Housing market must be regulated to address inequality: economist
AUCKLAND: One of the world’s most highprofile economists says the only way New Zealand will stop its burgeoning housing market being a driver of inequality is through wealth taxes.
Ireland’s ‘‘punk economist’’ David McWilliams, adjunct professor of global economics at the School of Business Trinity College Dublin, is ranked the 10th most influential economist in the world.
The bestselling author and awardwinning documentary maker told RNZ Ireland and New Zealand — countries with similar populations and demographics — faced similar problems, and that state intervention to regulate the housing market could create a quiet social and economic revolution.
He said both countries needed to keep their youth to ensure thriving economies, but that young people were getting a raw deal, either unable to afford homes or lumbered with debt as house prices rose.
‘‘With both [countries] their housing market is the main instrument of inequality, so consequently income taxes will not affect that in any way, the only thing that will actually help that are wealth taxes,’’ he said.
New Zealand remains politically resistant to taxing wealth; Labour leader Jacinda Ardern has ruled out the introduction of any type of wealth or capital gains tax as her party prepares to enter a second term in office.
Mr McWilliams, a former central banker and an investment banker, also said now was the time for governments to spend.
‘‘A state that can shut down an economy by an executive order can rebuild an economy.
‘‘You are still traumatised by Ruthanasia down there, you poor Kiwis . . . the idea of these bond vigilantes that are going to punish governments who overspend is frankly ludicrous at a time when central banks have signalled that interest rates are going to remain low for a long time.’’
The effects of Covid19 would pass, but entrenched problems in economies would remain.
‘‘The major issue in Ireland, and the issue that is driving politics elementally as opposed to cosmetically, is the fact that young Irish people are being completely priced out of the housing market.’’
This had deep sociological effects, he said.
‘‘Those really key milestones in your life, moving out from your mum and dad, moving into your own flat, moving in with your mates then maybe with your girlfriend or your boyfriend — the process of growing up maybe even getting married, maybe even having kids . . . for my generation were all more or less achievable in our 20s and by the time we were 30 we’d achieved those milestones.
‘‘This is now not possible for the generation coming behind us and the reason? They can’t ground themselves. Your 20s is an incredibly important decade which we tend to be flippant about as we get older.’’
Classical economics insisted the market would bring housing back into equilibrium, but this was a fallacy, he said.
‘‘It’s basic economics; when the price goes up demand goes down. Well that sounds good, but it’s actually not true. In a free market with lots of credit in the housing market, when the price goes up the demand goes up.
‘‘The reason is when they see prices rising, they panic and they front load their buying, so the very act of increasing prices brings forward rather than retards demand.’’
When it came to supply, classical economics also had no answer, he said.
‘‘Classical economics says when the price rises, supply will rise to meet demand, that’s actually not what happens at all.
‘‘What actually happens is when prices rise, people who want to sell, or people who are sitting on land, or builders who have permits ready to go they say, ‘Well maybe we’ll get another $20,000 next year so why don’t we just wait?’.’’
The state should therefore intervene, Mr McWilliams said.
One of the jobs of a civilised state was to provide housing ‘‘at a decent rent, for decent people, earning decent wages’’.
Doing so could ‘‘begin an entire social and political and economic revolution’’.
Keeping young educated people, and attracting them, was vital, as a young country was a vibrant country, he said.
‘‘I think a young population is always an asset. When you look at countries that get old and become decrepit, what happens is they stop spending and start saving — it’s called the lifestyle hypothesis in economics.
‘‘As society gets older it becomes more fragile, much less tolerant, much more likely to be reactionary, much more likely to be unimpressive when it comes to startup companies.
‘‘Young populations give us energy, they give us dynamism, they give us new ideas, they give us startups, they give us culture, they give us music.’’
Mr McWilliams said economics should be about making sure the next generation was better placed than the one before.
‘‘I would have thought it was the job of my generation to give my kids a country that is in slightly better nick than the country my parents gave me.
‘‘That’s what economics should be all about . . . Rather than anchor economics around doubleentry bookkeeping and accountancy, what we should anchor economics on is about deep, deep social trends.’’ — RNZ
❛ It’s basic economics; when the price goes up demand goes down. Well that sounds good, but it’s actually not true