House prices stifling productivity, hurting economy, ANZ economists say

Wednesday, 18 July 2018

High prices might stop people moving cities for work.

New Zealand's high house prices may be keeping a lid on New Zealand's productivity.

In their latest Property Focus report, ANZ economists said house prices, which have tripled in real terms since the 1990s, are limiting New Zealand's economic expansion.

New Zealand is a productivity underperformer by OECD standards.

'High house prices make it difficult for both workers and businesses to move to locations that will prove more productive, meaning that resources are not allocated in the most efficient way possible,' the ANZ economists said.

'This makes the economy less flexible and dynamic, and limits the scope for urbanisation and agglomeration benefits.'

Economist Gareth Kiernan, of Infometrics, said that could be seen in industries such as construction. 'The unaffordability of housing in Auckland relative to everywhere else is an issue that would stop builders moving to Auckland, where there's heaps of work that needs to be done, because they're better off staying in the provinces where the cost of living and housing costs are not as high,'

Former ANZ chief economist Cameron Bagrie, now operating as an independent economist, agreed there were productivity impacts of high prices.

Economist Cameron Bagrie says rising house prices have also supplied some business owners with access to capital.

He pointed to an OECD report which found New Zealand had high levels of job mismatch – people working in jobs they were not qualified or did not have the skills for.

It was a sign of housing unaffordability, he said. 'When house prices are unaffordable, like in Auckland, you're going to get some people who are not going to do the job they are trained for. If you're a nurse or a teacher or a police officer, it's hard to afford to live in Auckland. You have two options, you can leave Auckland and go to do the same job elsewhere, or you can do a different job in Auckland.'

ANZ said there was another problem for business because the high cost of housing made it harder for people to invest in start-ups or growing their own firms.

'The ongoing establishment of new businesses has an important influence on productivity as new firms tend to be more innovative. And while accessing figures on this is difficult, we suspect new businesses are more likely to be created and owned by younger people who are facing more and more capital constraints these days due to housing costs.

'In addition, our discussions with businesses reveal that succession planning is also an issue for existing businesses, and we suspect housing affordability and the impact this is having on younger generations is a factor.'

But Bagrie said rising house prices had also allowed business owners who already owned houses to put more money into their firms over recent years. They had been able to tap into the equity that built up in their properties.

'The challenge over the next two to three years, with the housing market going nowhere for a while, is that for a lot of SMEs, where are they going to get the capital to expand their business?'

Kiernan said it was not as simple as being able to blame house prices for low productivity.

He said it was possible that some people who could save money but were not chasing home ownership would put their money into investments that would help the economy and provide a better outcome over the long term.