Over the past couple of months most of my columns have focused on the effects of Covid-19 on the property market and the ways in which it should be supported over this difficult time. Predictably, this has led to a handful of emails from those who are anxious to tell me that ‘property ownership adds nothing to the economy’, occasionally employing quite colourful language to make the point.
This view represents a widespread, but incorrect, understanding of how economies work and usually centres on a mistaken understanding of either productivity or gross domestic product (GDP) - or both. In very simple terms (and at the risk of causing your eyes to glaze over) productivity is a measure of how efficiently labour and capital are being used in an economy, and GDP measures the total number of hours worked by Kiwis, and the dollar value of investment into the economy to indicate whether an economy is growing or in recession.
Those who say that home ownership doesn’t add to these measures appear to believe that, because a house is ‘static’, it isn’t actually producing anything and is therefore a bad use of the funds invested in it. They argue that investing in a business or supporting an entrepreneurial idea is better for the economy. I certainly agree that we need to do more to encourage Kiwis to invest in business and innovation, but dismissing property as non-productive isn’t just wrong, it defies the extremely important role that property plays in the growth and operation of the economy.
There are two very obvious ways in which the property market massively impacts both productivity and GDP, and you don’t need to be an economist to understand them.
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The first of these is because of something called the multiplier effect. This tells us that increased activity in one part of the economy will inevitably flow into other parts of the economy in a sort of domino knock-on effect. It’s usually used to refer to government or business spending, or foreign investment, but is every bit as valid as a measure of the impact that a house, can have on a local economy.
Think about all of the ways in which your own home contributes to the economy (and therefore, GDP). You pay rates to the council, which contribute to a huge range of multiplier activities from essential services through to libraries, sports grounds and parks. If you have a mortgage you pay interest to the bank, which, in turn, enables them to operate and re-lend funds to others. You pay for utilities such as power, broadband, digital television and water, you pay house and contents insurance premiums and you pay for maintenance and improvements on your property, either by hiring tradespeople, or by spending money on the materials that you need to undertake your own DIY.
The list goes on – and the economic impact is enormous. Every one of these activities allows the businesses being paid to employ staff, pay tax and often invest in growth, positively impacting GDP.
The other way in which the property market impacts GDP is through the huge impact of growth in the value of our homes.
Let me explain. New Zealand house prices have roughly doubled in value, every ten years, for the past 40 years. That growth in house values has allowed us to travel, invest (in some of those businesses and ideas I mentioned earlier), improve our lives and prepare for retirement.
Now try to imagine if that hadn’t happened. Imagine travelling overseas or even trying to buy a car or major appliance, using the equity in your home to fund such activities, based on what Kiwi houses would have been worth 40 years ago.
Do you begin to see the impact this would have on the economy? We would be a far poorer people and nation and rather than being the fifth wealthiest country in the world, we would have fallen dramatically behind other western nations.
Contrary to the claim that property ownership doesn’t contribute to the economy, it has been the number 1 driver of growth in our national wealth over the past 40 years and, aside from your job or other activity, the major driver of increased productivity in New Zealand.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at ashley@nzemail.com
