It’s an old adage that a speculative market collapses not when prices get crazy but when the last person who insists prices are crazy gives up in despair.
Worth bearing in mind when London’s Financial Times tells us that the pandemic has fuelled “the broadest global house price boom in two decades”, even bigger than the one which preceded and helped trigger the 2008 global financial crisis, and which is understandably reviving concerns about financial stability.
New Zealand happens to be winning the gold medal in this race, with the real price index for housing up by 88% since 2011, way ahead of the OECD average of nearly 30%.
As ever, the hard thing is figuring out how much of the boom is based on fundamental value and how much on speculative froth?
On a long-term perspective, it’s easy to find justifications for much of the increase: the rise in labour productivity; the benefit of living in highly productive urban environments (better known as cities); the largely tax-free returns; the opportunity for normal folk to use debt leverage.
Moreover, it seems to have a unique fit with our particular social structure: easy to understand and manage; family friendly; more flexible than you might think; and historically providing an excellent return (in the form of avoided rent).
Of course, it’s all the great things about an investment which can generate the speculation which pushes prices too far ahead of future returns.
And yet, you can argue that this boom has been running for a couple of generations now. And coupled with the global productivity boom it has transformed something like half the population of countries like New Zealand into a pool of people with the security of substantial capital. This must rank high in the scale of social transformations.
Leaving aside the problem that future generations are unlikely to cash in at the same rate, the fly in the ointment is that a significant chunk of the population are not even in a position to take part. This – rather than plain income disparities – may be the defining feature of being ‘left behind’.
And as a socio-political problem, leaders of the centre-right might ask if they need to take the initiative in fixing it, rather than hoping they can step in and fix things when the other lot resort to intrusive state control.
Let’s assume that in the housing market as it is, the capital-rich half of the population take care of themselves, while the poorest quarter are likely to rely on the state. That leaves something like 25% currently doubting that they will ever buy a house, and thus perhaps needing a political commitment that – if they play by the rules – they will be able to own their home during their lifetime.
How might a promise on this scale be realised?
The financial aspect – making long-term low interest mortgages available on a low deposit – is probably less financially burdensome to the state than one might imagine, given current financial market conditions. And even then, it would represent a better use of capital than some proposed public expenditures (not least stuff prefixed with the word ‘green’).
Growth in expenditure in this area would necessitate restraint elsewhere. And while most public services are valued at less than cost by the recipients, that would emphatically not be so in this case.
The really difficult part is fixing the supply side – and thus engineering substantial growth in the output of relatively cheap housing. But the necessary regulatory surgery might be possible if matched by a political commitment to build.
Streamlining development processes, permitting greater variation in housing quality and standards, and zoning urban fringe areas for development are all to some degree necessary. But it would probably also need the government to take responsibility for the very large infrastructure bill, before eventually passing it on to the established homeowners.
The disadvantages are obvious. But there are two advantages: first, it might encourage a real focus on how to reduce infrastructure costs; secondly, the marginal cost of new infrastructure is more fairly and efficiently financed by all the ratepayers and users, not just by aspiring suburbanites.
Some might say that such an upheaval of the established order would erode or even destroy the natural support base for a right of centre government. But it should be compared against the coming alternatives of rationing, controls and housing designed by the Green party.
Others might worry about the impact on taxes. Then again, you can argue that only the centre-right is able to deliver this programme by changing the focus of the welfare state, rather than by expanding it.
In politics, the left usually deals in hope and other people’s money, while the right deals in competence. For the last twenty years, most right wing parties around the world have trotted along behind the consensus, saying we can do better. It’s starting to look like something different is needed. Perhaps something like a housing promise?