By targeting real estate prices, New Zealand is leading the way


The writer, the global chief strategist of Morgan Stanley Investment Management, is the author of “ The Ten Rules of Successful Nations ”

These kiwi revolutionaries are starting over. In 1989, New Zealand’s central bank was the first to commit to a specific target of consumer price inflation, then the greatest threat to the global economy. Unions and businesses have screamed, claiming the move will kill growth and jobs. A real estate developer has asked for a rope for central bank chief Donald Brash to hang.

Brash, a former fruit farmer who had seen his uncle’s life savings wiped out by inflation, stood firm. By signaling the bank’s seriousness, Target has helped reduce the public’s self-fulfilling expectation of endless price hikes. In two years, inflation has fallen from 8 to 2 percent. The unpopular idea gained ground. Soon, most central banks adopted targets, which helped tame the global scourge of soaring prices for food, fuel and other basic consumer goods.

Today, a new scourge – asset price inflation – is looming. And New Zealand has launched another counterattack. While consumer prices have been controlled by globalization and automation, the easy money flowing out of central banks has driven up the prices of assets, from stocks to bonds and housing. Since housing is generally not considered consumer goods, even sharp price spikes carry relatively little weight in central bank deliberations.

House prices rose steadily during the pandemic, and in 12 months until the end of January up 19 percent in New Zealand. The price of a typical Auckland house has skyrocketed spent $ 720,000, embarrassing Prime Minister Jacinda Ardern.

Global political celebrity, Liberal Ardern was elected on the promise of affordable housing. Fed up, his government has ordered the central bank add house price stabilization to its mandate, starting March 1. It is new and healthy for a politician to recognize the unintended consequences of easy money.

If this idea comes to fruition, it could lead to greater financial and social stability in the world. Decades of flexible central bank policies have done less to generate growth in the real economy than in financial markets – and these gains mainly benefit the rich.

It widens inequalities in wealth, pushing homes beyond the reach of the middle class, and not just in New Zealand. Over 502 international cities followed by Numbeo, a research firm, prices are “unaffordable” (more than three times the median family income) by more than 90 percent. In recent years, the tiny minority of affordable cities has shrunk to zero.

Prior to the unusual recession of 2020, triggered by pandemic lockdowns, every major economic crisis in decades, from Japan in 1990 to the financial crisis of 2008, was preceded by a sharp rise in house prices or stock prices or both. My research has revealed that financial markets, fueled by easy money, have grown since 1980 from about the same size as the global economy to four times the size. The more markets loom, the greater the impact on the economy as a whole when they fall.

140-year retrospective research in 17 large countries showed that before the Second World War, only one recession in four followed a real estate or stock market bubble. But as banks, especially mortgages, have grown to assume a central role in modern economies, the dynamics have changed. Since the war, more than two out of three recessions have followed a real estate or stock market bubble.

Real estate bubbles are the worst. The $ 220 billion global real estate market is more than twice the size of the global stock market and is complicated by leverage. When prices fall, it can take years to eliminate failed mortgages, resulting in a recession. In general, the recessions that follow debt-fueled housing booms are the longest and deepest.

Ardern’s move may not slow down the property boom anytime soon, as the dynamics of supply and demand are too strong. But ordering the central bank to make house price stability a higher priority is a start, and could inspire others to rethink the role easy money has played in financial instability. The challenge of defusing bubbles before they become dangerous is not as overwhelming as skeptics believe. Research shows that the main warning signs are the pace of price and debt increases.

Policies must keep pace with changes in the global economy. A review is overdue, especially among Ardern’s progressive colleagues around the world. They have come to embrace easy money as a means of funding social programs, but must recognize its negative impact on financial stability, wealth inequality and housing affordability. Ardern is in the lead in remedying one of the drawbacks. As New Zealand leads the way, it would be wise to follow others, again.



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