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Housing in Auckland - Source: ONE News
There was a strong signal from the government this week that New Zealand will not be allowed to have another property boom like the one we saw between 2003 and 2007.
The signal, which included Bill English not ruling out a capital gains tax to stop a boom, followed a prediction from Infometrics that house prices could rise by 24% in the next three years.
While it's a surprise to hear English not ruling out a capital gains tax (normally politicians run a mile from that issue) it's not a surprise that the government is very worried about a new housing boom.
It would be a worry if it wasn't.
Treasury and the Reserve Bank and any number of economic commentators have been banging on for ages about the need to rebalance the economy so more investment goes into productive businesses rather than just houses.
It's a crucial issue if New Zealand wants to grow its exports and lift its living standards.
Investing more money in housing is not a viable way of lifting economic growth any more. It certainly won't help us catch Australia.
It will simply lead to higher borrowing and more consumption driven growth. This is not sustainable given the new credit environment we live in.
The fear from economists is that one day the foreign lenders who prop up this consumption-driven growth will get worried and turn off the tap or raise their interest rates.
At some point, our increased borrowing will also draw the wrath of the almighty credit rating agencies. Already Moody's has warned against a return to borrow and spend approach.
A credit downgrade remains a risk in the future.
The other reason why we don't want a housing boom is that it indirectly hurts the exporters we already have.
Putting it crudely a strong housing market drives up inflation.
As consumers feel more comfortable about their finances they borrow and spend more. This put pressure on resources and forces the Reserve Bank to hike interest rates.
Hiking interest rates, however, tends to force up the Kiwi dollar as it attracts offshore investors who want the benefit of a high yield.
Remember, in countries like Japan the interest rates are near zero.
A high dollar then chokes off the export sector...which is predominately paid in US dollars - the world's reserve currency.
A weak Kiwi dollar means more profit back for every US dollar New Zealand exporters earn.
Thinking outside the land bank
The policy markers are not saying people must not buy houses or invest in property.
That will always be up to the market and the individual. Kiwis love property and that is unlikely to change.
What they are saying is that we need to get the right mix of investment in the future and about having a level playing field when it comes to Kiwis making investment choices.
Right now, the field is slanted in favour of housing thanks to no capital gains tax and a slew of tax breaks for owning rental properties.
Removing some of these incentives might encourage people to invest more in businesses and the tradable sector.
But whether slapping a capital gains tax on a second home, for example, is the right answer, or palatable to most people, is highly debatable.
However, what's clear is that there is now a political will to do something! Having watched this issue closely for a number of years, this is a major step forward.
Frankly, from a business point of view, it is encouraging.
So watch this space, it is the major economic issue confronting New Zealand, in my opinion, and it looks like things are about to really heat up.
Read more of Corin Dann's blogs.
