A convenient truth in election year
Never mind coronavirus, this Government heads into 2020 inoculated against economic shock by the very thing it promised to end — soaring house prices.
This should be an embarrassment to those in power.
Perhaps it is, quietly, within the deeper ranks of the Labour Party.
But this is election year and if the wealth effect of rising Auckland house prices is what it takes to restore confidence and lift economic growth then I suspect the Government is going to take it.
The inconvenient truth, that house prices are again riding to the economic rescue, was laid bare by the Reserve Bank last week.
It’s taking a relaxed, wait-and-see approach to coronavirus risk because of the resurgent market.
In terms of timing it has been helpful for the Reserve Bank and its straight-talking Governor Adrian Orr wasn’t shy of acknowledging that.
“With house prices rising, that wealth effect is alive and giving and people will be more confident to consume and borrow to consume,” Orr said.
The Reserve Bank is forecasting around a 7 per cent annual increase in house prices.
Orr know the risks around housing bubbles, he did note that things shouldn’t get as overheated as they did last decade.
“While we’re seeing some momentum, we don’t believe it’s going to be . . . as strong or as persistent as what we’ve seen in past house-price asset cycles.”
Perhaps that’s reassuring from macro-economic heights.
The Reserve Bank’s other job (besides monetary policy) is to keep a close watch on New Zealand’s private debt levels.
But for the past 18 months the Bank has been more concerned with an economic slowdown.
It will be relieved that it has headed off the downturn in time to face-off a big external risk like coronavirus.
But a 7 per cent annual lift in house prices should come as a serious blow to those who were hoping to see meaningful shift in the housing equation.
On the current median Auckland house price of $885,000, 7 per cent would equate to an increase of almost $62,000.
That’s an extra $12,000 a firsthome buyer would need to find for an already improbably large 20 per cent deposit.
To put it another way, it is equivalent to double-digit growth on the median prices during the middle of the John Key era.
If you own a house, that kind of net wealth increases, even if it’s just on paper, and makes people more relaxed about their debt levels and more comfortable spending.
That’s good for businesses and pumps confidence into the economy, flattering GDP growth. Economists call it the wealth effect. Sadly it doesn’t create much real wealth the way that actually making more stuff and selling it to the world does.
It can bolster the economy for more than just homeowners.
It can boost employment and wages, keeping young people sufficiently funded to buy the latest phones.
But when they come to try and borrow for a house it just means they’ll have to borrow more — most likely from a foreign bank.
Or they’ll never buy a house, further entrenching social inequality.
With home ownership further out of reach for more people, pressure is going on rental demand.
Rents are currently rising at their fastest pace in eight years. That trickles down to hurt the poorest families.
This Government knows this story very well because it spent nine years explaining it in opposition.
It’s probably unfair to think the Government has fixed all the country’s housing issues in three years.
It will say it is finally getting new homes built. With a good deal of private sector support building consents are at record highs and supply issues are being addressed.
The Government will point to policies that have made things tougher for investors, and tackled foreign buyers. House prices are still rising, so what gives?
The resurgent market, in the face of these new policies, makes it clearer than ever that a more fundamental change was needed.
Prime Minister Jacinda Ardern balked at the prospect of a capital gains tax because it was seen as a political kiss of death.
So now what?
On Thursday it announced a $300 million funding package for emergency housing that includes 1000 extra places for homeless families and individuals.
That will make a meaningful difference to those directly in need. But it’s “ambulance at the bottom of the cliff” stuff.
Here we are then, heading into a fresh election cycle with a government buoyed by a housing market that’s making the rich richer.
So I doubt we’re going to hear a lot about this issue from either side of the political spectrum this year.
In the interest of staying in power the Government is sending a clear economic message to centrist voters: look we didn’t break it. To those hoping for more meaningful change the message seems to be: trust us we’re working on it.
Meanwhile, the National Party is never going to alienate its core supporters with policies that hurt housing.bIt is attacking the Government for stealing its policies and arguing they aren’t as good at delivering them.
We look set to see an election fought over competency and cultural approaches, with serious economic reform — of either political flavour — consigned to the back burner.