LeviathanJuly 5, 2016
Housing crisis solved
The Eye of the Fish takes housing very seriously. Lack of housing is causing headaches and headlines from north of Auckland to, well, somewhere further south of Auckland, and everywhere in between: various causes have been targeted for the lack of housing, with blame normally involving a mixture of too many foreigners, too many people wanting to live in Auckland, and too little land being made available for building on.
The Eye of the Fish has a different answer to what the problem is, but there are some certain basic economic principles that are being forgotten about here. I’m no economist but I’ve lived through enough economic crashes to have an opinion to what causes them. It seems to me that what we have here is quite simply an issue of excess liquidity: too much money in the system. The causes for this go way back.
In a closed loop system, like NZ was in the pre-Muldoon era, NZ had very strong controls over the flow of capital. The population was lower (I remember the day we clicked over to Two Million people!), section sizes were larger, and no one lived in the city (preposterous notion!). But more importantly, property supply and demand was basically balanced. There was moderate, manageable growth. The Government controlled the mortgage business (you had to apply to the State Advances Loan Corporation for money, or so my mother says), but basically, one average family could afford to buy one average family house, based on one average working man’s salary. New Zealand was, back then, an incredibly egalitarian country, with a very small spread of salary range. My Dad, working class average bloke, earned a wage that was about a third as much as that of the boss of his company, a very large NZ corporation. So, a spread of one to three. And lastly, but important to note, women didn’t really do much paid work in those days.
Its important to understand that this was the system back then, settled into a stable state: one family, one house, based on one wage. New Zealand had the highest rate of home ownership in the world. The system was stabilised on the amount of money a person could raise as a mortgage, being based on a fairly stable ratio of how much money one man could earn, in one lifetime, to purchase one standard home for one family. This also meant that one single man could afford one house for one person also. Note those numbers: One, One, One, One.
But then things changed.
To the joy of many people, New Zealand became a lot more egalitarian and started to include women in that equation. Women, previously stay-at-home housewives (“wedded to the house” – what a horrible concept), were liberated from the shackles of domestic slavery, and were allowed to go out and get jobs too. The effect of this economic revolution was hidden in the fallout from the first Oil crisis, where massively increasing oil prices helped cause massive inflation, but aside from the oil, what was happening was this: the average, one family home was now being being sought by people who effectively had two salaries. Banks would typically not factor this into their mortgage calculations, but while supply and demand were staying the same, there was now more money in the system. More money meant one of three things: either the same house could be paid off quicker, or more could be offered for the same house, or people could purchase more house for their dollars. The end result, inevitably, was that house prices start to go up, house sizes also went up, and they largely haven’t stopped going up since, except in times of recession.
The outcome of all this was that we are in the situation where we are now, where no longer can one person, on an average wage, afford one average house. Economically impossible, plain and simple, except in economic backwaters like Twizel, Mokai, Waitara, and Kaitangata. Mainly Maori names, mainly Maori communities. Everywhere else in New Zealand, it now takes a minimum economic unit of two average people on two average wages, to afford one average house. To enable this to happen, more money needed to enter the system, and so lending requirements on banks were raised. More money flowed. Add in massive oil price inflation, which added to the concurrent house price inflation, and the result of that feminist revolution has been fully disguised, but has also been fully built into the system. People who bought an average house for say, $50,000 in 1970, could sell it for $500,000 in the year 2000. That’s a lot more dollars being paid – a lot more money needing to be in circulation. But it was still an average house.
Most people still can’t actually afford houses at current prices, based solely on their salaries. Most people buy their houses by selling off their previous house, pocketing an increasingly large amount of cash, and then forking it back out for a house that is bigger, better, larger, or otherwise further up the ladder. As a single person, on an average wage, trying to save up for a deposit, it is now a completely impossible task to get to a 20% deposit if you don’t have cash from the sale of a previous house – so first home buyers are naturally reducing in number – and are almost exclusively couples. Singles are now off the list, for life, except in the back of beyond. And the ratio of what the average worker earns, compared to their boss, is pretty much certain not to be a one to three ratio any more. As an example, we now have companies where the CEO gets well over 10 times more than the lowest paid person in the company. Not good. Not equitable.
So what we have now, is quite simple. We have yet more money in circulation, chasing a not terribly larger pool of houses. Whether that money comes from Kiwi couples cashed up from selling, or from Chinese investors looking for a place to stash their cash that will appreciate quickly in value (they are not allowed to buy land in China), it still has the same effect – more money is put into circulation. Seeing as NZ’s population is only one third of one percent of China’s population, our stack of “excess” homes just sitting, waiting to be bought, is snapped up almost instantly. For the Chinese, Auckland is the only kid in town that they want to play with. All Aucklanders, not just singles, are now shut out of the market. Coupled with that is the new culture of greed now so prevalent in our society: the property investors. Deathly cold to the pleas from those who cannot afford a single home, the property investors basically are just solely focused on serving their own interests, and screw anyone else that gets in their way. One house for yourself, and one more for a retirement package seems to be a reasonable attitude to me, but investors now are looking at 5, or 10, or maybe even 20 houses as a nest egg. That’s 20 other families you are screwing with, dashing their dreams of owning their own homes. That’s fundamentally and absolutely NOT the Kiwi way of doing things, but as the John Key government encourages people to be investors, then we can expect these people to continue to amass property, to continue to make our society increasingly non-egalitarian, and to continue to screw up the housing market for everyone else.
All of that money-grabbing, multiple house-buying attitude is attributable to one primary thing: excess liquidity. Where did all this excess money come from? Well, it wasn’t earned by dint of long hard labour, that’s for sure (the way our parents had to do it – work two or even three jobs, to earn the money up front). No, you just go to the bank and ask for some. The world is awash with money, especially due to the post GFC policy of “quantitative easing” as it was politely known – in fact, it was just a fancy way of saying “print shit-loads of extra money and put it into circulation”. America did this. China did this. America now has more debt than it can ever pay off in a thousand years – hundreds of trillions of debt. One day, no doubt, it will all collapse. Call it what you will – I like to call it a “collective suspension of dis-belief”. China is even worse, but as it is all controlled by the Communist party, instead of by the market, then it will collapse in a different way. There is no doubt to me, that the problem is not so much “not enough houses”, but instead it is a problem of “too much money”.
The answer, therefore, is relatively easy: turn off the flow of money. No more foreigners bringing in large amounts of dosh, that distort our system. And no more excessive loan lending to locals. Force property investors to divulge themselves of their (to me: ill-gotten gains) excess housing, by taxing housing, or taxing capital gains, or taxing land, or taxing their carbon emissions, as I am sure they are as flatulent and full of hot air as they sound.