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Having and eating your housing cake

Published in Insights, The New Zealand Initiative’s newsletter, 30 November 2018
If house prices go up, it is a scandal. If house prices go down, it is a disaster.

That must be the logic by which the media reports on the ups and downs of the property market.

After years of covering the housing crisis, in which rising prices locked a generation of young Kiwis out of the market, the media have just discovered an equal and opposite crisis. This time it is caused by the threat of falling house prices.

In a story on Monday, the New Zealand Herald discussed recent declines in Australian property prices and what they might mean for our own market. “The good news,” the Herald told its readers, was that “there are a few variables which suggest the flow through might be tempered this time.”

The good news? The Herald had clearly forgotten about previously alerting us to people sleeping in cars, families living in overcrowded flats, and key workers enduring ridiculous commutes. All caused by high house prices.

And now the prospects of a moderate house price correction should have us worried?

Maybe it is unfair to blame the Herald for its confused reporting. The country itself does not know what it wants.

In opinion polls about the biggest political issues for the country, the affordability of housing usually comes up on top. Bringing housing back within the reach of ordinary New Zealanders was a key promise in last year’s election.

To make housing more affordable is behind the Government’s Kiwibuild policy. It is the reason the Government introduced new ways of financing residential infrastructure. It is why a new Housing and Urban Development Authority has just been established.

So why is it that the same voters who demanded political action on the housing crisis are now spooked by the first signs of a housing market correction?

It is a mixture of loss aversion and the endowment effect: Even if your house has gone up 50 percent in value over the past five years, you would not want to part with a single dollar of its current value. That is because people always value more strongly the things they own.

From a psychological perspective, the only thing worse than rising house prices are falling house prices.

From an economic perspective, what we really want is to unfetter our housing markets on the supply side.

Even if it means falling prices.

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