Guest Post: Why excessive house prices are damaging NZ’s economy

A guest post by David Schnauer- author of Uncomfortable Economics:

Compliments to Ashley Church for a well argued Post headed “Declining house prices are killing our economy”.    In this Post, I  put the opposing case. High and appreciating house prices have not been good for New Zealand. Instead they have done and continue to do this country major economic damage. 

  My book Uncomfortable Economics went on sale on 20 July.  It begins by describing the long term underperformance of the New Zealand economy.  From the 1950s when New Zealand was one of the most prosperous countries, we have drifted steadily down the ranks of world living standards. That relative decline continues-  voters in 2026 rank   NZ’s economy as their major concern. Unless our drift is arrested, New Zealand in another decade risks dropping out of first world status.  

Why has that longstanding underperformance occurred?  The central thesis in my book:  the New Zealand economy is seriously unbalanced. Kiwis have far too much of our wealth in property; and far too little of our wealth in NZ’s real economy.  My book argues New Zealand will only lift its economic performance and start keeping up with more prosperous nations, by moving its wealth away from housing and on to growing its commercial sector.   Some quotations from the book develop this central theme. 

After describing the fabulously wealthy Swiss commercial sector: 

Successful countries generate their economic success by having a

wealthy and successful commercial sector. Compare this with

New Zealand. Where is our wealth held? We don’t have even

one multinational company based in New Zealand….

Meanwhile, much of our commercial sector is owned from

offshore: our four main banks, our insurance companies,

breweries, one of our two supermarket chains, much of our

food manufacturing. Wealth generated by those overseas owned

businesses does not accrue to Kiwis; it gets sent out of the

country to the overseas owners. It is therefore no surprise our

economy has underperformed over the last 75 years……….

Then a comment on the limited contribution capital appreciation makes to the overall economy: 

In our North Shore legal practice, we saw countless clients

who had purchased their family home 25–40 years ago for, say,

$50,000. Their $35,000 initial mortgage had long been paid off

and their family had grown up and left home. Those clients were

now selling their home for $1 million, downsizing and buying

an Occupation Licence in a retirement village for $700,000.

The remaining $300,000 was put aside as their retirement nest

egg…..The problem for the country is that capital gains contribute

almost nothing to the economy and are not subject to tax in New

Zealand, so don’t add to the public revenue and do nothing to

lift New Zealand’s economic performance.

Businesses deliver much greater social benefit than houses

My wife  Tricia and I ran a law firm on the North Shore for 20 years.

 By the time of our retirement the firm had approximately $1 million

 Invested in it, aggregated across work in progress, book debts, office

equipment, office fit out and furniture, etc. The law firm used

total funds approximating the value of a North Shore house.

 It employed about a dozen people. Those employees back then

collectively earned, say, $1 million per annum, from which they paid

 income tax, ACC, KiwiSaver etc. The firm made profits from which

it paid income tax, GST, ACC, KiwiSaver, etc. I expect the firm and its

 employees in total paid several hundred thousand dollars to IRD each year.

My point should be obvious. A house creates jobs and income

for the building industry when it is first built but thereafter

contributes little to the country each year. On the other hand, a

sum of money equating to the worth of an average New Zealand

house, invested in a business, provides employment, tax revenue

for the Government and goods or services for its customers. A

sum invested in a business delivers far greater national benefit

than putting that same sum into housing.

Excessive house prices have done major damage not only to our economy, but also to  New Zealand society:

The housing boom has done major damage to New Zealand society.

 It has made two-income households common (with children raised in

crèches) to pay the enormous mortgages required to buy a house.

The Government, with already overspent budgets, has stepped

in with Family Support and other measures to help struggling

families and made its deficits worse. 

Exceptionally high house prices are driving major social disparity

 between Kiwis who can (almost always with family help) get onto

 the property ladder and those who can’t. Excessive house prices

 have diverted funds into housing that should have been going into the NZ

commercial sector, to drive our economic progress. Much of the

money the banks lend into the New Zealand housing market –

around one dollar in five – is borrowed from offshore, meaning

New Zealand has high private international debt. The list of

negative consequences of high house prices is a very long one.

In summary :

New Zealand’s overpriced housing is the ultimate

result of this country’s wealth being significantly misallocated,

with far too much in property and far too little in our commercial

sector. This misallocation is doing major damage to the country,

both economically and socially. A radical change, weaning

New Zealand off its housing addiction, reducing house prices

and moving the assets freed up from the housing sector into

institutional saving and the corporate sector, is vital for our long-term

success as a country and as an economy. Indeed, I would

go so far as to say that the New Zealand economy will assuredly

continue its disappointing trajectory of the last 75 years, unless

and until such a rebalancing takes place. The reality facing New

Zealand in 2025 is that clear.

So, while you wrote an interesting Post, Ashley, I am sorry, but I must differ from you emphatically. Doesn’t it seem too good to be true, that Kiwis should seek to generate high living standards without hard work, and just by sitting back and benefiting from house price appreciation?  

Lower house prices do not just benefit first home buyers, as you suggest. They deliver economic gains which are far more fundamental and far more important than that.  Lower house prices are a critical part of rebalancing the whole NZ economy back onto our real economy.  It is that real economy which creates the incomes, jobs, goods and services and wealth which this country desperately needs, if it is to start climbing back up world GDP per capital rankings again. 

In the national interest, and in tandem with a strongly enhanced KiwiSaver scheme, Kiwis need to build their wealth in the future from hard work and from saving large KiwiSaver balances, not from house price appreciation.

 For the NZ economy materially to lift in performance going forward, house prices ideally need to decline a lot further over the next decade.