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BusinessJuly 9, 2021

Bernard Hickey: The $1 trillion housing wealth crime of the century

Image: Tina Tiller
Image: Tina Tiller

Bernard Hickey reveals the scale and method of an intergenerational wealth transfer worth $1 trillion over 30 years. He shows how it could be atoned for and reversed, if only to ensure the culprits can enjoy watching their grandchildren grow up healthy, warm and in person.

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It’s said that a picture is worth a thousand words. In the worlds of actuaries, accountants and intergenerational wealth analysts, that picture is a balance sheet, and it’s actually worth so much more.

It’s a snapshot of the collective assets, liabilities and equity held or owed by a organisation, and is both the compilation of the successes and failures of the past, and sets the template for the future. You should be able to tell from a balance sheet just how skilful and ambitious or slothful and selfish the stewards of the organisation have been, and what needs to change if it’s the latter.

Every month our government publishes the “Crown accounts”, which detail how the profits and losses and borrowing and investment done in that month and over the last year have changed that balance sheet. In theory, this should be a snapshot showing whether our politicians and public servants have done a good job shepherding our resources to make us collectively better off, now and in the future. The accounts appear rosy-cheeked and shiny at the moment. The Crown’s core revenue was $94b in the 11 months to the end of May and core spending was $97.5b. The deficit of $3.6b was less than half that forecast in budget just seven weeks ago. Net debt of $101b is $6b less than forecast in the budget and the government’s net worth, $125b, is nearly $9b better than expected. Surely those are good things? It depends.

Balance sheets can be brutal and enlightening if they’re calculated correctly. They can also obscure the truth. For example, a decision to borrow $1b to pay for a massive fireworks display would show up as $1b of debt and a pile of burnt-out tubes and pots. That would show as a $1b reduction in net worth and the collective enjoyment of the night would rightly be ignored as an ephemeral series of stunned retinas and passing cheers that disappeared into the night.

But if that $1b was spent on 2,000 houses, that would register as $1b extra in debt and assets worth $1b. Over decades, that asset would also produce skilled young people who would add to ongoing tax revenues and reduce costs from hospitals and prisons. If the actuary monitoring that balance sheet was doing a good job, that would be reflected in a reduction in future welfare liabilities, which are a collective measure of future embedded spending. It would be a gift of investment in the past that kept on giving through the years. In 50 years’ time, the debt would be repaid faster through higher tax revenues and lower ongoing spending. The two balance sheets 50 years apart would show one with lower welfare liabilities, higher debt, higher assets and higher net worth today, and one 50 years into the future with lower debt and much, much higher net worth.

But there is a way a balance sheet can appear rosy, but disguise an effective pulling forward of wealth from the future to the present, particularly if it does not properly calculate the future liabilities that must be paid, and may be larger because of decisions taken today and in the past. For example, a government could choose not to borrow and not to invest in repairing and improving infrastructure. If the future costs of crumbling infrastructure, stressed and sick kids and the resulting lower productivity are not included in the embedded liabilities, then the balance sheet could look good. Debt would be $1b lower than expected and net worth would be $1b higher than expected.

Over time, if voters, politicians and public servants believed these repeated snapshots, they could convince themselves to lower taxes to, in theory, improve the position of today’s taxpayers. But they would actually be pulling forward tomorrow’s wealth and spending it today, or storing it up as equity in their own balance sheets. This is what has happened in New Zealand for 30 years. Our government has low debt, low taxes (especially on wealth, land and capital) and has underinvested in infrastructure, while the bulk of the voters working in the last 30 years have arranged their affairs and voted for policies that have amassed massive and untaxed personal wealth for themselves, mostly in the form of their house values, now worth $1.5t.

‘I want to spend my money, and the future’s money, now’

Back in the late 1980s and early 1990s, a generation of voters, politicians and public servants convinced themselves that Sir Robert Muldoon’s governments of the 1970s and 1980s had taxed voters too highly, invested too much in infrastructure, and were in effect “robbing” the generations just starting their careers in order to either “waste” the money on pointless and vainglorious “Think Big” projects, or push off consumption into the future for generations as yet unborn. Neither choice for their “hard-earned” taxpayers’ money seemed fair to voters of the day, especially when they believed New Zealand’s population was unlikely to grow much and would age.

So that generation of politicians voted in by boomers decided to cut taxes, impose user-pays fees on university students and stop investing in public infrastructure such as state housing, public transport and public health. However, their “war” on high taxes to shift their wealth to others now and others in the future did not extend to themselves. They fought to ensure their own future state-funded benefits from New Zealand Superannuation would be protected by forcing their politicians never to touch the age of eligibility of 65 and to link their pensions to average wages, rather than prices, as the beneficiaries of the day were forced to accept. This generation also embedded into law through the Public Finance Act that governments, both central and local, must consistently drive down public debt to keep interest rates low and enable more income tax cuts. The creation of the RMA in 1991 acted as a perfect weapon to fight back attempts to build new infrastructure and to keep taxes low. That generation of voters, who are still largely in charge, also voted to remove land taxes and never to tax capital gains, especially on land. They beat down a capital gains tax over four successive elections to the point now where it’s a smoking and radioactive ruin only to be visited, Chernobyl-style, by tax wonks and political history tourists.

This self generation then turned a blind eye when businesses and international educators successfully pleaded for looser rules on migrant workers that pumped up the population without having invested in education to cope with all the extra people. It allowed a lifestyle of cheap Ubers and Uber Eats, and continued low wages that kept interest rates low.

It worked a treat. The combination of limited public infrastructure investment, no capital gains tax, a relaxation of lending rules, an apparently accidental surge in population, no carbon taxes, and a global collapse in interest rates combined into a perfect machine for sucking wealth forward and pushing forward costs. It was such an effective collation of events and design that even those who benefited are stunned with the success.

Accidentally on purpose, the generations that owned or bought property from the mid-1980s until the early 2000s were able to profit enormously by effectively pulling forward the wealth of the state at large into much larger personal wealth. It sounds like the most dastardly plan perfectly executed. I would like to picture cat-stroking boomers and boomer-adjacents (like me) leaning back in their velour lazyboy armchairs stroking their cats and calling their mortgage brokers and property agents to buy their 13th rental property. But the truth is more prosaic. They were convinced the government was the problem, not the solution, and that they would always be a better steward of their money than some “bureaucrat in Wellington”.

The future seemed like another planet, rather than the place their kids and grandkids might grow up. That generation inherited affordable housing, cheap electricity and free university educations, built up and paid for through the sacrifices of high-tax-paying parents through the 1940s, 1950s and 1960s. Their parents had paid it forward, but they decided instead to both spend it today and pull forward wealth from the future. It seemed a costless exercise because Treasury and IRD didn’t properly calculate the future liabilities building quietly in the background of our societal balance sheet. The benefit cuts, the massive increase in electricity prices and the underinvestment in infrastructure are powering rising prison costs, rising preventable disease costs, falling productivity rates and rising mental health costs. Even with the recent talk of “livings standards frameworks” and “wellbeing budgets”, none of it was and is being priced into the societal liabilities side of the ledger, but it is very real.

The numbers for the wealth pulled forward are extraordinary and it’s clear in the government’s own balance sheet and in household balance sheets. Not even the “designers” can comprehend the scale of the success of 30 years of intergenerational wealth transfer. House values quintupled to $1.5t and household net equity rose by more than $1t.

Government debt and the government’s size fell sharply in the early 1990s and is now consistently much lower than our peers (see chart below). This is painted as a good thing, but actually just means the nation didn’t invest in its infrastructure and now has massively unpriced liabilities in front of it, especially in the form of health, lost productivity opportunity costs, welfare and investment catch-up spending that cannot be avoided in future. That’s before the likely enormous spending on carbon credits is taken into account if the government does not take substantial action to bend our trajectory of transport and agricultural climate emissions downwards.

I went looking for evidence the Treasury is beginning to price in these liabilities and propose ways to start pushing some of today’s wealth back towards the future to reinvest in future generations in its long-term fiscal statement, which is supposed to address these intergenerational issues once every four years.

All I found was another iteration of the same message from the last 30 years. Treasury’s main prescriptions were to reduce health spending and reduce entitlements for pensioners, rather than to tax wealth now and invest more heavily in infrastructure.

That’s why in this week’s When the Facts Change podcast I talked to two apartment and townhouse developers about the problems they face trying to build affordable housing because today’s home buyers are forced to pay for new infrastructure, rather than taxpayers at large. Back in the 1940s, 1950s and 1960s, taxpayers at large paid high taxes to ensure those investment costs were smeared over the entire society to ensure affordable housing for the boomers who had just been born.

Now, those costs are born through development contributions that massively increase the marginal costs for new house buyers today, and which in turn increase the cost of all existing housing. All in the process of reducing government investment and taxes.

The solution, of course, is to start taxing that unearned wealth and reinvesting it infrastructure that future generations will use, including their children and grandchildren, and the kids of those parents not lucky enough to own property before it became truly unaffordable over the last decade.

Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

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