Housing Crisis - Causes

Updated: Jan 21

Victor Luca, 11-Aug-20.

What and who is to blame for the present housing crisis?


Recent letters to the editor in the local paper (The Beacon) have joined the chorus of voices speaking to the nature and causes of the present crisis of housing availability and affordability.


In my earlier article entitled “Unaffordability of Housing – Revisted” (29-Jul-20) I made little mention of the problem of the sky-rocketing cost of rental accommodation but rather focused on house prices. The reason I omitted rentals from my original article was that I thought it obvious enough that if in our market-driven economy the price of houses goes up due to the shortage of supply and an excess in demand, then so too would rentals. However, I thank readers for challenging me to suggest a solution to the problem.


It has been pointed out that most landlords charge the ‘market rate’. Although some might resisted the urge to hike rents in the interests of being humane to tenants, I would guess that there are relatively few people like this these days. Folk who put a premium on the wellbeing of their fellow man must be rare and I applaud those that have such a kind disposition.


The question of how we can remedy the situation comes down to understanding the rotten dynamic that determines the market rate for rentals and how to change it? The answer must surely be, to a first approximation, the same things that determine the price of housing. My previous articles were aimed at addressing the determinants of housing supply and demand for rental or freehold properties and I laid the blame squarely at the feet of central governments past and present. Governments have fueled demand through generous immigration policies, and prior to August of 2018, allowing foreign buyers, who don’t even live here, to soak up properties in our market. This drives up demand and hence prices.


But it is not just foreigners that buy up houses they don’t live in. Locals with an excess of cash, or an ability to get the money from banks by using equity in other houses they have managed to buy using mostly bank money also drive demand. Since there is inadequate supply, these folk can simply charge renters the market rate for houses they don’t actually even own outright. I referred to this as a Ponzi scheme. In our country this scheme is fueled by commercial banks who operate under the aegis of the Reserve Bank of New Zealand. Commercial banks create money from thin air and their preference is to loan it to those with equity rather than first home buyers whose deposits and salaries are increasingly inadequate as prices are driven up. The result is that house prices go up and that the first home is increasingly out of reach for many New Zealanders who then fall prey to unscrupulous landlords who charge the ‘market rate’.

Figure 1. The graph shows how house prices of stand-along houses have risen exponentially since the 1960s while wages have risen only about 50% over half a century. Source: RBNZ.


Clearly, handing over housing to the market has proven to be an abject failure if the goal is to house people. We have now had decades of the scourge of neoliberal economics that came into existence in the seventies. As a result, what we now have in NZ is a low wage economy and a serious housing crisis and increasing wealth inequality. All this has been facilitated by commercial banks who are given a license by the sovereign state to essentially print money and loan it out as they see fit. In so doing central governments have essentially abrogated their responsibilities to their citizens. One component of the cure to the housing problem could be for government – the sovereign state, ultimate creator of money and the lender of last resort - to take back control of money creation and take a lesson from the history that preceded this housing debacle. Clearly, the money system needs to be reformed as is advocated by an organization known as PositiveMoney that I think is on the right track.


In the 1960s prior to the neoliberal assault there were things called State Advances Loans. All families needed to do to own a home in those days was scrape together a 5% deposit and then governments both national and labor lent them the rest of the money at 3% interest over 40 years.


In fact governments who have the biggest balance sheets in the land borrowed on their own assets to house their own citizens from 1930 to the late 1960s. These governments of old were driven by the belief that home ownership was the key to a healthy society and a stable democracy. Were they wrong?


Source: Award documentary by Bryan Bruce entitled “Who Owns New Zealand Now”. Available on You Tube.


Sorry to be repetitive, but whatever we did starting from the 1970s clearly hasn’t worked. Paradoxically, in global terms, while millions of people lack suitable homes, the stock of vacant houses is gradually increasing. Stuff reports that in 2013, 33,360 private dwellings in the city of Auckland were unoccupied and that by 2018 that figure had increased by 6,000 to 39,393. The data was from the latest census. The situation is not so dissimilar to what happens in another city I have lived in for a decade, the city of Buenos Aires in Argentina. In that city of 16 million people there are about 139,000 empty dwellings. Most of this excess housing is owned by the wealthy who buy dwellings up as a hedge against inflation and a store of real value. To this problem of excess, one proposed solution has been to tax empty dwellings more than those that are occupied.


According to United Nations sustainable development goals, everyone should have access to housing. More specifically, it is sustainable development goal 11 (sustainable cities and communities) that aims to make cities and human settlements inclusive, safe, resilient and sustainable. I am sure you have heard all these nice sounding words before. However, the absurdity of it all is that we are applying the medicine that caused the problem to try to fix it by increasing the dose. One of the key targets of the sustainable development goals is to ensure that folk have access to adequate, safe and affordable housing and basic services. According to the UN, affordable housing is key for development and social equality. We seemed to know this in the 1960s and somewhere along way we forgot it all.


The inability for a family to own a home consigns them to a vicious circle of poverty from which it is difficult to escape. Since they can’t raise a deposit, they can’t get the ever increasing loan and so they pay exorbitant rentals and so they can’t raise a deposit and so forth. You get the idea.


Source: State Housing. https://www.nzgeo.com/stories/state-housing/


At this point we should start asking ourselves the question, if we really want to end up in this country like the United States where 45% of the population doesn’t have $400 (USD) of savings, where the minimum wage is $7.25 and where there has been an explosion of human feces on the streets of cities such as San Francisco. In the richest country in the history of the world COVID-19 is out of control and the inequities of the health system is showing itself to be a disgrace. Is this really what we want here?


We would do well to remind ourselves that the word ‘landlord’ harks back to medieval England in which only the King and certain nobility had the right to own lands. The peasantry had to show fealty to the King in exchange for protection. The life of the rural peasant was one of restrictions, poverty, great discontent, unrest, stress and insecurity. Is the term ‘landlord’ really such an anachronism these days?


So the short of it is that if government used the four levers it has in its control in a responsible manner to put downward pressure on house prices then perhaps we would go some way to resolving the tragedy of poverty and homelessness that is starting to grip our country. The present government clearly deserves brownie points for trying to address the issue by using the conventional neoliberal medicine of growth although they have so far not succeeded. Perhaps it is time to consider changing the medicine and level the playing field.


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