Don’t get me wrong, I think far more radical changes are needed to get the housing market on a sustainable footing than Labour’s new policy on restricting foreign buyers.
As long as we leave housing out of the tax system it’s going to be a cancer to the rest of the economy.
But that important point is not the subject of today’s blog.
What is frustrating about the debate over Labour’s latest policy is how banal the criticism has been.
Critics say we don’t know if foreigners are buying up large so therefore we don’t have a problem – we simply have a “solution in search of a problem” (See House policy ‘reeks of xenophobia’ – Stuff)
It’s crazy to say that because we don’t have data about the extent to which foreign buyers are snapping up New Zealand houses, we don’t have a problem.
We may or may not have a problem, we don’t know.
But we certainly have the risk of one.
If New Zealand’s housing market is getting swamped by foreign money, depending on the type of investor we are dealing with, that could be bad news for the economy.
Having an effective pre-emptive policy in place to reduce this risk is justifiable (but that’s not to say Labour’s particular policy is likely to be effective).
The alternative of doing nothing until we’re certain we have a problem is a classic example of bolting the gate once the horse has bolted.
If in fact foreign money isn’t flooding in to New Zealand housing, at worst the pre-emptive policy will be redundant and the costs involved in implementing it wasted – hardly an excessive price for reducing potentially serious economic risks.
Central to all of this are foreign speculators.
Not all foreign investment is born equal.
Foreign investment committed for the long term is generally good for an economy, but speculative investment is not.
Speculative investment is money that is invested into a sector for short term gains.
It tends to leave as quickly as it arrives.
Speculative investment by foreigners brings added risks to the economy because, not only does it tend to leave as quickly as it arrives, it can involve very large amounts of money relative to the size of the market it is invested in.
Large volatile flows of foreign money can cause mayhem to a small economy like New Zealand.
Foreign speculation in New Zealand’s housing market would be bad news because in New Zealand housing is the predominant way people save.
When house prices fall people feel poorer and cut back sharply on their spending – which has repercussions throughout the economy.
Speculators would push house prices higher than otherwise and when they leave house prices would fall more sharply too – so the boom – bust housing cycle and economic repercussions that followed would be more severe than they needed to be.
In other countries the effect of a fall in house prices on the economy would be cushioned by the other investments people hold, but that is less true in New Zealand.
If foreign speculators are playing a part in the Auckland housing market (and we don’t know if they are) we should want to know about it and the absence of local data is no excuse for not investigating the issue.
Nor is it an excuse for ignoring the risk.
Let’s take as a given that we don’t have any decent data about New Zealand house sales to foreign speculators.
Is there anything we can learn from overseas?
What we find is that the housing market in China has been running hot, prompting the government there to clamp down in 2010, curtailing speculation in Chinese housing by both Chinese nationals and foreigners.
The measures have only been partially successful.
It looks as if this speculative fever might have spread in a contagion effect to other markets Chinese investors are familiar with (for example, having considered them for education or emigration) and have confidence in.
Is it a coincidence that Canada, Australia and New Zealand are all on the education and migration radar in China and have all at various times over the past year or two had anecdotal reports of high levels of foreign buying in their housing markets?
Pressure in Australia led to the introduction of restrictions on foreign ownership in 2010 (permitted investment is limited to new builds with a few exceptions), something akin to what Labour is proposing now.
It’s possible that Labour hasn’t done the hard yards and has just delivered a sop to public concerns without much research.
It also seems unlikely that their policy will be able to slow speculative foreign investment in New Zealand housing if it is in fact occurring (there are ways around rules like this).
But none of that should distract from the fact that foreign speculation in New Zealand housing is a risk we should be alert to.
Labour’s policy announcement is a healthy reminder that we should be continually looking at external risks to the economy and designing pre-emptive policies to reduce those risks.
Sticking one’s head in the sand simply isn’t an option.