Making flush banks share responsibility in a morally bankrupt housing market

As the Reserve Bank decides on new mortgage lending restrictions, the very fact more than two-thirds of New Zealanders’ wealth is tied to the housing market should be a cause of great concern, says Dr Matt Rašković.

We need to rebuild an economy of belonging.

The recent announcement of ANZ Bank’s profit of $1.92 billion for the year to September 30 shows a staggering 44 percent growth compared to the previous year. While not a record high, it shows that the New Zealand banking and finance industry, dominated by foreign ownership, has done exceedingly well in a time where many have seen their lives and livelihoods eroded.

It’s clear that far from being in the same waka, the team of 5 million has found itself in very different boats facing the same COVID-19 storm. Even those privileged with secure jobs and the luxury of being able to work from one’s own—and owned—home have seen their real and relative incomes eroded and their social identities challenged. In an economy of belonging that is supposed to work for “us” as the collective whole, many are falling by the wayside and being “othered” through an extractive banking and finance sector that is not fit for purpose.

The erosion of the so-called “economy of belonging” built on the principles of a social market economy and a social contract that should provide opportunities for everyone— which previous generations largely enjoyed— has been dealt a final blow by the COVID-19 pandemic, exposing policy fault-lines decades in the making.

At the core of this disintegration is the failure of economic policy and regulation. While globalisation has become a convenient external scapegoat, the reasons for a failing economy of belonging can be found right at home among senior leaders and policymakers, often due to lack of vision, creativity, and bold ideas.

New Zealand has adopted a pragmatic expansionist, but so far manageable fiscal policy, injecting tens of billions of dollars into the economy and citizens through increased public debt which can still be managed.

However, it has failed to rein in an aggressive banking and finance sector, which is exposing New Zealand to macroeconomic system risk and threatening the lives of many ordinary New Zealanders through increased “underwater debt” that is tied to mortgages and the housing market.

As argued by Martin Sandbu, an economist with the Financial Times in his 2020 bestseller The economics of belonging, the financial sector has an inherently destabilising nature which prolongs economic cycles and needs greater oversight in times of booms and busts. Successive National and Labour governments have done little to address this.

While leaders in the banking and finance industry in New Zealand refer to a multitude of factors when justifying the strong performance of the industry in the last year, including a stronger than expected economic recovery, the stark reality is that most of this has been driven by debt financing of households to support an overheated housing market and excessive household spending.

Economic evidence shows that a rapid expansion of the financing sector in boom times weakens the bargaining power of labour in favour of capital, while diverting capital from the economy driven by innovation and entrepreneurship to prop up the housing market and construction industries with plenty of collateral.

For example, home lending by banks reached a stock of $99 billion—an increase of $9.3 billion in the last year alone. This helps explain why the New Zealand housing market was the second most overheated housing market after Turkey in the first quarter of 2021, according to the Knight Frank Global Housing Index.

The very fact that more than two thirds of New Zealanders’ wealth is tied to the housing market should be a cause of great concern.

Instead of banks extracting value from customers in the form of high interest rates and penalties for early repayments, they could also act as equity financers and tie a portion of their earnings to the capital gain of the asset. This way, the sector would have some skin in the game. The government has a responsibility to protect consumers and not leave them at the mercy of an extractive and foreign-owned banking sector, which has seen New Zealanders paying double-digit interest rates on their mortgages not that long ago.

In an economy dominated by debt, rather than equity financing, where 70 percent of bank lending goes to households, this should be a top priority for any government, especially one that claims to favour the bargaining power of labour over capital.

Why hasn’t anything been done, I hear you ask. New Zealand’s housing market is what one would call a “super wicked problem”.

These are messy and complex problems sitting at the interface between society, the economy, and policy. They arise from heterogenous stakeholders with conflicting needs—and those who provide solutions are often part of the problem. Like the 15,000 New Zealanders who last year bought their sixth property—many of whom were the very decision-makers claiming to be addressing the problem, like bankers, real-estate agents, and politicians.

There are many parts to this economic problem but as a societal problem, it is quite straightforward.

It is time our leaders and decision-makers started demonstrating skin in the game and practicing what they preach. Kaitiakitanga shouldn’t be just reserved for tourism campaigns selling New Zealand to overseas tourists—it should also be applied within domestic economic policy, starting with reining in the extractive banking and finance sector.

A fair, inclusive, and supportive banking and finance sector should be at the core of rebuilding an economy of belonging that works for not against the team of 5 million.

Dr Matevž Rašković is Director of the Executive MBA programme at Te Herenga Waka Victoria University of Wellington

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