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.
36 Comments
Some good ‘common sense’ policies outlined.
There is no doubt that our over valued housing market has had a detrimental effect on the wider health of our economy - we’re in the poo because of it. Let us never repeat the ridiculously low interest rate environment that encouraged speculation in the housing market. Absolute nuts from the central bank/s.
Bit like saying I can drink 12 beers if they are only 2% but will fall off my chair if somebody swaps them out for 5% strong beers and I don’t have any control of this. But I don’t think it’s the alcohol level that is the problem and being able to drink 12 beers is a nice to do even if it might be the end of me.
Having insanely high house prices relative to incomes due to record low interest rates just introduces massive wide ranging systemic risk to our whole economy. Any rise in interest rates (that we can’t control) risks toppling the whole system and yet we encouraged people to take in as much debt as possible a few years ago (remember Orr encouraging banks to lend, lend lend to save the economy via FLP super low rates, just before he ramped up rates in one of the most aggressive rate hiking cycles ever seen! - sending many of the people who he encouraged to borrow into negative equity or even liquidation) - in hindsight it’s astonishingly crazy stuff with almost zero financial prudence - ie the exact opposite of what the RBNZ is supposed to encourage
Capital inflation, which often occurs over many years, is just as detrimental to society as consumer inflation.
Perhaps a better way to describe this 'capital inflation' is the conversion of base into broad money through mortgage issuance. That's essentially what it is. As Richard Werner suggests, this type of credit creation only leads to booms / busts, financial instability, and higher price inflation in goods and services.
These interesting ideas will have no effect while the economists within the Treasury continue to maintain their woeful neoclassical models of the economy (such as the ludicrous DSGE models). Those models take no account of the effects of misdirected credit on housing prices and inequality and "see" any direction of credit as an inefficient interference in the market. The only comfort is that when we are carving the epitaph on the tombstone of the economy we can write "died of a theory".
Hi Dean - I used to think that a mandatory retirement contribution would work but there is a huge problem with its approach due to our debt being so much higher then savings. Banks make a net interest margin between funding costs and mortgage rates. While it may seem like a nice idea to slow the economy by having a higher effect OCR for mortgage holders, there is a glaring problem
The cost of money offshore would go up with that magic retirement rate (as we are normally in sync with global inflation).
If we had savings to match mortgage demand it would work, although I suggest term deposit money would flee NZ for higher term deposit rates offshore?
Sorry to burst your bubble, on the surface it looks like a great idea. It may work at some points in time, but I suggest when you really need it, it would add to the base cost of lending not divert some of that cost to your own retirement acc.
The real culprit is the low RBNZ reserves required for residential loans, bang them up and instantly they would become more expensive, still see below does not mean banks want to invest in riskier things.
The capital gains tax is a good idea, but its not a safe assumption that this would push people towards high risk startups and business, as the housing money is borrowed, and banks are not as likely to lend to people for this risker purpose (to verify this for yourself look at the typical Spruiker on this site, do you think they are smart enough to start a green energy or biomass alternate fuel startup?).
Business is ruthless and today it requires STEM skills , most ma and pa investors in property only have equity (and an investment pooperty) because they purchased their original home some time ago, do not mistake historic luck for technical business ability... or do so, at your own peril
typical Spruiker on this site, do you think they are smart enough to start a green energy or biomass alternate fuel startup?
Would literally anyone here be able to? The DGM crowd don't sound like they could run a Mr Whippy, let alone any decent business.
The biggest issue with any retirement savings vehicle is that the asset value is tied to the future economic health. Almost all investment classes are priced for future growth/inflation. If we reverted to the tangible net returns of an asset, the repricing would destroy a shitload of retirement vehicles.
So it'll become self fulfilling, too many costs have been deferred, so they'll come due, and the "savings" by not making a resilient economy and society will negated.
Ah these DGM and spruiker arguments are so boring and often ends up with poor strawman conclusions being raised.
Eg ‘every person who is bearish on housing is a doom gloom merchant who wouldn’t be capable of running a mr Whippy’. There is no way of verifying this to be true. It’s an allegation or a fallacy without any legitimate proof - it’s jut mud slinging.
Same is true about what IT Guy says about spruikers. There could be elements of truth in each but it isn’t a fact of matter - it’s an allegation that you can never prove to be true. (If you can prove it to be true I’ll be happily corrected eg have meet somebody in person who failed at running a Mr Whippy because they were bearish on housing? It’s a quite ridiculous proposition).
They're here whether I ever mention it or not. From my first few posts I was being labelled as a spruiker. The only thing I'd encourage people to do is life as full a life as possible and be a net positive contributor to the people around them.
Edit to the edit:
Eg ‘every person who is bearish on housing is a doom gloom merchant who wouldn’t be capable of running a mr Whippy’. There is no way of verifying this to be true. It’s an allegation or a fallacy without any legitimate proof - it’s jut mud slinging.
Generalisations are generally true, and the sort of mindset that's constantly dgming, is not going to be very conducive to active commercial enterprise. In fact, being super smart, is also not necessarily beneficial, the most successful mindset is one that doesn't overthink things too much, allowing them to engage in the risk aspect that capitalism can reward - a smarter person will often talk themselves out of doing anything.
Too many people here think it's just a case of paint by numbers. You for instance, put too much weight on housing affordability, at the neglect of far greater issues.
Why would I adopt one of your delusions?
Much of your views involves envisaging stereotypes of an adversary and then working your argument backwards from there - it's way easier for you to throw in a Herald Reader or Ainsley Church observation than it is to actually objectively appraise what someone else is saying to you.
It's how you consider yourself possessor of objectively superior views, that don't translate into real world financial performance - why you don't own the water-cooler you congregate around, in someone else's office.
Much of your views involves envisaging stereotypes of an adversary and then working your argument backwards from there
Not at all P. I'm very much an agnostic and prescribe to Socratic method as much as I can. I don't consider people to be adversaries, more a product of their own motivations and biases. Given that groupthink is very much a part of modern society, you can see similar patterns of thought.
And personally I have nothing against AC and Granny. They talk their own shop with an aim to be heard as frequently and widely as possible - that's the fundamental reason-to-be for media. Doesn't mean I necessarily have to agree / disagree with their narratives.
Not at all P
In your view, but not in reality, because you fairly talk to all manner of stereotypes in your arguments. I've already told you I don't read the herald or know Ashley Church, but you keep needing to bring them up. So you're either not a good listener, or you feel the need to enter character assassination by stereotyping. That's the polar opposite of the Socratic method, knowing the term doesn't mean you're actually capable of it.
If I was taking a punt, you're socially awkward, and rather than make adjustments in how you relate to people, you need to cast them as inferior to yourself, and you the possessor of real truths. This leads to some fairly poor opinion formation.
I'm also not interested in DGM and spruiker battles, but if people want to use the label, I'll highlight the flaws.
It's human nature to gravitate towards tribalism, and accompanying phrases and terms. But then objectivity gets clouded by issues like groupthink, and adopting very polar views on things, when everything's a lot greyer - case in point JCs inability to view something like corruption on a spectrum where two locales can have corruption, but one can be greatly more corrupt than another.
I'm just tired of reading "Kiwi peso", "water cooler" or "ponzi" over and over again.
Also my apologies. These are just fun monikers to express the following:
Kiwi peso - the NZD that is susceptible to movements relative to USD, JPY, gold in particular given that it has long need a 'risk on' currency
Water cooler - Informal banter with peers where the peer group has an influence of what people say and expresss
Ponzi - The housing market given and its oversized influence on the Aotearoa economy. The world Ponzi is of course not entirely accurate and Ponzinomics is better. Ponzonimics is often described as sharing certain characteristics:
1. Promise of High Returns / Expectations: Schemes employing Ponzinomics often lure investors with promises of better returns and ideas like house prices double every 7-10 years
2. Dependency on New Participants: A system relies heavily on the marginal buyer to pay ever higher prices
3. Lack of Genuine Value Creation: Unlike productive and innovative businesses, Ponzinomic systems don't necessarily produce anything meaningful for an economy
4. Unsustainable Growth: These schemes require exponential growth to maintain the illusion of profitability, which is ultimately unsustainable
I've already told you I don't read the herald or know Ashley Church, but you keep needing to bring them up. So you're either not a good listener, or you feel the need to enter character assassination by stereotyping.
Well I apologize if somehow the associations offend you. I'm not sure why: AC has a wide following and his views / narratives are respected and Granny is one of the leading news publishers in Aotearoa.
They don't offend me, they're just a barrier to honest discourse.
You're making them because in your mind, you access more valid information, and the consumers of the alternative (AC fans and herald readers) are "sheeple" or "normies". That's not something someone applying the Socratic method would entertain.
You're making them because in your mind, you access more valid information, and the consumers of the alternative (AC fans and herald readers) are "sheeple" or "normies"
Absolutely not. Why and how would I possess more information than anyone else? Because I have a Bloomie terminal or something? In fact, I would say that Granny and AC have access to sources of info I do not possess.
'Sheeple' is simply a reference to how people blindly accept what the ruling elite and media says. As for 'normies', that is common in the crypto communities to describe attitudes from people who haven't done any serious work understanding the space but have strong opinions about the space. There are many aspects of the crypto space where I still consider myself a 'normie.'
You for instance, put too much weight on housing affordability, at the neglect of far greater issues.
Disagree.
Housing is the largest expense/capital capture that people face in NZ. This capture of income/capital means there is less to go to whatever you consider 'far greater issues'. The only far greater issue I can think of is possibly mass immigration that NZ has had over the last few decades. But then even that is a driver of housing affordability problems as it was pleasing to see this author note:
high levels of immigration have placed additional pressure on housing markets, driving up demand and causing rents and property prices to soar
What gets missed is:
- the average person's worth is derived from their labour, and the last hundred years has exponentially increased the number of other workers the average Kiwi has to compete with. So the relative worth of many Kiwis, has decreased and will continue to do so in a global market.
- the nature of capitalism to disadvantage newer entrants. If we're talking about housing for instance, take the leafy green inner Auckland suburb of Epsom. Limited space, there is almost no chance for a young family to buy there, because most of the houses are already owned, and the competition for existing houses is too high. Same goes for new business creation (unless it's in a new field, although even then established players are often making moves into new fields).
You are failing to understand that most investors qualify simply, by the fact that they purchased their original home at the right point in history. Banks do not ask for a business plan from them, they simply enter a few numbers into their internal models to access affordability and equity requirements.
IO if you want a business loan in NZ they first try and make you write all the way up to your limit of borrowing against your own house... why because there is less capital required, and they can approve these way way way easier. Maybe your experience is different ? But this is how both ASB and Westpac have approached it when I asked to lend for commercial ventures.
I find it very easy to lend for housing, much much much harder for an existing business, and nearly impossible for a startup.
I have found the key indicator of success in any project is selecting the right people and choosing the right design pattern to solve the business problem at hand.
Mortgage lending usually involves you having to lay out your liabilities and cashflow, much like you would a business (I've done a decent amount of both). As you've pointed out (and I'm not disputing), the requirements for a business are steeper, due to the fundamental nature of lending for a business vs a house. Shorter repayment time-frames, higher risk, lower ability to liquidate in the instance of a default.
You're also right that that's something less people are capable of. So their alternative is to make a guess and invest indirectly in active commerce, usually via a proxy.
So 70%, is about what you'd expect.
I can’t think of that many positives to a RBNZ controlled retirement fund. The only real advantage over interest rates is that it applies to everyone, not just mortgage holders. The downsides are:
- it’s very hard to save for retirement when you have no idea how much you will be forced to save in the future.
- a lot of retirement savings will be pumped into NZ businesses during high inflation which may cause more inflation
- what would happen to interest rates? Market controlled or fixed? If market controlled, could that actually end up worse?
- you could be forced to invest in heavily in shares at a time when the market is tanking
Not saying it would necessarily be worse than interest rates, but it definitely could have unintended consequences
Addressing the symptoms not the cause.
Here's an interesting view of productive businesses in the current paradigm
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