New Zealand: Banking must be a public utility to solve the housing crisis
By Mike Treen
31 percent of households spent 30 percent or more of their income on housing costs. This number was only 11% in the late 1980s.
For renters, 28% spend 40% or more of income on housing. Average rents have increased from $400 to $580 a week since 2008.
Over the last decade, average housing costs increased by 43%. This was similar to the growth of average incomes but the poorest housing incomes only increased by 29%.
The has been a decline in floating mortgage rates from 10% to 3% at the same time as median house prices have doubled.
Mortgage debt is now at $266 billion (May 2019) – up 38% in the last five years. Overall household debt has gone from the equivalent of 50% of GDP in the late 1970s to over 160% today. Household debt to income ratios is also extremely high and dangerous at 165% double the level of the mid-1990s.
Households with mortgages have on average three times their disposable income in debt. But 40% of recent borrowers have more than five times their income in debt.
The so-called housing market has very little to do with the laws around supply and demand. It is almost entirely a question of the banking system’s ability to create and sell mortgages and make enormous profits doing so.
A period of declining interest rates has allowed the New Zealand banks to seduce people into believing that this will remain the situation forever and all we have to worry about is servicing the debt not the amount of debt.
A significant economic shock, like we are currently experiencing, will put incomes at risk and interest rates could easily start moving up as a consequence of the increased risk attached to the borrowing.
This is perhaps easier to see when looking at bank lending in another entirely unrelated sphere – New York Taxi licenses. The city had a cap on licenses of around 13,500. The cap made the license a tradeable commodity that drivers, fleet owners and nowadays hedge funds can buy and sell.
A New York Times article headed ‘They Were Conned’: How reckless Loans Devastated a Generation of Taxi Drivers explains how banks predatory lending helped drive license prices up to $1 million each by 2014 and then the prices collapsed and hundreds of drivers were ruined and bankrupted.
This heartbreaking story is a real risk of being rerun in this country because of excessive bank lending in pursuit of profit. With land, there is always a limit to the amount available. Land can be left idle, but It also can also be used to earn income – from housing, agriculture, factories or warehouses. The banks job is to ensure that any increase in income or potential income over time gets capitalised in the price for that property that can then be demanded when sold. The bank’s job is to encourage a buyer to get a loan or mortgage that can be used to purchase that income stream.
Mortgage debt has been encouraged for speculative purposes by even relatively modest income households because there few capital gain taxes and New Zealand hasn’t suffered a severe downturn in the property market within anyone’s living memory. It seems a “safe” investment. This also makes it politically difficult to impose capital gains taxes on homes.
That is why wealth taxes are probably a better way to go to get at the accumulated wealth that has escaped the need to pay tax.
The escalating house prices have however made owning a home increasingly unattainable for many. Homeownership rates are now in a steady decline from 73.8% of homes in 1991 to 62% today.
The perfect storm of housing availability and affordability was compounded by the decline in statehouse building in recent decades.
A peak of 70,000 state homes existed in the early 1990s despite the neglect of the National governments which were in power for most of the period from 1950 to 1984. State housing ceased to be a right and was turned into something only suitable and available for the desperately poor or needy.
The number registered on the official Housing Register qualifying under the very high threshold demanded for access has leaped from 6000 to 15000 in the last two years. This was in part the result of real needs being better reflected when the new government stopped simply refusing to allow people to register.
But the new government has only built 3300 public housing units with another 2500 planned to finish by the end of this year.
There is a total of 67,253 total subsidised tenancies, up from 63,300 in 2017.
These are steps forward, but they are very tiny steps given the crisis level of the problem and urgent human need.
There are another 3500 desperate people in emergency hotel stays.
While the government has only very modestly increased the number of state houses, they have allowed most of the land in the traditional state housing suburbs to be privatised. Each new development in a working-class suburb like Glenn Innes is handed over to private developers who can buy the land and put three homes on for each one being taken out. Only one of the three remains a state house. The others are to be sold privately (one possibly at a so-called “affordable” price).
When these original state house suburbs were created those of us who grew up in them were proud to say we live in a state house. It meant a home of good quality with a flush toilet and a gas stove. These were working-class suburbs with nearly everyone having a job and active union, sport and social activities. You had tenancies for life and could apply to move from one city or suburb to another into another state house that became available.
The first Labour government built 30,000 between 1936 and 1949 as well as fighting in a world war for five years. When they left office there were 40,000 people on the waiting list and the intention was just to keep building until everyone who wanted one could have one.
This is actually what was achieved in Sweden under their Social Democratic Party government.
Sweden’s Social Democrats, in government from 1932 to 1976, did not favour “social” housing directed specifically towards those in need, but universal public housing, via tenant-owned co-operatives, municipal-owned building companies, and rigorous rent control, under a specialised housing department.
The Spinoff has a good article that is headed Good housing is considered a privilege in New Zealand. In Sweden, it’s a human right. It explains that 15% of Swedes live in municipally owned social housing with tenant unions that collectively bargain with the state and private owners.
The housing crisis in New Zealand has also been compounded by the creation of a landlord subsidy in the form of the accommodation supplement. By making it easier for low-income people to access a benefit that could only be received if you proved you had high rent then the inevitable happened. Landlords increased rents to suck up the full value. The increased guaranteed income stream is also then inevitable capitalised into higher house prices by the banking system. This is no different than higher dairy prices getting capitalised into higher dairy farm prices.
This level of banking debt can become a problem with an economic shock. This is what the International Monetary Fund told the government in 2017. As Thomas Coughlan reported in Newsroom May 9, 2017:
In March, after one of its regular visits to New Zealand, an IMF mission concluded while the immediate outlook for the New Zealand economy was good, housing affordability and the stress this placed on the banking system was a problem. If there was a significant global shock, they warned, the high levels of household debt held by New Zealanders (an astronomical 168 percent of disposable income) risked destabilising the economy should a global shock lead to conditions that made it difficult for New Zealanders to repay their mortgages.
The banking system is based on maximising the creation of debt to enable profits in the form of interest. The profits of the top four banks in New Zealand have doubled in the last decade and between them make around $6 billion in profits a year. The return on equity is one of the highest levels for any similar banking system in the world. Banking profits alone dwarf the combined profits of almost every other publicly listed company in New Zealand. The ANZ made more than Fonterra, Spark, Fletcher Building, The Warehouse, Air NZ and the major supermarkets combined in 2017 for example. These banks’ profits are equivalent to 2.5% on New Zealand’s entire GDP compared to only 2% in Australia – their home country for all four.
Their greed knows no limit and extends to cheating the taxman through elaborately designed tax avoidance schemes.
The entire banking system should be taken over as a public service. The big four actually have their presence in New Zealand through taking over previously publicly or community-owned banks during the privatisation mania that swept the country in the 1980s and 1990s and wreaked so much economic havoc. The BNZ used to be state-owned. The ANZ took over the old Post Office Savings Bank before it was privatised. The ASB used to be owned by a Community Trust that paid returns to the community.
The creation of money, in all its forms, should be a publicly controlled process without capitalist greed periodically putting entire financial systems at risk and that we end up having to bail them out because of their greed and that they are “too big to fail”. This is effectively what happened in Ireland, the UK and US after the 2008 crisis and we should make sure we do not repeat this time as we face the economic dangers ahead.
As part of a Green New Deal to deal with the crisis we should
- Nationalise the Big Four banks without compensation for their crimes against the taxpayer and working people of New Zealand.
- Start a massive state house building programme of 10,000 a year until everyone who needs a home has.
- All rents should be no more than 12 hours of a person’s income
- Empty homes to be made available to rent.
- Tenants should be empowered to create a union to represent them. This should begin to everyone in social housing.
- All wealth over $5 million should be subject to an annual 1% wealth tax. This could increase to 2% for wealth above $50 million and 3% for wealth above $1 billion.
- All income up to a living wage a year should be tax-free and new higher tax bands established on income over $150,000 a year with a 100 percent tax on incomes over $250,000 a year.