Declining house prices are killing our economy

This is a reprint of an article that I recently published on KiwiBlog. It’s quite long – but it encapsulates everything I’ve learnt about property over the past few decades. You may not agree with the conclusions – but I invite you to consider the logic of my case before you dismiss it…..

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The New Zealand Initiative recently released New Zealand by Numbers, a useful and wide-ranging look at what’s happened to this country over the past 50 years or so. It brings together a large amount of data across the economy, education, health, crime, housing, energy and other areas, and it’s a valuable contribution to the debate about where New Zealand has come from and where we may be heading.

Its housing section reflects a view that has now become close to orthodoxy: that over that 50 years house prices rose too far, that affordability got worse, that first-home buyers were locked out, and that the recent fall in prices, while painful for some, is a necessary correction.

That same view is heard almost everywhere. Economists say it. Journalists say it. Politicians hint at it when they think homeowners aren’t listening.

The argument is simple enough: New Zealand houses became too expensive, prices needed to fall, and first-home buyers are finally getting some relief after decades of being shut out.

It sounds compassionate, sensible, and obvious.

But it isn’t true.

In fact, it’s a dangerously incomplete view and, in important respects, simply wrong. The long rise in New Zealand house prices wasn’t just a social problem waiting to be corrected. It was one of the great engines of New Zealand household wealth, business formation, rental supply and economic confidence. Indeed, orderly, long-term growth in property values has been overwhelmingly positive for this country. Conversely, a disorderly fall in house prices isn’t a cure. It’s a threat to the wider economy.

Yes, I understand that that’s not a fashionable thing to say. To many, positioning house price growth as a virtue is a bit like walking into a vegan café and ordering a steak. But the argument needs to be made, because the conventional wisdom is missing the wider picture.

For roughly four decades, from the early 1980s through to around 2020 or 2021, New Zealand house prices followed a remarkably predictable pattern. Despite recessions, political changes, regulatory interventions, banking scares, immigration debates, foreign-buyer controversies and repeated claims that the market had finally reached its limit, residential property values broadly doubled each decade.

As a result, the former Credit Suisse Global Wealth Report, now published under UBS, has repeatedly placed New Zealand among the world’s wealthiest countries on a median-wealth-per-adult basis. In the 2023 Global Wealth Report, the top five markets for median wealth were Belgium, Australia, Hong Kong, New Zealand and Denmark. That ranking wasn’t built on unusually high wages, deep capital markets, or a nation of share-market savants quietly out-trading Wall Street from Tauranga. It was built, to a very large degree, on property wealth.

That wealth effect did something very important. It gave New Zealanders confidence.

It meant ordinary households could buy a home and reasonably expect that, over time, it would become more valuable. Small investors could buy rental properties, often with poor or even negative short-term returns, because they believed the long-term capital gain would make the investment worthwhile. As property values rose, families accumulated equity, and that equity didn’t simply sit passively on a bank statement. It became working capital for the country.

People used that wealth to start or buy businesses, support cashflow when conditions got tight, employ people, renovate homes, educate their children, travel, buy vehicles, support local economies, and retire with a degree of dignity and independence.

For most New Zealanders there simply isn’t another asset that performs that role. The average Kiwi doesn’t have a large share portfolio, substantial managed funds, a family trust full of investments or some other pool of capital waiting to be deployed. Their home is their major asset and it has been the primary means by which they’ve built personal wealth and improved their circumstances.

That is what a property owning democracy really means. It isn’t simply a country in which lots of people have somewhere to live. It’s a country in which ordinary citizens own assets, build equity, accumulate wealth and gain the independence and opportunity that comes from having a genuine financial stake in the society in which they live.

At this point there will be some who will claim that property ownership has come at the expense of investment in activities that might lift the productivity of the country – but this misrepresents how our economy works. Property wealth and productivity aren’t competing alternatives – they’re essential parts of a spectrum. Increasing productivity should be the primary objective of any government, but productive activity needs capital and, for a great many New Zealand business owners, that capital has come from the equity accumulated in their homes.

Home equity has enabled New Zealanders to start businesses, buy businesses, expand them and carry them through difficult periods. Far from being separate from the productive economy, that equity has often provided the capital that allowed productive activity to happen.

This isn’t incidental. It’s central to New Zealand’s economic story. Without that property wealth, New Zealand would be a poorer country. Household balance sheets would be weaker. Fewer people would have had the confidence to take risks. More people would be dependent on the state in retirement. More businesses would have failed earlier because their owners lacked the fallback of home equity when conditions became difficult.

At this point it’s important to note that the doubling of house prices every ten years wouldn’t have continued forever – in fact, in 2023 I pointed out that the previous doubling had taken around 12 years rather than ten and that this was evidence of a gradual slowing in the rate of growth. As prices rise, it’s entirely logical that future increases will moderate and that the period between each doubling will progressively lengthen.

There’s also an important distinction between this long-term pattern and the extraordinary surge in house prices during 2020 and 2021. What happened then wasn’t a normal continuation of the market cycle. It was the predictable response to extraordinary (and foolhardy) monetary and economic settings which dramatically reduced the cost of borrowing and made much larger amounts of money available at servicing costs that suddenly looked extremely attractive.

The housing market simply responded to those settings. Markets respond to the signals they’re given, and buyers responded logically to the incentives placed in front of them. The extraordinary increase in prices over that short period was primarily a reflection of monetary and economic policy settings rather than evidence that long-term property growth itself was the problem.

And then there’s the rental market.

One of the strangest features of the modern housing debate is the way private property investors are treated as though they’re a nuisance, or worse, a class of economic villain, variously demonised and labelled as ‘speculators’. The reality is that private investors have provided a huge public service. They’ve housed hundreds of thousands of New Zealanders in rental accommodation that the state didn’t have to build, fund or manage. Of the estimated 500,000+ rental properties in New Zealand, private property investors provide as many as 400,000 or more, and without them the country would have had to invest hundreds of billions of dollars in rental housing infrastructure over the past few decades.

It makes no difference to that argument whether an investor bought a newly built home or one that had already existed for 30 years. The provision of new housing and the provision of rental accommodation are two different functions. Developers create housing stock when the market creates incentives to do so, while investors, in time, make part of that stock available to people who want or need to rent it.

In the past, Investors did this because they believed that property remained a sound long-term investment. Many accepted weak cashflow because capital growth made the overall equation work. Take away that expectation, punish investors long enough, frighten them out of the market, or make them believe property no longer offers reliable long-term growth, and they’ll stop buying. Some will sell. Others will never enter the market in the first place.

The consequences of that won’t be felt evenly or immediately. They’ll show up gradually, then suddenly. Rental supply will tighten. Rents will rise. The state will be expected to do what private investors previously did at scale. And, inevitably, the same commentators who spent years attacking property investors will ask why there aren’t enough rentals and what the government is doing about it.

But what about first-home buyers? How have rising prices affected them?

It’s a fair question. Buying a first home is hard. Saving a deposit is hard. Competing at open homes is hard. Watching prices rise while you’re still trying to get into the market is frustrating and, for some, demoralising. It’s easy to see why the media focuses on the young couple trying to buy their first home. It’s a human story, it photographs well, and it gives journalists a victim, a villain and a policy demand.

But it’s also only one moment in time – and that’s the part that we never discuss.

A couple trying to buy their first home may spend months, even years, feeling locked out. But when they eventually buy their relationship with the property market changes almost overnight. The thing that they were battling becomes the thing they now own. The rising market that looked threatening before purchase becomes the mechanism by which they build wealth after purchase.

The media follows them up to the front door, then loses interest the moment they get the keys.

But what happens next matters. Five years later, they have equity. Ten years later, they have security and an asset that enables them to help their children, fund a business, and give them choices that they wouldn’t otherwise have had. Finally, forty years later, their home helps them to retire with some security and quality of life.

That also matters when we consider the growing number of people who could reach retirement without owning a home. The insecurity of retiring as a renter is another reason why increasing home ownership should be a national priority. If owning a home provides security in retirement, then the answer is to help more New Zealanders achieve that security.

So the first-home buyer’s struggle is real, but it isn’t the whole journey. It’s the difficult entrance to a much longer road.

But what about the claim that rising house prices have destroyed home ownership. Well, that claim isn’t supported by the long-run numbers. Home ownership in New Zealand has moved around, but it hasn’t collapsed in the way that many people claim – in fact it’s currently in the mid-60 percent range, slightly higher than it was in the 1960s, despite multiple property booms. That doesn’t mean that there were no barriers. There were. But it does mean that the simple story – house prices rose, therefore home ownership was destroyed – is wrong.

Yes, we’ve had higher home ownership at various times during that 60 year period – but it’s worth noting that this was during times when Governments took deliberate steps to help ordinary New Zealanders overcome the barriers to ownership without trying to crash the market in pursuit of this ideal – a lesson that current governments would do well to learn from.

The same is true of affordability. We’re told that houses cost many more times the average income than they once did, and that therefore houses are less affordable than ever. But that ignores one of the most important variables in the equation: the cost of money.

A house doesn’t become affordable or unaffordable simply because of its headline price. What matters is the relationship between price, income, deposit requirements and the cost of servicing debt. A much cheaper house at 18 or 20 percent mortgage interest may be harder to afford than a much more expensive house at 4 or 5 percent. For decades, falling interest rates helped offset rising house prices. That doesn’t make entry painless, but it does make the real affordability story far more nuanced than the slogans suggest.

Yes, bigger mortgages mean greater exposure when interest rates rise. That’s true, but it’s a feature of borrowing for any purpose. Anyone borrowing to buy a home, a business, machinery or a commercial property accepts the risk that the cost of that money can change. That risk needs to be understood and managed, but it doesn’t alter the wider economic value created by long-term ownership and equity growth.

That distinction matters because, for many first-home buyers, the real barrier hasn’t always been the ability to service the mortgage. It’s been the ability to satisfy the deposit rules imposed on them. A family that could manage the repayments may still be shut out because it can’t assemble a 20 percent deposit. That wasn’t always the world we lived in. A 5 percent deposit was difficult but achievable for many young buyers. A 20 percent deposit, especially in Auckland or Wellington, can be a brick wall.

This is where Loan-to-Value Ratio restrictions and, more recently, Debt-to-Income restrictions deserve far more scrutiny than they usually receive. They were introduced with claims about cooling the market, reducing risk, and improving stability. In practice, they’ve often done exactly the opposite of what housing policy should do. They’ve made it harder for first-home buyers to enter the market, protected those who already own property, and forced younger buyers to spend longer trying to save a deposit while the market moved further away from them.

The great irony is that many of the people who claim to care most about first-home buyers have supported restrictions that made entry harder. If government really wants to improve access to ownership, one of the fastest and most practical things it could do is to remove artificial lending barriers that stop creditworthy buyers from purchasing homes they can afford to service.

None of this an argument against reforming planning, land supply, development costs or anything else that genuinely makes it easier to build homes. Those things are important. If reforms in those areas naturally moderate the future rate of house-price growth, that’s simply the market working as it should – but that’s quite different from welcoming a sustained fall in the value of the existing housing stock. The first improves the functioning of the market. The second weakens household balance sheets.

This is why cheering falling house prices is so dangerous. If rising property values created wealth, confidence and investment, falling values do the reverse.

They reduce household confidence. They make people feel poorer. They weaken consumer spending. They reduce the appetite for business risk. They remove the equity buffer that allows small-business owners to survive difficult periods. They discourage people from buying rental properties. They make developers more cautious. They hit construction. They make banks more nervous. They create a psychology of hesitation.

That’s not theory. It’s exactly what seeing right now in the New Zealand economy. Weak consumer confidence. Cautious households. Struggling retailers. A subdued construction sector. Businesses under pressure. Investors sitting on their hands. First-home buyers may be told they’re getting relief, but the wider economy is showing the other side of the ledger. When the property engine slows, the rest of the domestic economy starts to feel it.

When households no longer feel wealthier, they behave differently. They delay purchases. They put off replacing the car. They spend less on renovations. They become more cautious about holidays and discretionary spending. Business owners who might once have borrowed against property equity to fund growth or survive a downturn no longer have the same confidence or capacity.

Investors who once tolerated weak rental yields because capital growth would reward them over time now look at the numbers and walk away.

That’s how a housing downturn becomes an economic downturn. Not in one dramatic moment, but through thousands of smaller decisions made around kitchen tables, in bank meetings, in accountants’ offices and at open homes.

The real risk isn’t simply that house prices have fallen – markets rise and fall all the time. The real risk is that New Zealanders stop believing that property is a safe, steady, long-term wealth-building vehicle. And if that belief breaks, the consequences will last far longer than the current downturn.

That is also why the government’s wider economic strategy, while welcome, cannot be enough on its own. Moves to sign new trade agreements, strengthen export markets and grow the productive economy should be applauded and supported. But they won’t make a blind bit of difference to the average John and Jane if their own household position keeps going backwards. Economic growth has to be felt around the kitchen table. If people don’t see their equity recovering, their net position improving, and their confidence returning, then all the trade deals in the world will feel distant and abstract. For most households, economic growth only becomes real when they feel more secure.

Against this harsh reality, popping the champagne corks over falling house prices is both tone-deaf and economically reckless – but it could be even worse. Waiting in the wings is a coalition of opposition parties that would kill the goose even more quickly if given the chance. That’s the stark position New Zealand now finds itself in: a government focused on house-price reduction without seeming to understand the damage being done, and an opposition that would turbo-charge the speed at which this decline became locked in.

A housing crash isn’t social justice. It’s the slow weakening of the household balance sheet of the nation.

The tragedy is that, in the name of helping people onto the property ladder, we may end up destroying the very ladder that has carried generations of New Zealanders into wealth, security and independence.

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