Fallacies promoting housing collapse - Mark Rais

If you read the top headlines or listen to New Zealand political debates, the housing boom and immigration are key concerns. What many seem to be ignoring is the very serious looming decline in the global economy and major decline in housing growth.

Toronto, Canada is currently undergoing a major housing shift. This is partially a result of issues stemming from Home Capital Group’s emergency liquidity arrangement for a C$2 billion ($2.11 billion NZD) credit line. Similarly, overall Australia has enjoyed particularly positive growth but is now steadily seeing housing price drops, potentially the canary in the mine signalling a major shift in their economic outlook. New Zealand lending is tightly interwoven with Australian monetary events.

Here in New Zealand we are approaching a similar macro-economic climate where the housing boom is over but rhetoric is ignoring this and encouraging a potential overall destabilisation.

There are three fallacies regarding the housing market that are potentially fostering a collapse.

These fallacies seem to ignore the economic reality that any dramatic shifts in New Zealand housing will precipitate similar shifts in the overall economy.

Fallacy 1: When property prices fall significantly, this improves opportunities for young buyers and new home ownership.

Macro-economic catalysts that drive property prices down also significantly impact liquidity and job markets as well as wages and wealth distribution. These will directly reduce the ability for new home owners to obtain lending and have stability or income necessary to purchase a first home.

Moreover, once property prices drop they also impact other economic growth factors, most of which have a concentrated impact on young home buyers and lower income households.

As a result major housing adjustments reduce the ability of new home owners to purchase property, even with prevalent lower prices.

The only effaceable solution to improve the circumstances of new home buyers is by applying proper legislation that does not kill the housing market but incentivises the building of low cost housing. Other methodologies fail when applied in the macro-economic climates of today mainly because they have flow-on negative impacts.

Fallacy 2: Major housing declines will improve wealth distribution.

This theory has not substantiated in any of the recent housing declines neither in North America nor in Australia.

The idea that major drops in housing improve conditions beneficial for broader economic growth is a seriously flawed concept.

It does not account for how substantially investment in housing is correlated with the levels of monetary liquidity. Liquidity and overall economic stability play a major factor in whether investors will invest in property and also how tightly they hold on to their property investments.

Most investors do not choose housing because it is the best growth driver, even in boom environments. Most use property as a portion of their portfolio diversification.

This is a very important point, since when bust cycles occur, property investors tend to hold their investments and not sell them. The idea that housing stocks improve, rents decline and lower income earners have better opportunity does not precipitate from major housing market declines.

When housing market collapses, many investors simply take a long term approach and do not sell their investments but instead hold them rigidly, creating a flow-on impact where fewer houses are available and rents rise dramatically. New home buyers and lower income households do not see improvements.

Even more serious instability is created when BOTH property investments fall and substantial sudden jumps in interest rates occur. In such worst-case events, entire western economies have collapsed.

Therefore it is vital to discourage the fallacy that significant housing declines mean improvements to the overall wealth distribution.

The real solution to wealth distribution must be stability focused. Stabilisers such as minor regular interest rate shifts, combined with tax incentives for improvements in business growth and development of infrastructure, and legislation that promotes investments in other areas should be applied.

Pressuring an already declining market downward in any major way can induce a sudden and substantial collapse, instead of the intended desire to improve wealth distribution.

Fallacy 3: Investors shift wealth from housing to other investment vehicles when there are major declines in the property market.

Numerous economic voices in New Zealand reiterate the fallacy that if there were fewer investors in the housing market this would result in growth in other investments such as securities. As a result they openly encourage major declines in the housing market.

The error lies in incorrectly timing such forcible measures to move to alternative markets when the housing boom is already slacking.

It is a theory that is flawed because it does not take into account that catalysts which drive housing prices substantially downward will also drive other investment vehicles such as corporate stocks downward.

Any legislation that creates substantial disincentives for property investment will result in reduced housing stock, reduced rental stock, and jumps in rent prices. This is already seen as tightening rental investment policies are implemented. Property investment is vital to a functional rental market.

Therefore, this week’s IMF call for new taxes on property to encourage a move to other capital markets is consistent with a regional economic viewpoint. It needs to be understood in the context of moderation, so as not to destroy the rental market or cause a housing collapse.

Discouraging property investment through legislation and policies is always quite complex and volatile. It could have a substantive negative long term impact on the overall economy.

Housing is directly linked to other major economic sectors such as Banking, Construction and Real-Estate. Any forcible or sudden declines in housing will fundamentally impact key elements such as employment in these areas.

Forcibly encouraging reduction in investment in housing market will always have flow-on impact to many other industries. The collapse of house prices whether by intervention or by economic climate changes rarely results in positive outcomes for alternative investment vehicles.

Conclusion

There is a prevalent attitude that housing should be cheaper and moreover that investors are a leading cause for housing booms. However, this mentality perpetuates volatile boom and bust cycles.

Instead, I submit that any macro-economic solution for New Zealand should be firmly grounded in the goal of stability and an understanding of the global economic climate.

Only with moderate growth cycles and modest declines in market conditions influenced by reasonable legislation and investment incentives, can New Zealand weather the pending storm. The storm which appears to be looming as a major global debt crisis and a global shift in housing prices and stock.

Anyone in New Zealand now recommending for strong reactionary methods to resolve the boom cycle will be partially responsible for encouraging a potential economic collapse and major failures across multiple sectors.

Other Scoop articles by Mark Rais:
• The End of the Housing Boom
• Clash of Super Powers in an Age of Global Conflict
• Op Article: Oil Rules the World
• Op Article: War for the Hearts & Minds of Our Children

Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and has written numerous articles on the influence of technology and society.

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