Housing Crisis

As every commentator, economist and amateur politician has a viewpoint on the so-called housing crisis , it must be time for us to also chip in with a view.

We have views on why houses are so expensive to build in New Zealand, but we don’t believe that impacts significantly on the price of Auckland houses. It makes them much more expensive than they should be, but  doesn’t contribute significantly to the rampant price escalation.
 
Our view is simplistic. We look at the unemployment benefit, and consider whether a person who moves to Colville, or Mangaweka or Murapara, where there is minimal work to be had, and consider whether in a caring society the taxpayer should be paying them to do nothing. Or should the taxpayer say that there is plenty of work in Te Puke pruning kiwifruit, or Nelson picking apples. Go there and work. To be a civil society we need to be a caring society. But that does not mean being a pushover.

Similarly, should society have a duty to make a $1M house available to a 22 year old new and inexperienced university graduate for $400k? Our view is that we should be saying “If you want the $1 M house for $400k, move to Gisborne . There seems to be an unwritten acceptance that there is some golden rule in nature that houses should be “affordable”.

Of real concern is when there comes a massive disconnect between price and value. Because when that disconnect exists there is real potential for the market to rapidly sink underwater. We recall the London market of the late 70’s and many parts of the US market after the GFC. An underwater housing market causes disruption through the whole economy.

We know that bankers are not the brightest bunch. Except of course when it comes to lining their own pockets. That they can keep the lending train barrelling along, knowing there  will be no adverse consequences for them if the market tanks, is a true moral hazard.

They can take risks that in a normal commercial sense would be too risky. But bankers in our market know that in adverse circumstances, or extreme events, they can play the “too big to fail” card. The government stands ready to bail them out, as they did to the BNZ.

Much as we would like to believe in the concept of an economy which was regulated by the market, the fact is that the free market is just not working. There are all sorts of reasons Auckland house prices are losing touch with reality. Because the downside to the whole economy is so great should the market reverse, even to a limited extent, there is surely a burden on both government and banking regulators to reel it in. The banks , as lenders, have a vested interest in continuing to assist the market escalation. They are in a no-loss situation. They know that they can continue to lend with impunity in the knowledge that ultimately they cannot lose.
 
Our view is certainly not that we owe it to anyone to be able to be buy an “affordable” house. That’s not the way the free market works. But we do owe it to ourselves to put a leash on excesses that ultimately could severely damage the whole economy.