Dr Don Brash: Do rising house prices damage economic growth?

In recent years, when addressing Rotary and other audiences, I often talk about the five big challenges facing New Zealand – persistently slow growth in productivity, and therefore in income levels; ridiculously unaffordable house prices; the increasing division of our society into those with a Maori ancestor and those without; the unsustainable path which government fiscal policy has been on for the last decade or so; and the foreign policy dilemma we’re facing in a situation where our traditional ally seems hell-bent on provoking war with our largest trading partner.

Until today, I hadn’t given enough thought to the possibility that rising house prices may have been part of the cause of our lousy productivity growth.

But today, something rather extraordinary happened. The front page of the New Zealand Herald (well, not quite the front page – the first page after the almost mandatory two pages of Harvey Norman ads) had a major article talking about how high house prices remain in most of our cities. The article began:

“Aucklanders would need to earn more than $213,000 a year – or about one-and-a-half times the city’s typical household income – to comfortably afford to buy a median-priced house.

“That’s according to analysis by the Herald and property commentators Cotality [formerly CoreLogic] that shows that the typical city house price was $1.08 million in the three months to June this year.

“Home owners who saved a 20% deposit and secured a typical two-year fixed interest rate in June of 5.88% would then face $63,948 in mortgage payments over the coming year. That’s equivalent to a typical Auckland family handing 47% of their $136,529 household income over to the banks.

“By contrast, many academic studies consider buying a home comfortable when buyers spend no more than 30% of their income on mortgage costs.”

The article went on to note that house prices remain seriously unaffordable in other cities, such as Wellington and Tauranga.

But shortly after reading this article in the Herald, I started to read an email from BusinessDesk, a daily news service focused, as its name suggests, on business news, and owned by NZME, the owner of the Herald. This article by Dileepa Fonseka was headed “How rising house prices hurt productivity”.

The article notes in part:

“A growing body of research suggests that housing booms tend to skew finance towards the least productivity-enhancing sectors: mortgages over machinery, construction over technology, and land rents over intangible yet valuable digital assets….

“A study by Motu Research Senior Fellow Stuart Donovan highlights this in a journal article examining the 2003-2007 property boom in Spain…

“The study found that the misallocation of capital sparked by rising property values accounted for around 40% of the [total factor productivity] decline experienced by the Spanish economy during that period…

“Earlier this month, the International Monetary Fund (IMF) released a working paper examining the impact of rising house prices in Canada on productivity. Canada has experienced at least a decade of increasing house prices, a rise that reached historic highs during the covid-19 pandemic.

“This rise in house prices has also been correlated with low productivity growth. This correlation doesn’t just exist at a national level, but across Canada’s regions and in data for Australia and the UK too, according to the study.”

Of course, correlation doesn’t equal causation, but the view that steadily rising house prices might well entice investment away from “more productive” investment seems at least plausible.

If true, the restrictive zoning policies of far too many local authorities – the policies which have driven the price of “houses” (really the price of the sections that houses are built on) to ridiculously unaffordable levels – may also carry a lot of the blame for our very slow growth in productivity, and so in living standards.

Over the last couple of years, house prices have declined slightly in many New Zealand cities, but only from ludicrously unaffordable to severely unaffordable. They are still far too high relative to incomes.

What of the future? Another subsidiary of NZME, OneRoof, often seems intent on talking up house prices, as if house prices should always rise faster than incomes. And that seems to be the aim of too many politicians.

Before the 2017 general election, Phil Twyford (then the Labour Party’s Housing spokesman) wrote an article jointly with Eric Crampton of the New Zealand Initiative arguing that crucial to getting house prices to a more affordable level was removing the Metropolitan Urban Limit around Auckland, because that tight restraint on access to buildable land, enforced by the Auckland Council, was by common consent the major cause of high section prices – and thus house prices – in Auckland. After Labour formed a Government with New Zealand First, the new Government’s policy programme – announced in the traditional Speech from the Throne near the end of 2017 – included a specific commitment to scrap that Urban Limit.

But of course, the Labour-led Government failed to do that, and before too long Prime Minister Ardern was insisting that she did not want house prices to fall but to “increase more slowly” – in other words, to remain severely unaffordable.

Enter the new National-led Government in 2023, with a commitment to reform the Resource Management Act and to require cities to zone enough land for the estimated housing demand for the next 30 years. At last, thought those of us deeply troubled by the seriously bad social consequences of ridiculous house prices, hope is on the way.

What has been promised is very encouraging, not only in terms of the reform of the RMA but also in terms of reducing the liability of councils for homes built within their jurisdiction – thus removing a risk which makes councils super-cautious in approving new homes – and making it easier to use new materials in the construction of homes.

No doubt, in part as a consequence, average house prices have declined very slightly over the last couple of years, and if present trends continue, they should continue to decline gradually.

Perhaps, all of a sudden, the temptation to buy lots of houses with as much money as the banks will lend, begins to look much less attractive. Buying houses with lots of borrowed money when house prices are going up appears a riskless way to boundless riches. When prices stop rising, or indeed fall gradually, not so much.

And just when this trend looks like it might gradually make housing more affordable, with immense social benefits and, apparently, considerable benefits in improving our disappointingly poor record in productivity growth, the Prime Minister panics.

Last Friday, 22 August (let the day be remembered as the day when the Prime Minister panicked), he visited OfficeMax’s East Tamaki facility and said:

“We want to see house prices rise consistently, but what we don’t want to see is the unsustainable increase in house prices… What we want to see is good, consistent levels of house price growth and appreciation.”

In this policy area, Christopher Luxon is no better than Jacinda Ardern.

Yes, let’s sympathise with them both. More New Zealanders own their own homes than don’t, so of course there are more votes when house prices keep rising faster than incomes than when they are slowly declining. But we now know that steeply rising house prices not only have devastating social consequences but may also be an important reason why over the last few decades our growth in living standards has been so anemic.

So yes, if we were lucky enough to have bought a house when they were much cheaper, we have gained wealth relative to those who weren’t so fortunate, perhaps because they came to the “game” more recently. But we may have to spend some of our increased wealth to visit our kids overseas.

I know a man who refused to lend his children money to buy a house because “houses are a depreciating asset”. Instead he lent them a modest amount of money to start a business. Now his kids are among the wealthiest in the land.

Dr Don Brash, Former Governor of the Reserve Bank and Leader of the New Zealand National Party from 2003 to 2006 and ACT in 2011. Don blogs at Bassett, Brash and Hide - where this article was sourced