No pain, no gain: Why this property crash is good for our economy – Liam Dann

I’ve been depressing people in the past week with a gloomy take on the extent of the current property downturn.

It is, when you look at it in inflation-adjusted (real value) terms, the second worst in our modern history.

In Auckland and Wellington, it’s probably the worst. Average house values are off by 35.5% and 40%.

With building consents running well ahead of our current net migration gains and inflation running hot for the immediate future, it will likely be years, maybe even a decade, before we see prices return to their last peak in late 2021.

Ooof ... that’s gloomy.

“Liam (mostly the glass half-empty, opinionist) certainly knows how to take what spring, one may have out of a winter’s day step”, Harvey wrote in the NZ Herald comments section.

Sorry, Harvey. I’m usually accused of being an overly optimistic commentator, which tells you how bad things must be looking.

But (here we go), maybe this is a good thing.

Maybe the property crash is exactly what New Zealand’s economy needed to rebalance and regain some much-needed productivity.

No pain, no gain, right?

News last week confirmed the importance of strength training for improving our longevity.

A study published in the British Journal of Sports Medicine found that two hours of strength training a week was associated with a lower risk of death.

Well, that sucks. Going to the gym and lifting weights is boring and painful – especially as you age.

Like many people, I belong to a gym and try to attend semi-regularly to justify the regular payment I have locked myself into for a seemingly infinite period.

My eldest son loves going. He is young and fit. He sees rapid gains and never injures himself.

Meanwhile, I suffer through brief waves of enthusiasm that inevitably lead me to overdo it, injure myself, and give up.

All of this, of course, provides us with an analogy for the New Zealand economy.

Let’s look at this historic property slump and period of low net migration as a painful workout for the economy.

The longer the property sector is down, the more investor behaviour is likely to change.

People looking for significant capital gains will be forced to take more risk and get involved in the productive sector via equity investment.

Banks will see fewer easy profits from housing and will have to lean into lending more to New Zealand businesses.

Every time I describe property as a non-productive sector, I upset people who quite rightly point out that it creates jobs and drives a significant chunk of GDP.

In fact, the Property Council, using a broad definition (including building, construction, real estate services and other property-related services), concluded that it was the largest industry sector in New Zealand, representing 15% of total GDP.

We can see right now how tough things get – especially in our big cities – when the property sector is down and out.

But that’s the problem, isn’t it?

However you cut it, the property sector is just shifting wealth around inside the economy.

It isn’t earning export dollars.

And as most of the investment is leveraged using foreign (bank) capital, we are actually sending billions offshore in interest payments every year.

I suppose you could count money coming in from foreign buyers and new immigrants.

But that is an immigration story.

High immigration maintains high demand for property and supports the sector. The two go hand in hand.

From boom to attrition

Strong, steady net migration gains in excess of 50,000 a year during the 2010s underpinned a property boom and an era that saw New Zealand dubbed a rock star economy.

Economists at the time argued that running such high immigration rates was undermining our productivity, because firms could rely on a steady supply of cheap labour, rather than being forced to invest in new technology and capital upgrades.

It was certainly a buoyant era, but in terms of our fitness analogy, it was all too easy. Almost like we’d discovered Ozempic and decided we didn’t need to do anything too strenuous to make good gains.

In 2017, a Labour-led Government commitment to tightening immigration threatened to end the party.

Then Covid hit. A huge influx of returning Kiwis in early 2020 and historically low interest rates sparked a massive price spike that peaked at the end of 2021.

That was followed by a record year of immigration when the borders opened post-Covid.

And then a big slump ... from a net migration gain of 134,000 in the year to October 2023 to just 8400 in the year to August 2025.

Now we’re suffering a massive recessionary hangover in our property-obsessed big cities – made all the more remarkable by the backdrop of an export commodity boom that should otherwise have the economy humming.

Anyway, back to that fitness analogy.

The Ozempic has run out. We’ve been forced back to the gym.

If we want to make economic gains in this environment, we are going to have to dig deep, sweat it out, do the hard yards or whatever other sporting cliche you can think of.

That’s easier said than done, of course. It’s not like firms have lots of money to invest in new, productive technology.

Most investors are more inclined to avoid risk and keep their money in the bank.

But the longer this period of low immigration and flat property market lasts, the more likely it is that we’ll see the economy adapt.

Business doesn’t stand still. People keep doing things.

There’s plenty of attrition. Liquidations, bankruptcies and so on.

That’s the “creative destruction” described by Austrian economist Joseph Schumpeter.

Others used the forest fire analogy: however devastating, a forest fire can be a natural part of an ecosystem, clearing out old and dying trees, fertilising the soil and making room for new growth.

Or in my gym analogy, it’s the tearing of muscle tissue, the painful process of shredding and getting ripped, as my son might say.

Like me on a bench press, we need to be careful not to overdo it. If the economy does it too tough, we risk more permanent injury.

That new study did mercifully say that you only need to do a moderate amount of strength training to get a really good payoff in terms of longevity.

Here’s to finding a sustainable balance.

New data on Friday showed net migration continues to tick back up. We had a gain of about 22,000 in the year to April.

Perhaps we can hit a sweet spot this time. A net gain of 30-40,000 a year sounds about right.

And how about a slow and steady upswing in property prices that buoys the services sector but keeps capital returns in line with other investment sectors.

Moderation, that’s the key. A careful, measured fitness regime.

This slump has presented us with a golden opportunity to get the settings right. Surely we’ll take it.

How’s that for optimism? It’s about all I can muster.

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