Why property ownership is what drives the economy

Most of my recent columns have focused on the effects of Covid-19 on the property economy and the ways in which it should be supported over this difficult time. This has led to handfuls of emails from those who are anxious to tell me property ownership adds nothing to the economy.

This view represents a widespread, but incorrect, understanding of how economies work and usually centres on a mistaken understanding of either productivity or GDP — or both. Simply, productivity is a measure of how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output, while GDP (gross domestic product) measures both labour inputs (hours worked) and investment to provide a guide to whether an economy is growing or recessing.

The argument is that because a house is static, it isn’t actually producing anything and is therefore a bad use of the funds invested in it versus, say, a business or support of an entrepreneurial idea. Dismissing property as nonproductive isn’t just wrong, it defies the important role that it plays in the growth and operation of the economy.

There are two ways in which the property market impacts both productivity and GDP.

The first of these is because of something called the multiplier effect. This refers to economic activity which, when increased or changed, causes increases or changes in many other related economic variables. It’s usually used to refer to government or business spending or foreign investment, but is every bit as valid as a measure of the impact that a house, can have on a local economy.

Think about all of the ways in which your own home contributes to the economy (and therefore GDP). You pay rates which contribute to a huge range of multiplier activities from essential services through to libraries, sportsgrounds and parks; if you have a mortgage you pay interest to the bank, which, in turn, enables them to operate and re-lend funds to others; you pay for utilities such as power, broadband, digital TV and water; you pay house and contents insurance premiums; and you pay for maintenance and improvements on your property — either by hiring tradesmen, or by spending money on materials you need to undertake your own DIY.

The list goes on and the economic impact is enormous. Every one of these activities allows the businesses being paid to employ staff, pay tax and often invest in growth.

The other way in which the property market impacts GDP is through capital growth. This is a slightly harder concept to get your head around because many people believe that any growth in the value of your home is offset by the fact that your neighbour’s home has also gone up in value and that there’s a nett zero gain. However, this ignores the impact of that increase on the wealth of the nation.

Let me explain. New Zealand house prices have roughly doubled in value every 10 years, for the past 40 years. That growth in house values has allowed us to travel, invest, improve our lives and prepare for retirement. Now try and imagine if that hadn’t happened. Imagine travelling overseas or even trying to buy a car or major appliance, using the equity in your home to fund such activities — but based on what our homes were worth 40 years ago.

Do you begin to see the impact this would have on the economy? We would be a far poorer people and nation.

Property ownership has been the number one driver of growth in our national wealth over the past 40 years and, aside from your job or other activity, the major driver of increased productivity in New Zealand.

“Imagine travelling overseas or even trying to buy a car or major appliance, using the equity in your home to fund such activities — but based on what our homes were worth 40 years ago.”