Key admits to ‘crisis theatre’ and talks up house-price inflation

 

You may have thought John Key was genuine when he’s talked about fixing the crisis in affordable housing – despite his deliberate tardiness in even acknowledging the crisis.  That isn’t the only thing about which he’s been deliberate.

Key’s visceral overreaction reaction to economist Arthur Grimes’s quite sensible proposal to reduce Auckland home prices by 40% reveals all you need to know about how serious he is about achieving affordable housing. Answer: he isn't, and would run a mile before allowing it, or anything remotely like it, to happen on his watch.

Grimes, a former Reserve Bank chairman at least dimly aware of central banks’ role in creating housing bubbles all around the world, suggests that by flooding the city with 150,000 homes prices would fall dramatically, by around 40%:

My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house.
    Others may have a different value judgement to mine – but rarely do they make such a judgement explicit.

Key lost no time in making his own judgement explicit:

"Nah, I think it's crazy," Key [said].

Translation: Too much electoral damage for the PM to pursue.* Older, richer families, couples or individuals who already own their own (highly appreciated) house do vote National, and these people are very much Key’s concern. So policies will continue as they are, the beneficiaries of government-maintained house-price inflation can continue boasting at dinner parties, and Joe and Josephine would-be-first-home buyer can just go out and get fucked.

He concedes only that a little bit of house inflation will do you good, and that is precisely what he would like his “policy settings” to deliver. Never mind all the very real the dangers of letting the inflation genie out of the bottle. When pointed out to Key that the modest price fall proposed by Grimes would simply take prices down to where they were in mid 2012, Key responded:

What Auckland needs, and what the rest of New Zealand needs where it's in high growth, is a sustainable supply of housing to meet the demand. Obviously making sure that prices don't go up too rapidly is an important part of what we're trying to achieve here. [Emphasis mine.]

This tells you more clearly than you may have wanted to know that every measure mooted by his government to “solve” the housing crisis is precisely what it appears to be: nothing more than ‘crisis theatre’ – action to appear as if action is being undertaken, and nothing more. Because we now have it confirmed that key Key policy is making sure, or trying to, that house prices keep going up. That’s “an important part of what we’re trying to achieve here.”

A pity for Joe and Josephine that his favoured policy settings have left them outdoors, their poorer relations sleeping in cars, and house-price inflation well on into its galloping phase. Just an unfortunate but electorally undamaging blowback from “what we’re trying to achieve here.” Because despite almost every government everywhere being tempted to inflate away their problems ( like every dieter: “just a little bit and no more!”) no government in history ever, anywhere, has managed to keep that inflation under control, to keep prices rising-but-not-rising-too-rapidly. Not one. What the policy unleashes, and has unleashed here, is severely destructive capital consumption acccompanied by “wicked inflation that no one can control” – the very ‘tiger by the tail’ that Hayek and others warned about that, once into its galloping phase, can only be cured by real pain.

But I doubt from what Key says that the crisis he’s helped cause and then stoke keeps him awake at night.

I doubt that, because rising house-price inflation has been his policy from the start of his premiership; the scumbag revealed it when he blithely dismissed leaky homes as a crisis that would be cured by the printing press. Speaking to Guyon Espiner seven years ago  about his plan to sweep the $11.5 billion leaky-home liability under the rug, Key said his plan was explicitly to inflate his way out. He told Espiner,

if we can ensure that a homeowner has guaranteed access to funds, and a guaranteed ability to repay . . . we can allow inflation and we can allow rising house prices to let people fix their home and actually move on and move out of the situation.

As I said when the Rug-Sweeper-In-Chief first let that news slip,

    Key’s plan to wipe out the billions of dollars of leaky home liability (and by implication the tens of billions of dollars his government is spending that it hasn’t got) is not to address the real problems, it’s going to be to print money – the age-old remedy of quacks, charlatans and short-sighted so-called statesmen.

No wonder the policy looked so appealing to this lot.

But that doesn’t explain why Espiner and other media have never picked up on the admission.

Or why we must be forced to continue living with all the unintended, but entirely predictable, consequences.

* * * *

NOTE:

* Writing of the very similar UK housing bubble and politicians fear to prick it, Dominic Frisby writes in the Guardian:

The solution to the housing crisis is lower prices. What politician will stand for that? They daren’t let this market fail because too many people’s wealth is dependent on the value of their home – and homeowners vote more than renters…
    The collapse of UK property prices between 1989 and 1994 made the Tories unelectable for half a generation. No party wants such a fate. Indeed if interest rates reflected 10% house price inflation, homes would become affordable pretty quickly, but then the whole financial house of cards would come crashing down too. Those responsible for that would become [totally] unelectable…
    However this ends – falling house prices or a generation even more excluded – it is going to be painful. But the sooner we recognise the causes of high house prices – our systems of money and planning – the sooner the problem can be properly dealt with.

N.B.:

Grimes recognises that inflationistas like Key will argue that a collapse in house prices of the magnitude he proposes

would cause financial instability given banks’ loans to mortgage-holders. Luckily [says this former Reserve Bank chairman], New Zealand’s banks are well-capitalised and stress tests have shown that they can survive a large fall in house prices – mostly because the bulk of their loans pertain to older mortgages with plenty of equity behind them.
    For those who share my wish to bring house prices back to a level which ordinary people can afford, what is to be done? …
    The question is how can Auckland grow and at the same time have house prices that become affordable for more people. Logically, the only answer to that conundrum is that the city needs a massive increase in the number of dwellings.

Like Eric Crampton last week, and me yesterday [scroll down to the first update], he has a raft of sensible solutions. “To save the city,” he summarises, “ we need to flood it with housing.”

READ  ON FOR GRIMES’S SOLUTIONS:
How to fix a broken Auckland? Add 150,000 homes to crash prices by 40% – Arthur Grimes, SPINOFF
AND FOR KEY’S REVEALING RESPONSE:
PM says Arthur Grimes' call to build 150,000 new houses in Auckland to produce a 'supply shock' that drives prices down 40% is a 'crazy idea'; says home owners don't want equity values to fall; says it would hurt banks – INTEREST.CO.NZ

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