Ta-da. Image: The Spinoff via Getty
Ta-da. Image: The Spinoff via Getty

BusinessMarch 19, 2021

Bernard Hickey: A cacophony of magical thinking on housing

Ta-da. Image: The Spinoff via Getty
Ta-da. Image: The Spinoff via Getty

Politicians, regulators and most voters appear to believe they can solve the housing crisis in their lifetimes without too much disruption or pain. Along with his debut podcast for The Spinoff, Bernard Hickey explains how we got into this mess.


Hear Bernard talk housing with guests Jarrod Kerr, Nicola Willis and Helen O’Sullivan in the first episode of When the Facts Change, his new weekly podcast created by The Spinoff together with Kiwibank. Subscribe now via Apple PodcastsSpotify or your favourite podcast provider.


For over a decade, first home buyers have been offered reassurance and hope by the grownups running the place. Don’t worry, they’re told: “We’ve got this.” There are no silver bullets, but “we’re working on pulling all the different levers at the right time.”

Time and again they’ve been reassured and developed rational hopes. Dreams even. Surely this is not rocket science, they’ve thought. After all, we’re a sensible little democracy with a set of functional and sane leaders. Surely this is solvable.

Yet every time they have been wrong because those grownups, the regulators, the politicians and various great and good of civil society, have believed they can solve it without much pain or disruption. Without redistribution or a shift in the way we all live and work and play and pay taxes.

Every time, they thought it could be done within the rules of the game set in the early 1990s and frozen in place by MMP. That meant doing it within a framework of red lines, which are that government gets no larger than 30-35% of GDP, which means taxes and debt stay low, capital gains aren’t taxed, and expensive public infrastructure is paid for at the margin by new residents, rather than existing taxpayers and ratepayers at large. The other red line is that 1-2% population growth from net migration is acceptable and even desirable.

Yet everywhere the grownups turned, they failed to tame the housing unaffordability beast and ended up staring wistfully at these red lines, looking over their shoulders and failing even to try to jump over them.

A litany of failures, starting in 2003

House prices really started taking off in the early 2000s when the Reserve Bank under Alan Bollard cut interest rates a few times and the big four banks worked out they could make lots of easy and low-risk profits by ramping up mortgage lending. The BNZ’s decision to stop using mortgage brokers in 2003 and go direct with its ‘Unbeatable’ campaign in the spring of 2004 unleashed a mortgage price war that increased mortgage lending 53% in three years. House prices rose 26% over that time to a peak at the end of 2007, before falling 10% during the Global Financial Crisis.

Even then, politicians were aligning themselves with first home buyers and talking up the virtues of building a lot more houses to try to control house price inflation. Then-opposition leader John Key made quite a song and dance about it in his August 2007 speech to the Contractors Federation:

“Young people – the people we most want to prevent joining the great Kiwi brain-drain – are really struggling to get onto the property ladder,” Key said then.

“Home ownership rates are predicted to plummet to 60% within the next decade, and one of the biggest factors influencing home-ownership rates over the next 10 years will be the difficulty young buyers will have getting into their first home,” he said. He was right about the fall in home ownership rates. It happened and he didn’t stop it.

Key then said he wanted to unleash a massive increase in housing supply.

“National’s goal is to turbo-charge the supply of housing in New Zealand by confronting the fundamental constraints that have kept a lid on it,” he said.

He detailed how a National government would free up the supply of land by legislating to remove rural-urban boundaries and making it easier to build more apartments and townhouses closer to the centre of town. It would also ensure the infrastructure to support those extra houses was built, the RMA would be reformed, consenting would be streamlined and the Building Act would be fixed.

“We are facing a severe home affordability and ownership crisis,” Key said in conclusion to a speech delivered years before the launch of the iPad, the arrival of Instagram or a thing called Covid-19.

“The good news is that we can turn the situation around. National has a plan for doing this and we will be resolute in our commitment to the goal of ensuring more young Kiwis can aspire to buy their own home.”

How Key was dreamin’

Those were fine words and actually quite a good diagnosis of the problem. But was Key resolute? Did he do any of those things?

The short answer is no. The RMA was never reformed and Key must have suspected, at least, it would be impossible under MMP, which usually gives power to the marginal parties near the centre. Even now with a full parliamentary majority, Labour will struggle to get reform done before 2023, 16 years after Key’s speech.

Key never removed the rural-urban boundaries or built the infrastructure for a population that was growing very rapidly because of migration by the time he left office. There was a burst of spending on motorways during the GFC and again in Christchurch after the earthquakes, but that spending was soon strangled as finance minister Bill English squeezed capital and operational spending with his “zero” budgets to get net debt back down to 20% of GDP in the wake of the GFC.

National deputy leader and Bill English and leader John in August 2007 in Auckland, a year before National swept to power (Photo: Hannah Peters/Getty Images)

English achieved his goal of getting debt back to 20%, thanks to the budgetary GST and PAYE tax windfalls from migration and a lack of infrastructure spending to go with it. That fiscal restraint allowed interest rates to fall, which in turn boosted house price inflation and allowed National to deliver its tax cuts. Key and English briefly considered a capital gains tax or a land tax to rein in rental property investment, but only briefly. Key rejected his 2009 Tax Working Group’s recommendation of a tax on unimproved land, which at the suggested rate of 1% per annum would have raised $3.8b annually in tax and led to a one-off drop in land prices of 16.7%. Key rejected it on the grounds it would have been too much of a shock to the banking system.

The end result of lower interest rates, high net migration and a lack of central government investment in infrastructure was a near doubling in house prices. By its final three-year term, Key’s National government was beginning to thrash around in desperation. It first allowed the Reserve Bank to impose loan to value ratio controls in 2013, before the initially blunt tool hit first home buyers, and then it blocked the regulator’s attempt to bring in a debt-to-income (DTI) limit in that last term.

Key also led the creation of the HomeStart grant for first home buyers, under which KiwiSavers can get up to $10,000 from the government to supplement the deposit on a first home. Treasury is forecasting the scheme will cost the government almost $1b a year by 2021. That is $1b of extra “demand” going straight into house prices every year, leveraged with another $6-8b of mortgage debt.

Key’s core problem was the determination to get net debt down to 20% of GDP and the accompanying commitment to lower income taxes and no taxes on capital gains and wealth. He was also stuck with an entrenched view in Treasury and beyond that the extra cost of infrastructure should be funded by the buyers of new homes in the suburbs, via development contributions and the type of special levies trialed at the Milldale development north of Auckland and now used as the test case for the just-passed Infrastructure Funding and Financing Act. That loads up extra cost onto the cost of new houses, which effectively lift the cost of all housing because the marginal price sets the price across the market.

It didn’t use to be like this. Before the advent of the RMA, local goverment reforms and the Public Finance Act in 1989, those marginal infrastructure costs were smeared across ratepayers and taxpayers in general, and happened much quicker. Effectively, it meant public debt and taxes were higher to fund this “pay it forward” approach to infrastructure used by all the public over many generations. The 1989 reforms reset government to make future new residents, ratepayers and taxpayers personally fund the new infrastructure. Back then, the concern was that the government over-invested in infrastructure and did it badly, and that New Zealand would have an ageing and flat population that wouldn’t need much new infrastructure. It didn’t account for the extra one million often-young people who were encouraged to come here over the last 18 years.

Jacinda Ardern at the Labour Party campaign launch in August 2017. (Photo: Dave Rowland/Getty Images)

Ardern was dreamin’ too

By 2017, the housing crisis was at the centre of the election debate and Labour was campaigning for a third time with a capital gains tax policy, along with a big plan to build 100,000 new affordable ‘KiwiBuild’ homes for first home buyers. It almost got over the line, but then-opposition leader Jacinda Ardern cracked under the pressure of a close election and bailed out of the promise to tax capital gains beyond the family home with four days to go before the election. She said Labour would not launch the tax in its first term and would have its own Tax Working Group give advice on how to do it.

The appointment of anti-CGT veteran Michael Cullen to chair the group sealed its fate. He regularly opposed any moves to tax homes, saying it would make Labour unelectable in an era when the public was baying for smaller government and tax cuts. The Cullen review’s recommendations for ways to tax housing wealth were lukewarm and a land tax was ruled out by the fears of business, farming and iwi leaders on the group.

As everyone expected, Winston Peters opposed even the mere mention of the capital gains tax and, fatefully, Ardern promised never to bring one in during her political lifetime as she unveiled the government’s response to the Cullen report. It was her most important policy commitment of her time as PM, apart from her decision with cabinet to close the borders and lock down large parts of the economy to eliminate Covid-19.

Since then, Ardern has repeatedly said she wanted to continue to have “moderate inflation” in house prices because that’s what home owners expected and their home was their main financial asset. She referred to the 4% average rate of annual house price inflation under Labour before Covid-19 as a much better rate than the 20%-plus seen in the last nine months.

That effectively means there will never be a return to the affordability levels seen before 2003 when the national house price-to-income multiple was 4 and the Auckland multiple was 5. They are now 8 and 11 respectively, as this Reserve Bank chart to December 2020 last year shows.

To return to 2003 levels any time in the next decade would require house price deflation of 30-40%. House price inflation averaging 4% in tandem with the expected household income inflation of 5% would not see a return to those levels for another 50-100 years.

Dreamin’ on KiwiBuild

Meanwhile, Ardern and Labour got tied up in knots trying to deliver KiwiBuild. The major problem was of Labour’s own making, and the Greens were also at the scene of the crime. Not many people remember it now, but Labour and Greens jointly committed to a set of fiscal rules that prevented Labour from using the Crown’s balance sheet to pay for the necessary infrastructure and public transport needed to underwrite those 100,000 houses. They committed to reducing net debt to 20% of GDP within five years and running surpluses over the economic cycle, which meant they couldn’t borrow to fund KiwiBuild. They also committed to keeping government spending around 30% of GDP, which meant it could not increase taxes to pay for the infrastructure under KiwiBuild.

Without a capital gains tax or a wealth tax or the ability to borrow to build those houses and infrastructure, Labour’s policy was another act of magical thinking, not too dissimilar from Key’s. House prices have risen 27% on Ardern’s watch and both Treasury and the Reserve Bank are forecasting another 20-30% to come.


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The final bit of magic has appeared in the last six months with finance minister Grant Robertson’s attempt to calm the farm by getting the Reserve Bank to take the foot off the interest rate gas. He directed the central bank to consider housing affordability (without defining it) when setting interest rates and capital rules for banks. Both Robertson and Reserve Bank governor Adrian Orr pretended it meant something for interest rates, when it didn’t – because that would require a complete change of the Reserve Bank Act.

The “housing affordability remit” directive does have more meaning around capital rules. The Reserve Bank, which regulates the banks, is likely to limit interest-only loans to landlords and dream up some sort of debt-to-income multiple to discourage landlords from borrowing against the inflated equity in their properties to buy more homes. Unfortunately, the genie is out of the bottle on that one and the Reserve Bank’s firepower isn’t quite as drastic as some might think.

Interest-only lending represented just 10% of new lending in February. Australia’s bank regulator clamped down on interest-only lending to landlords with great effect four years ago because it then represented 40% of new lending. That lending was cut in half to 20% in the second half of 2017, effectively stopping house price inflation dead in Australia for a few years. Orr may have much more impact with a debt-to-income tool as well as interest-only controls, but it may be rejected by Labour on the same grounds as National in 2017: it would hit first home buyers too.

An artist’s impression of the current housing market (Image: Tina Tiller)

National’s new attempt to square the circle

The latest attempt to curry hope with voters is coming from both National in opposition and the Greens in government. New housing spokeswoman Nicola Willis is talking a good game on increasing the supply of new houses, using many of the same talking points as Key in 2007. She is taking a bit more action though, even in opposition, as the sponsor of a private members bill to make apartment buying more attractive by standardising and simplifying rules for body corporates.

But Willis also can’t help the magical thinking on house prices because she knows even talking about lower prices is considered a political death sentence. She has suggested an interesting statistical tweak though. She argues that new apartment and townhouse prices could be built cheaply to drag down average prices without having to see price falls of standalone, existing homes in the suburbs.

Just like magic.

However, the history of big supply surges of apartments in the likes of Sydney and Melbourne is they do lower rents and prices of all homes, with the effects rippling out in concentric circles from city centres.

The trouble is we’re unlikely to repeat the successes of Sydney and Melbourne. That would require massive financial support from the government for infrastructure funding and public transport, which neither National or Labour are committing to.

The reason? They would breach the accepted “red lines” of keeping net debt low and keeping the size of government around 30% of GDP.

A supply-driven solution to affordability would also require the government to keep building as prices started falling. The pressure from home owners to stop supplying would be intense. John Key himself argued in 2009 and 2010 that New Zealand didn’t have a housing supply problem and he was reluctant to push prices down with extra supply. Unfortunately, that meant a whole generation of house builders migrated to Australia.

Hope is a finite thing. After a while, the hopes are dashed one too many times. We’ll see whether there’s another generation of voters who have forgotten or don’t know about the last bouts of hope that were dashed in 2007 and 2017.

This latest crop of hopeful politicians need to revisit their “red lines” and come back.

That means the Greens too, who proposed a range of tax changes and housebuilding proposals that look great in theory, but are useless in practice because the Greens have no leverage. Without the ability to ever choose National, Labour can afford to ignore the Greens.

A non-magical sign of Green commitment would be an announcement they could vote in a National government. That’s definitely in the magical thinking category.


Hear Bernard talk housing with guests Jarrod Kerr, Nicola Willis and Helen O’Sullivan in the first episode of When the Facts Change, his new weekly podcast created by The Spinoff together with Kiwibank. Subscribe now via Apple PodcastsSpotify or your favourite podcast provider.

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