House prices rising again — that’s nuts right?
News that house prices are rising again has prompted someentirely reasonable anger about theway traditional solutions to an economic crisis benefit the wealthy.
Westpac economists lastweek said they expect a 3.5 per cent increase in house prices between March and December 2020— a 6.3 per cent annual house price inflation for 2020.
That’s nuts right?
We’ve just had the deepest recession in our history and face a long, painful recovery.
Isnewzealand’s property market completely bullet-proof?
There’s possiblysomeweird pandemic stuff going on.
Immigration almost completely ground to a haltwhenborders closed — fromrecord levels that had been proppingupeconomic growth.
Instinctively that should lessen demandfor property and cause prices to fall.
Perhaps the spike in returning Kiwis— around 4000— between April and July are relativelymoreable or inclined to buy houses than the average immigrant of the past decade.
Wedon’tknowabout them because as returning citizens they don’t have to fill out somanyforms.
Someeconomists have suggested thismaybe creatingsomeextra shorttermdemandin the market.
But the obvious culprit for the strength of housing is super-low interest rates. They are also propping upsharemarkets around the world and making the Kiwisaver accounts of middle-classnewzealanders look good.
It’s a familiar story.
Central banks slash interest rates — and even printmoney— intimes
of crisis to ensure that the financial system keeps working.
Wesaw that in the financial crisis. Butwealso saw that once markets get used to the looser monetary policy it is very hard toweanthem off it.
Lowratesmakeputtingmoneyin the bank less worthwhile and investingmoneyin assets— like housing and shares— more lucrative.
The fact that this benefits those of uswhoalreadyownproperty or have savings in equity market funds is unfair and is sometimes talked about as if it is an unfortunate side-effect.
But Idon’t think it is. Whetherwelike it or not (and I don’t) Kiwiswhohave wealth, overwhelmingly have it tiedupin property.
Strong house-price growth creates a powerful wealth effect— even though economists and commentatorsbemoan the fact this does not drive productivity theway business investment does.
Wemissed the chance to deal with this issue over the past decade, while growthwas good.
The trouble iswearenowin a crisis where all the choices are bad.
The onus is on our leaders tomake
the least-bad choices. Both Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr are highly conscious of inequality.
Robertson is a Labour Partyman after all and Orr, while clearly still a banker and amonetarist, is perhaps the most socially liberal Governor we’ve ever had.
Both are prioritising stability in this crisis over social change right now. It is not hard to see why.
If the housing market and sharemarket had collapsed this yearwe would still be facing thesame economicdamagecaused by lockdown and border closure.
But we’d also be seeing confidence sucked out of the economy.
Spending would have slumped and the economic contraction would have beenmuchgreater.
That would likelymeanmuch higher unemployment and greater levels of poverty.
Wouldit be fairer?
Maybe, but you’d have to be of quite a revolutionary bent to see that as a viable option.
Does it sound like the last vestiges of the old trickle-down economics? Kind of.
Idon’tmeanto defend neoliberalism here. Wealth never quite seems to trickledownwithoutsome sort of government policy intervention— poverty certainly does.
It is a “lesser of two evils” argument. Using the tools youhave in front of you in a crisis can’t be easily dismissed. But neither can the notion of not wasting a crisis.
Timing is key.
Itmaybe that there is anarrow windowfor enacting transformative economic policy and thatwindowis approaching.
Lastweekiwrote about the failure to implement transformative policies during theboomtimes.
People wrote and asked what I thought those policies should be.
I’m not an expert, but I ama fan of listening to the experts.
Wehad an expert Tax Working Group that cameupwith a plan to balance our tax system. That planwas killed by coalition politics.
I believewestill need to take a deep look at our tax policy in the next few years— probablymoreso given the debtweare taking on.
Things like a capital gains tax might not be silver bullets but amore balanced tax policy is one of the fundamental issues.
Monetary policy is amore tricky proposition. It does what it says on the box very well. Inflation— which it controls— can also cause serious wealth inequality too. Soweshould be careful not to throw the baby out with the bath water.
Within the current structure, I’d argueweshould get rates back to morenormal levels sooner thanwe did aftergfc— even if that hits sharemarkets and housing markets. Whatelse? I’m not sure.
Weneed to start talking about them. Andweneed to be ready to enactthemwhenthiseconomygets out of intensive care. — Nzherald