Banks have role in housing bubble

House in Happy ValleyOne of benefits New Zealand gets out of the CTU’s work is the independent analysis and alternative perspectives that it brings to the public’s attention.

Most of the economic commentary in the New Zealand media comes from the chief economists of New Zealand’s major banks. The major banks have an interest in continuing the housing market bubble and continuing to lend to make money. So, while bank economists remain independent, their views are shaped in an environment that favours unregulated bank activity above everything else.

So it is helpful to have CTU economist, Peter Conway, pointing out that housing is a significant problem for the New Zealand economy:

“House prices rose by 9.8% in the March 2007 quarter compared with the same quarter of 2006. In the last three years house prices have increased by 38.5% while at the same time wages have gone up by 8.7%, meaning that house prices are outstripping wages by 4 to 1.

“On April 23, two housing reports were released, showing that the number of working households in Auckland who can no longer afford to buy at the lower quartile house price has grown 169% in the past decade to an estimated 54,900 households. An increase in the proportion of homeowners experiencing housing stress (paying more than 30% of their gross income in housing costs) has particularly impacted on young home owners and households earning between $50,000 and $70,000.”

Conway argues that the housing market and the current account deficit are two big threats to the New Zealand economy. The current accounts deficit is being swelled by banks borrowing overseas to fund their mortgage products, and by the large profits by foreign owned companies operating in New Zealand. Both of these factors are overwhelming our export of goods and services.

Finsec has been advocating that banks have a role to play in addressing both these threats to the New Zealand economy. Less focus on selling debt products and more focus on customer service will not only ease workplace pressure on staff, it will also ease pressure on the housing market.

Meanwhile increased local investment in recruiting more staff and retaining existing staff by providing them incentives to develop longer careers at the bank will not only improve customer satisfaction, but will lessen the impact of decreasing investment in New Zealand (in terms of operating expenses as a percentage of operating income) and large bank profits being returned to overseas shareholders, which will help the current account deficit.

(thanks to domino nz for the photo)

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