16 November 2008
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In 2008 the price of residential property in New Zealand began to decline after having risen sharply for nearly a decade. The change in fortunes will be seen as a vindication for successive governors of the Reserve Bank of New Zealand who have moralised about New Zealand’s “poor savings record” while deploring New Zealanders’ enthusiasm for investment in residential property. The objection to residential property investment is a valid one. Housing is not a productive form of capital, in the manner of farms and factories. Rather it is a good which ultimately must be paid for with the income derived from agriculture and manufacturing. If the money put into housing gets out of balance with the income derived from productive industry, then there will have to be a correction and eventually the price of residential property will fall.
Over the years the preaching of the Reserve Bank had little impact upon the behavior of ordinary folk. Not because New Zealanders are innately bad savers. On the contrary New Zealanders are willing or even desperate to save in order to buy a home, educate their children, or provide for their retirement. The residential property boom was classic “saving” behavior, in which present goods are sacrificed for the benefit of an anticipated greater future good. Many New Zealanders were willing to put all their disposable incomes into servicing the mortgage on homes and rental properties which were seen as capital assets which would deliver future benefits.
Given the right conditions, New Zealanders save as well as Belgian dentists or Japanese housewives. In fact, until the nineteen seventies there was a well established ‘pure saving’ culture in New Zealand based on low-yielding bank deposits, without any of the speculative element which is associated with investment in property, shares, or other financial instruments. That culture suffered a serious blow from the monetary inflation of the nineteen seventies, and was virtually driven out of existence by the stock market fever of the nineteen eighties, and the boom in property prices at the turn of the century
The current “savings problem” is a consequence of both inability and unwillingness to save. Only those who have significant discretionary income - say the top 20% of income earners -, or those who are already “well capitalised” by way of having a debt-free home and car, could be expected to offer a positive and substantial response to the moral imperatives of the Reserve Bank. But this class of high earners have not responded as the Reserve Bank had hoped, because for most of the past forty years monetary, economic and social conditions in New Zealand have not been such as to encourage a saving culture. Monetary inflation turned pure saving into “a mugs game”, and the repeated failures of joint stock companies and investment vehicles have made investment in New Zealand stocks and bonds a risky proposition.
Trust in the state?
Residential property was the one form of investment which seemed to offer good returns and reasonable security. So the New Zealand middle classes took to residential property investment with an enthusiasm or desperation born of the failure of all other measures which aimed to provide for “financial security” in place of the “social security” which had underpinned secular society through most of the twentieth century. “Social security” had been built upon popular confidence in the benevolence and competence of the state. But from 1984 onwards the leaders of the fourth Labour government - in particular Richard Prebble and Roger Douglas - set out to undermine public confidence in the benevolence and competence of all the economic institutions of the state. Their reasons for doing so were entirely cynical. One would be hard put to find any family in New Zealand which has profited from the normal operations of the New Zealand state more than the Prebble clan. One would also be hard pressed to find any family which has participated less in the productive economy. Richard Prebble, and most of his siblings, were well paid bureaucrats who became exorbitantly well-paid bureaucrats as a result of the “anti-state” reforms which brother Richard so earnestly promoted.
The fifth Labour government’s real intention was to appropriate the wealth and power of the state to the benefit of finance capital and the highest echelons of the state service. To do that they needed to destroy the notion of the benevolent state and “cradle to grave” social security. In all salient respects, their program achieved its objects. Senior state servants saw their salaries increase many fold. Finance capitalists who had never created a single productive enterprise of their own seized possession of the enormous productive assets of the state (which they swiftly laid to waste). And ordinary people lost confidence in the state as the guarantor of their economic security.
Trust in the market?
New Zealanders, having been taught to distrust the state, were then encouraged to trust in the market for economic security. The argument was that investment in the share market would help to develop the productive economy. The real reason was that the share market provided a source of cheap and ready capital for the same class of cowboy capitalists who had driven the privatization of state assets. Within a few short years the savings of those whom the regime (usually disingenuously) calls “mum and dad” investors had disappeared into the financial black holes created by fraud and incompetence. The unedifying spectacle of a “Businessmen of the Year” from one year being jailed for fraud the next will be etched in the memories of all those who lived through the nineteen eighties, while those merchant bankers with better political connections decamped overseas with their fortunes and their knighthoods intact.
After the fiasco of the nineteen eighties, “mum and dad” investors were understandably shy of the share market. They turned to residential property investment for the simple reason that it did not leave their fate in the hands of a corrupt and incompetent capitalist class which they knew from bitter experience could not be trusted. They suffered from shonky real estate agents, leaky home builders, volatile interest rates and bad tenants, but were comforted by the fact that as residential property investors they retained control over their own capital. Their decision might have been “bad for the economy” as Reserve Bank governors incessantly reminded us, but it was, in the circumstances, the best and most prudent form of investment for the individual - for the time being, that is. But in the long run, what is bad for the economy will be bad for individuals, and the long run is now upon us.
The New Zealand investing public, those who seek to achieve “financial independence” and to “provide for their own retirement” have run out of options. And it is important for them to acknowledge the fact. Financial independence is not just an illusion: it is a contradiction in terms. The market economy is a system of absolute mutual dependence. The value of financial assets depends entirely on the existence of people willing and able to physically labor to produce goods which will provide a return upon those assets. In the final analysis we are all dependent upon each other.
In particular, the old, the ill and the frail are dependent upon others to provide for their welfare, and always will be. Possession of financial assets may provide them with a means of control over others, but it does not change the basic reality of their dependence. Those too old to work for must depend upon others to produce the goods and maintain the infrastructure necessary to survival. Take those others - the young, the fit and the strong - out of the picture, and all the financial assets in the world will not save the old or the infirm. A large population of elderly and infirm baby boomers, even if they were to possess the entire housing stock and all the nation’s capital, could not dictate terms to the working age population. Supply and demand will see to that nature takes its normal course, and that for the baby boomer generation, as for any other, old age will be a state of dependence upon others.
Despite, or rather because of, all the efforts of the present generation to achieve “ financial independence ” and to “provide for their own retirement” old age may be a more painful experience for this generation than for those that preceded it. All too often they have provided for their own economic security at the expense of others. In their rush to acquire two, three or four houses for themselves they have effectively deprived young families of the opportunity to buy homes of their own. In many cases, by driving the price of property to unaffordable levels they have deprived young couples of the possibility of raising families at all, and thereby deprived themselves of the future workforce which might have provided for their old age. By lending money at usurious interest rates through banks and finance companies they have exploited the failure of others to purchase houses, cars, or the necessities of life. They have depended for their own success on the failures and disadvantages of others, and by making financial demands which serve to aggravate those failures and disadvantages, they have brought disaster upon themselves and their society.
At the heart of our present social distress is the secular delusion that there can be personal solutions to social problems. If individual financial success comes at the cost of social disintegration, then our lives and our happiness remain in constant jeopardy. You may live in a gated community, but eventually you will have to venture outside, or worse, find the outside intruding violently upon you. And even if we maintain a semblance of safety and security for ourselves, obtaining the same outcomes for our children will be problematic, and for our grandchildren even more so.
New Zealanders have been taught that they cannot trust in the state
for their economic salvation. And now they have learnt
that they cannot trust in the market. So they must trust in
God. I am not talking of the “born again” Christian conviction
of an other-worldly individual salvation by the undeserved grace
of God, but of the collective this-worldly salvation which may come to
a people who abjure usury and other forms of financial exploitation, who
labour as hard for their neighbour’s benefit as they do for their own,
and who attach more importance to the well being of their society than
to the well-being of their financial portfolios.