NZ housing

Nigel Latta Only Tells Half the Story on the Economy

Geoff SimmonsEconomics31 Comments

Last night Nigel Latta tackled the long-standing issue of the struggling New Zealand economy. For decades the country has been focused on working harder and producing more stuff rather than working smarter and making better stuff.

We’ve been a big fan of Latta in the past, particularly his documentaries on sugar and inequality. Last night’s documentary on the economy got a lot right, but when it came to the issue of poor investment he overlooked the elephant in the room; our obsession with housing. We need to invest in productive businesses, we simply can’t get rich by buying and selling houses off each other.

What Latta got right

The show covered all the right things. Latta was ably assisted by Shamubeel Eaqub who pointed out that our problems of inequality and poor economic performance are linked because we fail to sufficiently invest in our young people. Making sure all our kids grow up healthy and educated is an investment that benefits all society in the long run. The alternative is raising kids that fail to achieve their potential and end up as a burden on the state.

Latta was also correct in pointing out that our economy is anemic, suffering from a lack of investment. Hence we tend to focus on producing a greater quantity of commodities rather than adding value or producing more knowledge intensive goods. This is a problem that successive governments have pondered and fiddled with, but like Latta none have been brave enough to face up to the elephant in the room. The fact is that we can’t invest in business because currently most of our money goes into housing.

Most of our money is in housing

More than half of our national wealth is tied up in housing, which is relatively high internationally. And of course this investment in housing has largely been funded by debt. As a result our privately held net foreign debt is also relatively high, which opens our economy to risks if international lenders decide they don’t want to lend their money to New Zealand any more.

All this money tied up in housing can’t be invested in productive businesses. Our businesses are starved of the capital they need to invest, innovate and ultimately make the expensive step into overseas markets. That is why so many of our promising businesses are bought out by foreign multinationals when they are ready to take on the world. It is quite simply a lot easier to expand when you have ready access to existing overseas networks for raising finance and distributing products.

Housing obsession has a good reason – tax breaks

Of course our obsession with investing in housing and land is not a recent phenomenon – it has been decades in the making and exists for a reason. In other words the obsession is rational, and exists because of the tax benefits afforded to the owners of housing and land. New Zealand has some of the lowest rates of taxation of property (and indeed wealth generally) in the world, which explains why we have so much of our wealth tied up in these assets compared to the others.

Dealing with the supply side as the Government is proposing will only solve half of our housing problem. By international standards our housing stock has been unaffordable for decades now; long before the current crisis in Queenstown and Auckland took hold. Housing is now a key driver of inequality. We simply have to quell the demand for housing as an investment, rather than shelter. Housing should be viewed as a key part of our nation’s infrastructure, rather than a get rich quick scheme.

A Capital Gains Tax won’t solve the problem – this policy is used widely overseas, and causes large distortions with limited effect on housing speculation. That is because capital gain is but one of the tax benefits of investing in housing and land; imputed rental and write offs are other drivers. The Morgan Foundation has suggested a Comprehensive Capital Income Tax as a way of putting housing on a level playing field with other investments. That would ensure that businesses start getting a fair go when it comes to finance.

Nigel Latta Only Tells Half the Story on the Economy was last modified: September 28th, 2016 by Geoff Simmons
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Geoff Simmons

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

  • jasonkemp

    Bravo – thanks for making the connection between house price inflation and investment in productive business. It seems obvious but clearly many don’t make the connection. Also all the nonsense about living in an low inflation economy. It is broadly true but none of those indicators include housing costs and since that is where the real inflation is we all have a huge structural problem.

  • Steven Seagull

    Good commentary Gareth. With the strong voting power of those heavily invested in the property charade a political solution seems very unlikely to ever eventuate. I am reminded of the old adage that is takes three generations to escape poverty. This reminds us that lasting change toward a more equitable society will only come through a change in mindset coupled with a generational commitment to change. This is something New Zealand has done before, and very well, and it is something New Zealand can do again. As you say it is an investment that ultimately benefits all,

  • Kellar Taylor

    but if kiwis dont own the property then who will? does it work like that? dont we need investment in housing to grow the housing stock?

    • Alan Gordon

      Yes Kiwis will still invest in housing, but with Gareth’s proposal investors wont want to pay such ridiculous prices for properties as the asset will be priced on its cash-flow rather than potential capital gain as is currently the case.

    • Petercvs

      No property investor builds new housing for low income renters. Rentails for low income families is either state provided or comes from a fixed supply of older homes. Which is why the accommodation subsidy just causes rent rises and in the long term only benefits landlords.

  • Shane Davies

    So if we dont invest in housing.. what should people invest in that dont have millions of dollars?

    • Steve Withers

      Exactly. There isn’t much.

    • dmere

      A diversified portfolio of share investments in reputable companies, with a long term investment strategy.
      If DIY share investment is not suitable for you then work with a reputable financial advisor and broker.
      Or pump up your KiwiSaver investment if you won’t be needing the money before retirement.

  • This argument is just lacking intellectual depth. An ‘obsession with housing’. What is that per se? Simply it alludes to a lot of apprehensive people amidst a crisis over yields. Unless you get to the crux of issues, its a waste of breadth. So what’s the cause of low yields/interest rates? Why are they justified? This is how these issues need to be discussed. Causation; not tragic descriptive narratives.

    • jh

      Limits to growth?

      • does it need a limit? The global population will top out by 2050. The Western population is negative. i.e. Germany population falls 2mil a year before immigration, Japan 3mil a year. Now in ‘cartholic’ Philippines, an emerging market, it was over 2% a decade ago, now its 1.87% birth rate, so in 3 decades, you will be wondering what all the worry was about. Millennials are less concerned with consumption. Lock them in a room for a day with an Ipad, let them out for a walk, and they’ll be happy.

        • jh

          does it need a limit?

          ….
          That’s one for Geoff Simmons. I’m hopeful people will rediscover lost values. Was Peter jackson’s Lord of The Rings any better than the BBC’s radio version?

  • Steve Withers

    Since we tore down our tariff walls in the late 80s it hasn’t made sense to actually make anything here if it can also be made in China, India, Mexico, Thailand or Bangladesh….etc…etc. Investment in tech start-ups has typically been a get-rich-quick strategy for a lucky few in the right place at the right time with access to resources. They very quickly sell these businesses off overseas and the profits flow there ever after.

    Investing in NZ? Farms or houses or tourism. Farms cost too much. Houses NOW cost too much….and tourism is risky.

    So it’s houses. Changing the tax policies won’t change this situation much…it will just reduce the returns. I can’t see much changing, really, unless and until we re-establish some sort of tariff regime to allow manufacturing and engineering to resume locally….and from there we will see local innovation.

    All we do today is look overseas for the latest stuff and import it.

    So…it’s houses. Tax changes won’t change that.

    • David Washer

      Try the sharemarket. I know this may require a leap of faith, but so long as our investment is in non productive housing, our productive businesses will be bought up by overseas interests, just at the moment they become profitable. New Zealanders will then miss out on the benefits they generate, while we continue to trade houses amongst ourselves, at ever increasing prices. This creates nothing and simply doesn’t make sense.
      Regarding production within NZ, watch the Latta programme; he showed companies that were manufacturing their products here, and doing very well. They were also paying their workforce a living wage, and reaping the benefits of that, such as employee loyalty.

    • Peter Rankin

      can’t see anything to invest in? We do have a stock market, which has been doing very well, and plenty of good investment managers to do a professional job of managing your funds if you don’t like the time and risk it takes to do it yourself. Gareth Morgan Investments is one.

      • Steve Withers

        I’ve found when I invest in NZ businesses, I’m a small shareholder. When they sell the business off overseas my shares are stripped away and they send me a cheque. Been there. Sure, I made some money, but that doesn’t in any way address issues around loss of economic sovereignty and the obvious consequences for New Zealand in the longer term. We’re there now…. And still losing ground.

    • Peter

      Actually it will, farms aren’t run to make profit, they’re run to make a large capital gain because this isn’t taxed. Tourism can be a big sustainable industry as long as its marketed properly and isn’t just focused on getting low spend, bums-on-seat tourists (i.e. the lowest common denominator). There is a lot of smart stuff in NZ and smart and high tech businesses but we need our own money, not overseas investors, to develop them. Sure some businesses will fail, maybe the majority, but spread over all of them some will be spectacular and a lot just good. Look at successful companies, their share prices are many thousands more percent than when they started.

  • ross b

    “Our businesses are starved of the capital they need to invest, innovate and ultimately make the expensive step into overseas markets. ”

    This is not the issue. Nor is education or tax going to change anything. It is myopic to think from NZ’s viewpoint only – like Nigel Latta this causes you to miss the core problem … which is systemic and doesn’t recognise borders. The source of EVERYONE’s wealth is energy surplus. The world is now seeing a decreasing available energy surplus, so has reverted to a financial Ponzi scheme to maintain the illusion of surplus. See Gail Tverberg at ourfiniteworld.

    “The economy is a dissipative structure & depends on an INCREASING supply of energy. A substantial decline in energy supply will result in a collapse of the economy.Such collapses tend to happen when energy resources per capita fall. Economies tend to collapse because the individuals at the bottom of the hierarchy become increasingly unable to afford the output of the economy. As a result, commodity prices fall below the cost of production. Oil and other energy supplies can be expected to fall because of too low energy prices; not because of too high energy prices.”

    In short, the available pie is shrinking, Energy cos need increasing debt to refine harder to get to, lower quality energy supplies …

    • Jim Sargent

      I don’t agree. Have a look around, and you will see companies taking our raw products and adding value – Milk to baby formula and Ice Cream – financed by Chinese; pine trees to MDF and LVL – financed by Japanese. They put up the money, and take the profits. The opportunities are there, we just don’t have the money; its all in housing.

      • ross b

        You’re thinking myopically about NZ only – if the Chinese need to pay for this extra value they need to “add value” to a product they sell … the system is closed. Alternatively, someone can increase debt (ie the money supply) to put the extra value on the credit card… which effectively devalues your original money token anyway, and locks in future interest payments. These require ever increasing energy consumption to keep the wheel spinning. The opportunities you talk about only exist if you can keep energy consumption increasing indefinitely.

        The proof that the (energy) surplus in the world economy is falling lies in the 30-40 year trend of ever lower interest rates just to cope with the burden of ever increasing debt loads. But we are now closing on zero.

        • Madeleine Alexei

          You’re thinking myopically, only about fossil fuel energy. Fossil energy is on the way out, but renewables are on the way in, and that’s an area that NZ has some expertise in. Solar, wind, hydro, even new sources of marine energy are the way of the future. Most of the world’s continents have an excess of solar energy somewhere. NZ has an excess of marine energy, as well as geothermal, hydro and wind. Get with it!

  • Neville Du Fall

    Compared to investing in business, housing is a much safer option. Statistically way too many new businesses fail. This business failure needs to be addressed before mum and dad investor will be drawn away from investing in property.

  • John Pearce

    I suggest that the other factor in house prices is Aussie Banks lending capital into the housing market much faster than houses are being built. So the market balance of money and houses is out of whack, and competing bidders with access to cheap money are bidding up houses. Sadly, Governments lack the wisdom or courage to regulate these Bank behavours and balance house supply with money supply.

  • MCT

    The foundations for high productivity are sound decisions based on an honest assessment of the situation. New Zealanders are not critical thinkers and this lack of critical-analysis injunction with a total lack of accountability, especially for senior decision makers, results in a nation that fails to learn from prior mistakes and spends a significant amount of resources trying to rectify avoidable problems.
    The polities of the nation result in either a farmer-led government represented by National with many of its supports having never obtained a tertiary education or academics represented by Labour/Greens, who have never experienced the real world of business.
    This political dichotomy defines the duplicity of the New Zealand culture and explains why a significant amount of the country’s capital is either wasted, for example leaky homes, Pike River Coal/Solid Energy, South Canterbury Finance or misallocated, for example over priced housing

  • mark

    I took this quote from the Big Short movie. It seemed to some up the 2000s for me. “wages are flat but house prices are soaring so houses are debts not assets”.

    We seem to be in a similar place the US was in 07 before the GFC. Although I think they had a safety valve in that people just walked away from houses. The market collapsed along with the banks that loaned the money. Capitalism collapsed just like Marx predicted. He didnt predict a socialist bail out by the business bought politicians.

    Here once houses stop being an investment vehicle people will owe so much that it is going to stagnate our economy long term as it is harder to walk away from our banks. I think a collapse would actually be good for our economy long term rather than long term indebtedness that is strangling western economies world wide.

    If people cant afford to buy Auckland houses when we have historic low interest rates how will they be affordable when they double and how will people who have a huge mortgage at 4% pay it at 8% without crippling our economy.

    However no politician is going to kill this housing boom as its the big driver of this economy. There is no political gain from any capital tax as this is the way most voters have made their wealth.

    I know a capital gains tax is not liked ‘here’ but surely it could be way to dissuade investment in housing as investment. We have to have a first step. For me its unfortunate Labour have dropped this policy.

    Its going to be interesting when interest rates bottom out and I feel they have now regardless of more OCR cuts. I think our housing market has peaked and were going to see a correction. How big that will be will decide the next election.

  • jh

    What about Latta’s program “the New New Zealand”

    https://croakingcassandra.com/2016/09/12/hard-stuff-or-mbie-puff-piece/

  • KevinMcCready

    Does the Morgan Foundation believe in a minimum wage? Will it support a Jobs Guarantee Scheme? http://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee.cfm

  • jh

    Geoff, I asked you about this before:

    The distinctive feature of the New Zealand economy is that land is an important input into the productive process. This is obvious with the agricultural,fishing and forestry sectors but it also applies to international tourism. In a simple model of the New Zealand economy where the supply of land is fixed, and New Zealand’s isolation means it is not a ‘natural’ location for the production of a broad range of internationally traded goods and services, then an increase in the labour supply through large scale immigration will reduce the
    marginal product of labour. As a result:

    Real wages will fall

    Owners of land will benefit

    There will be an outflow of ‘native’ labour in search of higher wages in Australia

    The economy will be bigger, but average incomes will fall

    Resources will flow into low value service production.

    This conventional model of the impact of an increase in labour supply is obviously a simplification of a complex reality, but we think that the fixed factor effect is important enough to be considered in any discussion or analysis of the impact of immigration in New Zealand. The official analysis, however, almost entirely omits it. There is a tendency to follow the international literature, where omitting the impact of fixed factors of production is a simplification that doesn’t matter very much, without thinking at all about how New Zealand could be different.

    The model seems to be consistent with some of the observed facts:

    http://www.tailrisk.co.nz/documents/TheSuperdiversityMyth.pdf
    You said (from memory) real wages are increasing but also Australia’s experience doesn’t bear this model out?

  • jh

    The issues facing Queenstown Lakes District are certainly difficult, but
    they are not that different to those we face in the rest of the
    country. However, we have to get them right there, otherwise we risk
    exposing our 100% Pure brand. Solving these problems will require some
    innovative thinking, but not everything is within the hands of the local
    people. The Government will either have to step in, or grant the local
    authorities more powers over the issues they face.
    ……….
    Comments are now closed. A tour bus driver who left a long time back and now drives a milk tanker for Fonterra earns about $89,000pa having 3 days on and 3 day off and 2 months off in the winter . Had he stayed in tourism he would earn half that for much worse conditions. Is there a lesson there? I just heard Growth – Booster professor Paul Spoonley calling Queenstown a success story with no empathy for the low waged.

  • jh

    Anyone been to Queenstown lately?

    http://imgbox.com/hPbuHrAE

  • Maryrose Bell

    I am an old girl,since I was old enough have been passionate about this country. many years passed and an still bitching away,about Value Added”..
    election year,tone has changed ,….Hopefully the next influx of Well meaning ,sincere MPs,will work hard/ make some plans to alleviate the bad aspects of us,and we can look ahead with confidence…… Latta ,speaks with a Philosophical
    Bent,something that makes sense….or point of difference,maybe .