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.