“High house prices make it more difficult for younger households to invest in businesses, limiting the entrepreneurial endeavours of younger people. They also create barriers to labour mobility and social mobility, both of which matter for achieving our productive potential,” they say.
“And to the degree that high house prices are a symptom of excess domestic demand pressure, they will be associated with upward pressure on the real exchange rate, stifling exporting and import-competing activity. The challenges of low productivity growth and housing unaffordability are both complex and difficult to solve, but in our view these issues are inextricably linked.”
The economists say that to keep house prices in check, a steady stream of new supply and greater responsiveness of housing supply is crucial.
“A long-term solution requires that more supply can be made available in future, not just that more houses are available now. To do this, more land needs to be made available, with a steady future pipeline in train, and measures need to be taken to improve the capacity and flexibility of the construction sector so that it can respond to demand pressures. Productivity improvements in construction would help.
They say that making housing supply more responsive would also have the benefit of making any price adjustment “more orderly, which would be beneficial from a financial stability perspective as supply constrained markets are associated with not only high but also more variable house price inflation…
“A clear plan for migration (with well-targeted skill matching) is also an important aspect of managing housing market pressures, with investment in housing supply and infrastructure needed in order to accommodate migration policy settings.”
Really, the complaint about expensive housing, brought about through a lack of supply, is a complaint about excessive levels of immigration into New Zealand, since this is the primary cause of the supply shortfall in the first place. It is also a key source of the “excess domestic demand pressure” that has driven “upward pressure on the real exchange rate, stifling exporting and import-competing activity”:
Indeed, earlier this week, former special adviser to the Reserve Bank of New Zealand (RBNZ) and New Zealand Treasury, Michael Reddell, cited mass immigration as a prime cause of New Zealand’s weak productivity:
[Reddell] says the high level of net migration has been putting pressure on real interest rates, as large levels of investment have been needed to keep up with all the new people.
In a country with a fairly modest savings rate, Reddell says that puts persistent upward pressure on real interest rates.
That, in turn, has kept the kiwi dollar elevated for years making it harder to export from New Zealand – a major issue for Kiwi firms looking to sell their products to the world.
“The consistent pressure on the real interest rates and the exchange rate squeezes out the opportunities that might otherwise be here,” he says.
This means successful businesses choosing not to set up shop in New Zealand, given the increased costs.
Fewer successful businesses means less innovation, holding New Zealand back from productivity growth in the long term.
Given the similar economic structure and similar mass immigration policy, these arguments hold equally for Australia.