Unaffordable Houses

In New Zealand, house prices are rising at an uncomfortable rate, partly aided by a shortage of stock. Somewhere about the late 1980s a number of houses were built to “look desirable and be cheap”, but unfortunately they were built badly. Why? Because a nominal “Labour” party was hijacked by right-wingers who made the likes of Thatcher look almost left wing. Regulations were cut, the market ruled, and buildings are hard to tell how well made they are until some number of years later, when they started to fall to pieces. The consequence was that local government and a changed central government pushed out regulations, and with amendments, and from then on it became a bit of a nightmare to build. Further, Councils put restrictions on land use so developers began land banking, thus raising the price of available land to high levels. Prices rose dramatically, but houses were immediately bought because interest rates tumbled. I thought we might be unusual here, but I recently found an article in The Economist” on house prices. Apparently the New Zealand situation is occurring across most Western countries. Germany apparently has had an increase of 11% over the previous year, while South Korea and parts of China have had to tighten rules for buyers.

The Economist stated monetary policy is partly to blame. Cutting interest rates mean borrowers can afford bigger mortgages and others find it easier to manage existing loans. On the other hand obtaining the mortgage is far from easier as the banks are worried about the long-term effects of the virus. In America 60% of bank loan officers have tightened the requirements for borrowing. However, landlords are willing to pay more because the perceived return on other assets has fallen. That is why stock prices are rising, despite the fact that economies are in deep trouble. The quantitative easing is sending money into the economies, but too much is going to those who wish to invest rather than to those who want to buy consumables. Investing in new companies or new construction would be virtuous, but these guys want a quick effort-free result, in which case there is nowhere else for that money to go other than existing assets. Meanwhile the moderately richer people can liquidate some other assets, and particularly bank deposits, which now return very little and pay more for houses. Sorry, poor, but your rent will go up because these guys are not running a charity.

It should be noted that many governments claim that quantitative easing is not inflationary. Actually, it is, but we must recall relativity. It devalues the money relative to what would have happened had it not happened. Keynes would argue that is a highly desirable outcome, but only if the debt so generated is paid back when times improve.

Fiscal policy is also a problem. In a normal recession, people lose their jobs and as their income is insufficient, foreclosures drag house prices down, which leaves ex-homeowners with a blemish on their credit history, making further borrowing harder. Thus the supply of houses increases and the number of people able to get a mortgage falls, which leads to cheaper houses. However, this time the richer countries have preserved household incomes, at least for a while, through wage subsidies, furlough schemes and expanded welfare benefits. Apparently in the G7 countries, in the second quarter disposable incomes were $100 bn higher than before the pandemic. Go figure! A number of countries have also allowed borrowers to suspend or defer all or parts of their repayments, and some have even banned foreclosures. The governments are protecting those in debt, at the expense of those who save or are young.

There is also possibly a third factor: since it has now become desirable to work from home, many office workers are looking to buy a bigger home. This is not a bad thing regarding the poor, but it boosts the price statistics of larger houses. Accordingly, this creates an illusory aspect to house price increases, to add to the real increases elsewhere.Which raises the question, where to from here? Governments have to wind down the fiscal stimulus, and we can expect increasing unemployment to reduce demand, but supply may also decrease as investment for new houses becomes more difficult to obtain. Very low interest rates may lead to increased purchases, but it also leads to decreased savings, which means that other than printing money and inflating the economy, after the initial “sugar high” the investment needed to build new houses may dry up. As the Chinese curse reminds us, we are living in interesting times.