What would happen if we all stopped talking about house prices?

Thursday, 22 July 2021

The Government wants to ensure first-home buyers can get into the market, Prime Minister Jacinda Ardern says, and there is concern around 'what's happening with prices and that accessibility'. (This video was first published on March 15, 2021.)

House prices. Imagine we lived in a world where we did not talk about them, where they did not dominate the news cycle, and where politicians did not ask, or get asked, about them all the time.

This is, of course, a fantasy. New Zealand is probably more likely to stop talking about the weather.

What we may sometimes forget – or fail to realise – is all of this house price chatter is almost certainly having an impact on the market itself. As one expert puts it, particular communications about house prices may well be an engine driving the market, rather than a window shining a light on it.

So how does this work? And does how we speak about house prices actually warp our thinking?

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What is performative power?

A complicated-sounding concept that is actually rather simple. Language does not only describe the world, it has the power to change it.

There are literally millions of examples. This one is a goodie. After a politician misspoke at a press conference in November 1989, a German journalist went on TV and said a particular set of gates were open. No biggie, eh? Well, these gates were at the Berlin Wall and he was implying that people on the eastern side of the Iron Curtain were all free to leave.

It really wasn’t that simple but after he said it, all hell broke loose. The mix-up led to thousands of people taking to the streets and ultimately led to the fall of the wall.

Words have power.

The concept of performative power has been studied in dozens of fields – from gender to economics. What has this got to do with housing? Well, there is this one concept called “Barnesian” performativity – which sometimes suggests an economic theory or prediction actually shapes and shifts the world around. It is self-fulfilling.

So it is an engine, not a camera?

Of course, it is not just words. The housing market, like all markets, is generated and enabled by a whole host of ingredients – from the laws, to culture (the quarter-acre pavlova paradise is a Kiwi birthright!) to economic incentives like very low interest rates.

Markets are not these nebulous things humans can do nothing about. There is no literally invisible hand shaping the market. It is really just humans doing stuff, making laws, buying and selling stuff, and communicating.

Let’s talk communication and take the example of Treasury forecasts.

These are smart people – the Treasury is the lead adviser to the Government on economic and financial policy – and since (at least) 1997, they have included house prices in their forecasts.

In 2017, the Treasury predicted the price of housing would go up by 7.8 per cent the following year. Does that do anything?

Professor Iain White, a lecturer in environmental planning who has also written about the language politicians use to speak about housing, suggests it does.

“If the Treasury, of all people, say it is going up by 10 per cent next year, why on earth wouldn't you invest?”

Media will, of course, report on this. That is our job. But this in turn will further reinforce the belief that house prices will go up.

Investors become more confident. First-home buyers scramble desperately to get on board. There will be outraged columns, news reports on how this will put houses out of reach for even more people. People will speak to their friends about the need to buy a house while they still can.

And as White describes it, that public data from the Treasury that is intended to be a detached analysis of what is expected to happen becomes an engine that fuels the market.

We may well have seen a similar phenomenon play out in December last year when Prime Minister Jacinda Ardern said she wanted to see “sustained moderation”, or smaller increases, adding: “I think people expect that you see that in the market.”

Ardern is certainly correct – people who own an asset want to see the price of that asset go up. When the prime minister says this (and signals to the median voter that house prices really are not going to fall), it is likely to have an impact.

“If I was someone looking to invest capital in a way that would likely generate a reliable and good capital return, I would see a statement by the prime minister that ‘sustained moderation’ and acknowledging ‘people expect prices to go up’ in this particular form of asset was close to a one-way bet, particularly when compared with volatility in other options, such as with US tech stocks, for example,” White says.

“Capital looks for places to safely flourish. And housing is about the safest place it can be when politicians are so supportive of asset prices increasing.”

There is more. Once the Government essentially guarantees housing as an investment, there are knock-on effects. It means people are less likely to invest in new businesses that may actually provide jobs. It is easier to earn passive income from houses.

So why does the Treasury report on housing?

It helpfully explains this in the 2020 Budget Economic and Fiscal Update document.

“Household wealth is an important influence on the macro-economy, particularly via its impact on consumer spending.”

You can see that relationship here.

There are a range of factors at play but essentially when your home is worth more, you think you are rich and will spend.

“Controlling for the effect of wages, unemployment and interest rates, a 10 per cent increase in house prices is associated with a 1 per cent to 2 per cent lift in private consumption,” the Treasury says.

The reason the Treasury does not forecast other wealth generators, such as the US stockmarket, for example, is that “housing generally makes up the largest share of people’s assets, and so the wealth and confidence effects on economic activity will be more likely to be captured by forecasting house prices rather than other asset types”.

Wait a second. Didn’t the Treasury say house prices were going to go down last year?

It did. In a pre-election September Treasury report it was suggested house prices could fall 5.1 per cent from their March 2020 levels.

This did not happen.

Remember when I outlined how markets are made up of different ingredients. Well, think about it like this. Maybe in less turbulent times, the Treasury’s predictions are the steak, the centrepiece of the meal.

What is certain in 2020 is that the protein was the removal of LVR restrictions and extremely low interest rates.

That particular Treasury report was also quickly run down by a range of media reports suggesting house prices were continuing to shoot upwards.

And?

OK. Here comes the twist.

You may or may not have picked up that for the past 1000 words or so, I have written about house prices. Not homes.

I have framed houses as a good or product to be bought and sold. Something you use to turn a profit. I did this subconsciously, because, according to Dr Jess Berentson-Shaw, co-director of The Workshop, that is how the country as a whole views housing.

This is the New Zealand housing narrative. Owning a house is a rite of passage. It is what is going to happen to you if you work hard. It is part of life, like moving out of your parents’ house, like getting married, like having children.

The problem is that the narrative is becoming a sham. The reality is fewer and fewer New Zealanders are buying homes. It is not necessarily going to happen to you – but the dream is hard to give up. It is like admitting in your mid-40s that you are never going to be an All Black.

This “housing is something you earn” narrative has also shaped a generation’s policy response to housing, Berentson-Shaw suggests.

The narrative is the reason we don’t think about housing differently. We don’t, for example, consider a European-style public housing system.

Sure, it is easy for you or me to shoot off a self-congratulatory tweet saying “we should do what Austria does. Problem solved” and move on. In the real world, as Berentson-Shaw points out, it is unlikely we have the capability, expertise or will within the public service to do something entirely different. Our policy responses to housing have been warped by our own narrative.

“Houses are assets to be owned. And when they get more expensive they are better, because the owner gets richer,” economist Shamubeel Eaqub says of the narrative.

It sounds OK, doesn’t it? But there is a flip side.

“Half of New Zealand [is] being made worse off because they can’t access the home-ownership ladder.”