Economist Brian Easton looks at housing bubbles and what we might do about them

Economist Brian Easton looks at housing bubbles and what we might do about them

This is a re-post of an article originally published on It is here with permission.

Stein’s law says that if something cannot go on forever, it wont. But does a speculative bubble matter? The cryptocurrency bubble can be left to itself (tax evasion and criminal transactions aside). Why shouldn’t we do the same for housing?

There are two general reasons why we should be concerned with a house price bubble. The first, is that, dangerously, housing is currently in the middle of a Minsky speculative bubble. How close we are to the ‘Minsky Moment’ and the crash which follows one can never tell. But when a market goes into the downer it is likely to cause great distress to people and to the financial system. (Recall what happened in the US in 2008.) The second Stein’s law is the longer it goes on the more people who suffer when it stops. The sooner we ease out of the bubble, the less distressing it will be in the long run.

The second is that rising house prices compound economic inequality, especially against those who do not own their own homes.  This column deals only with the dangers of a speculative bubble. The distributional issue belongs to another column, although it is kept in mind here.

Perhaps there is a third reason. Should public policy actively promote a speculative bubble in housing? It does in at least two ways.

First, the tax system favours speculation in housing over other sorts of investments. The story is complicated and various powerful resolutions, such as a comprehensive capital gains tax, have been ruled out. Recall that the Key-English Government tightened up on some of the loopholes in housing-investor tax avoidance in its first term and later introduced a limited ‘brightline’ capital gains tax for rapid housing turnover. Do not be surprised if this government removes more loopholes.

The second promotion of the speculative bubble is the way we report house price changes. Understandably real estate agents choose the statistic which encourages speculation. Thus, the current focus on the national median selling price up by 19.8% in October compared to a year earlier. However, the Real Estate Institute (REINZ) also publishes a House Price Index (HPI), which covers the price of all houses and not just those sold. It increased by 13.5% in the same period, less – but still high. The selection of houses being sold is different from the total housing stock and, not surprisingly, what is sold experiences bigger price increases than average

We need an official House Price Index. A decade ago the government turned down a proposal for Statistics New Zealand to construct one. (As usual, the government showed little foresight of impending policy challenges. We also need an official Housing Affordability Index which recognises that the cost of unit debt servicing has fallen with lower interest rates.) It would still show sharply rising house prices but be authoritative. In the interim we need to focus on  the REINZ HPI. The difference will become critical as housing prices stabilise. Perhaps there should be a specific reference to housing price stability in the next Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank.

But how to stabilise them? Removing tax loopholes and reducing the hyping of the market is a start. But the key mechanism in a Minsky bubble is leveraged borrowing for speculation. That causes the greatest havoc when the bubble pops. On the other hand, borrowing for own-homing against one’s future earnings makes sense.

So the new LVR restrictions need to reduce the amount of highly leveraged borrowing within the housing market by requiring an increasing share of homeowner equity for mortgages beyond particular thresholds: for instance 20% equity required for borrowing up to $800,000 (that is, for houses below $1m), and 40% equity for any borrowing beyond $800,000. The immediate effect would be to continue to assist first home buyers, while reducing overall leverage in the housing market. The longer term effect would have price rises at the top of the market curbed (and that would reduce them in the middle of the market, again favouring first-time purchasers).

Meanwhile, we need to increase housing supply. In the last three years, the government has been building up capacity to do this.

For instance, underutilised suburban land could be unlocked by charging rates on the basis of it being fully developed. It would avoid the opprobrium of the central government raising taxes; it should simply facilitate local government doing so; while it would be voluntary on their part, few will not seize the opportunity, given their desperate needs (including upgrading failing parts).

Another opportunity arises from the shift to working-at-home. That will release office space in CBDs (some cities are expecting 40 percent reductions in demand). Why not convert the surplus office space into accommodation? While much will be done by private initiative, speeding up the transition requires an active government housing agency, especially targeting suitable accommodation for those in housing need.

The above measures targeted against speculation will check house price rises in the short run (say, by the end of 2021) and the supply initiatives will reinforce them in the medium run.

However, in the longer run the house price inflation will return unless investors’ financial holdings (savings) can be channelled elsewhere. Investors invest in housing because they think that will give them the best return on their savings. Today nominal interest rates are likely to be below inflation for some time in the future.

The danger is that if investors are discouraged from investing in housing, they will invest in even less-productive speculative schemes (as they did in finance companies in the first decade of this century and in cryptocurrencies in the second). Unless they are leveraged investing, there is not the same issue of financial stability but it is wastes the economy’s savings.

Can we offer new investment opportunities, to encourage them to use their savings more productively for them and the economy? The obvious need for younger investors is to save more for retirement (especially if interest rates are going to be low).

One possibility would be an EET retirement scheme, that is, Exempt deposits in the scheme, Exempt returns to savings in the scheme and Tax withdrawals from the scheme. This is the opposite of the Kiwisaver scheme which is TTE (tax, tax, exempt). So the investor gets the benefits from day one. Put $10,000 in the scheme and you get the benefits of reduced income tax as soon as you invest in the scheme.

Introducing an EET is fiscally tricky. But insofar as it encourages savings it will benefit the economy and take the pressure off the housing market. Mind you, it is not leveraged investment so the return will not be higher, nor will there be a resulting crash and losses.

If we cannot find better investments for ordinary people, we can only stabilise house prices temporarily and do little for those with inadequate accommodation.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on It is here with permission.

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Housing is a major game here in NZ. Not going to change much, inspite of share trading platforms making some head way into the savers' funds. Kiwisaver is another safe bet, like housing. No pooing in trying to manipulate these too much. Government effort and funds should be spent in more house building, infrastructure and clean energy, transport, etc. Subsidise FHBs if they can. That will do.

Agree, house prices will continue their upward climb, the fundamentals behind it are as strong as ever, returning kiwis, some returning to get super, affordability for all the young, well paid professionals, call it a ponzi if you like, but there are plenty of more risky ponzis out there. We live in a very desirable county, its uncrowded, compared to almost anywhere else, and there is plenty of work, for everyone with skills, its politically stable, and we are a net exporter, of products we produce at a lower cost than competing countries. .

Net Exporter? Links please

'we are a net exporter, of products we produce at a lower cost than competing countries. .'

This why we buy all our 'stuff' from China - because we can make it cheaper?

"returning kiwis, some returning to get super, affordability for all the young, well paid professionals,"

You know this bogus line has been completely debunked multiple times over - even by none other than head spruikers T Alexander and B Norwell.

So yeah.

Well I guess we are all entitled to an opinion aren't we. For me, we have more than enough people here. I personally would be happy with near zero immigration for the next 20 years, which would solve a lot of problems, eventually. Why don't we have a referendum on a population figure. I don't have anyone in my circle re friends, work colleagues or family that want immigration to continue at the rate of the last 5 years. As I said, uncrowded to you is over crowded to me. If I want huge crowded cities, I go on holiday to those places and then come back to the quiet life.

Njay... exactly but if we don't have that referendum on immigration soon we will be outvoted by "new NZers" wanting the migrant production line of cheap labour (for their specialised liquor and fast food businesses), family, relatives and cultural brides (who they have often never met) to continue to flow unchecked into our country.
Just listened to eight interviews on housing problems. There was not even one mention of immigration. We need to insist on a Royal Commission of inquiry into the whole issue of immigration without delay.


It is a Fiat money bubble not a house price bubble.

Indeed. one just has to compare a 70's Fiat 500 with the bloated MY20 version.

Oh, wait, the other 'fiat'....

Isn't this EET scheme what Australian super is based on using incentives like salary sacrificing? Look at the balances they've built up over the ditch as a result... average earners have million dollar+ super balances.

However they pay tax if they draw it out as income over a certain minimum level. But on the plus side they can do this from age 60. Imagine being able to retire at 60 not 67 if you had the choice. Their super is way more complicated than boring old Kiwisaver but offers a lot more incentive and flexibility I believe.

They do have a problem with people hoarding money in their own homes tax free. Can't see how NZ will avoid that if we pull back on investor loopholes now.


This is worse than just a housing bubble: this is a full-blown Housing Ponzi scheme that will create havoc to the whole financial system once it gets to its inevitable re-alignment with the economic reality. The higher it goes, the bigger the mess once this happens.

A good read. I liked that you wrote this on 20 Nov and made the following statement: "Perhaps there should be a specific reference to housing price stability in the next Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank."
Your idea of having different LVR limits for different price brackets is worth exploring further. And I very much agree with the premise that NZers will need an investment route that is easy to understand and accessible once houses are no longer the only game in town.

I'll say it again - rent controls!

God no Kate! That would stunt our already stunted housing supply

Are you meaning that the majority of new builds are purchased by investors?

I see very few new builds coming on the rental market - that said, there are some, but they aren't common;

The ones that concern me and should be subject to rent controls are the lower quartile houses, that are purchased by buy-to-let investors - such as this one;

Now offered for rental at $670/wk;

By the way, the rent estimate is $410-560/wk.

According to my proposed formula for rent controls - the rent maxima on that place would be $545/wk.

Rents are skyrocketing. This has to be stopped in its tracks - as ultimately taxpayers pay these higher premiums via the accommodation supplement... and even then, tenants still find such weekly outgoings unaffordable.

Rent freeze for 10 years, tax for unoccupied houses and massive cuts to immigration would go a long way towards fixing the housing issues.

Yes, I think we should introduce a Stalanist era too. Get rid of all those fancy things in the shops the people don't need.

They can survive fully well on cabbages potatoes and mutton.

The problem is just about unsolvable politically. Both Leaders ducked the question; they won't get a tick from anyone who thinks their 'wealth' (related to a number someone attached to their aging house) is going to diminish.

Given that they represent the majority at any one time, no downward move is palatable. Thus the 'stabilise' word, probably spin-doctor-originated. A kick-for-touch.

Inevitable there will be a readjustment; good luck to us all given the knock-on effects.

Good points but savings are old money. New money (since 1987) is ever increasing debt inflated by leverage.
Economics split on this fact and some sill emphasise saving incentives. But the rich are making most money in stocks and REIT by leverage


A 10% drop in house prices can hardly even be described as a correction now.

I have a solution: let Brian Eaten set the prices of houses, land, taxes, cryptocurrencies, interest rates, and why stop there.

You have no solution.

The joke is: Neither does he.

Both of you, somewhat bewildered, are facing the Limits to Growth. Both of you need to do some homework:

This has been creeping up on us for some while, unrecognised except for by a very few.
Running out of conventional growth is basically turning us into economic cannibals (how I see the whole rentier culture that has arisen out lack of other investments to feed on).
Growth is not the answer, neither is blowing each other to bits till we are sick of that and have lots of rebuilding (growth) to do, we have already hammered the planet's resources.
Party is over.

Building retirement funds and equity is vital. EEE on taxation would be a great promoter. For individuals and the nation both.

Brian thinks about supply but forgets to consider demand.
But if it is a bubble, which it is to a great extent, then neither supply or demand remedies will make a big difference.
Bottom line is that New Zealanders should have warm houses, with low long term cost of ownership. Ownership has huge advantages for families and the nation both.

Replacing TTE with EET makes a tremendous amount of sense. I would also propose that the unfair FIF tax regime is abolished.

Yet another article about the housing crisis which fails to even mention the disastrous mass immigration policies which have both suppressed wages and caused a shortage of houses. Brian Easton reminds me of Muhammed Ali who carried on for far too long. Easton is past his best and has nothing insightful to add anymore.

Bang on again K Keith

It's not rocket science to fix - but political willingness is far far harder.
We have had appalling strategic failure after failure by government after government to address the issues.
Real (LAND) house prices have been rising since 70s/80s.
1) A population strategy based on maximising total welfare (wellbeing) per capita, not gdp growth. As soon as covid19 is over we risk reigniting the migration tidalwave.
2) Massive government fiscal stimulus to build state housing for the bottom of the market where there is no developer profit
3) RMA fixed/replaced. National standards for all effects (based on social costs benefit) & no zoning & density limitations otherwise - we dont need city plans stacked as high as the sky tower full of rules that planners dont bear the consequences of.
4) A land tax. Its not houses going up in price, but land. It wont be in Jacindas time (she does have the fortitude to show real leadership), but it needs to happen soon after.

you didn't read my link


The Govt needs to stop penalising people who try to invest outside of housing. The NZ stock market has only a handful of investable companies, most are rubbish, but even including them there are only 160 or so listed. However if you try to invest in a company like Apple or Nike you get hit with a wealth tax, where even if you don't make any money you still have to pay tax on your entire portfolio holding. Hardly an incentive to diversify your investments is it?

The NZ tax treatment of shares held in overseas companies is nothing short of bizarre. Maybe it should apply a similarly weird tax on NZ landlords.

I think the question needs to be asked, what are we saving for?'

From the numbers I have done on housing, for example, we are saving and then having to spend twice as much as needed to achieve even our basic housing needs. If these inflated/non-value costs/waste was removed from the system, then we wouldn't have to save/spend on debt, etc. as we are doing.

The argument seems to be how to afford to save to pay for the gas-guzzling engine and the gas to go into it, rather than a smaller cheaper more efficient engine.