology of money) where the Japanese will keep saving even when the interest rates got down to 0% – taking an experience in one country and using it as a general rule is a foolish position to take.
Anyway, back to the mistake 30 years ago – loosening up the monetary policy allowed lowered interests which then expanded borrowing but without a corresponding increase in supply of houses due to local zoning rules not changing. When houses started to pick up in price – what was the response? money being invested into more social housing so Housing New Zealand became the primary provider of rental accomodation so that housing could be decommodified? nope, the response was to lower the deposit amount required, then loosen the lending standards then to add more fuel to the fire you could dip into your Kiwisaver and the icing on the cake being a first home owners grant – every policy making the situation worse by having more money chasing higher prices aka the textbook definition of asset inflation. The response by the Reserve Bank of New Zealand? nothing because they don’t count asset inflation as part of their figures directly (they do indirectly through rents but it is an imprecise way of capturing inflation).
Now, there has been an attempt to address the issue particularly around the zoning regulation, unitary planning, a focus on transit oriented developments and allowing great competition in building supplies such as allowing building supplies to be imported overseas that conform to comparable regulations thus not require retesting. That has had an impact on house prices of new builds to some extent but we’re still suffering from the same lack of productivity improvements in the building sector as we’ve seen in other parts of the economy (Australian has seem similar productivity issues). I think part of the solution has to do with the fact that we really need to adopt the sort of mass production techniques with standardised components so you gain economies of scale.
The obstacle faced isn’t technical but rather a large number of New Zealanders who want to feel that their houses is special and unique but the problem is with a house being special and unique is that it comes to additional costs because everything has to be created bespoke for that particular build. You can either have affordable houses based on maybe 6-12 standardised designs or you have expensive houses where each house is unique but more costly to build. I would also argue that standardisation has the benefits of being able to build it, test it, find design defects, fix them and then retest them again – accelerated wear and tear can find a problem before it becomes a problem so then when people eventually have the house built it is based on a thoroughly tested design which should save the owner money in the long run.
