By Bernard Hickey
They should be known as the lucky generation.
Anyone owning property in the mid 1980s could never have imagined what would happen in the next thirty years.
Inflation fell from regularly above 10% to consistently around 2%. Mortgage rates more than halved to under 8%.
House prices quadrupled and rents doubled.
It was like manna from heaven and it was all driven by a fall in inflation.
It wasn't accidental.
The Reserve Bank Act of 1989 was focused on dragging inflation down to around 2% and it worked.
It took a while to sink in to the national psyche and to flow through the bank accounts and balance sheets into asset prices in the real economy, but when it did it was enormously powerful.
Don Brash would be a much richer man if he had been able to claim a commission for success in beating inflation down.
It made owning property much, much cheaper because interest rates fell. That was then built into the value of property and land in particular.
It's axiomatic in the world of investment that the value of any investment that produces a regular income stream, such as a rental property or bond, will rise whenever interest rates fall.
It makes sense for rental property investors at auctions too. Lower interest rates allow a buyer to offer more.
The end result is that a structural shift lower in interest rates and inflation powered a massive one-off increase in the capital values of assets with reliable income streams that could be used to pay those lower interest rates.
The scale of this accidental benefit to whoever was owning property before this shift is ginormous. The value of New Zealand's houses rose from NZ$100 billion in 1987 to NZ$725 billion this year.
Meanwhile, mortgage debt only rose from under NZ$20 billion to NZ$192 billion, which means the equity in this property has risen from NZ$80 billion to NZ$533 billion.
This NZ$453 billion windfall was only possible because of a structural fall in interest rates and this is the story of asset prices all around the world over the last 30 years.
But the crucial point is that it was a one-off.
It can't easily happen again. There's only so far inflation can fall before it can't fall any more.
The point that yields on New Zealand's rental property and bonds can't fall much more is clear in research this week from ANZ on yields on rental property across New Zealand, region by region over the last 20 years.
Auckland's yields are approaching 3.5%, down from 7.4% in 1992.
Those rental yields are already half the cost of servicing the debt on that land and just below the tax-paid returns from investing in 'risk-free' alternatives such as Government bonds.
The brutal truth is that the generation buying into property now can never hope to repeat the gains captured by the generations who owned or bought property from 1987 onwards. That horse has bolted.
They would require inflation to turn into deflation and for the Reserve Bank to cut interest rates to 0%, as has happened in the rest of the developed world. Or they would have gear up to the absolute max, taking on 120% plus loans over 50 years or more.
The Reserve Bank is in no mood to help them out, and nor should they.
But the landless generations sitting outside the fence and looking in on the more than half a trillion dollars worth of equity tied up in housing will eventually look for ways to tax that wealth and start transferring it to the unlucky generations.
A land tax, as advocated by many serious policy-makers, would help change that 30 year relationship between falling yields and rising values. And not a moment too soon.
It's no accident that the land tax proposed by former Reserve Bank Chairman Arthur Grimes in 2009 would have reduced land prices by 15%.
The trouble is that now the stakes are too high, and the unlucky generations are as uninformed and disconnected as they are unlucky.
More than a quarter of a million 18-34 year olds are unregistered to vote less than two months before the election.
They are also the generation of renters supporting the edifice of high values and low yields that is modern New Zealand.
A version of this article also appears in the Herald on Sunday. It is here with permission.