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Gareth on housing policy

Gareth Morgan
Morgan Online, 31 January 2013

Gareth Morgan, Director at Gareth Morgan Investments

A couple of developments in the housing policy arena have got Gareth’s attention:

Rigging of housing market is deliberate policy

14 January 2013

January’s North & South magazine is headed “Is the Housing Market Rigged”? The article goes into depth on the resurgent property market and whether the take-off in prices is like constructing castles of sand.

It compares New Zealand with the US and all those economies in Europe that have had property booms and an almighty bust as a result. As we all know New Zealand has had the booms but nothing like a bust – there’s been a “gentle settling” we could say. As a result, property prices here remain massive compared to household incomes on any international comparison.

The two questions of course are whether our property prices should or will fall (or in economics parlance, “correct”)?

One thing the North & South article – which is otherwise excellent and comprehensive – doesn’t cover is the consequence for New Zealand of our ingrained over-investment in property. I have pointed this out before – it is a misallocation of investment on a national scale where the investment pattern is driven more by tax and finance availability than by economic or market fundamentals.

Everybody agrees that it is a major distortion. The consequence of this investment misallocation is that the economy is not as large as it otherwise would be, incomes not as high and jobs not as bountiful. You would think then it would be a no-brainer to fix the distortion, to remove the shackles from economic growth and employment – and for that matter, the tax base of government. Oh we could be so lucky.

Perhaps the most frustrating aspect of the North & South opinion survey is that everybody is agreed about the disease, even on the causes of the disease. But we are either too intellectually lazy or politically cowardly to fix it. It will persist until this crisis manifests itself in a form that cannot be avoided.

An economy that continually performs below its potential either ends up generating an inflation, balance of payments, or unemployment crisis – or all three as we saw in the 1970′s. Once one or any of these get serious enough adjustment occurs for sure – even if it doesn’t involve correcting the actual cause of the distortion.

For example a general outburst in inflation will spark the Reserve Bank into action raising interest rates and crushing economic activity across the board as inflation is brought back; a balance of payments blow out will see the currency fall and produce inflation or a recession (if the Reserve Bank reacts to the inflation) and will move resources into the export and import substituting sectors, which could well be irrelevant to the fundamental distortion, and a rise in unemployment is generally met by a raft of part fixes to stimulate the demand for labour. In summary all these policy reactions address the symptom not the cancer.

So the obvious question is why don’t we address the drivers of the property market distortion – the tax break and the preference for mortgage lending that the Reserve Bank requires the commercial banks to have?

The tax question scares the bejesus out of the politicians who are terrified their careers would be terminated by taxing the benefit property ownership confers on owner-occupiers. When in Opposition the politicians are more prone to advocate the tax loopholes on capital ownership be closed, but when in power their conviction evaporates. So the real answer on tax then is that New Zealanders will not support a change in tax on property until the crisis gets a lot more serious than it is currently is – most people have jobs, enjoy life, so who cares? How far away could such a cliff lie? No idea – the overseas precedents suggest we need the equivalent of a local “Global Financial Crisis (GFC)” until any commitment would emerge. Meanwhile we’re more than happy to see the disparity between rich and poor keep growing – another outcome from the favours conferred property owners.

And on the Reserve Bank’s preference for mortgage lending over any other form of loans? The Reserve Bank is at least talking post-GFC more about its responsibilities around prudential supervision and managing better the exposure of the banking system to sector risk. But it still doesn’t get it – there is no acknowledgement that the systemic over-investment in property that has been with us now since financial deregulation is a direct result of its risk-weightings, that the resultant mis-allocation of investment around the economy inhibits incomes and jobs. The Reserve Bank doesn’t care about that – unless there’s a crisis in the banking system there is no problem. It’s a depressingly sterile central banker view on life to ignore the fact that the arbitrary numbers it imposes on risk-weightings to mortgages is distorting the economy. Why successive Governors have not got off their butts and corrected it is a direct result of a lack of accountability for the outcomes its policy settings fosters.

So in summary N&S are on the button – they record that those in positions to make change recognise the enormity of the problem and they identify the causes. Small beginnings I suppose. N&S adequately summarise the political and bureaucrat resistance to correcting it. But we should be in no doubt over the ongoing damage such negligence by those in a position to do something, is imparting on the lives of all New Zealanders. It’s inexcusable.

Gareth Morgan is a director at Gareth Morgan Investments. Any opinions expressed in this article are personal views and are not made on behalf of Gareth Morgan Investments.

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Better late than never – Reserve Bank edges ever closer to acknowledging mistake on mortgage policy

27 January 2013

The consideration given by the Reserve Bank to controlling the bias in its policies that favour housing over all other lending types is most welcome (See NZ Herald article here). It is 20 years late but until they deal to this, New Zealand’s economic growth will suffer, capital will be misallocated and incomes and job numbers lower than they would otherwise be.

Whether the Bank does it by addressing risk weightings or via equity to loan ratios is a second order issue but the important thing is it stops pussyfooting about and gets on with it. The damage already done through years and years of neglect on this issue is immeasurable and it will just persist until we get some sort of responsible policy from the RB.

What’s important for the Bank to come to terms with, is that this is not about averting yet another financial crisis in the banking sector, the issue is far more insidious than that – it’s about the economic potential of NZ being needlessly held back by an aversion by policymakers to address the two main drivers of the distortion in the housing market – RB prudential policy and the tax loophole housing ownership offers.

The tax issue is the responsibility of the politicians so don’t get your expectations too high, our book “The Big Kahuna” outlines what to do, most politicians privately agree with it but don’t have the guts to provide leadership on it.

But getting one of these reforms away is better than none so Deputy Governor Grant Spencer is to be congratulated for at least stepping up and highlighting the bad mistake that the previous two Governors have stubbornly resisted addressing.

Any system that made these policymakers actually accountable would have forced those men to have acted during their watch. That neither did is an indictment on the accountability Reserve Bank operates to.

Of course there have been “discussion papers” from the RB on this before but the limited perspective both Governors had which led them to the conclusion that unless the financial system was at risk then it has been okay for the RB to tell banks to lend on mortgage in preference to all other forms of lending, saw the Bank come to the conclusion that there wasn’t a problem.

That conclusion was naïve in the extreme and New Zealand has paid the price in lost jobs, incomes and exacerbated wealth disparities as a result. Against that backdrop I won’t believe that the RB has actually mended its ways until it actually does something.

Until then I will continue, as most investors do, to prefer housing over all other forms of investment and in so doing push the price of it up further and further beyond the reach of more and more New Zealanders.

Gareth Morgan is a director at Gareth Morgan Investments. Any opinions expressed in this article are personal views and are not made on behalf of Gareth Morgan Investments.

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