Banks culpable in Auckland housing crisis

The following letter was sent to the editor of the Listener but not published, so we publish it here.

Absent from the vigorous discussion of the Auckland housing crisis on The Vote (Sept 11, TV3) was mention of the role of banks in creating this crisis. They stand to gain billions not just from the rising price of houses but from the eventual crash.

In a January 2013 seminar IMF economist and former Barclays Bank manager Michael Kumhof makes it clear that the role of banks is not intermediation but to create credit and control its supply.

“The key function of banks is money creation not intermediation. What that means is that it becomes very easy for banks to start or lead a lending boom even though policy makers might not, because if they feel that the time is right, they simply expand the money supply. There is no third party involved, just the bank and the customer and I make the loan.”

Yes the banks have started a lending boom in Auckland, rewarding staff who issue more loans. Banks find it more profitable to row the economy between easy money and tight money then “laugh all the way to the bank when it finally collapses”. Loan to value restrictions will not help.

Alan Dudson, an Auckland accountant, says “In Auckland it is not uncommon for residential real estate investors to own five, 10, 20, 50, or even 100 houses.”

And all the while Government collaborates by making the interest, insurance, rates and maintenance tax deductible. So Dudson says there is hardly any tax to pay.

When we have a government and opposition both blind to the true role of banks, banks are almost in complete charge. A tax policy favouring property investment and making it easy to hold land without financial penalty will see to that.

The opposition solutions are little better. A capital gains tax doesn’t hold down prices when too weak and just keeps land off the market when it is strong.

It can only end in tears.

1. Michael Kumhof
2. Alan Dudson. NZ Herald Let’s stop subsidising property investors.

Deirdre Kent
Spokesperson New Economics Party