Be careful saying that housing is “taking away” from businesses

By Matt Nolan 17/04/2013

There is an interesting narrative running around at the moment.  Liam Dann articulates it in the Herald:

But wait, there is more; this property investment tradition is deeply damaging to the long-term growth of the New Zealand economy.

As well as accelerating property prices it is taking investment capital away from the productive, job creating sector.

What this country needs is more jobs and higher wages. That’s means more wealth-creating companies and more growth for the companies we have. Our companies need local capital.

We need a thriving stockmarket that small businesses aren’t afraid to list on. We need great pools of savings to invest in smart Kiwi companies.

Sounds fair enough right – since we are all (well not me, but other people) buying up houses off each other, we are borrowing dollars for this.  These dollars could instead go to innovate firms!  Another way of viewing it is that our demand for buying other peoples houses is  pushing up the interest rate, and that this is increasing the cost of lending to innovate firms.

Ok ok, let’s just stop right there for a second.  House prices are appreciating due to the large shortage of property (in Auckland this is especially the case), and recent improvement in credit availability.  Now the improvement in credit availability is actually reducing interest rates for “innovative firms” – but let’s put that to the side as well.

Let’s instead pretend that there is just a fixed pool of capital.  It isn’t true, but it is what this argument is based on.  And let us also ignore the fact there is a housing shortage and a terribly low build rate – instead we will assume that no houses are being built, and that there is no population growth, and no aging, and nothing that will change the composition or quality of houses required.

In this case, when people “borrow to buy houses off each other” (the primary concern of bubble proponents) we aren’t removing capital from the stock available for businesses.  Remember, the person who borrows to buy a house then gives someone else a bunch of wealth – which they can in turn invest or save (which will then go back to become credit available for our “innovative businesses”).  In the case where there is no actual INVESTMENT in housing, we aren’t (on the face of it) restricting business investment by buying property!!!

All the factors I ruled out above are reason we SHOULD invest – they are drivers that indicate we need to invest, or they were actual investment.  A bubble is supposed to “crowd out” investment to other areas by leading to TOO MUCH investment – we should be experiencing TOO MUCH building … but this isn’t what is happening. [Note:  Even if you do not believe there is a shortage of property in of itself, build rates remain low.  As a result, part of any concern about a housing bubble needs to be premised with “and I expect a sharp increase in spending on residential investment”]

We could argue that it is due to risk – the more mortgages that are written up, and the larger gross debt is, the more risk banks are taking on and as a result the less they are willing to lend to other business types!  This is true – but to think about this we have to ask about how banks view relative risk (Note:  A bubble should make mortgages relatively riskier, which in turn should (depending on regulation) make them PREFER our innovative businesses – it is on the willingness to borrow side whether things are out of whack).

We can argue about what is going on with this, and what regulation should be – but arguing that the rising house prices and a low level of building activity is crowding out local investment is fallacious.


This “productive vs non-productive” distinction is investment isn’t economics – it is a value-judgement.  It sounds like economics, it even smells a bit like economics.  But an economist recognises that a house provides a set of “rental services” and that an individual is willing to invest in something that provides a “low rate of return” if they trust it.  We need to ask about relative risk, relative insurance, relative returns for different investment classes (including housing) rather than giving housing a demeaning name and then expecting people to change their behaviour.