Week in Review
Young renters just got double toasted
New Zealand's tyranny of the status quo under MMP just killed off KiwiBuild, the last great hope of our lumpen mass of young renters. Jacinda Ardern's Government didn't fight the gerontocracy very hard to save it, either because it is clueless and spineless, or just pain co-opted, Bernard Hickey argues.
The ruthless, selfish, money grabbing cynic of a landlord in me is rubbing my hands together in quiet satisfaction. The property-owning gerontocracy won again. It has always won since 1996 because it uses its votes under MMP to stop change that would hurt its interests. That's the way MMP was supposed to work and until those young renters gang together to use MMP in their own interests, nothing much will change.
Any remaining hopes that an enlightened government would engineer a supply shock to drive home prices down to improve affordability for both renters and first home buyers has just evaporated, if it ever existed to start with.
New Housing Minister Megan Woods did her best on Wednesday to put a brave face on what was easily the worst day politically in this second Labour-led Government post-MMP. Labour deployed Green Co-Leader Marama Davidson and the Green's rent-to-own plan to try to distract from the complete capitulation of abandoning the 100,000 over 10 years target. It also tried to dress the broken promise by making it easier to use more KiwiSaver money for home deposits and to be able to borrow more to buy a first home. Neither will sweeten this dead rat much. It's more of a rotting and hairy cat.
The KiwiBuild target and name was a core plank of the Labour Party's bid for re-election in 2017, and had been for five years. It was the one hard and measurable policy that was large enough to make a difference, if achieved, and voters knew it. For those holding out hope that the grown-ups in charge of the country would do the right thing and engineer a big enough surge of new housing to push back at another doubling of tripling of prices, this was yet another sobering moment.
Just like Jacinda Ardern's decision to abandon a capital gains tax in her political lifetime, this Government has yet again misled young renters into thinking it was really serious about solving this issue. They should know better now if they are paying attention. I wrote almost a year ago after the draft Tax Working Group report (when it was clear Labour was backing away from a CGT or wealth tax at pace) that young renters should know they were soo toast.
Today, they should know they have been double toasted. MMP was supposed to stop the breaking of promises. Instead, MMP itself and the poor judgment and execution of this Labour Cabinet has broken this core promise. Young renters won't truly believe in Ardern and this Labour Government so easily again. She had her chance to deliver on her suggestions of transformation and generational change in a way that echoed her heroes.
The death of the CGT and KiwiBuild, along with only tip-toeing steps on climate change, prove she is just another transactional smile-and-wave politician who believes she is better at wielding the status quo than the other lot. She has now forfeited any right she had to talk about being transformational and claiming ownership of a generation's dream. And don't forget she did do that during the 2017 campaign. Read this campaign opening 'nuclear free moment' speech to refresh your memory.
It didn't have to be this way
Woods and many of the tut-tutting brigade yesterday tried to water down the scale of the capitulation by saying 100,000 was never really possible and that, somehow, the mere fact of a target had created 'perverse incentives' that led to unintended consequences.
It's true that houses were built for KiwiBuild in places where first home buyers don't live, and this was done in a hurry to try to reach the early numerical targets.
But to abandon the entire target for the entire 10 years is simply silly because the first year's target was missed. Urgent and large scale action by the Government could have cleared the way for a 100,000 house build over the next 10 years.
It could have taken that action, but it has dawned on it once in Government that property owners don't actually want to change the situation and the power of the existing web of status quo is enormous. Councils can't and won't pay for housing infrastructure. Voting ratepayers and taxpayers don't want to pay for the massive city re-engineering costs (new rail lines and large scale medium density housing) necessary to solve this problem.
The majority of voters with property love their suburban lives with backyards, endless tax-free capital gains, a double cab ute and a relatively short commute. They also love the continuation of the mass migration of the last seven years because it perpetuates everything in that list except for the short commute in Auckland.
Mass migration without infrastructure spending and house building is the perfect mix: low wage growth and high house price growth that delivers outsized tax-free capital gains and perpetuates a simple life for our small-business dominated economy of not needing to invest for productivity and wages. Instead, we (the gerontocracy) just leverage up and make the real money from our houses rather than our jobs.
Renters are just the cannon fodder of this business and personal finance model and nothing changes while they are unaware, distracted and not organised. Understandably, many of these millennials and Gen Y tenants are way too busy working multiple jobs in order to pay their rent and student loans.
How MMP embeds the status quo
Labour just gave up at the first hint of trouble and as the tyranny of the status quo expressed itself with full force through the idiotic adherence to a debt target our lenders don't care about, the usual RMA and local government infrastructure funding blockages, and an ingrained generational opposition to providing subsidies for housing.
MMP was invented to prevent more of the big swings in policy that weren't promised before elections by elected dictators. Essentially, the public rose up in the early to mid-1990s to stop another Rob Muldoon or Roger Douglas or Ruth Richardson from using the barely fettered powers of the 7th and 9th floors of the Beehive to change the law between electoral cycles without asking first.
Fair enough. It was done because New Zealand is a lot like Britain, albeit without the largely-toothless upper house (we used to have one), and doesn't have the same constitutional protections or separation of powers seen in the likes of Australia (where there are two houses of Parliament, a written constitution guarded by a Federal or Supreme Court and state Governments have spending and taxing powers) and America (which also have those constitutional protections). Our councils can't tax to support debt needed for infrastructure, their voters won't pay and our political class are still wedded to the idea that public debt should be as close to zero as is possible (with the proviso there's enough bonds to support a debt market).
There are good things and bad things about tying your government's arms down with political, structural and financial rules that stop any wild swinging of policy arms. In means that the system in place before the lock-down is very hard to change quickly, unless there's a crisis that allows a government to suspend the rules.
The previous National Government used the Global Financial Crisis and the Christchurch earthquakes to suspend the financial rules (20 percent net debt target) and planning rules (RMA) to get things done quickly. It's why Christchurch is rapidly becoming the least unaffordable large city. The suspension of the fiscal and RMA rules allowed massive central government subsidies for the housing and transport infrastructure needed for a supply shock. Rents in Christchurch are now falling and prices have been flat to falling for a couple of years.
Grant Robertson and Ardern would love the excuses afforded by such crises, but they don't have them yet.
All this means that it is very difficult to enact policy change that either shifts wealth from the rich to the poor and changes the perceived or real property and pension rights held by a large enough section of the population that can protect that wealth and those entitlements by getting a guarantor and protector party to win more than five percent of the vote.
The only changes possible are the ones that add entitlements to already powerful vested interests that are paid for by reducing debt and increasing taxes on those who don't vote much -- which means a higher GST rate. We've seen a range of these bits of middle class welfare since 1996, including KiwiSaver, interest-free student loans, the removal of student fees, Working For Families, the HomeStart grants, the Winter Energy Payment for all superannuitants, including retired High Court Judges and serving Deputy Prime Ministers.
It's only possible to give more benefits and entitlements to already powerful interests under MMP. Taking anything away from them and giving them to those who need them is impossible without a party leader using up precious political capital and/or gathering a coalition of parties that support that particular policy.
New Zealand First's presence in the current coalition ruled out a capital gains tax. The decision by the Greens and Labour to both adopt the 20 percent debt target ruled out subsidising a mass house building programme. The only way to change that would be for a political party representing the interests of young renters to be formed and express their desires in combination with Labour and/or the Greens.
The Greens would say that party is them. That's not credible any more when its effective leader in the cabinet actually proposed the adoption of those debt rules.
A lucky generation that pulled up the ladder
Normal service has resumed. The vested interests won. Until those blockages and that refusal of one generation to help the next up the ladder is abandoned, nothing will change.
As a landlord, I'm thrilled. As a citizen and a future taxpayer for the consequences of inaction, I hope the toasted finally get the message and use their democratic powers at their fingertips to push the gerontocrats like me out of the way.
One thing is now certain. They cannot rely on Ardern, Labour, National or anyone else currently in power to change things.
They will have to fight tooth and nail, vote by vote, in both local and central government elections, to put in policies that pry loose the more than $1 trillion worth of tax-free capital gains that are now in the hands of those mostly over the age of 50, and who are set to force those young renters to pay for their ever larger pensions and ever more hip and knee replacements over the next 30 years.
So far, this class of tenant cannon fodder have shown few signs of a real revolt. Most are still holding out hope that they can 'get on the ladder' and win the same property lottery that their parents and their friends' parents won. Sadly, only those with generous parents willing to hand over some of that equity will actually achieve that.
The rest are set for penury as renters and taxpayers, making their elders ever more comfortable and rich.
How the cannon fodder could revolt
If Labour had been serious about producing a housing supply shock and tax system reform to change the status quo it could have done it, but only by challenging and beating those protecting the status quo. It tried for a bit on CGT and gave up. It had a mandate to do that KiwiBuild, but either didn't realise the big changes needed to make it happen or couldn't stomach the fight to do them.
It would have had to massively subsidise public transport and affordable house building in the big cities, which would have necessitated a relaxation of the debt limit. It would have had to share some of the income tax and GST largesse from population growth with councils, to allow them to borrow more without alienating the older ratepayers who vote in the suburbs.
It would have had to take on the Mike Hosking-style conservatives who rail against higher fuel costs and any change to the motorway driven lifestyle.
But most importantly, it would have had to change the incentives for investing in leveraged property. I agree a capital gains tax was the least useful way to do it. The best way would be a land tax, but that was ruled out by the Tax Working Group and would trigger an almighty fight with the property owning vested interests.
It is possible, given the millennials and Gen Xers are due to outnumber the Baby Boomers in electoral terms within a year or two. But unless they increase their participation massively in both local and central government elections, that won't happen.
The landlord in me is quietly confident it won't happen. There are too many articles and programmes about Kardashians for that to happen.