A few days ago, Moneycontrol reported on the Government of Karnataka hiring Boston Consulting Group to advise on resource mobilization for fulfilling their unreasonable poll guarantees, Praveen Chakravarty of the Congress party posted on X that, “If one wins elections by outsourcing core political functions to external fee charging transactional consultants, then one also governs by outsourcing core policy functions to similar consultants!”
He got chastised by his own party men for his comments. The role of consultants in both political parties and government arises from capacity issues. While the role of external consultants in the government has caught the media attention before, the sudden increase in the number of consultants in the political arena has not been discussed in detail.
Of course, Prashant Kishore, Sunil Kanagolu and the likes have been in the news for a decade now. But how the sudden proliferation of consultants is disrupting political setups has to be studied in depth. It can be a good topic for a researcher of management science focusing on Organizational Behaviour.
An Information Overload?
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“Informatize” or “informationize” is a new word that has caught my attention. It refers to any field becoming complex, because of the surfeit of information and consequently, the mastery of the field is predicated on making the most sense of the information. It is safe to say that elections have become massively “informatized” over the last decade.
Booth-level data of voters, data on media chatter/preferences, data from polls and surveys are some examples of large datasets, which are sliced and diced to eke out political advantages. What was previously gut-feel based has become more scientific. “Should one drop intuition altogether?” is a larger philosophical question.
But the need for advanced skills in campaigns has brought in consultants of all kinds. Consultants galore for polling, media strategy, social media, voter outreach, data analysis, strategists that put everything together etc. have been employed not just big national parties, but even small regional parties.
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Hired Guns vs. Emotionally Committed
But these professionals do not bring in the big political virtues – loyalty and consistency. They are hired guns with no skin in the game. Exhibit A is Prashant Kishore himself who has worked with many parties with varying ideologies.
But these experts get more facetime with top leaders and get to decide on party strategy. This rankles party workers that spend their lifetimes in political setups, hoping to get to decision making positions. That their loyalty is not being rewarded and that external advisors with no loyalty are hobnobbing with the powerful have become a sore point.
The insidious nature of these consultants in politics and policy is that they have perverted the relationship between the party-worker and the leadership. It has damaged the fraternity and torn the loyalty to an ideology or a party. If we take a step back these attributes of the party workers form the bedrock of democracy itself.
What happens if smart party workers decide to join consulting firms instead of working for the party directly? She will get a good salary instead of toiling hard with no pecuniary benefits. Parties might be hollowed out for good talent, which will make them more dependent on consultants, thus starting a vicious cycle!
With more money needed to support the “professionals”, parties have entered the race to the bottom in generating cash flows. Consultants everywhere would encourage clients to spend more. They accrue direct and indirect benefits of those spending. Look at the United States. Their polity is run by consultants and lawyers. Both Democrats and Republicans spend billions of dollars directly and through Super PACS.
BJP Regulates Better
Coming to national parties, the use of consultants have increased in both the Congress and the BJP. But, it is better regulated in the BJP. A general secretary is usually put in charge of handling main consultants, at least the ones assisting in candidate selection and the pan-India media campaign. So, the ideological coherence is at least not in serious doubt.
But, with Congress’ decentralised mansabdari system, the consultants have wreaked havoc. With no strong political ideology, the consultants play on the internal political fault lines. Such a system is ripe for foreign interference – the ‘Soros gang” as the BJP would label them.
One can only look at the Congress manifesto for the 2024 elections. The promises made to women and youth – promising 1 lakh per year – is out of whack. One wonders how the former Finance Minister, P. Chidambaram, the head of the manifesto committee, approved it.
The fiscal complications that Karnataka and Telangana are staring at can be squarely attributed to consultants. Promises made were highly irresponsible.
The romantic idea of a volunteer catching a train from any part of India to work with a leader in Delhi is perhaps over. For the BJP, the spectacular success of 2014 campaign can in some part be attributed to the intelligent and motivated volunteers.
The political consulting industry was non-existent in 2009. It was akin to a petty shop in 2009, growing to become a supermarket in 2019 and a hypermarket in 2024. It threatens to grow into a whole shopping district by 2029.
Political Leaders Can Still Exercise Choice
Looking into the future, democracies world over are facing the “AI panic”. Deep-fakes are already part of our elections. “AI agents” that mimic population subgroups are already being tested in the west, to better polling. These technologies will inevitably become part of our elections, making “cognitive security” an important aspect to work on. As Nate Persily of Stanford University put it, “we have palaeolithic emotions, medieval institutions, and god-like technology”.
A common karyakarta cannot be expected to be an expert. She just acts as the vital last mile connect to the common public. But, the consulting hypermarket of 2029 is also inevitable. Thus, the conundrum of “expertise vs loyalty” is inescapable. But how to tactfully and empathetically manage the dilemma is up to the top leadership of parties. If leaders brazen it out at the cost of party workers, it will have corrosive consequences for the parties.
With the advances in social media and technology in general, political parties are becoming more and more “communication-based” than “karyakarta-based”. But as 2024 results have proved, the volunteers still form the fulcrum of the party system and by extension our democracy itself.
It is a relationship based on devotion to an organization, ideology, leader or a cause. The sanctity of that relationship should be preserved. If it is made transactional, it will be the beginning of the erosion of trust in the system.
Citizens should not be forces to think of political parties just as election fighting machines. They are vehicles of collective aspirations and modes of pursuing common truth. One should remember that democracy is, after all, an “information system” that runs on trust.
There should be a larger debate on the outsourcing of policy and political functions to consultants with “no skin in the game”. Hope our media will step in to provide clarity.
About the author: Susan Wachter is the Sussman professor of real estate and professor of finance at The Wharton School of the University of Pennsylvania and co-director of the Penn Institute for Urban Research. She is currently an advisory committee member of the Bureau of Economic Analysis of the Department of Commerce.
The U.S. Federal Reserve has been hoping for rent declines to slow inflation as measured by the consumer price index, where shelter costs make up more than 30% of the index. This hasn’t happened, and the evidence suggests that rents may now be on the increase. While housing has been a major channel for monetary policy to work to bring down inflation, this time around neither rent nor house-price declines are likely to assist.
Housing came to the Fed’s rescue in past episodes of inflation. Historically, the single-family, owner-occupied market has been the transmission vehicle for monetary policy. As the Fed tightened, higher mortgage rates dampened demand, causing declines in housing prices.
Not this time. Mortgage rates have doubled, but housing prices persist at all-time highs and affordability at 40-year lows. And while rents were falling, they are now moderating and, in many markets, rising. What happened?
The hope was that as pandemic bottlenecks resolved and housing supply increased, rents would decelerate. Rental supply in fact surged to more than 500,000 units a year in 2022 from a pre-Covid annual average of 300,000. Observers expected this would slow the pace of shelter costs, as accounted for in the CPI, with a lag. But markets have a mind of their own.
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Lags are due to the way shelter costs are measured in the CPI. Owners are asked to estimate their owners’ equivalent rent, what their home would rent for, at six-month intervals, and renters are asked for their contractual rent. In contrast, newly leased rental units reflect current market conditions, and existing rents take time to catch up. In this case, a helpful lagged effect of market rents on shelter costs was expected due to the supply surge. But that supply surge is currently being absorbed, while current rent and asset-price levels don’t justify new supply.
Rental prices had initially shot up starting in 2021 driven by economic stimulus, an overall recovery in aggregate demand, and the decision of many households and firms to move to the Sunbelt. Rents jumped by 10% in 2021-2022. This kicked off a wave of development. With the delivery of these new properties to market, vacancy increased and rent growth dropped below 2%.
With supply and vacancy growing and market rents decelerating, observers expected rents and OER rates to come down with a lag and lower the aggregate measured CPI inflation rate. The CPI data for May contained some good news: The overall rate of inflation decreased, in part due to declines in energy costs. Consumer prices increased 3.3% in May compared with a year earlier, slowing from April’s 3.4% reading. And for the first time since July 2022, the overall price level stayed flat from the month before. But shelter inflation increased at a rate of 5.4% on an annualized basis, more than offsetting the energy decline.
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Instead of continuing to decline, market measures of rent growth are now once again accelerating. Market rents are likely to move back to their long-term pattern of increasing faster than overall inflation. Since 1980, rents have increased at an average annual real rate of 1%. Rent increases vary by market, with rent softer in the Southeast and stronger in coastal markets (the Northeast and West), and by property type. Overall, recent rent-index numbers in the single-family rental market, which most closely mirrors the OER market, show rents increasing at about the same rate as the CPI year over year from April 2023 to April 2024, at 3.4%. Rent-growth rates had fallen to the 2%-3% range. The high-tier sector, which is disproportionately newly built, was in the lower part of that range. Rent growth fell less for low, low-middle, and high-middle market tiers.
But recently, all of these rent growth rates have trended upward. High interest rates and the Fed’s restrictive policies have decreased rental supply by pushing multifamily asset prices below construction costs. New multifamily housing starts fell back to about 300,000 units in 2024 and, with high housing prices discouraging moving homes, rent growth rates are reaccelerating.
In the owner-occupied space, the locked-in effect is part of the cause of low supply and persistently high prices, as high rates keep inventories low. Equally important are supply-side fundamentals. Construction costs are increasing faster than inflation due to scarcity of developable land, regulations, and labor costs. These cost increases also contribute to the lack of supply in the rental sector.
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The Fed can’t count on weak housing markets to dampen inflation, in the absence of a recession. But that doesn’t mean we’re stuck. Overall, it appears that inflation is once again falling. Economists widely expect the Fed to cut interest rates this year. That will help lower mortgage rates, and will make owner-occupied housing more affordable. Resulting inventory increases will help to meet demand.
Nonetheless, supply-side pressures will persist. Pent-up demand from millennials who have put off ownership will put upward pressure on prices as rates come down. Lower inflation and mortgage rates will help lower housing-finance costs, but we will also need to ease supply-side barriers to make housing more affordable.
Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
President Biden’s Investing in America agenda is delivering generational investments to grow America’s economy, restore competitiveness, tackle climate change, and reshore manufacturing – all while strengthening our small businesses, which are the backbone of our economy. The Investing in America economic agenda has fueled a historic nationwide
with the first, second, and third strongest years of new business applications on record occurring in Biden’s first three years in office. New Census data shows that the U.S. has exceeded
17 million new business applications
filed since 2021 – including 28,000 in North Dakota.
With the end of the pandemic, and the reopening of SBA offices nationwide, we are seeing an increasing demand for our business training services, lending programs, and information on ways business owners can secure federal government contracts. The Investing in America agenda refers to four major bi-partisan laws signed and enacted during Biden’s first three years in office: the American Rescue Plan Act, the Bipartisan Infrastructure Law, the CHIPS and Science Act and the Inflation Reduction Act.
Each of the four new laws include major new public investments in our economy and in America’s critical systems. These four laws have set in motion a rebuilding our roads, bridges, airports, strengthening supply chains, upgrading our clean energy and clean water systems, and much more. To date, these historic laws have secured funding for more than 23,000 infrastructure projects across the U.S. including $1.5 billion for electric vehicle charging stations on U.S. highways and expanded affordable internet access for 16 million households. All this while also attracting more than $425 billion in total private sector manufacturing investments and sparking the creation of over 800,000 new manufacturing jobs.
To help entrepreneurs access the benefits of these four new laws, SBA Administrator Isabel Casillas Guzman made sure small firms have the resources, tools, and know-how to capitalize on vast new federal investments that are available today or in the near future. That’s why the SBA launched its new
Investing in America Small Business HUB
which is located at
.
The Investing in America Small Business Hub will assist entrepreneurs connect to the resources, funding opportunities, and support they need to capitalize on these opportunities and strengthen their businesses. At this HUB business owners will get information on how to apply for the many Inflation Reduction Act rebates and tax credits to complete home energy efficiency projects. Business owners will also learn about the federal construction projects funded by the IIA in their state and determine how the CHIPs Act may benefit their bottom line.
The IIA Small Business Hub includes new technological assistance guides to help entrepreneurs access Investing in America grants, contracts, and market opportunities. It also highlights SBA resources that can help business owners access the capital they need to scale and the certifications they need to qualify for IIA funding. As part of this effort, the SBA will collaborate with other federal agencies to host local events and webinars to connect directly with small businesses and provide assistance on how to access IIA contracting opportunities, as well as incentives such as home energy rebates and tax credits.
There has never been a better time for entrepreneurs to benefit from historic federal programs that directly benefit our business community. For more information on the Small Business Hub visit
.
Aikta Marcoulier serves as the SBA’s regional administrator in Denver.
As an unabashed lifestyle-blog stan, I would like to encourage more celebrities to follow actor and Goop founder Gwyneth Paltrow’s example, and channel their wealth and status into stores that sell, to put it bluntly, all of the vaguely woo California stuff I love. I recently went to the store in Sag Harbor with my mom and she bought me a bag of the Martini Emotional Detox Bath Soak, which was deeply healing to the tween part of me that was denied the pink glitter bath bombs from Lush cosmetics that she so craved. (Has anyone made the connection between the former Lush kid and the current Goop girlie?)
Given my alternately worshipful and critical relationship with Goop, it’s natural that I would jump at the chance to see Paltrow’s actual home—which I did this week, as Paltrow listed her $30 million Los Angeles property. (It appears that she is planning to downsize now that her younger child, Moses, has graduated from high school.) The whole thing has a pleasingly Nancy Meyers-esque ring to it; I must assume that she’s going to Tuscany to garden with Stanley Tucci, or something equally fabulous. Paltrow bought the house 12 years ago, for $10 million, with her ex-husband, Chris Martin—he of “conscious uncoupling” fame.
See pictures of the house below:
Opinion: 100% Media 0% Nonsense
Specialist media consultancies like PwC’s should be in high demand. And yet the market for them could have a quickly approaching expiry date.
“The big question now for MediaSense is how it will use this influx of cash to evolve into a business that offers even more for advertisers when Mediapalooza dies down.
“The trouble is, this may have to happen more quickly than is comfortable. Private-equity companies are not typically known for having long-term patience when it comes to making returns from their investments.”
Nearly three years after I wrote the above in a previous column, MediaSense, majority-owned by Apiary Capital, has made its first major acquisition. It has swooped for the UK media and marketing consulting arm of PwC, led by its sharp frontman Sam Tomlinson, who will become chief client officer at MediaSense after the deal completes on 31 July.
Three years is a long time when you have PE owners, which typically look to sell after four to seven years, depending on the return they expect to get from the overall bag of companies they’ve acquired.
Off the scale
And yet this particular acquisition appears to be tactical rather than strategic, according to sources familiar with both sides of the deal.
If we go back to 2021, when MediaSense inked the PE deal, CEO Graham Brown talked about how Apiary’s access to funds would allow the company to push into other markets and develop its ability to provide global media consultancy for some of the world’s biggest brands.
“We have a relatively small presence in the US and an early presence in India and no presence in the rest of Asia,” Brown told Campaign.
It’s curious that a UK consultancy, whose headcount is similar to that of MediaSense, would be MediaSense’s first buy.
Unless, of course, this was an opportunistic buy.
Terms of the MediaSense/PwC deal have not been disclosed, but sources have told me that MediaSense was certainly not the only potential buyer. However, people familiar with the deal have described MediaSense as keener than most to make a deal, given its desire to scale.
I repeat: private equity is not known for patience.
Conflicting advice
PwC had put Tomlinson’s division up for sale because it had become something of an annoyance.
Yes, it might have grown quickly into a 50-person team since being formally established seven years ago, but media auditing can create conflicts if you’re also advising on how to make brands more sustainable and better-equipped to integrate AI into an organisation. PwC had begun running global media pitches — including the Unilever review that is currently in the works.
While these are big deals in the world of media, there’s always a bigger fish and these consultancies are never short of hunger.
The timing of how this deal came about is also telling.
I understand that PwC effectively started the process for selling the media and marketing division in September 2023. That would be just three months after the US Association of National Advertisers and PwC failed to produce a planned study of that country’s programmatic supply chain. In other words, PwC’s US failed to recreate what the UK team led by Tomlinson acheived: a landmark report in 2020 that laid bare how ignorant our industry is at knowing where the money in automated media buying is actually going.
Here we saw a potential conflict of interest in action: PwC’s US team was appointed by the ANA to audit the programmatic supply chain, but PwC was already the financial auditor of The Trade Desk, a massive supply-side platform and player in programmatic advertising.
PwC also audits WPP, one of the world’s largest agency groups and media buyers. WPP’s agencies are often blocked from pitching for brands’ accounts because of “conflicts”, whereby you can’t work for more than one airline or car brand.
And, incidentally, WPP media agency Mindshare is the incumbent on Unilever, a pitch which PwC is overseeing as a consultant.
How to spend it
MediaSense had secured a majority buyout from Apiary on the basis of there being a premium in this industry for consultancies that can credibly demonstrate independence.
When you’re an advertiser struggling to know the murky details about what media agencies are really doing with your budget or what are the meaningful innovations in marketing versus the new shiny thing, specialist consultancies like MediaSense should be highly desirable.
Its bigger rival Ebiquity is publicly owned and has been rumoured to be on the radar of PE too. MediaLink, even after the acrimonious exit of Michael Kassan, has been bought and sold twice in the last six years. ID Comms and R3, which also provide media consultancy, are likely targets too.
However, that market for boutique media consultancies could have a quickly approaching expiry date.
As technology continues to disrupt the way we keep track of how money is spent in digital media, it also affects how consultancies can give good advice on how to spend it well.
Ashley MacKenzie, founder of adtech platform Fenestra, tells me: “In the new age of programmatic media activation and global real-time bidding, humans aren’t able to assess performance of real-time bidding or follow its complexities — only machines can.”
The ANA/PwC study, which ultimately failed to achieve its objectives, proves that, he explains.
MacKenzie adds: “Further, a PowerPoint deck containing a performance [media] or media buying review — now necessarily one and the same thing — used to take a subject matter expert weeks to write. They are are now created by [AI] in, literally, minutes.”
Editor’s note: This article was amended after publication to include the fact that PwC is WPP’s auditor and to use clearer language that the ANA study was not conducted by PwC’s UK team.
Omar Oakes is editor-in-chief of The Media Leader.
100% Media 0% Nonsense is a weekly column about the state of media and advertising.
A special opportunity in investing terms is an unusual event that can trigger the chance to buy in at an attractive level. The term applies to stocks and various other assets. The steadily rising and sustained increase in borrowing costs has created more of these special situations, but rebounds are not guaranteed. The rise in these type of opportunities in 2023 correlates with a 27 per cent increase in UK administrations, along with a 30-year high in corporate insolvencies.
Scratch the surface, and the outlook becomes even bleaker. That’s because the number of administrations fell away over the last quarter of the year, while liquidations were on the rise, suggesting that insolvency practitioners have struggled to optimise the value of distressed businesses. And little respite is in sight as the Bank of England has delayed cuts to the base rate, meaning that an ever-increasing number of businesses in the UK will be lumbered with higher loan repayment schedules when their existing credit arrangements expire.
Few areas of the economy have been feeling the pinch more than the commercial real estate sector, both in the UK and abroad. Global commercial real estate investment was down by 54 per cent in 2023, according to analysts at Knight Frank. Increased financing costs have suppressed activity in the sector, but in the post-Covid-19 era “uncertainty over occupational demand due to structural shifts” has also had a profound effect on volumes. Nonetheless, the Knight Frank analysis posits that “asset prices have likely reached the bottom” in the most liquid UK markets, so we are already seeing an influx of private capital “taking advantage of reduced competition from debt-backed purchasers”.
All this provides the backdrop for a planned £500mn initial public offering (IPO) of units in Special Opportunities Reit on the London Stock Exchange. Founder of Primary Health Properties (PHP), Harry Hyman, and former Workspace (WKP) chief Jamie Hopkins are leading the internally managed Reit, which comes with a projected total expense ratio of 0.6 per cent, together with a 7-8 per cent EPRA cost ratio (net overheads and operating expenses against gross rental income). Debt financing is not projected to exceed 25 per cent on the portfolio relative to its market value – a relatively conservative target and wholly understandable given recent history.
Around £275mn will be allocated towards a portfolio comprised of structurally underserved areas of the commercial real estate market, such as student accommodation and budget hotels, although that could conceivably stretch to data and logistics centres, depending on entry yields. The onus is on acquiring assets with passing rent significantly below estimated rental value. It is a buyer’s market as there is no shortage of motivated sellers. Property sales with a value estimated at £18bn are expected from defined-benefit pension schemes following insurance buyouts, while many over-leveraged local authorities are looking to balance their books via disposals. The trajectory of interest rates means that there are more property investors who need to rapidly de-leverage as refinancing is no longer viable.
Timing any market is a fool’s errand, but there are signs that commercial real estate could be approaching the bottom of the cycle, as Knight Frank thinks, at least in the UK – the situation in the US is rather more parlous. Special Opportunities Reit makes the point that over the last 50 years, “there has not been a sustained fall in inflation adjusted property returns for more than three consecutive years”. That might be tempting fate, but the point is that the Reit isn’t burdened by legacy assets, so it doesn’t have to make up the yawning valuation gap to net assets that is now a feature of the sector. It’s also worth remembering that Reits have historically delivered their highest returns during early stages of the real estate recovery cycle.
If it makes it on to the London Stock Exchange – the prospectus is due for publication on 20 May – Special Opportunities Reit, in common with industry peers, will benefit from any eventual reduction in the risk-free rate of return. Many Reits carry fixed-rate debt, although hedging via floating rate exposures has become increasingly common, but the real problem with the current interest rate environment is that it has resulted in steep negative revaluations across the industry. Yet the general fall-away in commercial real estate valuations provides the main opportunity where this Reit is concerned, at least theoretically. Doubtless, administrators at the London Stock Exchange will be hoping that the prospective IPO will herald a change of fortune on the admissions front, but the trust will have to overcome the resistance to the sector that has built up over the past couple of years.
Bishop’s house price comments show the mood is shifting. Will we see actual change?
A housing minister willing to publicly discuss house price falls is encouraging, but true affordability is likely to remain a long way off, writes Max Rashbrooke.
House prices must always rise. For as long as I can recall, this has been one of the core assumptions of Kiwi politics. It has seemed like a long-run item of faith, a central tenet in the national religion of property investment.
Metiria Turei learnt this to her cost in 2016, when the then Greens leader told Morning Report prices needed to halve – over a period of time, but halve nonetheless – if homes were to become affordable once more. Labour leader Andrew Little called her “irresponsible”, and the public, according to Greens I spoke to at the time, “freaked out”. More recently, Jacinda Ardern sought nothing more alarming than a “sustained moderation” in prices.
But on Monday, the housing minister, Chris Bishop, dipped his toe into these dangerous waters. Asked by Herald reporter Thomas Coughlan if prices should fall, he simply replied: “Yes.”
“Average house prices to the average household income are too high by any objective measure. They are severely unaffordable by international standards,” he added. “The flipside of house prices falling for people who own homes is that they become more affordable for people who don’t.”
So far, Bishop’s laudable comments have not brought the proverbial house down upon his head. On the Stuff story carrying his remarks, the responses were mostly – though not universally – positive.
Possibly this is because Nats can get away with saying things Greens can’t. But it could also represent the slow movement, from the fringes to the mainstream, of the view that house prices are just too high, and therefore must fall. As indeed they’ve done in the past. Relative to incomes, house prices declined sharply from the mid-70s to the mid-80s. And in the last few years they have dropped from their ridiculous pandemic-era peak.
Crucially, though, Bishop hasn’t been explicit about what he wants. When most people hear “house price falls”, they think of a scenario where a house that’s valued at $800,000 one year is worth, say, $790,000 the next. But if house prices increase at a slower rate than inflation, that still counts as an “inflation-adjusted” or “real terms” fall. If, in other words, a house valued at $800,000 sells for $808,000 (that is, 1% higher), but inflation is 2%, the value of the house has “fallen” relative to the costs of other goods.
When The Spinoff asked on Tuesday which scenario he meant, Bishop’s office said only that he “stands by his comments yesterday and all previous comments around housing affordability”. Which reveals nothing – except that he isn’t taking up the opportunity to say, “Yes, absolutely, I want the actual dollar value of homes to drop.”
One might ask: so what? There is no knob marked “house prices” that the government can turn up or down with infinite precision; only the broad aim matters. And that’s a partially fair point. It’s helpful – encouraging, even – to have a housing minister talking about house price falls of any kind.
But still the distinction does count. First, it’s the difference between really facing down anxious homeowners versus still not wanting to frighten the horses, à la Ardern. The scale of government action needed to achieve the two scenarios is also somewhat different.
The distinction, finally, matters for the path back to affordability, usually defined as prices being only three times incomes. The average house-price-to-income ratio, according to interest.co.nz, has fallen from its 2021 peak of 9.3 to a mere (!) 6.9 today. That’s because the average house is now valued at $790,000, and assuming a prospective house-buying family of two 30-year-olds, 1.5 incomes and one child, the average income available is $115,000. (Other assumptions give higher ratios.)
If one then projects that incomes will rise 2.5% above inflation each year, as they did in the decade pre-Covid, what does that mean for the “real-terms fall” scenario in which house prices increase by 1% but inflation by 2%? It means at least a two-decade wait before we get back to a situation where house prices are three times incomes. Such slow-and-steady progress would nonetheless represent a long wait for those currently locked out.
If house prices freeze (in actual dollar terms), affordability might return a little quicker: in 15 years, say. But to get back to the three-to-one ratio within a decade, prices would have to fall something like 3% a year in actual dollar terms.
That may not sound like much, but it is. A house that’s worth $790,000 one year is only worth $721,000 (in actual dollar terms) after just three years of 3% falls. By the end of the decade it is worth only $580,000.
These are all rough numbers: a spreadsheet not a detailed model. Nonetheless those are the kinds of projected falls to make homeowners, well, freak out. Some would soon owe the banks far more than their houses are worth. Those with their retirement hopes pinned on an investment property would – rightly or wrongly – be in some trouble. And if the “wealth effect”, in which people spend more when their house value rises, is real, the economy would slow.
Nor is it clear how far public opinion has shifted. It’s true that, for some time now, polls have shown support for house price falls as a concept: in 2022, three-quarters of New Zealanders backed the idea. Last year they were far more likely to be “optimistic” rather than “worried” about price drops.
But that is very different from saying that one’s own house price should fall – and the last time that, as far as I know, the public was asked that specific question, just one-quarter responded favourably. This is probably why, as Hayden Donnell and others have noted, any media mention of falling prices is related in the same tone one might use to announce the death of a beloved relative.
This may change: the “aspirant homeowner” and “parents of aspirant homeowner” demographics may come to outweigh the “hands off my house price” cohort. Media coverage may shift. But if not, any real assault on prices would require National to face down two-and-a-half years of negative headlines before the next election – and, as above, countenance some startling declines in house values.
This is the problem with having allowed prices to rise to such insane heights, over so many years: the unwinding is liable to be either painful or slow. And it’s worth noting that Bishop has publicly pledged only to achieve house prices of “three to five” times incomes – which provides some wriggle room. Merely freezing prices could get us to the upper bound of Bishop’s target early next decade.
Of course no one can predict exactly how prices will respond to any given set of government actions or wider economic shocks. And Bishop is a canny politician: if he’s willing to publicly discuss house price falls, something in the debate has clearly shifted. But a gentle stasis is still much more likely to be National’s dream scenario than anything that brings affordable housing more quickly into view.
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