When houses are bad for the economy

When a tumbledown bach with a modest view on a modest section is “valued” at $640,000, up 36 per cent from 2011, that suggests an economy seriously out of kilter.

Land and house “values” are wildly out of whack whether judged by history, incomes or other asset prices. Result: misery, frustration and economic loss.

That is Graeme Wheeler’s conundrum as he prepares his interest rate pronouncement on Thursday. In October 2013 he put limits on bank lending to people with a deposit below 10 per cent of the house price. He is considering an anti-speculation measure.

Wheeler’s job is not to get people a house. It is to stop banks getting too risky and to stop house price rises driving up other prices if house-owners spend up on the strength of the added “value”.

Part of Wheeler’s problem is that New Zealand is a pingpong ball on a heaving ocean of money printed by four big central banks, which has gone less into productive business investment, because consumer demand is not flash, than into shares, company bonds and real estate.

Property prices have climbed. This is on top of price pressures driven by rapid urbanisation of populations globally. Chinese, Russians and others hunting for a nice place to live or hide have added still more pressure in some places, including Auckland.

A recent McKinsey Institute study of 2400 cities of more than 200,000 people (including Auckland) found that 330 million urban households — 60 million in rich countries — live in substandard housing or are financially stretched by housing costs. It projects current trends will expand that to 440 million households by 2025.

“The housing affordability gap is equivalent to $US650 billion a year or 1 per cent of global GDP” and in some cities 10 per cent of local GDP, McKinsey says. Closing the gap will need investment of $US9-11 trillion by 2025, plus $US5 trillion for land.

So Auckland is not alone. In part, its house price pressure is a global urban trend.

But it is a standout, McKinsey says. And generally New Zealand’s supply response to higher prices is limited.

Quotable Value reported nationwide house prices 17 per cent above the level the 2007 bubble peak in November. Auckland was 37 per cent up and “reaccelerating”. Even adjusted for inflation, nationwide prices are level with the peak and Auckland’s 17 per cent above.

The result: accommodation costs keep rising as a share of income.

Those buying at high prices, Melbourne University research economist Warwick Smith argued last week in The Conversation, have to “spend their whole life in debt peonage to banks just to have a house to live in. They are no freer to challenge the financial system than feudal peasants were to challenge their lords”.

That limits their economic and social options.

And price “overheating” flows into rents. Low-income renters, as science-prize-winning Phillipa Howden-Chapman has tirelessly researched, get squeezed: into substandard or crowded accommodation and/or into shortages of necessities, including food.

The tighter that squeeze, the less healthy they are and so the less productive workers they are and the less well children — the future workforce — do at school.

The government has been firefighting. Opposition parties have been on the attack.

Among other things, the government has signed “housing accords” with some councils, changed the law to free up land around and inside urban boundaries and got the Productivity Commission to start on a report on land issues, cut tariffs on some building products, started to “right-size” state houses (but then stalled) and is now about to sell off state houses.

Not enough, says Labour’s Phil Twyford. And he says outsourcing public housing went badly wrong in Britain.

McKinsey says: unlock land, cut construction costs through “value engineering and industrial approaches”, lift operations and maintenance efficiency and reduce financing costs. It says government subsidies and income support are not enough.

Here the government has largely relied on regulatory change. Twyford says active state intervention is needed.

He wants large-scale state building and regulation to provide more and better rental houses. That includes backing the near-stalled Tamaki project of mixed state, community and privately owned units to replace state house slums.

Twyford wants the state to finance bulk building of houses for onselling to first-home buyers. This would enable builders he has talked to to use industrialised prefabricated componentry to cut costs but still allow customisation. He wants tough action to force open materials markets. Plus tax changes to reduce houses’ investment advantage.

His rationale: only the state is big enough to make much difference and ameliorate global market forces. A loose parallel is Working for Families, which subsidises wages driven down by global forces.

Labour lost the election so Twyford is just a voice. But if the “value” lunacy persists, others might strike up a chorus.