The perversity of rising wealth inequality in Godzone

by Ferdinand Balfoort

TINZ board member

Transparency Times regular contributor

Part I – Low interest rates, quantitative easing, and the perversity of rising wealth inequality.

Over the past month, TINZ focused on preparing a professional submission in response to a Ministry of Justice Consultation paper on the Anti-Money Laundering and Countering Financing of Terrorism Act Phase 2 (AML). The object is to expand the New Zealand AML provisions to encompass a broader range of at-risk sectors of industry and require compliance from professional accountants, lawyers, and real estate professionals heretofore not included in AML regulations.

Of particular concern is the real estate sector. It has seen a remarkable rise in investments driving up housing prices to where New Zealand property in now the most unaffordable in the world, according to the IMF. Home purchase is now beyond the reach of the average working Kiwi.

While hard data on the use of corrupt money to purchase New Zealand property is elusive, it is clear that criminal proceeds are being used to invest in New Zealand property:

  • New Zealand police estimate that $1.6 billion of domestic crime proceeds are laundered annually
  • Property was involved in 56% of the cases where the New Zealand police have frozen assets.
  • In a recent court settlement documents allege William Yan concealed a $40 million fortune in New Zealand through complex money laundering transactions, where property and shares in companies were held by trusts and companies in other people's names.
  • In a shocking corruption case involving two senior Sabah Water Department members, the Malaysian Anti-Corruption Commission (MACC) just seized over RM114million worth of assets (NZ$38.4 million), traced RM30million stashed in foreign banks and another RM30million in land titles. Offshore funds and property were located in Singapore, Australia and New Zealand.

The extraordinary flow of funds into property investments is not limited to New Zealand. The United Kingdom, Canada and Australia are among other countries facing similar asset inflation. The younger generations in these and other countries are therefore far more restricted in their ability to get on the property ladder than their parents or grandparents.

Feeding this buying frenzy are historically and artificially low interest rates globally in the wake of the 2008 Global Financial Crisis. Credit is now available in unprecedented levels.

For example, the US Federal Reserve, and more recently the Bank of Japan and the European Central Bank, have implemented quantitative easing for periods of time.

Quantitative easing is unconventional monetary policy in which a central bank purchases government securities or other securities, from the market in order to lower interest rates and increase the money supply. It is a modern day equivalent to unrestrained printing of money.

Neo-Classical economic theory contends that credit made available is distributed to the population at large. The desired result is for easy credit to fuel economic growth driving production and job growth.

Contrary to classic economics, the credit created has not resulted in more consumption of goods and services. It has instead raised the prices of assets, including property and the expected contributions to growth are disappointing. Too much of this free money is being applied to the purchase of real estate driving the alarming wealth inequality we see globally and in New Zealand.

Real estate investments are favourable because:

  • The limited supply of real estate particularly in markets like London, Vancouver and Auckland
  • Security provided by controlling tangible property
  • The majority of credit is lent to low risk asset backed investments, including property, since the expansion of credit is via risk adverse financial institutions
  • Available real property lending allows lenders to avoid higher risk associated with new business or business growth - job creation - initiatives
  • The resulting feedback loop is fuelled by limited availability, asset appreciation and greed
  • The absence of capital gains tax for some property owning categories within New Zealand

While in theory low interest rates make it easier for anyone to purchase property the opposite is true.

Paradoxically, because banks have become more risk averse they prefer lending to borrowers with higher collateral, usually in the form of assets such as property. Property, as long as everyone believes in the market, continues to rise in value. It is only logical with low costs of capital, high expected returns on property investments, and relatively low levels of risk. (Property investments also make it easy under current law to protect investor anonymity, as the recent case in Malaysia confirms.) These are perfectly sound reasons to avoid investing in often messy and challenging start-ups, early stage companies and risky expansions. Those with assets experience asset inflation, while those without stay stranded.

An unfortunate outcome is the rising percentage of renters in New Zealand with no hope of owning their own home. Once known as Godzone where the ‘haves’ and ‘have-nots’ ate at the same table, in New Zealand the current housing crisis has shown that New Zealanders live noticeably different lives. The gap is yawning wider than ever.We will explain the links between Quantitative Easing, corruption and rising property prices in New Zealand in part II of the article.

An alternative lifeboat which Kiwis increasingly need to use. But is it watertight in the long run? - Courtesy New Zealand Herald, August 24, 2016.

About the author: Ferdinand C Balfoort (MCA,CA,CIA) is an international corporate governance expert with academic and professional expertise and interests in cross cultural impacts of corruption, economic history and the Scottish Enlightenment philosophers.

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