Hamish Rutherford: The biggest winner of the booming housing market has been the Government


Just about anyone who owns a house in New Zealand will have felt the effect of rising house prices, but no one got a boost as big as the Government itself.

On Tuesday the Treasury published the Government’s annual financial accounts. As Finance Minister Grant Robertson was at pains to point out, these were much better than were expected a few months ago.

The tax take was higher and expenses lower than Treasury forecast in May’s Budget, meaning the deficit was a fraction of what was expected ($4.6 billion compared to the more than $15b expected in May). Net debt at the end of June was more than $11b less than forecast.

Just as he was a year ago, Robertson could only see good news.

“I don’t think it is fair to argue that these accounts represent anything other than New Zealanders having worked very hard … and achieved a very good outcome,” Robertson said.

The biggest difference between what the Treasury predicted in May and what it published on Tuesday was the value of the Government’s own assets.

The net worth of the Crown – a broad measurement of the assets it owns minus the liabilities – rose a stunning $40b in the year to June 30, and is now above where it was in 2019, a time before Covid and at the end of a decade in which asset prices had already been climbing.

Kianga Ora – what was Housing New Zealand – saw the value of the land it holds rise by $5.8b alone, while the financial assets owned by ACC and the Super Fund climbed went up in value by $18b.

Just as it was a good time to hold financial assets, and it was a good time to borrow, as interest fell.

Although the Government’s net debt is around $20b higher than a year ago, the cost of financing the debt is $1.3b lower. Given how closely linked asset prices are to interest rate movements, this is not a surprise.

Most of the increases in the value of Government property provide little benefit that can be spent. Even the value of the conservation estate rose, but it cannot conceivably be sold.

But the influence of rising asset prices had a broader impact on the Government’s books. Rising asset prices make people feel wealthy and they spend.

Treasury said as much, as it noted that GST rose by $3.8b, which it put down to increases in “household consumption and residential investment”.

As has been well documented, consumers spent up last year. While a significant part of this has been put down to “pent-up demand” as a result of the first lockdown, a lot of it is likely to have been driven by the so-called “wealth effect” of rising house prices.

There is nothing peculiar to New Zealand about this, but it remains to be seen whether anything like the boost of 2020 and 2021 will be seen again in 2022.

Although Treasury’s forecasting record has been far from flawless during Covid, it is forecasting that house price growth will fall to basically zero this year, as has the Reserve Bank.

Meanwhile, the Reserve Bank raised interest rates just over a week ago and is expected to hike several more times before the middle of 2022.

Robertson pointed out that business confidence and consumer confidence remained relatively robust according to recent surveys and he expected to see some bounceback in spending when the current lockdowns end.

But it is one thing for spending to bounce back aggressively when Covid restrictions ended up being less prolonged than expected and interest rates are falling.

It is another for it to happen after restrictions drag on and interest rates are rising, especially if house prices are not rising.

What Robertson put down to hard work may turn out to the inevitable effect of pumping billions of dollars into the economy to keep the party going.

Next year we may find out what happens when the sugar rush stops.

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