I am teaching the macro economic part of my course to my students. Macro economics is about the entire economy. It’s big picture stuff about economic growth, employment, incomes and inflation. Macro economics is like a Rubik’s cube that can never be solved. The father of macro economics was John Maynard Keynes. He realised that a big picture approach to economic thinking was essential to understanding the causes and possible solutions to the Great Depression of the 1930s.
The first thing I teach my students is that according to standard economic theory, the prosperity of any country depends on how well it uses its resources to make stuff to improve the material well being of its citizens. But this process needs to be sustainable. A country can easily increase its immediate output by cutting down all its native timber, strip mining its land for minerals or depleting its fishing stocks. But within a few years its citizens will be poor and living in a bleak lunar landscape. The small island nation of Nauru is a good example. In the 1950s and 60s its tiny population enjoyed a high standard of living as it mined phosphate bird droppings to create fertiliser for countries such as New Zealand and Australia. These glory days are long past. Nauru is now a very poor nation that mainly serves as a desolate prison for asylum seekers that have been parked there by the Australian government. The Aussie government pays Nauru to act as its jailer.
The next key lesson I want my students to learn is that no nation has ever become wealthy from its houses. House prices should reflect nation prosperity, not the other way around. Individuals may get wealthy by buying and selling houses but a country does not. Houses are for people to live in while they work and make stuff in the real economy. Making stuff is what generates jobs and higher incomes in an economy. Buying and selling existing houses is a zero sum game for a country. There is no new wealth or higher incomes created for a country. Individuals may gain but the country does not. There is just higher debt levels and higher house prices.
I drill this message to my students because I fear for their future. Some of them, from affluent backgrounds, may have parental assistance which could avoid the potential housing debt trap. But many will not. I want them to live good lives. I want them to consider other avenues to ensure their financial security. I don’t want them to live a life of debt indenture just to own a very average roof over their heads. I don’t want them to spend their lives earning average incomes to pay off huge mortgages to own an average weatherboard in average suburban New Zealand. Yet sadly this is the cultural conditioning we are inflicting on them.
This ugly housing debt trap is the legacy we are leaving to our young Kiwis. We need to stop the bullshit about how hard we had it in our youth. The rules have entirely changed since then. This process has occurred in the last thirty years since the deregulation of the banking system. We need to be honest and realistic about what has gone on. We have been using massively increased debt levels to bid up the prices of our existing houses. This has been happily facilitated by the banking and real estate sectors and self serving politicians. No country in history has become prosperous from housing inflation. It is little wonder that many people are now living in very expensive houses but are struggling to pay the bills. We need to be brutally honest with our young people , and with ourselves.
Peter Lyons teaches Economics at Saint Peter’s College in Epsom and has written several Economics Texts.