A Solution To The Growing Property Price Increases
Westpac's economists are picking annual New Zealand house price inflation to peak at 16% in June next year, and then to decline slightly to 12.2% by the end of 2021. In their latest Home Truths newsletter, the bank's economists say the currently red hot housing market is likely to continue well into next year.
"All of the usual indicator dials are now redlining, indicating ongoing rapid house price inflation for at least the coming few months," the newsletter said. "The driver of the current increase in house prices is low interest rates. "Physical factors like net migration and housing supply cannot be the driver right now - net migration has been zero since April and the construction sector is booming.
"Over 20 years, rents have risen 29% faster than inflation, but real house prices have risen 158%. "Physical shortages cannot explain why the price-to-rent ratio has doubled, or why property investors are now willing to pay 30-40 years' worth of rent to secure an investment property, whereas they used to pay only 15% to 20%.
Falling interest rates do explain the observed blowout in price-to-rent ratios - people are now willing to accept lower yields when they invest in anything from shares to property, and when interest rates all, owner-occupiers find that the rent-or-buy decision favours buying." It is time to reset how our economies operate.
The rising property prices is not unique to New Zealand, as the same scenario is beginning to occur in other advanced economies. It is being contributed by the rapid increase in the global money supply to shore up domestic economies in response to COVID-19. We are now seeing property prices increase up to 20% in New Zealand and elsewhere even in these uncertain economic times. The reasons why property prices are increasing so rapidly is because the increase in the supply of money along with record low interest rates. The result will be a flow-on effect to the entire economy with widespread inflation.
While politicians from all parties are becoming alarmed about the rapidly rising property prices, none appear to have a solution. Governments around the world are reluctant to tighten the money supply and increase interest rates in fear that it will tip the global economy into a deep depression, resulting in a collapse of the banking system, widespread corporate failure and economic collapse. If a country such as New Zealand were to raise its interest rates it will result in an influx of speculative money chasing the higher yields resulting in increasing the value of the NZ dollar, but which would also damage the export sector. However, if governments continue with the current policy it will end up with uncontrollable inflation, growing gulf between rich and poor, widespread poverty and social unrest. Either way our societies are facing an unparallel crisis.
The problem is not so much rising property prices but land prices. Generally, buildings are a depreciating asset – it is the land that the buildings are constructed on that is increasing in prices. Our banking system is based on having land as collateral. The present unsustainable capitalistic business model needs to be reformed or it will self-destruct.
The current system is making it extremely difficult for younger people to purchase their own homes and start a family. Those who can find the deposits to purchase are often burdened with large debts because of the high property prices. Those who own property are seeing their capital values increase but as they need to still live somewhere this does not mean much unless they sell.
There is a need to shift capital from speculation into financing the productive sectors of the economy. At present the productive sector is penalised by the transfer of wealth into speculation in the unproductive property sector.
What is the solution? There is a need for an alternative economic model. This is my recommendation.
1. Ownership of land to remain within families or the state, rather than speculators.
2. Land cannot be used as collateral by the banking system.
3. If land is required to be sold, it can only be sold to the state at fair market prices.
4. Income from the sale of property must go to either a government-controlled fund, support of family members or investment into approved commercial enterprises – it cannot be used to purchase further land.
5. This fund will allocate money to young families to build or purchase houses on property of State-owned land in the form of interest-free loans. Loans to be repaid within 7 years.
6. The fund will provide investment capital to businesses requiring funding to start up or expend. Income for the fund will come from the lease of land or the Central Bank.
7. If there are mortgagee sales the State will purchase the land at the value of the mortgage. Land will not be able to be resold or auctioned. It will become the property of the State.
8. Large land holding with absentee landlords will be purchased by the State and redistributed.
What will be the benefits to these changes?
1. It will stop land speculation.
2. It will create a more equitable society reducing the gulf from between rich and poor.
3. It will bring an end to a banking system based on land as collateral that has benefited those with surplus capital at the expense of the productive sectors of society, as It will shift capital from the unproductive speculative sectors of the economy to the productive sectors.
4. It will enable young families to become established without taking on a lifetime of debt to service mortgages.
5. It will strength the family unit – many who are under financial pressure due to their high debts.
6. It will control inflation as the money supply will only increase if there is an increase in goods and services.
7. It will reduce the massive debts consumers and businesses have accumulated.
8. It will benefit those with savings to obtain a return on their capital whereas today banks pay little to savers investing with them.
How will these reforms be implemented?
1. Because of COVID many businesses have had to close this year. There is a need for the people involved in these enterprises to be supported in restarting again.
2. If they have land as collateral to the banking system and have defaulted on their loans, the State will take over the land. Banks will be repaid what they are owed by the State, but not back interest.
3. If the owner wishes to sell or dies, their children will have the first right to take over ownership. Otherwise, the property must be sold to the State.
4. Banks will no longer be able to use land as collateral for loans. Money to be returned to depositors or lent to businesses on a profit-sharing basis.
5. Those allocated land will pay an annual lease based on the income derived from the property. They will also have the right to purchase the property.
6. In addition to the state taking over the ownership of property as it comes available, they will develop new land for growing communities.
Benefits to society.
1. Without debt servicing costs disposable incomes will increase.
2. It will reduce the debt levels – both household debt and business debt.
3. It will share with the investor and the producer the rewards based in success of the endeavour and its profitability.
4. It will greatly reduce the role of the parasitical banking system we have at present.
5. It will end land speculation freeing capital to invest in productivity.
6. It will strengthen the family unit.
7. It will increase the standard of living and the wealth of the nation.
8. It will lead to more sustainable uses of land rather to improve the environment.
Land reform is not new to New Zealand. The Minster of Lands (John McKenzie) in the eighteen nineties introduced several land reforms, which resulted in breaking up large property holdings and distributing to the land to smaller family operated farms. He introduced the lease-in-perpetuity tenure or 999-year lease, which was the major feature of the Land Act 1892. This allowed 1.3 million acres of land to be opened for closer settlement. Some 7,000 farmers and their families moved onto these properties, revitalised the countryside and accelerated New Zealand's move away from a 'plantation' type of agriculture to family farming. He also introduced the Government Advances to Settlers Act, which greatly expanded the supply of credit available to farmers.
These reforms are not new. If introduced all of society will benefit. However, the bankers and financiers today will oppose introducing such reforms until there is an economic collapse. This is the time to now look at an alternative economic model to replace the current failed system.