Is Auckland’s property market “the canary in the -market coal mine.”

A recent report on the property market in Stuff is headed: “World watching NZ housing market as Auckland labelled ‘canary in coal mine’” The report notes that:

The likes of Ireland and the UK have DTI caps between three and a half and four and a half times income. In New Zealand, customers with DTI of more than six account for 39% of recent borrowing, Barrenjoey found after analysing Reserve Bank data.

Auckland was higher, with 51% of recent borrowers taking out home loans at DTIs over six, and a fifth borrowed at DTIs over eight.

In the 1980s in NZ price to income was about 2. Other facts we need to be aware of

  • Real house prices have gone up 300% since 2000 – an OECD record. The USA and OECD average is half that.
  • Our household income to price ratio is also one of the worst.
  • The value of NZ’s housing stock has gone from $250b to $1600b since 2000. It has gone from 2 times GDP to 4.8 times GDP in the same period. This compares to 1.7 in the US.
  • The Sharemarket is only worth 0.6 of GDP compared to 2.2 in US.
  • Current household debt as a share of income has doubled in the same period from 80-160%.
  • In addition recent lending has been trending upwards to risky levels in in terms of debt to income

This make the likelihood of a major housing downturn as part of the coming New Zealand recession almost inevitable.

There Is simply no escape route from the capitalist point of view.

They must and will attack inflation. Budget cutbacks and interest rate rises are the principle tools they have at their disposal to achieve that goal.

For a period we will have “Stagflation” where we combine economic stagnation and continuing inflation. This is the worst of all possible worlds for working people.

Inflation is back worldwide and with it is the blame game. Central Banks and governments want to blame the Pandemic associated lockdowns and shortages or Ukraine War.

An impending worldwide recession in late 2019 was followed by the Pandemic in early 2020. This led Central Banks and governments worldwide to embark on a massive amount of money printing and government spending to prevent a broad economic collapse.

World production and and trade was then disrupted by economic closedowns that were imposed as public health measures to combat the impacts of the Pandemic.

The Central Banks then doubled down on money printing in response. This was led by the US Federal Reserve. “To understand the magnitude of the Fed’s money printing, we need to go back 22 months ago. At the start of 2020, there was $4.0192 trillion in circulation. On January 4, 2021, the number increased to $6.7 trillion dollars. Then the Fed went into overdrive. By October 2021, that number climbed to $20.0831 trillion dollars in circulation.” Since January 2020, the US has printed nearly 80% of all US dollars in existence.

All of the central banks have followed a similar policy. The New Zealand Central Bank Balance sheet went from an average of $20 billion in the 1990s to $30 billion in the mid 2000s to over $90 billion currently.

The monopolies that dominate global production and trade then seized whatever opportunities of genuine or manipulated shortages to impose price gouging wherever they could.

Most Central Banks (including New Zealand) ignored the growing inflation and tried to simply blame the temporary supply chain problems.

Rightwing pro-capitalist economic and political voices that would normally raise alarms at the risks to their economic system by such measures stayed silent as well as they sense their system had dodged the bullet of a broad economic collapse.

The money printing also induced an extraordinary explosion in the asset wealth of the 1% globally was also a factor in muting criticism as well I don’t doubt.

But today we have inflation averaging 7% over much of the globe including the central advanced capitalist countries in North America. Europe, and Australasia. In Japan the inflation is lower for now but their currency has started depreciating significantly. These are numbers not seen for decades. Two important economies, Turkey and Argentina, have inflation rates of 50-60 percent.

There is an ultimate risk risk that the continuation of current policies, if ignored, will unleash a hyperinflation that will destroy the value of the US dollar and end its role as the world currency. From the point of view of the 1% that is something that must be prevented at all costs. This was threatened once before in the 1970s when US inflation hit 13% and required what was dubbed the “Volker Shock” in the name of the then US Federal Reserve Director Paul Volker who pushed the official cash rate up to 20% to restore confidence in the dollar. Government spending on welfare and education was also targeted for cuts. Aiming for a budget surplus became economic orthodoxy although this was only achieved temporarily in the US given the demands of its permanent wars of empire across the globe.

After the inflationary 1970s in New Zealand we had our own version of the Volker Shock under the new Labour Government elected in 1984 and the official cash rate reached an all-time high in March of 1985 of 67.32%! Variable mortgage rates hit 20%.

Of course capitalists who were in the business of lending money rather than producing goods were massively advantaged. That is the economic origin of financialisation and de-industrialisation in the advanced capitalist countries as literally General Electric became GE Capital. The one percent don’t care how they make their money.

Accumulated wealth is stored in financial or non-financial assets. Historically this was broadly 50/50 in share but a gap has opened in favour of financial assets since 2008.

The 1% hate inflation with a passion as it reduces their financial asset values by that percentage or more. In the last analysis, they determine central bank and government polices on these matters and the war on inflation will be declared as absolutely essential for a nation’s economic survival.

For the rightwing politicians and monetarist economists the fault lies with too much government spending and too much central bank money printing and a certain extent they are correct. Broad-based inflation is in the last analysis a monetary problem.

In the 1970s the principle means of creating money and fueling inflation was to run budget deficits. The governments routinely spent more than they took in taxes. The US also needed money to finance the war in Vietnam. The economic orthodoxy at that time became known as Keynesianism after the UK economist John Maynard Keynes. Keynes was an upper class classical pro-capitalist free-market economist but accepted something must be wrong with the classical view when the  theoretically impossible economic depression happened in the 1930s. He came to the view that a budget deficit is alright at times to stimulate demand and employment. Prime Minister Robert Muldoon and US President Richard Nixon were public supporters of Keynesian policies in the 1980s despite their right wing views on other matters. Keynes also had a cost-plus view of inflation so it was always in the last analysis the workers fault when prices started rising and his solutions involved wage controls to cut wages when that happened. Both Nixon and Muldoon followed this aspect of Keynes policies as well.

However, after the deep recession following the Volker Shock budget deficit financing was sharply curtailed – especially spending on working people – like welfare, health and education. Infrastructure spending was also routinely starved.

Central Banks like New Zealand were made “independent’ with the exclusive goal of targeting inflation to keep it low.

A central bank can create money by simply printing it electronically. What that gets used for however is something that can be different in different periods. In the US they used the money to buy up bonds from distressed banks and industrial corporates to prevent them going under.

In New Zealand $28 billion was given virtually free to the banks to lend directly to whoever they wanted. They gave most of it to property speculators who drove up prices by 30% in one year. Another $100 billion was made available to the government to use to prop up businesses during the pandemic.

This allows the government to run big budget deficits without worrying about if te market can absorb the amount needed in the short term.

This is “unorthodox” by any measure but was considered necessary by governments and central banks across the capitalist world as the crisis hit.

World capitalism got out of the 2008 and 2020 crisis with massive  money printing dubbed “quantitative easing”. Interest rates were driven to rock bottom as part of the process. Debt in all forms – personal, corporate or state-owned – massively increased as well. A significant number of debtors of any type cannot survive even a modest increase in rates

The return to orthodoxy means the central bank must retire the bonds that it has created by buying them back and pushing up interest rates to do so.

But the budget deficits are also being targeted because they are also a way of creating spending artificially – a form of money creation but different from the central banks printing money directly.

This will inevitably induce a recession over the next year or so. This is true for the rest of the globe as well.

In fact the poorer countries are being hit by a double whammy of war induced shortages and prices rises for basic food, fertiliser and other commodities. This will accentuate the downturn. There is also no chance of QE being deployed to tackle the deepening recession.

As Oxfam notes in a new analysis, during the pandemic’s second year (from March 2021 to March 2022), the IMF approved 23 loans to 22 countries in the Global South – all of which either encouraged or required austerity measures.

The International Monetary Fund has announced that the global economy is entering a major slowdown, downgrading the growth prospects of 143 countries. At the same time, inflation rates have reached historic levels. Around the world, hundreds of millions of people are falling into poverty, particularly in the Global South. Oxfam has sounded the alarmthat we are ‘witnessing the most profound collapse of humanity into extreme poverty and suffering in memory’.

This government of New Zealand has acually said it wants to go back to budget surpluses as soon as possible. This is economically illiterate. It is akin to a religious dogma rather than economic science. But it was a dogma adopted by the previous term of the Labour Government from 1999-2008.

This is not economically necessary in New Zealand which has one of the lowest debt to GDP rations of any advanced capitalist country. A modest deficit is actually possible permanently so long as the economy is growing and the debt to GDP ratio can even trend down with one.

Government surpluses actually have the negative impact of withdrawing money from circulation and contracting rather than expanding economic growth. Why does that make good policy?

Also the deficit could be reduced from the current high levels by increasing taxation on wealth to supplement all the taxes workers pay but that seems unlikely in the forseeable future.

Refusing to tax wealth at all includes nearly all forms of capital gains. This encourages a huge weight being given and taken by the property market in the New Zealand economy.

There is also a two funds with over $100billion between them that could be taken and use for an emergency like this.

These are the funds for future national superannuation and ACC payments that could be directed to be funds for the massive infrastructure deficit the country has. These funds were created for ideological not economic reasons.

The ACC fund was created to stop it being a pay-as-you go system to being an insurance system with its own fund to cover future claims because it was being prepared for privatisation.

The fund was created by overtaxing us in ACC payments. The privatisation was stopped by Labour in 1999 but the fund remained and the penny-pinching insurance model which aggressively denies entitlements also remained. The $40 billion could be taken and used for investments in infrastructure while ACCS was restored to being a pay-as-you-go system with a culture of entitlement not denial.

The Superfund was also established by the 1999-2008 Labour government to allow an ever bigger budget surplus to be maintained rather than be spent on things like public transport, water or climate change. It now has $58 billion accumulated.

A fictitious panic was promoted that national super would become unaffordable in the future and we need a special fund to save for the future expenditure that will be needed. No government in the world thinks it is so incompetent that it cannot prepare for the future by spending appropriately now on infrastucture, health and education needs to make the economy more productive to be able to increase the tax take in the future. This is doubly the case when they could tax wealth and choose not to. The Finance Minister Michael Cullen used the fund to keep money out of the hands of the other minister who wanted to spend it.

The coming crisis will threaten the viability of New Zealand’s banking system given its almost total reliance on lending for property (including agriculture). It is probable the banks will need to be rescued from their own reckless expansion of debt in recent decades. In the US and Europe many banks were nationalised after the 2008 crisis only to be handed back to the thieves who created the crisis in the first place.

This should not happen in New Zealand. Banking and insurance should be public services dedicated to meeting people’s needs not profit-gouging thieves.

The only alternative is to nationalise the banks and insurance companies without compensation to the shareholders who have robbed us blind for decades. This will allow the state to take control of the debt mountain and at least partially write it off for home owners and the many farmers who are also likely to be in a dire position once a global recession happens. It will also put the state in charge of all forms of money creation, including that of the banks in the form of credit creation which should be controlled to avoid inflationary surges like we have seem in housing. The banks have also been central to the transformation of New Zealand agriculture into dairy production – a debombbt laden, l and and  water poisoning operation.

An alternative democratically developed economic plan for a Green New Deal to save the people and the planet then needs to be implemented.

The alternative economic plan that must not be dependent on commodity production for profit and relentless and endless degradation of the planet.

We must end all participation in the wars of empire we are currently engaged in to protect our own oligarchies in the so-called West that control, exploit and degrade human life and the planet in our part of the globe. Working people have no side in these wars.

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