I totally agree with your post.

I think the real problem is some people decided that rising equity in their own home made them somehow richer and then they have gone and spent some of the equity. This is a fallacy because someone who owns their own home is invested as a producer of ‘accommodation’ AND is a consumer of the accommodation they produce. Therefore they do not really see any benefit from this increase in the price of the accommodation. At best they are fully ‘hedged’ against increases in the price of accommodation.

To use an analogy – The UK is an oil producer that now produces about the same amount of oil as it consumes. If the price of oil increases, does this increase the wealth of the UK? Is it sensible for the UK to start importing more goods? I wouldn’t have thought so.

“Investing in housing” is not the same as “building new houses”. It never was in this country.

We have not “overbuilt” in terms of numbers but We have certainly overpaid in terms of each house built or sold, particularly given the quality (lack of) of the housing stock in the country.

The tax structure favors the passive investment in housing by not ring-fencing the LAQC and by not providing for Cap.Gains on the house. The rest of the investment examples (getting taxed and so many going BK) help us NOT to invest in anything else.

So citing the failed investments in/of the business community is quite accurate and an important point to be made.

As for calling the housing “productive” – it can be argued but I won’t. Y’all can take that any way you like. 🙂

respectfully
BJ

Matt Nolan :@Miguel Sanchez
If one household borrows $X to buy a house of another household it is just a transfer – it doesn’t matter what the ratio of debt to equity is.
If the other household then spends the money on consumption this does lead to higher debt – however, the issue isn’t the transfer between households, it is “what might be” excessive consumption.

What do you mean “if”? What else do you think they’d do with the borrowed money – leave it in the bank? The fact is that we couldn’t have borrowed nearly as much as we have for consumption purposes without putting up our houses as collateral (even though it makes no difference to our ability to repay, which comes down to expected future income). So the problem is that our current rules encourage overinvestment in housing as a vehicle for excessive consumption – you can’t separate the two and say “step A is okay as long as step B doesn’t follow”.

If the NZ supply curve of building new housing were lower than socially optimal (because of problems in the credit market for house builders, so they had difficulty getting finance, if I understand you correctly), then that would mean there were too little investment in housing, as you say.

This is almost the exact opposite of other countries, where problems in the credit markets meant that loans were arguably too cheap, both for home builders and buyers, because they underpriced risk and were based on ex post unrealistic expectations of house price appreciation.

NZ =/= US

I don’t see why it matters whether people (individually or in NZ aggregate) have been borrowing to finance the investment in housing. Though there is a separate question of whether savings might be too low.

I’m tempted to write a Canadian version of your post.