OPINION: In 1027, legend has it that King Canute of Denmark, England and Norway conducted a practical experiment to demonstrate that the power of Kings was not omnipotent.
He set up his throne by the shore of the sea and commanded the incoming tide to halt and not wet his feet and robes. Instead, the tide continued as usual and covered his feet and legs, causing the king (a deeply pious man) to exclaim: "Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws."
However, in 1982, despite this demonstration – or perhaps, in ignorance of it – and following almost a decade of economic upheaval on the back of the loss of the British export market and two significant increases in global oil prices, New Zealand Prime Minster Robert Muldoon decided to introduce a Wage and Price Freeze, passing legislation making price increases illegal in an effort to hold back the tide of inflation. It failed, and when it finally came off inflation and interest rates in New Zealand skyrocketed to record levels over the following few years.
The freeze, along with some of the other questionable policies introduced by Muldoon, provided a cautionary example of what not to do and demonstrated that efforts to regulate prices don’t work and generally end up creating perverse outcomes which are worse than would have been the course if the market had simply been allowed to run its course. This understanding has had a significant effect on the economic direction our nation has taken over most of the 35 years since.
So I just have to shake my head at recent comments by Jacinda Ardern and Judith Collins, in response to a question from Paddy Gower in the recent TV3 Leaders Debate, where both suggested that house prices can’t be allowed to rise further (Collins even said "some house prices will need to come down").
The implicit inference in their statements is that governments can somehow control house prices. But can they?
Forty years of market history teaches us, unequivocally, that the answer is no and the idea that we can influence house prices by pulling a couple of levers is incredibly naïve.
As I wrote in a recent OneRoof column, the character of each of the four property cycles we’ve seen since the 1980s has been very different – and anyone looking for a silver bullet solution to fix the market is kidding themselves.
Governments and the Reserve Bank can certainly do things which create barriers which make it more difficult for different types of buyers to enter the market – but history teaches us that these measures have made absolutely no difference to the upward march of house prices, themselves.
In recent years we’ve seen policies which have banned foreign investors, deterred local property investors, and made things significantly more difficult for some first home buyers. However, despite the claims of the Government and lobby groups, none of these measures have made the slightest jot of difference to house prices, themselves.
There’s also the question of whether we should try and stop house price inflation. Capital growth in the value of our homes has been absolutely transformative over the past four decades. It has allowed us to travel, educate our kids, buy businesses, house those who choose not to be homeowners and save for our retirement.
According to Swiss-based Research Institute, Credit Suisse, it has also made us the world’s fifth wealthiest country, so it beggars belief that any politician would be trying to curtail that extraordinarily positive trend.
The typical retort to this argument is to point out that not every New Zealander is lucky enough to own their own home, and that point is certainly valid. While a significant majority of Kiwis are homeowners, around 40 percent of us are renters through choice or circumstance.
But we won’t fix that problem by penalising the 60 percent for the sake of the 40 percent. A wise government would recognise that it can’t control house prices (and shouldn’t try).
Instead, such a government would focus on developing policies to house the most vulnerable and provide incentives and pathways to make it as easy as possible for everyone else - those who wanted to buy a first home, in particular - to do so. Such a government would measure its success, in government, by it’s ability to move the needle and increase the percentage of home ownership amongst Kiwis – not by some arbitrary and, ultimately, impossible aspiration to hold back the tide of house prices.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]