New Zealand's Housing Crisis - A Catastrophe in the Making

Victor Luca, 30-Jan-20.

Everyone needs water, food and shelter. The last of these has been moving out of the reach of at least 1/3 of New Zealanders.


On 20-Jan-20 I heard a news report on TV (Newshub) that we in Aotearoa have among the least affordable housing in the world. Nothing new here. We have been hearing it for a long time. A few statistics were then given of the ratio of house price-to-income ratios in some of our major urban centers. Incidentally, NZ’s median income is one of the lowest in the OECD and in the Whakatane district it is an alarmingly low $25K/annum. Apart from brief reference to the fact that things are getting worse for first-home buyers, again nothing much new. I doubt many of us learned much listening to this ‘news’ broadcast that contained not a single word of analysis. Why do we have the situation that we have? Why is it that an entire generation of New Zealanders, will find themselves unable to buy a home? That is, unless they inherit wealth of course.


At the risk of sounding condescending by telling people what they already know, I will venture my own simple-minded hypothesis on the matter. I warn you that I have no background in economics or demography or town planning or any related area.


Let’s start the analysis with interest rates that are controlled by our central (RBNZ) and to a lesser extent by our foreign-owned banks. We all surely realize that mortgage interest rates in NZ are at all-time historical lows. Variable mortgage interest rates have in fact been trending south for decades although they declined steeply after the global financial crisis (GFC). Remember the GFC? Following the GFC the need for central banks to apply monetary stimulus to resuscitate flagging economies resulted in a drop in interest rates of about 5% in a matter of months. This in turn was spurred by the creation of massive amounts of new money by banks. In the jargon, this process is called quantitative easing. Cheap money was a significant catalyst for housing speculation. If you already owned a home, or part of a home, you could use the equity, and this cheap money, to buy another. You could then rent it out and use the rental income to finance the loan. Not rocket science as long as you already had the initial equity. It is in financial parlance a sort of legal Ponzi scheme. However, stimulating demand via this mechanism only works if there are sufficient numbers of renters.


Another mechanism for stimulating demand for real estate is to sell houses to a wider market, say the world market. Until the present government got into power, virtually anyone from anywhere on the planet could buy a chunk of Aotearoa. This mechanism is a direct result of government policy. To get a good picture of the situation the reader is referred to the brilliant 2017 documentary by Bryan Bruce entitled “Who owns New Zealand now?”. It is available on You Tube at the following address:

https://www.youtube.com/watch?v=HzSAmOQuyjU&t=33s


Fortunately, the present government, has to some extent, put the kybosh on this with its foreign buyer’s ban that took effect in about August of 2018.


Yet another means of putting upward pressure on housing that is totally within central government control is the control of immigration. More people entering means more houses are needed to house them. For the years 2014, 2015, 2016 and 2017 New Zealand has allowed 50,922, 64,930, 70,600 and 72,400 immigrants into the country respectively. Most of these new migrants wind up in Auckland. This high annual immigration is responsible for about ¾ of NZ’s annual population increase of about 2% per annum in the 2014-2017 period. Simple math shows that an annual growth rate of 2% would translate into a population doubling time of 35 years. This growth rate is substantially up on the historical mean of about 1.3%. It follows that if we stopped all immigration, NZ’s population would remain almost constant. Our immigration rate is about twice that of Australia’s which already has a relatively generous immigration policy. In fact, since 2012, Aotearoa has had one of the highest net inflows of migrants of any OECD country.


It is the previous government that presided over much of this upward trend in immigration. In 2018 the number of immigrants dropped to about 63800 which is still high. By controlling the numbers of immigrants, be they buyers or renters, the government directly exerts control over housing demand.


Finally, one of the levers for control of house prices in which local government can exert some influence is land availability.


Enrico Fermi once famously stated “Never underestimate the joy people derive from hearing something they already know.” For those who don’t know, Fermi was the famous American-Italian physicist whose work contributed to the development of nuclear energy and atomic bombs. Fermi received the Nobel Prize in physics in 1938.


The above was written on the 3rd of February of 2020 in a Contributed piece I published in the local newspaper entitled “Unaffordable Housing”.


My piece was motivated by something that should concern all New Zealanders. A housing availability and affordability crisis which in turn generates homelessness, financial stress in families and many other ills. Large mortgages on incomes that have and continue to stagnate also raises concerns of a housing bubble akin to that which caused the great recession of 2008.


It will come as no surprise that there has been a dramatic increase in house prices over the past decades, and especially the past half-decade or so. Whilst relatively wealthy New Zealanders with multiple properties take advantage of this situation and delight in the fact that the wealth they accumulate will ultimately be passed on to their children when they die, those with only one property, or no properties at all, should be concerned for their children. Those with massive mortgages relative to income might also have cause for concern, especially now that we are dealing with the COVID-19 aftermath.


My initial analysis was a basic one, and it was designed to be framed in terms that folk (like me) without training in economics could understand. I attributed house price increases to the following four main factors that I called government’s levers:

1) Historically low mortgage interest rates.

2) Sale of NZ properties to foreign non-residents.

3) A zealous immigration program.

4) Lack of available land.


Central and local governments have the levers that control each of these four factors.

Although the above factors may well be some of those driving up house prices, there was another factor influencing prices that was missing from my list, and it may indeed be one of the most important.


To find the missing lever we need to look at the activities of the Reserve Bank of New Zealand (RBNZ) and the commercial banks that it regulates. A central bank such as the RBNZ, a supposedly independent body, is given the power by a sovereign state to manage monetary policy, maintain price stability, promote the maintenance of sound and efficient financial systems and supply us with banknotes and coins. In short, the RBNZ is in charge of creating money in its own right or through control of the money creation process by commercial banks. The mechanics of how this money is created ‘out of thin air’, by issuing debt, is a complex subject that is out of scope for the present discussion. Suffice it to say however that all fiat money is created out of thin air (ex nihilo) by the abovementioned actors. The word ‘fiat’ is Latin for, ‘let it be done’.

Below is a graph that contains two lines. The red line is the increase in NZ’s money supply since 1977. Readers can see that this red line follows exponential growth kinetics. That is the curve curves upward dramatically in the shape of a hockey stick. We are seeing a lot of these sorts of hockey stick graphs these days. Some simple math shows that the money supply has doubled every eight years or so over the period shown. Also included in the graph is a blue line that represents the House Price Index (HPI) for Whakatāne since about 2009, or post the great recession. The HPI is basically an average of sale prices for different market groups and is compiled by RBNZ.


From 2009 to 2015 – the post great recession recovery years - the HPI was relatively stable, or even decreasing slightly. Then from 2015, the HPI tracks the growth in money supply quite closely almost doubling in about five years. This increase over such a short period may be terrific for some but it is devastating for many individuals and families. The correlation between HPI and the growth in money supply over the five year period from 2015 to 2020 has been quite good. That is, they track each other. Although correlation is not necessarily causation, it is quite well known that money is created by banks in the process of making loans. This is what banks do!




Commercial banks can invest in a range of lending activities and what they most like to do is loan at minimum risk. One of their favorite sectors to invest in is the housing market because it is safer than loaning money to more risky, but potentially more productive, business activities. If a borrower for some reason cannot pay their loan, then the bank simply takes the home. In a rising housing market the bank gets a real asset after loaning money they created out of ‘thin air’ and it can flog that asset off for more money than was loaned out in the first place. In this way banks have become major actors in driving house price inflation.


Voila, there you have it! Government controls all the housing price levers and one of these is that of the money creation process that has helped create a housing crisis, and maybe eventually, a housing bubble. Recently, I stumbled upon an organization called PositiveMoneyNZ with roots in the UK and a branch here in NZ that has been lobbying government for a fairer money system that gives young folk, unable to rely on inherited wealth, a chance to get ahead.


Since Central Government has through the levers described created the housing crisis, it will need to step in and fix the damn problem!