Are we really among the wealthiest people on the planet?

elocal Magazine, ed. 249. 24 December 2021

There are lots of ways of measuring how New Zealand is doing, and none of them is perfect.

We stack up very well on measures like life expectancy, unemployment, infant mortality, and car ownership.  Not so well on the quality of our education system – an area where we have been going backwards in recent years, at least in comparison to other developed countries and many of the East Asian countries.

And we stack up particularly poorly in terms of the rate at which production per hour worked – or productivity – is growing.  Indeed, our productivity growth has been slower than virtually every other developed country for years, and was particularly disappointing over the last decade.  And it is growth in production per hour worked which, in the end, is the only sustainable basis for improving economic well-being.

So it was particularly pleasing to see the new National Party Leader, Christopher Luxon, openly acknowledge that our productivity record has been very poor for a long time, including over the nine years during which National was most recently in power.

When John Key became Prime Minister in 2008 he said that his aim was to have income levels in New Zealand (a reflection of productivity) match those in Australia by 2025 and, as one of the conditions of ACT’s coalition agreement with National, he established the 2025 Taskforce to provide the Government with advice on how best to achieve that goal and to monitor progress.  I had the privilege of chairing that Taskforce.

The Taskforce prepared two reports setting out the policies which, in our judgement, would have been required to give us some chance of achieving the Prime Minister’s goal, though we knew that reaching Australian income levels in 17 years was a tough challenge.  To have had any chance of success it would have required the Government to give improving productivity a very high priority.

Just two years after its creation, the Taskforce was disbanded and the Prime Minister never discussed our reports with us.   Sadly, the gap between productivity in New Zealand and that in Australia has continued to widen.

We must all hope that Mr Luxon is serious when he says New Zealand must improve productivity, and hopefully he has a plan about how to achieve that objective.

But if productivity growth is so poor in New Zealand, how come the Credit Suisse Global Wealth Databook reveals that, in 2020, the median wealth per adult in New Zealand was, at US$171,620, the fourth highest in the world, behind only Australia, Belgium and Hong Kong, and well ahead of Switzerland, France, the United Kingdom, Canada and the United States?

The answer to that paradox is almost certainly our old friend, which I have written about repeatedly in these columns, our absurdly over-priced housing market.  I know nothing about the housing market in Belgium, but the other countries above us on this measure, Hong Kong and Australia, suffer from the same housing market disease that we do.

We continue to hear politicians lament the ridiculous price of housing in New Zealand, though of course the Prime Minister is on record saying that she wants house prices to continue rising – but more slowly!

The reality is that successive governments have tinkered with this problem – blocked most foreigners from buying houses, promised to tax any gains from selling houses (other than owner-occupied ones) unless held for 10 years, distorted the tax system by denying deductibility of interest for houses owned by investors – all to no avail.    And the suggestion that the primary cause of the rapid escalation in house prices is a high rate of immigration has surely been debunked over the last year or so, when there has actually been a small net outflow of people even while house prices have risen at an absurd rate.

Recently, we’ve seen the Government reach agreement with the National Party to change the law so that people owning residential property in our major cities will be able to have up to three homes on sections where previously only one was allowed.

So far at least none of these measures has resulted in any fall in house prices, though the rate of increase seems to have slowed somewhat and a few commentators are even forecasting a modest reduction in prices for the next 12 to 18 months.  Such a fall, it is suggested, might even take prices back to the already-very-elevated level of 12 months ago.

The harsh reality is that no amount of tinkering will bring house prices back to the level at which the ordinary wage and salary earner has the slightest chance of buying a house unless they have access to the bank of Mum and Dad – which means that at least 40% of the population will reach retirement age while still paying rent.

What would bring prices back to a more affordable level?  Only the removal of the artificial boundary around Auckland which is keeping section prices at truly ridiculous levels.  At the moment, 400 square metre sections (one-tenth of an acre in the old terminology) are being offered in Papakura at $977,000, with title not available till 2023.  That isn’t the price of a house, but simply of a very small bare section.  That implies that the price of land is in the order of $20 million per hectare (allowing for the need to leave space for roads).  Given that the price of good dairy land is around $50,000 per hectare, it is clear that something is seriously nuts.

But surely we don’t want urban sprawl?  Why not?  Less than 1% of New Zealand’s total area is currently urbanized.  If in a decade’s time 1.25% was to be urbanized, would that be a disaster if, as a consequence, the great majority of ordinary New Zealand wage and salary earners could afford to buy a home?  (By way of comparison, some 9% of the United Kingdom is urbanized, and 15% of the Netherlands.)

But what about the environmental impact of urban sprawl?  How can we tolerate that?  Well, the Government is planning that most of us will be driving electric cars within a few years and given that, it is by no means obvious that allowing the suburbs to spread a bit further will have a serious environmental impact.  Indeed, high rise apartment buildings – made of concrete and steel, requiring 24-hour lighting and elevators, often involving air-conditioning systems and certainly requiring electric clothes dryers rather than an old-fashioned clothes-line – may have a more adverse impact on the environment than “sprawling suburbs”.

A few years ago, a study done by Energy Australia and the New South Wales Department of Planning found that energy consumption per person in high-rise apartment buildings was almost double that in stand-alone houses.

And if the reason for preventing “urban sprawl” is related to a misguided attempt to preserve the productive value of the land, then I strongly suspect that the real culprit is not houses but lifestyle blocks, which occupy a much greater area than all our towns and cities.

Despite all the media stories about “house” prices – and yes, I know the price of building materials has gone up over the years, and wage rates as well – the real culprit is not “house” prices but section prices.  Those have gone through the roof, and the only way to reduce them, and thus to reduce the price of the house-and-section package, is to remove the artificial boundary around Auckland (and our other major cities).

Those who oppose the removal of that boundary are effectively condemning nearly half the population to a life of continuing financial stress, with all the adverse consequences for the physical, mental and emotional wellbeing of literally millions of Kiwis.

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Copyright © 2022 Don Brash.