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

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, as most people would want to learn how to setup SMSF and make regular payments. 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.

4 replies
  1. James McD
    James McD says:

    This is a point that I have always been confused about, how does property “take away” from business. Other than the IPO, how does investing in stocks affect the business? If I buy the stock off someone else, then I am essentially paying them a gain on the stock based on my analysis of the value of that stock, which sounds quite similar to how property prices increase. The stock price is in response to the underlying value of the business, not in relation to the amount of money being put into the stock market. We are connected to the global market, so surely if our businesses are undervalued then there is willing people worldwide who will purchase the stocks. I realise that there are things such as bonds which direct investment can help a business, however businesses seem to be getting enough buyers of those to survive, would more investors in bonds mean lower interest rates for businesses and therefore increase ability for capital investment?

    In summary, other than initially buying share, I don’t see how trading stocks “helps” businesses at all other than making big demands on their profitability. (Note : I am in no way an ecomonist or have studied economics, it is just an interest, so if someone wants to tell me why I am wrong and answer my question then feel free.

    • Matt Nolan
      Matt Nolan says:

      I think deep down the idea is the same as the idea of “crowding out” from government investment. We have some real stock of goods and services sitting around, which can be used for consumption or investment – if we choose to invest in something, it will bid up prices (including the interest rate) such that we invest less in something else.

      However, the trade-off needs to be looked at in terms of actual investment – the fact that house prices have appreciated in of itself doesn’t tell us anything about what is going on with investment and what SHOULD happen with investment … to do this we need to discuss the “nature of the shock”. In other words, never reason from a price change – try to figure out where something fundamental might be going wrong 😉

      With regards to trading stocks on a secondary market (so once the claim on the firm has been made by some of their equity being listed), the price is just a useful way for the firm to get an idea of:

      a) What the market expects for their profitability (inc the value of the capital),
      b) What the cost of raising more equity to fund investment would be.

      Transfers between people (changes in the price) don’t tell us terribly much about the underlying idea of savings-investment … and I think these ideas can accidentally get muddled sometimes, something I’m sure I am guilty of on occasion 😉

  2. Darthb
    Darthb says:

    I think you need to read more broadly – try for a start. You are falling into traps that every economist over the world falls into – misallocation of debt and risk and moral hazard. The free market works.
    You are destroying the world. Yay. How do you ecos feel about that?

    • Matt Nolan
      Matt Nolan says:

      That is easily the least constructive comment I’ve seen on this blog this year – congratulations!

      Let’s see, this post discussed that we actually need to think what a bubble is – and what different changes in investment mean for how we look at an issue. If ensuring that my arguments are logically consistent is “destroying the world” then I apologise.

      However, instead I think that people who overuse the word bubble live in a nasty little world of class wars and zero sum games. This makes me feel extremely sorry for them.

      This isn’t to attack heterodox economists – as many of them are willing to do exactly the same thing, and discuss which assumptions we differ on. This is to attack a lot of the emotive bullshiz used to attack economists on the internet without providing any sort of coherent argument.

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