Indian Newslink 15th June 2016 Digital Edition

JUNE 15, 2016
02 HOMELINK
The bursting bubble can explode on our face
Housing prices are getting beyond endurance
Phil Goff
The bigger the Auckland’s
housing price bubble
grows, the greater is the
likelihood that it will
burst; worse, the consequences
for those caught up in it.
That is the warning leading
economists have given as
Auckland’s house prices continue
to soar.
Within a year, the average
house price in Auckland will exceed
$1 million.
The government has allowed
this to happen because it believes
that huge inflation in
house prices make those fortunate
enough to own houses feel
better off and more likely to be
positive about the government.
Realising flaws
However, there are now a
growing number even within
Government as well as in
Opposition who are beginning
to see the serious flaws in this
strategy.
Veteran Funds Manager
Bryan Gaynor, also a respected
economist and Economic
Adviser to former Prime
Minister the late Sir David
Lange, warns of the parallels
with the soaring stock market
before it collapsed in 1987.
People start to believe that the
market will never fall and fail to
see the warning signs until it is
too late, he said.
Over-heated markets
There are plenty of examples
around the world of crashes in
house prices after they have become
over-inflated. At the start
of this decade, for example,
house prices in Dublin, Ireland
dropped 57% in four years and
in Nevada, USA by a massive
64% in the six years to 2012.
Median house price in
Auckland has nearly doubled
since 2009 and people are going
heavily into debt to meet the
cost.
Record housing debt
Housing debt in New Zealand
has reached a record level of
over $218 billion.
If and when a crash comes,
it leaves people with mortgages
worth more than the price of
their property and in financial
crisis. It also results in a huge
slump in consumer spending
which would push the country
into serious recession.
A number of factors could
cause the bubble to burst.
When interest rates go up, people
with huge mortgages will
struggle with the cost of servicing
them. If migration flows
change, for example with the recovery
of the Australian economy,
or if our economy suffers
from some external shock
like a slump in the Chinese or
American economies, that could
trigger a major drop in house
prices.
Gone too far
Some economists and longtime
property investor Olly
Newland say that the property
bubble is now too far advanced
to fix. I hope for the sake of New
Zealanders that is not correct.
What should the government
have been doing?
Firstly, after the Global
Financial Crisis of 2008 they let
the building industry sink to
a level that it has taken years
to recover from. The government
should have intervened
to sustain building levels during
the recession. That would
have allowed them to acquire
new houses relatively cheaply,
build houses to meet the inevitable
rise in cyclical demand and
would have helped alleviate the
effects of recession.
Secondly, by allowing demand
to far exceed supply of housing,
in part through record levels
of migration into Auckland,
Government ensured that housing
prices would soar. All governments
in the past have
moderated migration to levels
with which infrastructure could
cope.
They have increased migration
in line with our ability to
cater for housing and transport
needs. The government has not
attempted to ease pressure because
it relied on immigration
to hold up New Zealand’s GDP
level.
Thirdly, as house price inflation
has soared government has
done almost nothing to stop the
rush of speculative activity, domestic
and foreign, which has
caused house prices to rise even
further.
Official action
As a member of the reforming
Labour Government of the
1980s, I support a market economy.
However, I also know that
there is market failure and governments
need to intervene
when necessary to counteract
that. Governments also need to
intervene to ensure socially fair
outcomes, such as by preventing
homelessness.
The current Government policy
pays no attention to these
needs. As a result, we have an
unsustainable house price bubble
which, if and when it bursts,
may have devastating consequences
for all of us.
Phil Goff is former Foreign
Affairs, Trade and Justice
Minister and has been
Member of Parliament for 35
years. Elected from Mt Roskill,
he is today Labour Party’s
Spokesperson for Defence
and Ethnic Communities. Mr
Goff is a Mayoral candidate
for Auckland, postal voting
for which will be held from
September 16 to mid-day on
October 8, 2016.
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