Who's Responsible for High House Prices in NZ

25th November 2019

One of the particularly nasty aspects of 21st century society is the propensity to try and blame our various ills on specific groups.

Blaming others isn’t new of course — it’s been going on for millennia. But our ability to wind an issue up from mild discontent to outright hatred has been exponentially amplified in the age of social media, and we need to be ever vigilant to ensure that we don’t go from legitimate questioning to mob rule.

We also need to focus on facts rather than hysteria. Sadly, some of us have been at the latter again, this time blaming the Baby Boomers (those born between 1945 and 1964) for high house prices and for making home ownership impossible for those coming up behind them.

To blame a generation is to misunderstand the two major forces — inflation and the decline in mortgage rates

But is it true? Not really. Let me explain.

Firstly, the very existence of the Baby Boomers was the response to a problem. Following World War II, Western nations embarked on a programme to encourage repopulation.

In New Zealand, this took the form of incentive payments to encourage people to have children, subsidies for housing, and education and building programmes.

This building programme was so successful that there was little house price inflation before 1970, arguably because supply met demand.

Nevertheless, there’s no doubt house price increases can be traced to the period following 1970, the same period in which the Boomers were starting to come into adulthood. But to hold the Boomers responsible is to misunderstand the two major forces which have since driven the massive increase in house prices.

The first of these was inflation, which really took off in the years following 1970 following fundamental changes to the global economy.

Inflation erodes the value of an asset, which means you need to increase its price to maintain its original value. Put simply, a houses price had to increase to maintain what it was ”worth” when you first bought it.

Figures out last week indicated that the new median house price in New Zealand is around $607,000. That same house, in 1970, would have cost around $40,000. The numbers are different, but the relative value is still the same.

This phenomenon wasn’t caused by the Boomers, and it didn’t particularly benefit them because the underlying values haven’t actually changed much in 50 years.

The second major driver of house price increases has been the gradual decline in mortgage interest rates since the early 90s. This trend has been driven by central banks and has been largely used as a way of stimulating economies, but the lower cost of borrowing has also had the effect of pushing up prices.

Again, this is no more the ‘fault’ of Boomers than any other group. And the alternative, that Boomers should have somehow collectively agreed to forego price increases and ‘cap’ prices, would have had a disastrous effect on the economy.

While house prices have been going up and interest rates have been coming down, household wages and salaries have also been increasing since 1970.

The combined effect has meant that the cost of servicing a mortgage has reduced in recent years. Under current interest rates,the cost of servicing a mortgage for a house priced at the national median is as good as it has been at any time since the mid 1970s, so the lot of a Millennial today is pretty much the same as it was for a Boomer 50 years ago.

Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. 

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