An open letter to Mike Hosking on housing

Published in the New Zealand Herald (Auckland), 25 November 2020

The Mike Hosking Breakfast, 26 November 2020

Dear Mike,

In a country where people often hold back opinions for fear of offending others, your breakfast show is a refreshing exception.

I am a fan of your clarity and boldness (though, sadly, we still haven’t met). Does this buy me enough licence to criticise one of your positions? I think that’s how it works in New Zealand.

When you talk about housing, you often make it sound like price increases are a good thing.

Last week you even went a step further, saying: “The part of the housing market I have never understood though is why politicians believe they can somehow control it.”

Normally I would be with you on a statement like this. Politicians are always finetuning and second-guessing markets. Usually such control fantasies end in disaster. That’s what happened to Muldoon’s “Think Big” projects, New York’s rent controls or India’s import substitution policies. The moment politicians claim they can control something, run a mile.

But that’s not what you meant. You said when Labour was in opposition, it promised to rein in property prices “as though any government has any such trick in its bag.”

That is looking at housing the wrong way.

Bad government policies are the main reason housing is unaffordable. Said differently, if government wants to make housing more affordable, it could do so simply by getting out of the way. There is no law of nature that says house prices must go up and up.

To prove my point, I just got real house price data from the Bank for International Settlements (BIS). The BIS is the “central bank of central banks” and it collects inflation-adjusted house price data.

The good thing about inflation-adjustment is that it removes the noise of “normal” inflation from house prices. That makes cross-country house price changes more comparable.

Just look at the graph. The BIS data from 1970 to the first quarter of 2020 shows Kiwis and Brits are now paying about five times as much for a house. Compare this with Australia where houses are only four times as expensive as in 1970, while American and Swiss house prices roughly doubled.

Yet Germans can still buy a house for the same 1970 price (inflation-adjusted). Why the difference? It’s not like Germany is an economic basket case. At least, not more so than New Zealand.

If, half a century ago, you had asked anyone to bet which country would lose its housing affordability, who would have picked New Zealand? No-one.

New Zealand had everything going for it. A small population thinly spread over a couple of large islands – a homeowners’ dream. Ours could have been a property-owning democracy where people earning ordinary incomes could raise families on affordable quarter-acre blocks.

Instead, densely populated Germany kept its property prices stable, while New Zealand kicked out the bottom rungs of its property ladder and created one of the world’s worst housing crises.

Milton Friedman once quipped if the government was in charge of the Sahara Desert, in five years there’d be a shortage of sand. Well, that is roughly what happened to New Zealand’s residential property as successive governments conjured up ingenious ways to block city growth and frustrate new house building.

Councils are struggling to recoup the infrastructure investment on new development. The Resource Management Act created a bureaucratic nightmare for hopeful home builders. And the NIMBYs (“not in my backyard”) never want anything to spoil their views or conveniences.

Actually, let’s not forget the BANANAs. You know, the “Build-Absolutely-Nothing-Anywhere-Near-Anyone” brigade. You can add the Ihumātao and Shelly Bay protestors to that list.

This self-inflicted house price disaster was an avoidable result of one stupid government policy after the other. Over decades. Under every flavour of political party. And now you are letting the politicians off the hook by saying they can’t do anything about it?

The government destroyed the market which means it has a moral obligation to repair the damage.

If you put me in charge of housing policy tomorrow, I would try to emulate the flexible housing markets policies that worked for Germany and Switzerland. That means incentivising councils for growth. I believe councils, especially poorly performing ones, need incentives. I know you are sceptical, but let’s leave that for another day.

I want to challenge another of your housing perceptions.

A few weeks ago, you talked about some friends who made a small fortune on the housing market and were now able to retire early.

But you made it sound like rising house prices was a good thing: “If there was an article written for every person who did well on housing versus every so-called person who’s been locked out of the market we might restore a bit of the balance.” Fair enough.

Your friends obviously did well out of their capital gains. But New Zealand cannot get richer by just boosting house prices. If you don’t believe me, read Adam Smith, the founder of modern economics.

In 1776, Smith wrote: “Though a house … may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public … and the revenue of the whole body of the people can never be in the smallest degree increased by it.”

Smith warns against the illusion that rising house prices somehow makes us wealthy. Houses are not productive assets. They provide the same shelter and security no matter their nominal value.

Mike, there is much more to discuss on housing, but I am running against the word count of this column.

I am always happy to discuss house prices on your show. I’d be even happier do it over a good bottle of wine. The value of our houses has gone up so much, we can afford it.

Keep up the good work.

Best wishes,