Housing Boom Caused By Massive Inflationary Cycle
The political debate is now focusing on housing and the dramatic exponential growth in housing prices since the major COVID-19 lockdowns ended.
Unfortunately, as I wrote almost six months ago, the massive growth in housing prices is a derivative of overt economic tools that help stoke the very rise in house prices. Extreme low interest rates are the number one most effective method by which you can inflate overall costs, and housing happens to be the most overt vehicle that demonstrates this.
Moreover, it is inconceivable that housing would fail to have such significant and perpetual growth in an environment where many Kiwis are returning to New Zealand, there is excessive liquidity in the banking sector, and these are underpinned by a continued flight of capital to lucrative investment options.
Housing will remain massively inflationary because every conceivable catalyst is at play.
Moreover, a substantive failure of our economists and politicians has been lose sight of the fact that Housing prices reflect an ongoing massive inflationary cycle, and are not part of some isolated boom.
Over the past few years, since the GFC, true inflation has been increasingly hidden across sectors.
Manufacturing covers inflationary pressures by reducing volumes, improving processes, and enacting cost reduction methods for produced goods. From appearances, prices remain steady but the delivered goods often are in lower volume or size to compensate for this price stability.
In the retail sector, prices are held at stable levels while the industry focuses on automation and changed packaging and altering goods supplied, so the consumer gets less for the same money. These sectors have been working fervently over the past few years in an overall effort to manage the inflationary reality with stable pricing by altering production and goods supplied.
A simplistic example of this is toilet paper. Although a roll of toilet paper remains relatively similar in price, over the past few years there has been a marked reduction in the length of the roll, the total sheets per roll, etc.
This technique has effectively hidden inflation across numerous industries -- and in most sectors we see consumers receive less for the same pricing, which is inherently the result of inflation.
Unlike the days prior to the GFC, where CPI (consumer price index) and other inflationary measures were effectively identifying real inflation, today most markets hide inflationary indicators. Prices remain stable but the goods delivered, the type of services, the manufactured products supplied to consumers all have reduced either in volume, scope, size, or quality.
One of the unique few sectors where you cannot easily hide this inflationary reality is housing.
Housing is inherently tied to the monetary policy and methodology and will invariably demonstrate inflation. The longer interest rates remain at all-time lows, the more momentum the inflationary cycle gains, deeply impacting more and more sectors. Eventually the outcome is extreme and turbulent inflationary pressure that impacts sectors such as housing.
Ironically, the original intent of the central banks and politicians was to help stimulate the economic engines, and they were highly successful in the short term.
However, when macro-economic policies are over emphasising growth and liquidity, eventually a imbalance occurs that will cause run away inflationary momentum.
Simple macro-economic principals appear to be ignored as our leaders discuss isolated industries and sectors. Some leaders refer to a Housing boom, or unemployment figures, as if these are unique elements of the economy. They are all integral components of an overall monetary system, and when liquidity is extreme for a long period of time, uncontrollable and destabilising momentum occurs.
To further exacerbate this issue, many are still using antiquated indexes that cannot properly indicate economic reality in such a unique monetary and macro-economic climate.
The solution to runaway inflationary pressures that are driving many sectors, and the dramatic and untenable growth of housing as well as overall share market prices, is to return to non-extreme measures.
For instance, examine a typical family borrowing for a home loan today at the ultra-low interest rate of 2.5% fixed term for 1 year. It is reasonable to expect that over the 30 year life of the mortgage there will be interest rate fluctuations. It is highly likely to see their mortgage hit 5% during the 30 year life of their debt. Today’s fortnightly payments at 2.5% will look substantially different when the rate shifts to a modest 5%.
The idea that the current methodology is somehow saving New Zealand from a decaying economy is not quite accurate, considering that the tactics being used now are highly inflationary and destabilising.
The most effectual solution to such issues with the current New Zealand economic environment, including Housing inflation, is to enact stabilising measures.
Stabilising measures include the gradual and gentle raising of interest rates over the coming years, reduction in excess liquidity by renewing barriers for specific investments, and legislating tax reduction and other incentives focused on industries to make improvements and upgrades needed for produced goods and services, as well as housing stocks.
These measures are effective, but only when leaders understand two important realities:
1. We are in a very volatile inflationary cycle and,
2. Antiquated economic measures such as CPI are no longer effective in identifying the current economic climate.
Mark Rais is the creator of the think tank Trend Analysis Network, writer for the technology and science industry and volunteer senior editor for an on-line magazine. He has published several books and written numerous articles on the topics of macro-economics, technology and society.