Houses (and their prohibitive prices) will be high in Ardern’s considerations as she appoints her ministerial team

One  of  the   strange  outcomes    of  the   Covid-19 pandemic   has  been  the  surge   in  house  prices,  not  just  in  Auckland   but through the  rest of the  country.    It’s  a   phenomenon  that  runs   contrary   to  past  experience  when the   economy   has  slipped  into  recession.

Many  authorities  say booming house  prices are being  driven  by  the  loose  monetary policy  operated   by the  Reserve  Bank    in conjunction  with the  economic   stimulus  applied  by the  government.   Mortgage   rates   have  fallen,  with  at  least   one  bank    offering  a  rate below   2%.

The   Reserve   Bank’s  chief  economist  Yuong  Ha  is  on  record  as  saying:

The worse situation we’d face right now is actually if we had house prices falling”.

Just  why  that   might  be  the  case    in the  present recession  has  not  been  made  clear,   though he  seemed  to  suggest   the  wealth  effect   of  rising  property prices  is  helping to  sustain  the  economy.

Ha isn’t just any official. He is one of the four internal members of the Reserve Bank’s Monetary Policy Committee.

Appointed chief economist by the Governor,  Adrian  Orr, he serves on the statutory MPC with the endorsement of the Bank’s board (themselves appointed by the Minister of Finance) and of the Minister of Finance himself. His department delivers the forecasting and analysis that typically guides the rest of the MPC in their deliberations.

Higher   house  prices,  says  the  London  “Economist”,  could be  an  enduring  legacy  of  Covid-19.

If  so,  in the  2020s, they  will deepen  the intergenerational tensions  that were  already emerging  in the  2010’s. The fact that  the  economic  costs of fighting the disease  are  mostly being borne by  the young  mostly  to protect the lives of the elderly makes the  problem knottier  still”.

It  says   booming  residential property   prices  spell  trouble   for the   social  contract  after the  pandemic.

For  the  newly  re-elected   Ardern   government, the  issue   could  become   one of   the  most  difficult  it  has to  confront  in its second term.  It   has  made  the  commitment    to  achieve  affordable   housing    one of  its priorities.

Yet   its  record   with  its  previous 2017  election   commitment  on   KiwiBuild    to  provide  100,000  new houses  is  hardly   likely to   inspire  confidence.

In  any  case,  the   Reserve  Bank    has  signalled    it  will be  continuing  the   policy of   quantitative  easing,  with  the  prospect  the  Official  Cash Rate  could  go  negative.    That  could  ensure  the  upward  trend   in  house  prices   extends  over  several  years  ahead.

The   house  price  boom  is  not  just a  result of  policy.  Structural  forces  are at  work. Job  losses  this   year have been concentrated  among  low-paid service-sector workers  who are  more  likely to  rent  than   buy.

The  unequal effects of the   pandemic  have  allowed  prices to  surge even as  banks  have  curtailed   their  riskiest  loans.  Pricey  houses  make  life  tangibly  harder    for potential  home-buyers  who  struggle  to  raise the  minimum  down-payment necessary to   get a  mortgage.

The    Economist  points out   the  problem  is  most acute  in  countries  (like  NZ)  that see  home ownership  as a  rite  of  passage.

In  such  places high prices drive  young people  towards leftist populists  and threaten  the  social  contract”.

Will   Finance  Minister    Grant    Robertson  be  able  to   crack  the  financial   kernel   of  this problem?     Maybe  he  will  have to  find  inspiration  in  what  Michel  Joseph Savage  and the  first  Labour  government   did    with  the  State  housing  programme  (although that  took  several  years to  crank up).

The difficulty  is  that  the  Ardern  government   has  already ratcheted up  government  debt  as  it has   sought  to protect  jobs  and  keep the  economy  afloat.  And  it  has  a  long  list  of  pressing  financial   issues  to  resolve,  including   child  poverty,  costly  infrastructure projects,  acute  health  demands, tourism  industry  and  international education resuscitation,  Treaty  obligations  and  climate  change commitments.

In  any  case   the  government   has  yet  to  dismantle  the   Resource  Management  Act (although it is committed to  doing so),   seen in  many   quarters  as  compounding the  surge  in  house  prices.

Jacinda  Ardern,    when   she   shapes   her  new  Cabinet,    will  (or should) be  pondering  deeply  over  her choice    for  the Housing  portfolio.

Point of  Order  suspects  there   won’t be  any  volunteers:  Megan  Woods,   who  landed  the portfolio  after  Phil  Twyford   made   a hash   of  it  in the  first  term, therefore may be stuck  with  it.

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