DON BRASH: WHY GET ON THE HOUSING LADDER?

Almost since I returned to New Zealand from nine years abroad in 1971, there has been a widespread assumption that house prices always go up, if not every single year then almost every single year. And that those prices would rise faster than general inflation and faster than income growth.

As a result of that widespread belief, it was taken as a self-evident truth that the most important financial decision a young person could make was to “get on the property ladder” by borrowing as much money as the bank – the commercial bank or the bank of Mum and Dad – would lend to buy as much house as possible.

That behaviour has been richly rewarded, while the behaviour of the “suckers” who lent the money – Mum and Dad or the savers at the bank – has been sorely punished.

When I was at the Reserve Bank, I used to illustrate the injustices caused by inflation by quoting the experience of my uncle in contrast to my own experience. In 1971, I had bought a home in Castor Bay, Auckland – it was a fine home with five bedrooms, two bathrooms, and pleasant sea view. I paid $43,000 for it, which was almost exactly three times my very considerable (for the time) salary of $14,000.

The same year, my uncle, who had been an apple orchardist in the Nelson area all his life, retired and sold his orchard for $30,000. Being a prudent man, he invested that $30,000 in government bonds for 18 years at the rate of 5.5%, believing that to be the safest place to invest the product of his life’s hard work.

When he made that investment in 1971, $30,000 was a considerable fortune – it would have bought him 11 Toyota Corolla cars. When the bonds matured in 1989, that $30,000 would have bought him one Toyota and a very small amount of change. He had been robbed blind by the inflation of that 18-year period.

By contrast, the house which my wife and I had bought for $43,000 – mostly with borrowed money - had increased in market value roughly tenfold. We had very considerably increased our family wealth; my uncle had been robbed of most of his.

In 1988, I became Governor of the Reserve Bank, and for a time I was renting an apartment. I still recall being phoned by a real estate agent trying to sell me a house. When I pointed out to him that the interest payments on the mortgage I would need to take out to buy the house he was proposing I buy would be considerably higher than the rent I was paying on a similar house, he pointed out that, while that might be true, the rise in the house price would more than offset that difference.

I noted that if house prices kept increasing rapidly I could well lose my job, given that my sole responsibility was to get inflation under control, so I couldn’t afford to take the risk of buying.

Fortunately for me, my wife and I did buy a house not long after that, and also fortunately for me, my responsibility as Governor was to keep inflation as measured by the Consumer Price Index under control. Had my job been tied to limiting the increase in house prices, I would have been out on the street!

Tragically for more than a generation of New Zealanders, house prices have been rising steadily at a rate markedly faster than incomes. This has been great for some New Zealanders – those who were lucky enough, or wise enough, to be able to buy residential property with borrowed money and hold on as house prices rose and the real burden of their mortgages shrank.

The widely accepted rule of thumb is that an “affordable housing market” is one where the median house price in that market is about three times the median household income in that market. Four or five decades ago, that was broadly true in New Zealand cities.

But over time that has changed so that by 2021 or 2022 the median house price in Auckland was about 11 times the median household income, ranking that city as one of the most severely unaffordable cities in the English-speaking world.

In that environment, it always made sense to borrow as much money as the bank would lend to buy as much house as possible. House prices were constantly rising – and not only rising but rising faster than other prices or than incomes. The game was to start with a modest house and then, as its market value rose, sell it and use the capital gain to buy a larger house, and so on; until in due course the buyer was well up the ladder and could live comfortably ever after.

This of course glosses over the sometimes considerable stresses involved in this kind of behaviour – when the house is found to have faulty foundations or a leaky roof.

But as a generality, this way of becoming affluent served a great many New Zealanders well. Hence the frequent encouragement to young people to “get on the property ladder”.

But what if house prices stop rising faster than incomes, as indeed has happened over the last couple of years? What if, perish the thought, house prices actually fell from their recent ridiculous levels? In Auckland, the median house price has indeed actually fallen a little in the last few years, so that the latest data suggest that the median house price in that city is now “only” about 8. This still qualifies the Auckland house market as “severely unaffordable” but it is now well down, relative to median household incomes, on the level a few years ago or relative to Sydney or Melbourne.

Sadly, there are plenty of people who have a very strong interest in talking up house prices – people who have borrowed heavily and now need to sell, even at a loss; retirement villages which depend on new customers being able to sell their homes before moving into a retirement village; lots of real estate agents who are much more prosperous when the housing market is buoyant and houses are selling quickly.

But at last we have a Government which appears intent on dealing with the factors which have caused house prices to rise much faster than incomes over decades. And we have known since at least 2011 when the Productivity Commission concluded its report on unaffordable house prices that outrageous house prices are a direct result of local council behaviour – particularly in restricting the availability of land to build on, in requiring the cost of infrastructure to be loaded onto the price of sections (rather than being spread over the life of infrastructure like roads and sewerage), and in taking interminable time to reach decisions.

We have in Chris Bishop, Chris Penk and Simon Court leaders who are genuinely committed to fixing this problem – in particular by reforming the Resource Management Act, pressuring local councils to release more land and allow for taller buildings, and simplifying building approvals.

If they continue on their present track, these men will do more to reduce poverty and ease social distress than any other action the Government has taken to date.

Don Brash

2 June 2025