Idle riches
Our "housing market with an economy tacked on"
In Aotearoa NZ, where I live, we never really had a clear delineation of class. We had Māori tribal structures for centuries; then colonists turned up and, even where they obtained land in ‘questionable’ ways, they still had to be hard workers on it, clearing ground and building.
By the time we’d had a generation or two of embedded land “ownership”, ready to make things comfortable for their progeny, along came World Wars and Depressions and then the egalitarian (some might even say “socialist!”) taxes of the 1950s and 60s.
In either case, in our young country, it’s taken a few extra generations for the bourgeois idle rich to really emerge from the orifices of their wealthy parents, and claim their predictable place at the axis of political power and influence.
In many, older, nations this structure is so embedded that political and business lineage are just social wallpaper. But, down here, we still are a bit suspicious of rich people. There's literally a derogatory term we have for this in our part of the world—“Tall Poppy”—referring to a person who shows some ostentatious sign of success or wealth, and therefore is in need of being “cut down to size”.
The result of all that is ‘success’ here is pretty low-key. People hide their helipads on off-shore islands, tend to drive Teslas rather than Maseratis, and think of wealth building in terms that objectively are closer to ‘property speculation’ than to ‘investment’.
Indeed, local legend,
describes us as a “housing market with an economy tacked on”.If you’ve been reading me for a while, you’ll know I’d much prefer us to be taxing idle wealth than productive income.
The reasons for that should be self-evident but, given the media keep telling me that any wealth or land tax policies are “toxic” and “impossible”, for “reasons”, I think I probably need to clarify why I have that view:
Wealth is passive. There are reasons for wealth to exist and grow—sometimes we need to “save up” to buy things—but that shouldn’t be just for its own sake. Basically, there should be simple limits on how long and how large wealth can grow before it gets “put to work”.
For example, a $50m DaVinci artwork should be in an (admission-charging, if necessary) museum, not a dark crate in a tax-dodging freeport warehouse.
There is no good reason for economic and social infrastructure things like banks and utility companies to make super profits; there should be windfall taxes. There is no good reason for billionaires to exist; they should be taxed out of existence1. And, generally, we should tax things in such a way that they incentivise productivity, rather than hoarding.
But as things stand, it is from income that most of the disincentivising power of tax gets directed—a thing tied directly to productivity. Of course, not all the income-earning work people do is good, but at least you have to do something to earn income. The thing that grates me about stashed wealth is that, as often as not, the less you do with it the more it becomes worth. This is true for land in desirable areas; it is true for intellectual property kept out of reach from uppity young things who might adapt it to revolutionise money-printing legacy industries; it is true of that DaVinci artwork languishing in the dark.
And it’s true of the VC-funded megacompanies which have stored up so much wealth using those sorts of machinations that they can undercut, buy-out, and drive out of business, entire sectors with the promise of “efficiency”. And then, when they’re the last men standing, start raising prices and reducing services; safe in the knowledge that a “market” no longer exists to compete with them.
The thing is, it’s hard for any good capitalist to even deny this is a bit shit. When your economic growth is measured by the success of monopolisation and hoarding you haven’t got an economy. You’ve got, as Yanis Varoufakis points out, a return to feudalism: That is, a social and financial system where a small segment of the population controls all the wealth and therefore all the choice about whether to imbue civilisation with innovation and progress or not, because the rest are largely ‘tenants’.
Housing, in particular
You can’t exactly blame people for taking advantage of these idle riches. The Working and Middle Classes have, for decades now, been taught that housing is not just a “nice to have”, but essential for our wellbeing after we retire. If you don’t own property in this country—and many like it around the world—you’re going to really struggle when you stop (or are stopped) working.
This is not just inequitable however, it’s actually dysfunctional. The perception that housing is an investment and a safety net, has duped us into thinking “the more we all have, the better”.
Only, actually, hardly anyone benefits from this situation. In reality, the more the housing market grows, the more it takes from the majority.
I could write pages on the social ills of an overpriced housing market: The extra costs to our health and education and crime and skill shortages and traffic congestion and business underinvestment. But, it’s actually easier to just think about it in terms of who is actually benefiting from this
So, who does benefit from high house prices and an ‘investment mindset’ around housing:
Land bankers—if you have equity or cash to buy property and do fuck-all with it, you can get, in the immortal words of Mark Knopfler, money for nothing. All you need is a cool community to build the desirability around you, and a tax and regulation system that encourages you to waste our precious land resource, and your pointless overgrown eye-sore can make you rich!
Actual bankers (and their shareholders, if applicable)—in Aotearoa New Zealand last year, our biggest banks made a profit of just over $1400…For every adult and child in NZ…After tax. A large portion of that is the arbitrage between the stingy rates they pay in interest for savings accounts and the interest they charge for lending on increasingly expensive houses. They are, without question, incentivised to lend more and more to ensure the amount of interest they earn goes up and up.
People selling to leave the country—it goes without saying, if you can sell your house at the peak of one market, then leave for another more subdued market, you can do quite well from a booming investment.
So, who doesn’t benefit?
Home owners—there’s an economic principle which drives a lot of the housing market idiocy (and political justification for it) called the “wealth effect”. Basically, it’s the idea that an economy benefits from people ‘feeling more rich’ and therefore ‘spending more money’. Only, it’s not really real.
In practice, most of the money gets spent on garbage outdoor furniture which lasts 16 months then gets put on a trailer and dumped at the tip, or on pointless consumptive car or boat upgrades…
Someone with an overvalued house might feel more confident to start up a productive small business; and that probably does happen. But, most small businesses still fail.
And, most important of all, in each of those cases the spending is likely to be financed by debt—essentially borrowing from some imagined future, in such a way that the more disconnected your house price is from reality, the less sensibly you’ll invest in your present.
So, you feel rich and therefore borrow more for inefficient things, but you’d actually be better off if house prices were just lower so you weren’t getting yourself in more debt.
Sure, you can sell the house and benefit from its increased value, until you find you immediately need to overspend on another place to live in the same market.
Businesses—clearly, money spent on buying houses and paying interest to banks could be spent on other things. I can’t think of a single good argument for spending money buying up land and just sitting on it while demand grows vs. investing in growing a businesses which (at least in principle) requires innovation, employment, and expansion in order to remain competitive.
It’s got so bad here that a significant number of small businesses are kept viable not via their operation, but by the capital gain of the residential house they borrow against to fund the business. That, a functioning economy, does not make!
Younger generations—young people locked out of secure housing will either become bitter and disengaged and become a burden on their parents or society or, if they are qualified and have prospects, they’ll move away and take their potential elsewhere. A country needs the energy of young people, so concentrating access to something as basic as shelter in the hands of older generations is really counter-productive. Literally.
Employers—high housing costs applies continuous pressure on wages. Even if you believe the balance of labour power is fine, and employers should be able to suppress wages as they’ve done for decades, there’s still only so much employers can do: They either put up with exhausted and disgruntled employees with multi-hour commutes, stress, and a desire to move on, or they have to increase wages to give their employees a productive work-life balance.
Renters—this seems obvious. But, actually, some people genuinely believe landlords are doing The Lord’s Work; providing housing for people who can’t (or don’t want to) purchase a house outright. To them I say, we seem to expect nurses and teachers to receive part of their remuneration in ‘feel-goods’; why do landlords expect their good work to not be similarly rewarded?
I’m being factious of course, but the main problem with a housing market that operates in its own universe, disconnected from the social value market, is landlords are encouraged to revert to other disconnected signals for determining their pricing. So, they raise your rent simply because wages have gone up, while simultaneously allowing the property to get older and shittier and objectively worth less for living in. Speaking of that…
Landlords—I’m guessing you didn’t expect these guys in this list. But high house prices actually don’t benefit anyone trying to run an honest landlord business.
In the landlord game, there’s a concept called yield, which is basically the profitability of a rented property: The more you pay for a house then, the lower this yield.
To make this clear: While (lack of) taxes, and things like zoning and banking regulations determine the purchase price of your property, it is the market that determines what you can charge in rent. So, when you purchase a house in an established street, the rent you can charge is largely determined by what the rest of the landlords in the area—many who purchased their properties years earlier for far less than you—are charging, or what renters can afford to pay. As such, most landlords in NZ rely on capital gains to make their purchase worthwhile.
This, to be clear, is bad business: Most of these landlords need to top up their “business” constantly with other income, and certainly can’t afford to improve or properly maintain their properties. All in the hope that property demand will continue to outstrip supply, and keep this fragile gravy-train rolling. Any landlord who is honest with themselves knows this is both ridiculous and tenuous.
Socialists and libertarians—let me tell you, it’s tough to find things that both socialists and free-market libertarians both ought to hate, but increasing housing prices is definitely one of them.
It’s probably pretty obvious why socialists might like more accessible housing for everyone. And, also, why they might prefer there to be fewer ultra-wealthy property barons.
But, partially because of this “socialist appeal”, recent confused libertarian talking points have tried to claim high property values are good because they “give their owners autonomy from government”.
That, of course, is idiotic: It’s clear that in even the most extreme ‘small-government’ scenario, some kind of bureaucracy is always going to be required. You can have your private police and schools and hospitals and toll-roads and free markets, but someone still needs to mediate when your police force starts a fight with your neighbours’ police force; someone needs to file the property ownership records; someone needs to chair the town council and collect donations for the Civil War Memorial maintenance… In practice, there’s still a bunch of bureaucracy involved in having a small government and it needs to be collectively paid for.
Only, if you’re a true libertarian, the last thing you want is to have “hard work” or “freedom” taxed in the form of either income or consumption taxes. So, that means any sensible libertarian is actually pro-land taxes (!)… Because a land tax is the only kind of tax that doesn’t penalise actual work; wealth-growth from price increases in a ‘monopoly’ market which simply rewards supply constraint, is wealth extracted from other peoples’ (communities) work, not the owner’s. That makes wealth generation from a housing market impossible to completely rationalise for any genuine libertarian: Indeed, if you think about this for just a second longer than many reactionary right-wingers seem to, it’s obvious that increasing house prices impose exactly the kind of unfair burden on individual rights that libertarians hate.
No matter how much sense departs the room any time an ignorant libertarian opens their mouth, the one thing they all agree on is libertarians really like low taxes. Meaning, if they’re stuck with rationally having to support land taxes, their only sensible desire would be for house prices increases (and therefore tax increases) to slow way down.
The whole nation—as I mentioned, housing insecurity is directly corelated with stuff none of us want, like productive and educated citizens leaving. But there’s also a strong line to increased crime, higher demands on healthcare systems, poor education outcomes, increased pollution and climate emissions, damage to mental health for adults and children, business failures, and so much more.
None of this stuff is good.
I’m sure I’m not telling you anything you don’t already know here. It’s clear that only the thinnest slice-of-a-sliver of people actually should want house prices to keep rising. It’s just that fixing this problem is hard; any substantial fix (like land taxes) is going to look like it’s hurting a large portion of home-owning citizens who have come to depend on the ‘wealth effect’.
It’s also clear though, we’re beyond the point where people can credibly argue that treating housing as ‘an investment in need of continuous value growth’ is a universal good. Even the people who own property now are simply stuck. This is a problem that needs bravery by both regulators and property owners, and it starts with frank and honest conversations. It starts with processing the reality that, regardless of your social class, you’re essentially statistically-guaranteed to be among those not actually benefitting from infinite house price growth.
If you’re here for that. Same.
-T
Just to clarify, taxing billionaires out of existence is about redistributing power, not wealth. I wrote a whole series on this stuff. I don’t want you getting distracted by the myth that taxes “pay” for things like hospitals and roads in a country like ours (with its own money printer); taxes are primarily about directing behaviour for redistribution (not money for redistribution).
Absolutely billionaires shouldn't exist, multi-millionaires should be taxed out of existence as well (down to a maximum of maybe $100 million?)