When a Housing Boom Turns to Bust

In early 2021, a three bedroom property featuring peeling paint and boarded up windows sold for 1.81 million New Zealand dollars in an Auckland suburb. The local press referred to it as a dunger. Now I had to look this word up as it's not a term I've come across before. It turns out that a dunger is New Zealand slang for something old, broken down and barely functional. Often an old car held together by rust and optimism. So the property in question was, in the considered judgement of the New Zealand press, the residential equivalent of a 1987 Chevy with one door that doesn't open. It sold for 1.81 million dollars. At the time, paying almost 2 million dollars for an uninhabitable shack was considered wise. Today, it's not looking so good. According to The Economist, at the peak of the market in early 2022, the average home in Auckland cost around 1.4 million New Zealand dollars, which worked out at 35 times the median income. That's not a typo, 35 times. Over the last few years, the New Zealand property market has gone into a rather aggressive tailspin. Prices have fallen by 16% nationwide from their peak, and in some areas like Wellington, they're down by 27%. Once you factor in inflation, the real value of these homes has dropped by about a third. This has left a lot of recent buyers trapped in negative equity. One couple interviewed by the local media decided to sell their home at a massive loss in order to buy a bus and live in it full time. The article I read didn't clarify if the bus was classified as a dunger or not, but in my opinion, it's always good to have wheels on your home when the bank is chasing you down for the mortgage payments. Now, if you live in the United States, Canada or the United Kingdom, you might be wondering why you should care about the real estate market on an island in the South Pacific. The answer is that New Zealand is basically a laboratory for what happens when an entire national economy is built on the assumption that house prices will just go up forever. It turns out that trading the same increasingly expensive boarded up bungalows back and forth with your neighbours does not actually generate any real wealth. You might ask how an economy gets into this position. The answer, as is so often the case, involves politicians. Now, politicians are very good at one particular kind of math. They understand that people who own homes vote and that people who own homes really like it when their homes become more valuable. They also understand that older voters who tend to own property show up on election day, while younger voters who tend not to are notoriously unreliable. So, a politician faces a simple choice. You can allow house prices to rise indefinitely or at the very least make sure that they don't fall, making your most reliable voters feel wealthy. Or you can allow house prices to fall, making your most reliable voters furious and then lose the next election. Framed that way, there is not really a choice at all, is there? This is why housing policy across most of the developed world points in the same direction, regardless of which party is in power. In countries where the family home is the largest asset most households will ever own and where it has quietly become a leveraged investment rather than just a place to keep your furniture, no government wants to be the one in charge when prices go down. So, they don't restrict the things that push prices up. They subsidize mortgages, they offer tax breaks to landlords, they hand out first home buyer grants that mostly just allow buyers to bid more and they make it remarkably difficult to build anything new. Each of these measures is announced as a way to help people afford homes. Each of them in practice makes homes more expensive, which is of course the point. It was a flawless political strategy, right up to the moment when it broke the economy. To understand why a national housing boom is so harmful, it helps to look at what happens when you invest in a normal productive asset. Before we dig into that, a quick word about this week's video sponsor, GenSpark. If you are already paying for AI tools, you know the cost can add up fast. GenSpark puts all the major models like chatGPT, Claude and Gemini into one workspace where you pay for just one subscription. Here are three features worth knowing about. First, fact check. If you are doing research, this one matters. GenSpark's fact checker runs up to 30 rounds of verification across live web sources, pulls verbatim quotes and even takes screenshots of the actual source pages as proof. With a reported 99.4% verified factual accuracy. That's not asking an AI to guess, that's getting it to show its work. Second, AI meeting notes. This one is clever. You can use your phone to record a meeting and GenSpark's AI will generate professional notes that you can automatically share with other participants. It allows you to focus on the conversation rather than on typing up notes. Third, AI designer. Whether you need thumbnails, social media graphics or marketing visuals, you describe what you want and GenSpark generates it. New users get free credits to try premium features and AI chat and AI images are unlimited for paid subscribers for 2026. Use the link to genspark.ai in the description. If you invest in a business, the company takes the capital and uses it to maybe build a factory, invent a useful product or provide a valuable service. It generates earnings from doing that, it hires people and the overall economy grows. A house, on the other hand, does none of this. The physical structure does nothing at all and the building itself actually depreciates over time which is why you periodically have to pay someone to fix the roof or replace the plumbing unless you're happy living in a dunger. The part of a property that goes up in price is mostly the land it's built on. An American political economist named Henry George pointed this out back in the 19th century. He observed that land increases in value not because of any work or innovation by the owner but because of what's going on in the community around it. If the things around it improve, a new train station, a good school, a tech company opening an office down the road, that specific piece of dirt becomes much more valuable. The owner just sits there and collects the windfall. George thought this was not only a bit unfair but economically wasteful and he had a proposed solution. His idea, laid out in an 1879 book called Progress and Poverty, which improbably was one of the best-selling books in America at the time, was that governments should stop taxing things like work, trade and buildings and instead levy a single tax on the underlying value of land. The logic was that taxing somebody's wages discourages them from working and taxing a factory discourages someone from building one, but taxing land discourages nothing because the land just sits there regardless. You can't scare land into leaving the country. So, in George's view, a land value tax was about the only tax that didn't gum up the economy in the process of raising revenue. Henry George's ideas were enormously popular in his day and they've never entirely gone away. Economists from across the political spectrum have a soft spot for the land value tax, which is a rare thing for any tax to manage. Whether it would work as neatly in practice as it does on paper is a separate and much-argued question and not one that I'm going to settle here, but the underlying observation is hard to dispute. When a piece of becomes more valuable, it's almost never the owner who made it so. This brings us to the math of property bubbles. When house prices soar, politicians and homeowners like to celebrate the enormous amount of national wealth that's supposedly been created, but land appreciation is not productive wealth creation, it's a zero-sum game. If you buy a $300,000 house and sell it a decade later for $800,000, you feel half a million dollars richer. You might even mistake yourself for a financial genius, but you haven't created half a million dollars of new economic value. The person buying the house simply has to borrow an extra half a million dollars from a bank in order to pay you. If you need to buy a new home for yourself, there's a good chance that it'll cost half a million dollars more too. So you're not really any better off, other than that you're better off than a person who didn't buy a home. The seller's gain in that example is exactly equal to the buyer's penalty when house prices rise. The country as a whole is no wealthier and no more productive. We've simply transferred a large amount of capital from young people who need somewhere to live to older people who happen to buy a house 30 years ago. And that's generally considered a great deal if you're the person who bought the house 30 years ago. To understand why property prices grew so relentlessly for 40 years, you have to think about how a prospective homebuyer decides what they can spend on a home. Most non-cash homebuyers don't know the dollar amount they can spend on a house. They instead look at their monthly income, decide how much cash flow they can afford to part with each month and run that number through a mortgage calculator. The most important number in that calculation is the interest rate. The lower it is, the more borrowing that the same monthly payment can support. So let's take a buyer who can put $1,500 a month towards a mortgage and see how much that gets them. Back in 1981, with mortgage rates at around 20%, a buyer who could spend $1,500 a month on housing would be able to borrow about $90,000. This is because a 20%, a 30-year loans payment is almost all interest. So a given monthly payment supports a tiny principal amount. By January 2021, rates had fallen to 2.65%, the lowest on record. And that exact same $1,500 a month could borrow around $370,000, more than four times as much. Today with rates at around 6.5%, $1,500 per month borrows about $236,000. Same buyer, same monthly budget and depending on the decade anywhere from $90,000 to $370,000 of borrowing to buy a home. And notice what happened in the last five years. The borrowing power of that $1,500 fell from $370,000 to $236,000, a drop of about a third. Which means that for a home bought at the 2021 peak to be affordable to the same buyer today, its price would have to fall by roughly the same amount. It's fairly obvious then why falling rates push home prices up and raising rates drag them down. And this calculation doesn't even take into account that there are way more people who can afford that monthly payment today than there were in 1981 as wages have gone up significantly since then. Now this is also why the American housing market has frozen up over the last few years. And here American homeowners should count themselves lucky because the United States is one of the few places in the world where you can borrow at a fixed rate for 30 years. A homeowner who locked in a 2.65% mortgage in 2021 has two very good reasons not to move. First, they don't want to sell at the kind of price an equivalent buyer could afford today. And second, even if they were able to sell for the price they paid 5 years ago, their income would now only stretch to buying a much cheaper home somewhere else as they'd have to give up their cheap mortgage and get a far more expensive one. So they just stay put and the real estate market freezes up. In most of the rest of the world, New Zealand included, borrowers don't get the same luxury. Mortgages are only ever locked in for a few years or they float. Which means that when rates rise, you don't get to freeze in place and wait it out. Your monthly payment simply goes up. You either find the extra money each month, you renegotiate your mortgage or you sell. This is why countries like New Zealand felt the pain of rising rates quickly and directly while American homeowners have mostly been able to pull up the drawbridge and pretend it isn't happening. So this is the mechanism that drove home price appreciation for 4 decades. Without a single dollar of real wage growth, the same monthly cash flow gradually allowed buyers to bid higher and But this pushed home prices steadily upwards. On top of that, people got used to home prices going up year after year and began to see them as a way of making money and became more confident getting into bidding wars over houses. During that 40 year period, central bankers saw the of goods fall due to globalization and favorable demographics and were able to lower rates year after year. They had the wind at their backs and could keep cutting rates without sparking consumer price inflation. But as Pratton and Goodhart argue in The Unanchored Central Banker, those deflationary days are gone and they are not coming back any time soon. The demographics have reversed, globalization is fracturing, and central bankers can no longer rely on structural tailwinds to keep inflation inside its neat little box. So we arrive at the current situation where central banks are being forced to keep interest rates elevated, trade policies and demographics that are entirely outside of their control are pushing consumer prices up, and after the outbreak of war in the Middle East, Tehran effectively closed the Strait of Hormuz, a stretch of water responsible for moving around 20% of the world's oil. This energy shock has sent inflation expectations ticking upwards, which forces central banks to prioritize their price stability mandate and that should continue to squeeze real estate prices. Higher interest rates are bad for property values, but a central bank has to react to the reality of ongoing consumer price inflation. At its May meeting, the Monetary Policy Committee of the Reserve Bank of New Zealand found itself on a knife-edge situation. The committee split 3-3 on whether to hike rates immediately to counter the oil shock, forcing Governor Anna Brennan to cast the first tie-breaking vote since the committee was established. They held the cash rate at 2.25% for the moment, but raised their projected terminal rate to 3.28%. A central banker cannot set monetary policy to protect the net worth of suburban homeowners while a geopolitical conflict is driving up the cost of fuel. If fighting an energy shock requires keeping interest rates high, then the property market simply has to absorb the blow. Since 2022, more than 2,000 construction firms have gone under in New Zealand, with construction insolvencies hitting their highest level in a decade. You might think that a big drop in property values would be great news for anyone trying to buy a house, but as we just saw with the mortgage math, higher rates mean that while prices may be down, affordability hasn't actually improved, and a housing bust comes with a rather inconvenient side effect – it bankrupts the people whose job it is to build houses. If your goal is to solve a national housing shortage, driving your construction industry into insolvency is a suboptimal approach. When prices start falling, politicians don't rush to encourage new development to push them even lower. In Auckland, city officials recently scaled back plans that would have allowed greater housing density in wealthier neighborhoods. Homeowners were already nervous about their property values, and the thought of someone building a townhouse nearby was apparently too much to bear. This reluctance to build is not a New Zealand quirk. It's baked into planning law across much of the developed world. Take the UK, where young people have been told for decades that they need to get on the property ladder, buy a small flat, let it rise in value, and trade up to a family house. Data from Night Frank reported by Bloomberg suggests that this ladder is broken. Flat prices in London have fallen by about 5.5% since January 2020, while house prices have risen by more than 10%. So it turns out to be less of a property ladder than a game of property snakes and ladders. Right at the moment a millennial wants to trade up to a house and start a family, the flat they own is down in price and the house they want has drifted further out of reach. A big reason that UK houses are so expensive is that the country simply doesn't build enough of them. Governments routinely announce targets of 300,000 new homes a year and routinely miss them. The roots of this go back to the Town and Country Planning Act of 1947, a piece of post-war legislation that effectively nationalized development rights and drew green belts around cities to stop urban sprawl. The underlying assumption of modern planning law is that the public cannot be trusted to build anything tasteful or reasonable, which is interesting because most of the charming, universally beloved old villages that people travel to photograph were built centuries before a single planning committee existed. And before my North American viewers get too comfortable, this particular brand of dysfunction is not unique to Britain. After last year's wildfires destroyed thousands of homes in California, you might think that a blank slate would have been a chance to build the kind of housing that Californians need. To be fair, the state did try to help. Executive orders offered homeowners expedited permits, letting them skip years of environmental review and get rebuilding quickly, which in a state with a severe housing shortage sounds entirely sensible. The catch was that to qualify you had to rebuild essentially the same structure in the same spot with an allowance of around 10% for extra size. So the fast track was available as long as you used it to recreate exactly what had just burned down. Because if there's one thing you want to preserve after a natural disaster is the precise layout of the very thing that just caught fire. Now, part of why all of this matters so much in places like Britain is that the family home isn't just somewhere to live, it's the national investment portfolio. Only about a third of British households invest in the stock market, compared with well over half of Americans, despite stock returns comfortably beating house prices over the long run. When a country's wealth is mostly tied up in housing, the political pressure to keep prices rising is enormous, but there's a flaw in that strategy that the people running it tend to overlook. When you price an entire generation out of the housing market, they don't just rent forever, they often leave. We're seeing this happen in real time in New Zealand. Young professionals are running the math concluding that they'll never afford a dungar in Auckland and simply moving to Australia. According to the Financial Times, almost 200,000 New Zealanders have crossed the Tasman in the last three years for higher wages and better living standards, around 66,000 in the last year alone. The exodus is severe enough that even the former Prime Minister Jacinda Ardern has packed up and moved her family to Sydney. When the person who used to run the country decides the economy looks a bit bleak and emigrates, that's usually a sign that things are not going well. You see the same dynamic in the US and the UK. British millennials are stuck in depreciating leasehold flats with rising service charges, unable to start families because they can't afford the jump to a house. American workers are leaving supply-constrained coastal cities for places like Texas where the local economy still lets them buy a house and have a child, rather than spending a large share of their after-tax income to rent a small apartment in a city where they'll never own anything. Propping up the property market to keep older homeowners happy might win an election today, but it quietly hollows out the productive workforce of tomorrow, which is not much of a long-term economic plan. So before we get to how these things end, it's worth being clear about why an inefficient property market is so corrosive in because it goes well beyond just a few young people emigrating. When workers can't afford to live near the places that actually need them, the big commercial centres, the productive cities, one of two things happens. Either they don't move there at all, and the business does without talented workers, or they move there and demand much higher wages to cover the rent. They don't get to pocket those higher wages as the cost gets passed straight on to landlords and home sellers, but the business is now much more expensive to run. Do this across an entire economy, and you've made your most productive cities expensive places to do business for no productive reason at all. Capital and companies then drift to wherever it's cheaper to operate, which increasingly is somewhere else entirely. An efficient property market, in other words, is not a nice-to-have, it's a precondition for an economy that functions well. Property bubbles don't really benefit anyone, and busts don't really make things much better either. So if propping up house prices eventually hollows out your economy, what happens when a market finally corrects? Now, standard macroeconomic models tend to treat housing as a footnote. Residential investment is only about four or five percent of GDP, but the UCLA economist Edward Leamer argued in a 2007 paper with the wonderfully blunt title, Housing is the Business Cycle, that this is exactly the wrong way to look at it. Leamer's point was that housing doesn't just contribute to the business cycle, housing is the business cycle. He argues that almost every major US recession since the second world war was preceded by a sharp drop in housing activity, and that housing is the main channel through which interest rates hit the wider economy. This is the loop we opened earlier. Rates move, housing responds first, and everything else follows. According to Leamer, the reason housing drives the cycle is that housing behaves nothing like the stock market. If a company reports terrible earnings, its share price drops that afternoon. Home prices don't work like that. When the market cools, sellers mostly just refuse to lower their asking prices because their neighbor sold a similar house down the street for a fortune and they won't accept a penny less. So, the market just doesn't clear. Prices stay sticky and instead the transaction volume collapses. And when transactions dry up, the construction workers, mortgage brokers, conveyancers and estate agents who depend on those transactions lose their jobs, pulling the rest of the economy down with them. So, when a big property bubble finally bursts, policy makers are left with a fairly miserable set of choices. One choice is to take the Japanese path. After their enormous real estate bubble peaked around 1991, the Japanese authorities tried to manage the decline gently. Urban land prices then spent decades slowly, painfully deflating. Doing it this way avoided a sudden banking collapse, but the price was a zombie economy and a zombie banking system that ground sideways for a generation. Or you can take the path the United States and Ireland took after the 2008 financial crisis. In these examples, the housing markets crashed hard and fast, construction firms went bankrupt, over-leveraged homeowners were wiped out and it was chaotic and genuinely painful. But a few years later, the rot had been cleared. Prices reset to levels ordinary people could actually afford and capital was pushed back towards productive, innovative businesses instead of sitting trapped in overvalued dirt. A housing bust is brutal for the people caught in it. And nothing here is meant to make light of that. But the deeper problem was never the bust, it was the decision made gradually and almost everywhere to treat the family dunger as a leveraged investment vehicle rather than as a place to keep your furniture and raise your family. Once a country decides its houses are supposed to make everyone rich, it has to keep prices rising forever, which means restricting supply, blocking development and quietly pricing out each new generation, which works until it doesn't. Returning to a world where a house is priced like somewhere to live rather than a tech stock that happens to have a roof is probably the only way to get an economy growing again. If you found this video interesting, you should watch this video on inflation next. Don't forget to check out our sponsor GenSpark using the link in the description. Have a great day and see you in the next video.