Sun. Feb 5th, 2023


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Liam Dann: Sir John Key says the housing boom is over. Is it really?

4 min read


The housing boom is over.

I don’t know if that’s official. I think the latest property market data is still a little inconclusive.

But Sir John Key called it last week. And that seemed to be a bit of a thing.

Key’s comments – that rapid housing market growth is no longer sustainable – were hardly a revelation.

To be fair, they weren’t meant to be.

Key was asked his view on housing during the launch of a new NZ Initiative report looking at the risk of another Global Financial Crisis.

And he answered in typically media-friendly sound bites.

Then he rattled off a list of factors that drive housing markets and noted that all of them had now been addressed in some form in this country.

Interest rates are rising, banks are restricting lending (both voluntarily and because of RBNZ restrictions), we are building more houses than ever, we’re opening up more land and immigration has stalled – the population is not growing.

It was pretty much the same list we’ve heard from Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson in the past few weeks.

So while Key’s observations weren’t new, there was something significant in him joining this chorus.

His voice still carries a lot of weight with a large section of middle New Zealand.

That’s why he got the headline.

The point is that there really isn’t much left to drive house prices up except for emotion and speculation.

Any growth now is detached from what stock market analysts would call “the fundamentals.”

Unfortunately for young house hunters, that doesn’t mean a crash or correction is imminent.

Just look at the cryptocurrency market or the US$1.2 trillion valuation for Tesla.

Emotions (famously fear and greed) still drive the financial world as much as rational analysis. Perhaps more so these days.

Those of us who prefer a purely rational approach to investment often find ourselves left behind, pondering why we thought $100 Tesla shares, $10,000 bitcoins or $1 million Ponsonby villas were overvalued.

The answer is because we don’t have a high appetite for risk. We prefer a balanced approach that allows us to sleep at night.

Sadly the suffocating overlay of irrational human emotion also dictates politics.

It is the reason the NZ Initiative report won’t achieve any drastic shift in policies, even though it makes an eloquent and rational case for the grave danger facing the global economy.

The report, “Walking the path to the next global financial crisis”, authored by Dr Bryce Wilkinson and Leonard Hong, highlights the almighty disconnect between asset price growth and productive “real-world” wealth creation.

It makes the familiar point that central bank policies of low rates and money printing have propped up the global economy through the GFC and pandemic.

These were meant to be temporary measures. But they’ve become embedded.

That’s boosted share markets and housing markets and meant that household wealth has kept rising even when economies are actually in recession.

Now the public is investing on the basis that politicians and central bankers will step in to avoid any kind of serious crash or correction, Wilkinson warns.

It can’t last.

We have inflation now. The cure for that is higher interest rates but central banks can’t lean too hard on that lever because debt is too high.

If rates go too high, people will default and the system will come crashing down.

But if we do nothing, inflation means prices for everything – including assets keep rising into even bigger bubble territory.

And eventually, something weird and unlikely will pop it.

If that happens with interest rates at record lows and public debt at record highs, where will we look for relief?

There are some who argue, that we should collectively recognise that debt – like money itself – is an artificial construct.

That it’s within our control to write it off.

That is problematic because it would involve a vast reshuffling of wealth.

People who own the debt quite legitimately view it as an asset just like land or shares.

Writing it off would be akin to a socialist revolution.

It’s certainly not something New Zealand could consider in isolation.

Whether we like it or not we’re very much embedded in the global financial system.

The solutions suggested in Wilkinson’s report are more pragmatic but are politically unpalatable right now – not just here but around the world.

They largely involve great fiscal discipline, leaning harder against inflation and debt than the mainstream politicians, left or right, have an appetite for these days.

But I don’t know that many of those politicians, or central bankers, would disagree with the underlying premise of this report.

For those who worry about this stuff, it’s useful to consider that New Zealand remains one of the most cautious OECD nations on public debt and inflation.

The Reserve Bank stopped printing money in May and is already lifting interest rates. Our government borrowing remains at the low end of the OECD rankings.

Even our centre-left finance minister regularly acknowledges the risks of high public debt and has a keen eye on returning that debt to more manageable levels.

Still, Wilkinson’s report is a salient reminder that we need to be ready for the next shock.

When it hits – hopefully not for a few years – New Zealand can again be among the most well-positioned economies in the world.

We are small and we need to be.

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