Editorial

If there’s a statistical comparison that best encapsulates New Zealand’s lingering economic imbalance, it’s this one: NZ stock exchange value – $121 billion; rise in house values in a single year – $123 billion. And that’s after a pretty good year’s trading for NZX. At $985 billion, our overheated housing sector is now worth eight times as much as our sharemarket. For all that other indicators are telling us house-price inflation is fuelling good things in the economy, including business confidence, it’s doing the opposite for productive investment.

Worse, it is fuelling our indebtedness. We have never been in hock to such a degree – our household debt puts us in the top quarter of the most indebted nations in a new OECD report.

It’s not as though our debt is shrinking in relation to our income. On the contrary, credit is growing at twice the rate of household incomes. Our debt-to-household-income ratio is now up to 165% – compared with just 56% in 1991. Yet despite economists putting us on “amber alert”, we are spending more, and not on productive assets. Along with last month’s uptick in dairy returns and lower import prices, the house bonanza is emboldening us to buy more goods and services. New car sales just reached a historical high.

True, there are early signs that the most perilous aspect of all this, people borrowing to buy still more property, is levelling off. The Auckland Rental Property Performance index has just hit its lowest level in 18 months.

This seems partly due to the Reserve Bank’s loan-to-value-ratio restrictions, requiring investors to have a 40% minimum deposit. However, strong price growth in other areas, such as Tauranga and Wellington, continues despite the recent extension of the LVR nationally, indicating Auckland investor flight has merely spread the problem.

Today’s feel-good times cannot last, since we’re fuelling much of our economic growth with debt. The cost of paying off debt has fallen from a peak of 14% of disposable income in 2008 to 9%. But there is mounting evidence that our liberal immigration policies are helping depress wages.

We’re already at a point where even the assiduously laissez-faire John Key admits we could be hammered if there’s an appreciable rise in interest rates or a serious world event.

It’s the old story: we’re not saving or investing, because we think our property investment is not only the same thing as saving or investing, but even better.

Perhaps it’s because this country hasn’t seen a severe or lasting property-price reversal in modern history. There were difficulties after the 80s sharemarket crash, but that was a consequence for property, not of it. We feel bulletproof because we came through the global financial crisis so well. But that had nothing to do with our perspicacity. It was because our trading banks had no exposure to sub-prime mortgages and others of the highly leveraged instruments that caused so many financial institutions to collapse.

What can be done to reverse our big-borrowing ways? Any measures have to be electorally saleable. But National should by now be worried that today’s economic boom from immigration and property inflation could become tomorrow’s bust, even going into the election.

The risk of an unmanageable collapse at any time should be shifting policy attention urgently towards a state-managed slowdown. All eyes are on Canada, where British Columbia’s new tax on foreign investors seems to have caused a sharp plunge in property sales and to have halted Vancouver’s massive house-price spiral. The province has added other measures, such a tougher “stress test” forcing lenders to ensure buyers have enough income to withstand higher interest rates.

Although it’s too early to see the effect of each measure, or who is affected, it’s a cue for our Government to reconsider its refusal to discriminate against foreign buyers. Australia already restricts foreign property investment.

There’s nothing offensive about protecting one’s economy from distortionary speculative pressure. Property owners will take a hit whatever politicians do. National needs to consider how severe the punishment will be for the party that refused to take adequate steps to cushion the impact of our debt.

It’s a cue for our Government to reconsider its refusal to discriminate against foreign buyers.