For decades, owning property has been considered the most reliable path to wealth, but there are powerful signals the era is over.
The theory of New Zealand as “a property market with bits tacked on” was originated by the commentator Bernard Hickey more than 20 years ago. It was originally a “half-joke”, but quickly became entirely serious. While clearly reductive – we do have some businesses here! – it captured the overwhelming sense from our politics and culture that the only way an ordinary New Zealander could get wealthy was by owning property. At least your own home, ideally a couple of investment properties too.
Former prime minister John Key expressed it succinctly earlier this year. “If you want to get things going, the core of what’s wrong is the housing market. The guts of what’s wrong is that the housing market is going down, not up.” He was expressing the view that all economic malaises are ultimately a verdict on the housing market, and that the only way out of the current slump was by bending that line up. That’s why this current nascent recovery is so rare: it’s the first in decades which might not be heralded by a rebounding property market.
The obsession with property is actually a collective immune response to the trauma of 1987. After a few years of extraordinary sharemarket returns in the mid-80s, thousands of New Zealanders poured everything they could into the NZSE (now NZX), only to have that obliterated during the post-Black Monday recession. The NZ Herald’s Liam Dann documented the response vividly in The Crash, writing that “a generation of investors – the baby boomers – turned away from capital markets and put their savings into property and property focused finance companies.”
1987 was not a major downturn globally, but it was prolonged and painful in New Zealand – our markets slumped and unemployment rose sharply, ultimately leading to the “tough medicine” documented in the first few episodes of the second season of Juggernaut. As a country, we grew distrustful of shares, preferring the perceived solidity of property.
As Ben Thomas pointed out in the most recent episode of Gone by Lunchtime, the passage of the Resource Management Act followed not long after the crash – well-intentioned legislation that had the unfortunate byproduct of making housebuilding far harder. The supply constraints it induced set off a 40-year boom in property prices. Which means every graph charting New Zealand’s median house price over time has a familiar shape.
All the graphs look pretty much like this
It was not causation, but it was not entirely uncorrelated that the same period saw an endless drift for the local sharemarket. There were few sustained growth stocks, with the top end dominated by dutiful utilities and lumbering near-monopolies. Some of our biggest stocks – think The Warehouse, Fletcher Building, Sky TV, even Spark – have endured a rough decade. It means many who did put their money into local markets saw their money stagnate, while their neighbours who bought a unit in Kelston enjoyed outsized returns. The narrative became well understood politically, and because around two thirds of us lived in houses we owned, we saw our net worth increase along with the property market – while coming to view capital markets as places money went to, if not die, then to drift aimlessly.
The only world we’ve ever known
Almost half of NZ’s population – our median age is 38, meaning they were born the year of the ‘87 crash – has only ever known that reality. It’s little wonder that they assumed it was all there ever was or would be.
But change seems to have finally come. Dileepa Fonseka wrote an adroit piece of analysis for BusinessDesk yesterday that posited that the generational fear of markets and devotion to housing is coming to an end. He puts it down to a variety of factors. First, the debut of KiwiSaver made us far more exposed to sharemarkets than ever before. Then reforms created a huge increase in the amount of land that could be developed in our main centres. Finally, the rise of direct investment platforms like Sharesies, Stake and Hatch has made some of our working age population far more interested in markets.
It means there is a much greater level of exposure to sharemarkets beyond our own. It also means the opportunity to buy into sexier companies – it’s more exciting to own shares in Apple or Nvidia than Skellerup or Mainfreight – but in recent years it has also meant far more profound increases in value. The “magnificent seven” stocks have provided eye-popping returns in recent years. That means that after decades of shareholders watching property investors’ returns leaving theirs for dead, the past few years have seen both KiwiSavers with index funds and retail investors into US companies earning far greater returns.
A generational change
Millennials and gen Z have been particularly exposed to this switch in fortunes. While baby boomers carried lifelong scars from the 87 crash, younger people have had a very different experience. Many came out of high school into a world of unsustainably high house prices, which crashed post-Covid and haven’t yet recovered. They also grew up with the narrative that housing was out of reach, so many turned to both index investing, through the likes of Simplicity, and stock picking in significantly greater numbers than Boomers and Gen Xers.
Despite regular coverage of the “young property investor”, it’s much more likely that the younger half of our population views investing in housing as out of reach and a place of indifferent returns. Instead, they view houses as – how novel – a place to live.
With a flood of new builds on the market, we’ve seen first-home buyers represent 27.7% of the market in the most recent quarter – an all-time high. Likewise, net migration out has been framed as a bad thing – and it is in many ways – but it has slackened demand for housing, helping make it more accessible for those who’ve stayed in New Zealand. Whole generations preferring investment in shares to property, for the first time since the ’80s.
Trying to disrupt our fixation on housing as the path to wealth has been a multi-decade project. It’s very easy to frame the problem: by having a housing market measured in the trillions and listed businesses in the billions, you have a weak and under-capitalised corporate sector, while every spare dollar goes towards rent and mortgages.
Brian Gaynor, the brilliant writer and investor, devoted dozens if not hundreds of his columns to railing against the consequences of this. He died in 2022, with house prices near an all-time high. Yet the past three years have seen zoning reforms initiated by Labour’s Phil Twyford and carried on by National’s Chris Bishop bring meaningful change to this most pernicious of problems. Their efforts to vastly increase the supply of land which can be developed should mean that trend continues for years, even decades.
It portends house prices which are boring and stable, and developers which efficiently respond to new demand. And as BusinessDesk’s Fonseka pointed out, there is now an emerging consensus (albeit with very different methodology) that we need to nudge capital away from housing and into business. Labour started the move in October with its capital gains tax on investment property. National is now campaigning on raising Kiwisaver to 12%, which should pump even more money into our public and private markets.
It’s early days, and there are powerful forces working against it – not least property investors wanting a return to big untaxed gains. There’s also the risk of another ill-timed crash (the AI bubble, say) scaring people back to the assumed safety of property. Similarly, an outsized proportion of capital flowing into a handful of US companies doesn’t do a lot to help local businesses.
Still, while nascent, some of the conditions driving this appear more secular than cyclical. If they hold, it could mean the end of 40 lost years, and the start of a new era of homes being for living in, and, instead of being the bits tacked on, businesses could be the big show – just like a proper grown up economy.