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Keith Rankin: Feeding The Market

Keith Rankin, 2 May 2002

Recently, the suggestion was made (by Pamela Wade, a NZ Herald contributor) that Aucklanders should receive an Auckland allowance to top up their wages and salaries. The idea is not quite as silly as it sounds; after all Londoners receive a London allowance. Further, the price of living in Auckland is high. It's hard yakka to raise a family in Auckland on the national average wage, and Work and Income benefits (set nationally) cannot be stretched as far as they can in other parts of the country.

Yet, if we think about it, paying Aucklanders more will simply add to that high price of living. It's understanding the housing market in particular that is required.

Prices go up when money is fed into a market. An Auckland allowance would do little more than feed more money into the Auckland property market. After all, the argument for the allowance is that we need more to pay our higher rents and mortgages.

What makes living in Auckland so stressful is (in addition to the traffic) the fact that families have to work many more hours than in other places to pay the much higher mortgages.

But why are house prices so high that Auckland mortgages are so huge? It's partly because Aucklanders work too much. The problem is that, in the 1980s when some Aucklanders felt obliged to work longer hours, the rest of us had to follow suit. Those who started to work more fed the market, raising the price of living. That rise in the price of living was experienced by the rest as a rise in the 'cost of living'. So the rest responded by working longer hours, further feeding the housing market, thereby forcing us to work even longer hours. And so on.

It's more than peer pressure. It's a kind of destructive economic 'game' (noting that 'game' is a technical word in economics). This is a 'positive feedback' game.

The mid-1980s' property boom is instructive. 1984-87 was the period of the greatest influx of female labour supply since the Great Depression of the early 1930s. The 1980s was different to the 1930s though. The additional female earnings added to everyone else's earnings in the 1980s, whereas in the 1930s they only took up a part of the huge slack that was the Depression.

In the mid-1980s the sudden influx of additional female labour had only one cause; very high interest rates. In order to pay the higher cost of servicing household debt, households increased their labour supply. They gave up leisure (meaning one's own time) for labour in order to pay the mortgage. The positive feedback was that many more households (now with two incomes) could raise a deposit for a house, despite the higher price of housing.

With more deposits for houses, the banks responded by feeding huge amounts of credit into the housing market. All that extra money going into a market with relatively fixed supply could do only one thing: raise the price of housing. So mortgages feeding demand for housing meant that people needed bigger mortgages, and bigger mortgages simply fed more money into the housing market. And so on. In places like Auckland and Wellington, it became impossible to choose to not work 80 to 100 hours per week per couple. (Most Auckland households are centred on a working couple.)

Of course I'm not opposed to women working for pay. But if we had resisted the interest rate pressures that forced women to work many more hours in the mid-1980s, then much less money would have been fed into the Auckland property market, and Auckland property values might have stayed in step with values in parts of the country where there were fewer jobs.

(If women had wanted to work more in 1986 than they had wanted to in 1984, then the best way to have avoided the extra wages just feeding the cities' residential property markets would have been for men to make way by working correspondingly less in 1986 than they had done in 1984.)

To make Auckland more affordable this decade, Aucklanders collectively need to reduce rather than raise their earnings. Such a reduction should be a result of Aucklanders choosing to work fewer hours; not a result of reduced hourly wage rates.

It won't happen, for two reasons. First there are too many existing property owners who would prefer their properties to hold (or increase) their existing inflated values. Second, individual couples who decide to work less risk ending up either bankrupt or houseless. The decision to work less has to be made collectively. This contrasts with the many individual decisions to work more in the 1980s and 1990s. Then individual decisions had the effect of imposing a collective decision on all to work longer hours.

(The 1990s' property boom was aggravated by banks raising money offshore and feeding it, as mortgages, directly into the Auckland property market.)

The situation will resolve itself. As young workers become relatively scarce by say 2020, wage rates will rise and couples will be able to feel that they can afford to reduce their combined hours of work. The result is that property values will stabilise, despite rising wage rates.

The high cost of living is not a cost at all. Rather it’s the inflated price of housing. Actions that further inflate the price of housing will not solve the very real problem that Aucklanders face.
 


© 2002 Keith Rankin
keithr@pl.net
http://pl.net/~keithr/


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