By Dean Attewell*
Since the 1980s, central banks worldwide have relied on interest rates to control consumer inflation, the rising costs of goods and services that can affect families' everyday lives in the short term.
When prices go up quickly, the impact is immediate and felt by consumers, who struggle to manage the increased cost of living. However, while controlling consumer inflation is critical, there is another long-term issue that requires attention: Capital inflation, especially within the housing market.
Capital inflation, which often occurs over many years, is just as detrimental to society as consumer inflation. A prime example of capital inflation is the housing market, where property prices continually rise. This trend has made homeownership increasingly out of reach for many people, with young families, first-time buyers, and retirees suffering the most.
The longer-term effects of capital inflation, such as the growing number of people who retire without homes or adequate retirement funds, could lead to widespread financial insecurity, with more people relying on government support or social housing.
In light of these concerns, governments worldwide must set clear goals to ensure citizens have high rates of homeownership and strong retirement savings. A society where citizens can retire without relying on social welfare or government housing would not only be more financially secure but would also have a better quality of life overall.
The role of interest rates in controlling house price inflation
It's well-established that interest rates set by central banks can directly impact house prices. When interest rates are low, borrowing becomes cheaper, encouraging more people to take out mortgages. This surge in demand drives up house prices, creating housing bubbles that are followed by inevitable crashes when the market corrects itself.
Conversely, when interest rates rise, borrowing becomes more expensive, slowing down demand and stabilizing prices. By using interest rates to control house price inflation, central banks can help reduce market volatility and ensure a more balanced housing market.
If central banks adopted this approach, we would likely see a more stable housing market, with fewer boom-and-bust cycles that cause construction booms followed by industry layoffs. A consistent housing market would help keep the building sector steady and reduce unemployment, as construction companies and related industries would experience more reliable demand.
A new tool: Mandatory retirement deductions for wage earners
To control consumer inflation more effectively, an additional tool could be implemented: Mandatory retirement savings deductions for all wage and salary earners (excluding students, retirees, and people on social welfare). By adjusting these mandatory contributions in response to inflation, central banks could have an immediate impact on consumer behavior, encouraging people to save more during times of high inflation and reducing disposable income in periods of excessive consumer spending.
This strategy would directly affect all wage earners, not just homeowners or those with mortgages. In contrast, increased mortgage rates take time to impact the broader population due to fixed-rate mortgages. With mandatory retirement savings, the impact would be felt immediately by everyone in the workforce. Importantly, these savings would be directed into people’s personal retirement accounts, rather than flowing into third-party financial institutions like banks or investment firms, ensuring that the funds are used for individuals’ long-term financial security.
Redirecting investment from property to productive business
Currently, many people invest in property primarily for capital gains, the profit made from selling a home for more than its purchase price. While this practice has contributed to skyrocketing property prices over the years, it has also led to less investment in productive businesses. If people were no longer incentivized to invest in real estate solely for capital gains, they might turn their attention to more productive businesses, which would help drive innovation, create jobs, and contribute to a stronger economy.
Such a shift would not only relieve pressure on the housing market, but it could also reduce the need for governments to introduce capital gains taxes to curb excessive property investment. Instead, people could focus on building businesses that benefit society, from technology startups to sustainable energy solutions, fostering long-term economic growth.
Managing immigration levels to align with housing supply
A stable housing market also depends on balancing immigration levels with the rate of housing construction. In many countries, high levels of immigration have placed additional pressure on housing markets, driving up demand and causing rents and property prices to soar. If governments implement policies that ensure immigration levels match housing construction rates, they can prevent such imbalances.
By managing immigration in line with the availability of new housing, governments can help stabilize the market. This would ensure that house prices and rents don't become unaffordable, particularly in areas experiencing rapid population growth. Additionally, it would prevent housing demand from outpacing supply, helping to ensure that citizens can find affordable housing without competing with speculative investors.
New Zealand as a global leader
New Zealand is well-positioned to lead the world by adopting the policies outlined above. As a country that faces both unique housing challenges and an ageing population, New Zealand could set an example by integrating interest rate management, mandatory retirement savings deductions, and immigration policy to create a more balanced and sustainable housing market.
By focusing on long-term solutions for both consumer and capital inflation, New Zealand could offer a model for other countries looking to address the growing housing crisis while securing a better financial future for all citizens. In doing so, the country would ensure that its people retire with homes, financial independence, and a strong retirement fund, without relying on government assistance.
Conclusion
As global economic dynamics continue to shift, the need for governments and central banks to adjust their policies has never been clearer. By adopting a holistic approach to controlling both consumer and capital inflation, with an emphasis on high homeownership rates and strong retirement savings, societies can create more financial stability for their citizens.
Managing interest rates, mandatory retirement deductions, and immigration policies in tandem can create a future where homeownership is attainable, retirement is secure, and the housing market is stable and resilient. New Zealand has the opportunity to be a global leader in this approach, paving the way for others to follow.
*Dean Attewell is an occasional contributor to interest.co.nz focusing on government, society and business at a macro level.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.