Housing market not alone in driving inflationary pressure

After months of coming under critical fire from Reserve Bank (RB) governor Alan Bollard, the housing market has finally hit back. The Real Estate Institute of New Zealand (REINZ) says that blaming housing for economic inflation is making homeowners a scapegoat.

Tuesday, April 24th 2007, 11:59AM

by The Landlord

Homeowners should not be the “fall guys” in the anticipated lift by the Reserve Bank in the Official Cash Rate (OCR) this week, says REINZ.

Instead the government should look at its own expenditure and its impact on inflation and interest rates.

But rising housing prices would inevitably receive the blame for inflationary pressure resulting in the OCR increase and further pressure on the exchange rate, says REINZ national president Murray Cleland.

Cleland says that housing isn’t the culprit; it is just one of many factors that have contributed to inflationary pressure and shouldn’t be singled out for undue attention.

“A strong housing market is not the only driver of inflation, and the consequent pressure on the exchange rate, and the RB should consider other factors over which the Government has more control, rather than relying solely upon the OCR to quell inflation.”

“The RB has a choice: it can either continue to demonise homeowners or it can put pressure on the Government, both central and local, to rein in their expenditure. Having raised the OCR, at a cost to exporters, the productive sector and homebuyers, we’d like to see the RB focus on the contribution of a growing public sector in the OCR announcement,” Cleland says.

“Houses are worth what people are prepared to pay for them. The housing market is strong because we have high net immigration, good job security, easy access to finance, and the cost of building new houses and acquiring the land for them has increased markedly in recent years.”

“The role of the public sector in fuelling the increase in house prices should not be underestimated. Local authority policies aimed at limiting urban sprawl have driven up land prices by reducing the availability of land for housing. Council levies and developer contributions, ostensibly to fund local infrastructure, can easily reach $30,000-$40,000 by the time additional costs of resource consents for the actual properties are added.”

In Wellington’s CBD, public sector occupation has increased 27% since December 2001 with further significant expansion expected to accommodate the ever-growing number of state sector bureaucrats. In 1987, Crown related agencies accounted for some 20% of the space available; now they occupy almost 40%.

REINZ also notes that a leading bank economist recently suggested that the introduction of the 39% tax rate increased the incentive to pursue capital gains as opposed to income, thereby driving investor preference towards housing and away from managed funds and term deposits.

“A further increase in the OCR will not benefit anyone. It will cause more pain for the productive sector, dash the hopes of aspiring first homebuyers and result in lower economic growth. We would rather the RB turned its attention to the public sector and begged them to stop spending other people’s money,” Cleland says.

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