By Dr Brendon Blue for The Democracy Project
OPINION:The day after New Zealand's first lockdown was announced, I expressed to a senior colleague my concern for those around the country whose livelihoods would suffer as a result. She agreed, but was confident that the spirit of "we're all in it together" accompanying these drastic public health interventions would allow the government to lead the country towards a kinder, more equitable society. "I think we might see a universal basic income," she said hopefully.
As it turns out, the government had little appetite for progressive welfare or tax reform. Instead, working with the Reserve Bank, they have propped up the economy through a combination of measures that have drastically inflated the price of houses. This has most likely protected some jobs, but it has also made work increasingly irrelevant as capital gains completely outstrip wages. The wealthy have been made even wealthier, while many can no longer afford a roof over their heads.
In the past year, the average New Zealander effectively lost $54.59 for every hour they turned up to work if they did not own a home. According to Stats NZ, the median worker earned $26.44 per hour before tax in 2020. That comes to $21.49 per hour after tax if working a 40 hour week. Meanwhile, in the year to end of February 2021, the median nationwide house price increased from $640,000 to $780,000: a difference of $140,000. If houses took weekends, public holidays and four weeks' leave off each year, which of course they do not but it makes the calculation simpler, that makes an hourly rate equivalent to $76.08 per hour. Tax-free.
This is a direct result of the decision to support the economy through a combination of quantitative easing, a reduced Official Cash Rate and wage subsidies, instead of meaningfully increasing spending on things we need such as infrastructure and welfare. The government handed out money to the banks, effectively at no cost, allowing them to lend more at increasingly attractive rates. The government also bought bonds at the same time, devaluing deposits and making it pointless to keep money in the bank. This combination of easy credit and disincentivised saving caused a large amount of money to start sloshing around looking for somewhere to go.
The traditional concern with this approach to stimulus is that it will inflate the price of goods and services, increasing the cost of living. In New Zealand, though, we like to buy houses. A tax system that drastically favours property ownership, combined with a cultural sensibility that houses are a safe bet, has seen much of this newly available money pumped straight into the housing market.
This is a feature, not a bug. It represents a new, more interventionist version of trickle-down economics for the 2020s. Decried in 2011 by Labour MP Damien O'Connor as "the rich pissing on the poor", politicians from the right have long argued that if the wealthy feel wealthier, their increased spending will benefit those less well off. Generally used to advocate for reduced taxes on the rich, these 'trickle down' arguments refuse to die,no matter how comprehensively and repeatedly they are discredited.
This revival of trickle-down economics is a little different, as it is based on direct stimulus rather than a reduction in tax, but the effective mechanism is the same. House price inflation is desirable, we are told, because homeowners feeling the resulting "wealth effect" will spend more on the goods and services provided by other New Zealanders. The win-win logic of this argument hides the fact that, fundamentally, someone is paying a heavy price.
Another way to think about it is that the government has effectively paid for Covid-19 by levying a special tax on anyone who wants to live in New Zealand, but did not happen to own property during the summer of 2020/21, and handing that money to homeowners. Many will pay this price throughout their lives.
Some will be consigned to renting forever, handing over ever-increasing portions of their incomes to landlords seeking increased yield from their value-inflated properties. Too many won't even be able to do that, and sleeping on the street or in emergency accommodation. The relatively lucky few who do manage to buy a home will have mortgages hundreds of thousands of dollars larger than they otherwise would, spreading the cost of COVID-19 across their entire lifetimes.
Even as the beneficiaries of this COVID-19 levy, most homeowners are unable to simply stop working and enjoy this newfound wealth. They may feel that they cannot realise their capital gain because it is tied up in their family home. What this windfall does provide, however, is choice: the option to release some of their newfound capital by downsizing into somewhere cheaper, or to stay put, taking advantage of the extra equity to fund lifestyle improvements like a new boat, a bach or a remodelled kitchen. Unprecedented demand for watercraft this summer suggests that many are doing exactly this.
It can be tempting to view this growing inequity as just another "baby boomers vs millennials" issue. Certainly, it does represent a massive transfer of wealth from generally younger New Zealanders who do not currently own homes, to the largely older folk who were able to buy homes cheaply in the past.
This disparity is reflected in Westpac's latest consumer confidence figures, which show that younger New Zealanders are far more likely to be worried about their financial situation compared with older cohorts. Patronising advice about avoiding avocados and food delivery services to save for a home entirely misses this point. Nonetheless, it is important to note that many older New Zealanders also live in poverty while subject to similarly individualising narratives of self-control.
Perhaps the more important question is how this rapidly accumulating wealth will be deployed to further entrench a growing social divide. Parents with equity to spare are increasingly using it to help their children "get on the property ladder". On an individual basis this is an entirely reasonable thing to do. At a larger scale, though, the competitive advantage conferred by having generous, wealthy parents makes it even harder for those who do not have such privilege to obtain a home. Many are being left behind as a new landed gentry takes shape.
These political-economic arrangements favouring existing wealth over hard work have been a long time in the making, beginning well before most of the current crop of politicians arrived in parliament. It is notable, though, that a government that promised to address the "housing crisis" has actively and knowingly pursued policies that have produced an unprecedented upward step-change in the market. Perhaps most concerning is that the Prime Minister has expressed her intent that house price inflation should continue, just at a more "moderate" rate, because that's what "people expect". It is exactly these expectations that are the problem: these issues will not be resolved while houses remain a speculative investment vehicle, rather than a home.
Tuesday's announcement of measures to "tip the balance" towards home buyers, rather than investors, might begin to signal a growing recognition that housing is more than an investment. A substantial class of investors have certainly been made exceptionally wealthy by the COVID-19 response, even as those who work for a living have seen their incomes stagnate. But while this separation of 'investors' or 'speculators' from 'homeowners' might be politically convenient, it makes something of a false distinction. Whether a house is owned as a home, or purely a source of income, any non-improvement appreciation in value comes at someone else's expense. Until New Zealand acknowledges this, little will change: whoever is in charge, and no matter how many new homes get built.
COVID-19 has shown that when politicians want to act, they certainly can. As many others have pointed out, this government promised "transformational change". I'm not sure that taking money from those with the least, handing it to those with the most, is quite the kindness my colleague had in mind.
This article was first published on The Democracy Project.
Dr Brendon Blue is a geographer in Te Kura Tātai Aro Whenua, the School of Geography, Environment and Earth Sciences at Te Herenga Waka, Victoria University of Wellington. He mostly studies and teaches the politics of environmental science and restoration, but would have been better off owning a house instead.
