By Lowell Manning*
The concept of “affordable housing” is political propaganda, a hand washing exercise so governments can “feel good” while household home ownership rates in New Zealand continue to fall.
Property, especially residential property, is one of the few genuine “markets” left in New Zealand. It is neither affordable nor unaffordable. It simply reflects what buyers can and will pay and sellers will accept at any given place at any given time.
Everyone in the property business knows that property values are the sum of the land value and the value of improvements.
The main value of the improvements is the house or other building on the land. That building has a cost made up of materials, labour, council and government compliance costs and the like.
The cost of housing in New Zealand has not been rising quickly. For example, the capital goods price index for residential housing in New Zealand rose just 4.7% between December 2010 and December 2012[1].
Much of that increase is in higher regulatory costs caused by builder registration, double glazing, permit fees, better earthquake standards and the like over which people building or buying houses have little or no control.
There are regional variations in construction prices but they are rarely substantial. Every valuer takes the cost of a new building and reduces its value according to its age and condition. The improvement value is based on objective costs and has nothing to do with speculation.
A cheaper building has to be smaller and simpler and use relatively lower grade fittings, because everything else is controlled by the applicable standards and regulations. So, a government that talks about a cheap or affordable house it is really talking about a lesser house in respect of size, comfort and quality.
Since house “costs” do not govern the variation in property values, the land value must be doing so. Wide variations in land values mean they are subjectively assessed according to location and demand. Those factors determine the relative value of land from one place to the other, but not the value of the land in aggregate.
The aggregate “value” of the land portion of the property is determined by the pool of investment money available to purchase and exchange it, not by the land itself or government policy.
Residential property forms a large part of the value of unproductive capital investment in all developed countries. When the banking system deposits increase sharply, so will land prices in aggregate, and therefore property prices in aggregate, but not the prices of the improvements on them.[2] In New Zealand, the monetary stock M3 has risen moderately quickly over the past three years. House prices are changing because the investment pool is getting bigger all the time as shown in Figure 1 below.
The year to year correlation of the two graphs in Figure 1 is low because housing is only one of four areas of non-productive investment, the others being equities, government and commercial paper, and bank deposits. Investors always have a choice where to invest. For example, during the dotcom boom, equities were preferred relative to residential housing. House prices at that time fell briefly while bank borrowing surged. The M3 data also reflects changes induced by offshore “crises”. From 2002 to 2007, after the dotcom crash, housing was relatively preferred to other forms of investment as Figure 1 shows clearly. The plunge in property prices in 2008 and 2009 largely reflects investor withdrawal from the housing market in sympathy with the US housing crisis even though that had no connection with house prices or “the affordability of housing” in New Zealand. In the March years 2011 and 2012 house prices rose less than M3 because equities prices rose very quickly. Yet there was no move by the New Zealand government to restrain the New Zealand share market!
Figure 1:New Zealand 1993-2013 % Change in House Price v 0.945*M3[3]
Note: 0.945*M3 is used in the graph because the productive transaction account deposits used to physically generate the GDP are not part of the non-productive investment sector. The author estimates the productive transaction account deposits are presently about 5.5% of GDP in New Zealand. So 5.5% has been deducted from M3 to give the total of 0.945*M3 investment sector deposits.
The trend lines in Figure 1 rest almost on top of one another. That shows that over the past 20 years house prices have followed the money supply (0.945*M3) available to the investment sector, not the physical cost of building houses or of developing land.
A government or a territorial authority that “forces” housing development in chosen areas is literally squeezing on a housing balloon. In New Zealand, for example, the government intends to subsidise “greenfield” subdivisions in the outer suburbs of Auckland. That will not reduce land prices in aggregate because the sale and purchase of that new residential land will still increase the money supply. The new investment will be mainly funded by new bank debt. That new money will add to M3 and grow the available investment pool and so cannot make property prices “more affordable” as the government seems to think.
The only way to reduce the rise in real property “values” in aggregate, and residential housing prices in particular is to slow the increase in the money supply as a whole. Unfortunately for the government the money supply growth in the existing debt-based financial system is systemic. It cannot arbitrarily be reduced below the trend line shown in Figure 1 without wrecking the economy.
The mechanics of the debt system [4] require that the total money supply increase by an amount sufficient to cover systemic inflation (presently about 1.75%) plus “growth” (say1.5% after deducting a productivity increase of about 1%)[5] plus domestic deposits that result from the current account deficit. In New Zealand, those last are presently increasing at nearly 4% of M3/year, and, according to the recent government budget, will increase faster in coming years. That’s about 7.25% altogether. To keep the economy above water, M3 presently needs to grow faster than the trendline shown in Figure 1, not slower [6]. The most practical way for New Zealand to manage property inflation in the absence of broad financial reform is to stabilise the current account and begin reducing foreign ownership of the domestic economy.
As discussed below, the excessive investment sector growth in debtor countries like New Zealand is related to the sale of productive assets to foreigners on the current account. When New Zealanders sell assets to foreigners those sellers then have an equivalent amount of domestic currency deposits they must invest. Figure 2 shows the correlation between 0.945* M3 and GDP for the 26 years since the New Zealand dollar was floated in 1985. While the correlation is almost 1, the series have not increased at the same rate due to the impact of surplus deposits arising from the current account deficit. Figure 3 shows M3* 0.945 and GDP plotted against time.
Figure 2: New Zealand 0.945*M3 v GDP 1986-2012.
Figure 3: New Zealand 1986-2012 Growth of GDP and M3*0.945
Source: New Zealand National Accounts – March Years
The trendlines in Figure 3 are exponential because the payment of deposit interest in the interest-bearing debt system creates systemic inflation as mentioned on page 4. The net additional flow of deposits from the current account deficit creates a different exponential rate of growth of the investment sector relative to GDP. That differential rate of growth has been about 0.7%/year over the period 1986-2012 [7].
Due mainly to the current account deficits, the investment sector has grown at 5.9%/year while nominal GDP has grown at 5.2%/year over the same period. That is why prices in the non-productive investment sector are “overvalued”.
While nominal GDP has grown by $159.2 billion, 0.945*M3 has grown by $196.3 billion, a difference of $37.1 billion. That extra $37.1 billion represents surplus deposits over and above those needed to fund the principal outstanding on capital investments in the capitalist system[8].
The author’s paper “The DNA of the Debt-Based Economy” demonstrates that GDP equals the outstanding principal on capital investments [9]. Were the growth of 0.945* M3 to exactly follow the growth of nominal GDP, the increase in the prices of existing capital assets in aggregate would mirror GDP growth. As shown in equation (1) below, it is mathematically impossible for the total deposits to be lower than the existing interest-bearing debt in the capitalist system after subtracting the banks’ residual (net worth) that they have “captured” from the deposit base (mostly their net retained profits) and the country’s net foreign currency debt.
Debt is linked to deposits and the current account/NIIP [10] by the formula:
(DC + NFCA) = M3 + Residual (1)
Assets = Deposit Liabilities + Net worth
The formula represents the basic accounting equation viewed from the banks’ point of view, where DC is Domestic Credit, M3 are the total bank deposits, NCFA is the Net Foreign Currency Assets of the banking system and Residual is the net worth of the banking system. The Residual is positive when the equation is in that form, and NFCA is negative for debtor countries.
The numbers for New Zealand in December 2012 were [11]:
DC was $333.2 billion
NFCA was $-52,6 billion
M3 was $ 253,6 billion
Residual was + $ 27.0 billion
Applying Formula (1) to New Zealand at the end of December 2012 gave
$333.2 b - $52.6b = $253.6b + $27.0b
At that time,
- New Zealand’s accumulated current account deficit was $203.8b and GDP for the 12 months ended December 2012 was $209.3b,
-$151.2b (203.8- 52.6) of the deposits created to fund the accumulated current account deficit had therefore been returned to New Zealand in the form of foreign ownership,
-$209.3b x 1.055%, or $220.8b of the $253.6b M3 deposit base was needed for capital and to fund the productive transaction accounts[12]
Between 1985 and 2012 New Zealand “imported” net surplus deposits amounting to $151.2b - $220.8b or $30.4b through its current account. The situation would be $52.6b worse still were ALL the deposits created to fund the accumulated current account deficit returned to New Zealand in the form of foreign ownership, as could theoretically happen over a relatively short time span. The $52.6 billion borrowed offshore by banks operating in New Zealand has temporarily frozen their release for the purchase of assets in New Zealand.
Recent IMF comments that housing in New Zealand is “overvalued” by about 20% are directly related to the surplus $30.4 billion of net surplus deposits imported through its current account. This is about 17% of GDP when the pre-1985 surplus (referred to in footnote 8) is included. That IMF comment reflects an ideological bias against housing because surplus bank deposits have a similar effect on all other non-productive investments too, including share market equities. That is why there are regular share market collapses!
In New Zealand, if the government were to somehow succeed in “slowing down” the housing market, the unintended consequence would be to “overheat” the rest of the investment sector. Debtor countries themselves, not the foreign investors, pay for the foreign ownership they cede on their negative current account. Very few people understand that, because few understand how the foreign exchange process works[13].
New Zealand therefore remains at risk of further asset inflation should the present arbitraging of interest rates by the New Zealand banks be reversed. As shown on page 7, the banks have borrowed a net amount of $52.6b offshore. They have done so because it is cheaper for them to do that than pay deposit interest in New Zealand. The arbitraging is sustained by New Zealand’s relatively high domestic interest rates. When viewed from that perspective, the international rating agencies can be forgiven for keeping an eye on New Zealand’s current account.
International financial institutions are concerned with financial stability. They are not concerned about the economic asymmetry that foreign ownership of a domestic economy creates. Nor are they concerned about domestic imbalances in wealth and income distribution. If the banks were to stop borrowing money abroad to finance their operations, most of the NFCA of $52.6 billion would be invested in existing assets in New Zealand, driving their prices up.
The main options
There are two main options to “pop” the housing “investment bubble”. Neither of them has anything to do with building houses!
Either the proportion of the available M3 investment funding ($253.b*0.945) now actively used to purchase and exchange existing non-productive residential property and other non-productive assets is reduced, or the investment pool M3 itself needs to be reduced through progressive debt retirement, starting with foreign debt.
The New Zealand government appears to support the first option in the form of higher mortgage deposits and tougher bank lending criteria. That makes the purchase of residential housing more difficult for the man in the street, especially for first home buyers, but it will have little affect on the speculative residential market that tends to use existing deposits to purchase and exchange existing assets.
The government proposals would have their main impact on ordinary people who borrow from the banks to pay for their homes, making housing less available to them. The result would be to reduce household home ownership rather than increase it. How such an approach would lead to more “affordable” housing for homeowners is anyone’s guess.
The second option makes more sense because it removes a primary source of the structural asset “bubble”, namely the persistent growth of foreign ownership through the current account.
Reversing that growth means managing the exchange rate, but the government and it advisors like the Treasury and the Reserve Bank of New Zealand claim there is no viable policy tool available to do so. They are wrong.
The government could easily set up a variable and tax neutral Foreign Transactions Surcharge (FTS)[14]. The FTS is an automatically collected levy on all outward domestic currency transactions passing through the foreign exchange interface. Its effect is to increase the aggregate cost of repatriating domestic currency offshore and lower the aggregate cost of using domestic currency locally.
The revenue obtained from the levy would be used only to reduce domestic taxation and to begin repayments of foreign debt, in effect repurchasing those assets already ceded to foreigners. While an FTS will correct the exchange rate and current account it will have little immediate effect on investment prices or the property market. It would instead lead to a gradual easing of the rate of investment price increases over time.
The myth
There is no such thing as affordable housing. There is just a housing market.
Aggregate prices in that market are structural.
Any government attempt to manipulate the market without addressing the structural causes of property inflation will fail.
The sooner the government introduces a program to resolve the main issue of foreign ownership generated through the current account deficit, the sooner house prices will become more stable.
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[1] Source: www.stats.govt.nz capital goods price index
[2] This is true for all non-productive investments in equities and commercial paper as well. The relative weighting of non-commercial property, equities, government and commercial paper, and bank deposits depends on regulatory policy settings such as tax rates, lending criteria, subsidies and the perceived impact of offshore events.
[3] The housing data is interpolated from Real Estate Institute of New Zealand (REINZ). That data is global only and subject to further research. The M3 data is for March years and is from Reserve Bank of New Zealand Table C3 (historical).
[4] Fully described in a paper by the author “The Ripple Starts Here” given to the New Zealand Association of Economists’ 50th annual conference July 2009. The paper develops a simple debt model of the economy. It is available, together with later updated papers at www.integrateddevelopment.org. Systemic inflation is the net deposit interest paid on deposits. The systemic inflation rate is the net interest expressed as % GDP.
[5] A positive balance of trade is counted as GDP “growth” but it does not appear in domestic deposits because it is “used up” to reduce the size of the current account deficit. The GDP “growth” figures in the official data for New Zealand are artificial because the positive trade balance “disappears” from the domestic economy. Similarly, heavy discounting of consumer goods and services (among several other factors) masks systemic inflation. That is why measured CPI inflation in New Zealand is shown as just 0.9% in the March 2013 year instead of about 1.75%.
[6] The actual M3 growth from February 2012 to February 2013 was 7.5%.
[7] The exponentials shown in Figure 3 (5.2%, 7.8%) cannot be compared directly because the curves in Figure 3 have different starting points. If the data series are set at the same starting point (52.7) the 0.945*M3 exponential would be 5.9 instead of 7.8. This shows that 0.945*M3 increased 0.7%/year faster than GDP from 1986-2012.
[8] The total surplus is more than $37.1 billion because the accumulated surplus from before 1985 needs to be added. The total is thought to be a little over $40 billion.
[9] Available at www.integrateddevelopment.org
[10] The Net International Investment Position, (NIIP) might better be a little more accurate but the author uses the current account for simplicity.
[11] The debt figures used in this article exclude secondary savings and loan debt such as the on-lending of deposits through finance companies and other non-bank financial institutions. Secondary debt is thought to amount to about 10% of Domestic Credit in New Zealand but it is higher in some overseas countries, notably the US.
[12] The productive transaction accounts in New Zealand are about 5.5% of GDP
[13] Lowell Manning, 2011, “The Savings Myth” Section 4 www.integrateddevelopment.org
[14] Full details are available from www.integrateddevelopment.org and from www.sustento.org.nz or from the author manning@kapiti.co.nz
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Lowell Manning is a researcher at the Sustento Institute. You can contact him here »
135 Comments
The RtHon John Key told me in person in January this year, he will do NOTHING to stop foreign ownership or immigration into New Zealand. There are therefore no tools Wheeler can use, other than shut-out the first-home buyer... Any hope of first home buyers getting in, is slipping further and further away daily! Expect lots of hand wringing from our local and national pollies over the next 10 years...
Well then, maybe what we need is for Hone Harawira to propose a bill to get rid of non-resident foreign ownership of our stuff, then just wait for Key to leap in front of him to do the same to try make himself look like Santa, just as he has with food in schools.
Seriously, though, people are getting into desperate circumstances because of the cost of just putting a roof over your head. It must be addressed somewher along the line
raegun.... good one! Alas all one can do is follow our leaders and wring hands. Maybe we could have a Wringing Hands Across New Zealand Day? Unfortunately the property owners, both PIs and owner occupiers still have a greater sway in the eyes of the government so ergo Nats will do nothing except to continue their fluff and bs... which is nothing. By the time the other usless lot gets in, it will be all too late (I mean really too late, it's too late now)... I'm going with the predictions of 20 years to sort this housing thing out... And sad to say Olliy Newland will have been proved right and pretty soon a 2 bedroom flat under the powerlines in Massey, where the kids will be closer to the cars on the motorway than to Mum and Dad in the lounge, will cost you the modest sum of NZ$750k.
Well then, maybe what we need is for Hone Harawira to propose a bill to get rid of non-resident foreign ownership of our stuff, then just wait for Key to leap in front of him to do the same to try make himself look like Santa, just as he has with food in schools.
Seriously, though, people are getting into desperate circumstances because of the cost of just putting a roof over your head. It must be addressed somewher along the line
Really thoughtfull piece.
One question I have relates to this:
As shown on page 7, the banks have borrowed a net amount of $52.6b offshore. They have done so because it is cheaper for them to do that than pay deposit interest in New Zealand. The arbitraging is sustained by New Zealand’s relatively high domestic interest rates.
My understanding is that banks create money when they write a loan, that the promise to pay interest by the borrower creates the money.
So the banks that loan money for housing create the money to do so. ( in the main)
This seems reasonable because if they actually did borrow the money that the lend out from offshore- where would they borrow it - where would they actually get the New Zealand dollars from. No one else in the world accepts New Zealand Dollars- they don't want them so I figure they don't really have them. Ie there is no giant bucket of New Zealand Dollars anywhere else in the world.
So the babk borrowing from offshore looks like a way of offshoring profits rather than anything that is really happening.
NZ Banks do borrow from offshore - particularly USD from private rule 144 lenders in the States.
The USD proceeds are then swapped for NZD borrowed by the same, but not necessarily so, highly credit rated USD counterparty.
Each party suppossedly gets cheaper financing (credit wrapping in the local case) than they could expect to obtain using their own rating within their own borders - but more importantly these swap liabilities are exempt from pre-positioning in the RBNZ's bank solvency recovery mechanism, known as OBR. After a bank insolvency event swaps are settled then under rewarded local depositors get called upon to re-capitalise what remains.
The RBNZ engages in currency swaps (section 10) to collateralise thin air NZD credit creation to pre-fund institutional deposits to the settlement cash balance and loans of government cash surpluses to local banks.
Plan B
The point seems to be that the banks have already created the debt and deposits to fund the current account deficit. Since as you say (unlike US dollars) nobody wants to hold NZ dollars so they are ultimately returned to NZ where they are used to buy up our productive economy and investments like property and (not so much yet) land.
That debt already exists as part of NZ domestic credit.
The banks can also "sit" on some of the NZ dollars and borrow offshore to meet the foreign exchange commitments ... but they will only do that if it is cheaper ... I think that's why the paper calls it an arbitrage process. It is only "offshoring" profits to the extent the NZ banking system is all but Australian owned.
Yes, well Stephen, this isn't the place to go into the mechanics at the foreign exchange interface. I'm trying to keep the discussion simple without introducing the complexities of changes in domestic and foreign reserves and the like. But if you want to summarise the process in a couple of sentences, go ahead. "Returned to" refers to the reverse financial flows that are essential for a debtor country to balance its current and capital accounts.
Thought-provoking piece - thank you.
In lay terms, we have a pool of would-be investments. Their opportunities to 'grow' are increasingly limited (too many investors chasing a permanently-lessening number of opportunities) and so the 'value' of existing things - houses, paintings, shares - gets pumped up. In scary times, there's a flight to safety and the 'real'. Gold, say, or bricks and mortar. (Post Chch, maybe that's pine, cardboard-covered plaster and tin?).
Another form of 'investment' is the gaining of exclusivity via lobbying for regulation granting you same. If you're the only one 'qualified', you can charge more. Nobody contemplated the fact that there might be an inability to pay - that the invisible hand had cancer.
But "So, a government that talks about a cheap or affordable house it is really talking about a lesser house in respect of size, comfort and quality". I take some issue with.
Size, yes. We've been building too big lately - an ego-trip, no more. Folk do - quite comfortably and long-term - live in smaller spaces; boats, house trucks/buses, containers, yurts. Comfort, though, is not a function of size, indeed maintaining temperature and internal infrastructure becomes easier with a reduced volume. Quality? No, the 'small' means you can keep the quality up - indeed I'd suggest that much stuff plonked into the over-big houses of today, is of throw-away quality. Have a look at those bench-tops everyone just had to have in the last decade.........
"inability to pay" yes but I think there is limited awakening on that, persil (or whatever) to expensive? find something that cant be subsituted or done without....so the next stage seems to be privitise things like water, essentials to life...."cant pay? well tough die" how did it go? let them eat cake?
regards
Good food for thought (which may take a while to think through). A couple of quick points:
-under this model, is the increasing unaffordability as measured by the wage/ house price ratio (which is an observable change over time) explained as there being a lot more money (or money and debt) but a lot less of it is in the wages of most people? So growing structural inequality?
-one of the big dangers of models like this is over fitting- that the model seems to explain things well but has little predictive power because it has made unsupported correlations. One way to check this would be to see if the model holds for other similar countries data. In theory this is the standard plan of develop a model with one data set, test it against another. Of course, if it fails against the test set, you are then supposed to drop the model rather than change it in response to the now no longer unknown test data (otherwise you are over fitting to the new data).
dh - there is indeed a problem with models relying on the 'givens' of past trajectories.
This applies to BH's 39000 houses piece - they may well get built, but the mortgages will not get serviced. Since 2005-7-8, we've seen what the future is, and this is only the plateau. The social question then is: who will end up owning them, after the fire-sale after the fire-sale? What will they be worth, in the face of permanently-decreasing tenant incomes, while also in the face of increased demand?
Or will there be increased demand for city dwelling? What happens when you overlay an exodus towards food-acres-per-head?
39000, ignoring the expectation that you and I as tax payers will bailout the banks. Ive come to the conclusion that really experience and bad ones are the best and fastest ways for ppl to learn. We have education but really ppl ignore it. We have copious examples throughtout 3000 years of hostory and ppl ignore it. I just shake my head at ppl desperate to buy on 95% and 30 years....but how do you condense 7 years of reading and thought into a sentance that such ppl will take on? You cant, or I cant any way.
So really Im pretty much saying let the developers and the ppl etc build/buy its too late now...lett them go off to their play pen and crash and burn.... Provided we keep the same infrastructure cost model, ie no MUDs financing the costs which is yet more risk to u and i for no gain. Sure 30 years wont get serviced, I doubt 10 myself....just how do you handle losses on that scale I wonder? does a few more % matter?
Exodus per acre is interesting. The kids (in general) listen though, and and understand they are thinking about such things...I dont think they will be happy with us at all.
On the brighter side I think "our side" is winning a little I think, lay it out, the fanatical you wont convince, the open minded might just get it. maybe we'll see a new generation of pollies voted in on that.
regards
Steven you clearly read BH article about Aucklands 39,000 houses with my analysis of MUDs. So can you explain why going into your expected mega financial crisis in a decade or so New Zealand should have 160% of GDP in private debt instead of something a lot lower like say 120%.
Actually I didnt see your bit on MUDs, at least I dont recall, url? I have read other pieces and the farces of 75 year bonds on roads with a life of 35years etc is crazy....or the huge swathes of land that has roads and services on it in the USA but houses have never been built...those bonds must be paid off by someone or they were defaulted on, as there is no income (rates) so someone got hurt.
I dont agree with municipal infrastructure financed bonds behind MUDs on principle. I think the buyer should and can pay they want the good. Passing the risk and debt onto rate payers many who couldnt pay is like a drowning man clinging to others, simply wrong. Plus I see it as being no cheaper, so the only advantage is to vested interests ie developers like HughP or the land bankers who Im sure support him 100%.
On the 160% v 120% for all of 39000 houses? anyway say its 120 v 125% or even 120% v 121%....no matter I expect there to be default.....What other options are there?
What flows on from that?
My understanding is ratepayers are ultimately responsible for the council debt/bonds. So are we really saying when councils default anyone such as say myself left still standing (assume mortgagee's sales of the 80%+ are long gone) will also lose their house to pay the debt? (just who will be buying?) ouch on a huge scale, unswalable politically?
Kind of wonder on how that works politically, sure 5% of the population can be hog tied and their houses sold from under them, and 95% of us wont care much but 20%? with obvious risk to even more? no one will wear it especially if its overseas debt. So there has to be a default and a debt jubilee....I cant myself see any other way.
Of course this is very crystal ball / what if stuff.....kind of hoping its so extreme is simply not realistic, but as I watch things unfold and study history Im not so sure...
regards
Steven, the discussion Brendon is referring to is near the bottom of THIS thread:
As I said there, "....This is the sort of discussion that their forum SHOULD be getting used for....."
It is a most helpful and insightful discussion.
Hi Steven, check out the link that Phil kindly provided for some information on MUDs which covers those topics you raised. Regarding your crystal ball gazing my best guess on what would happen debt wise if and when oil goes into decline and there is no replacement. I'm inclined to think that what cannot be repaid will not be and that commonsense would prevail. So a debt jubilee would be announced. If this change happened we would have more to worry about than some pieces of paper.
Yes dh, I agree with you that the inability of mums and dads to buy a house is about growing structural inequality. Most real incomes in NZ have been stagnant for decades despite a lot of accumulated productivity growth. (It's much worse in the US)
It seems to me there are several sources of structural inequality. The first is the mechanical transfer of income, as I understand it, from debtors to depositors in the form on unearned interest income. Secondly the unidirectional changes in tax law that have seen taxes on business and upper incomes decreased while those the majority of income earners have increased. We no longer have a progressive tax system - in fact the total tax paid by the wealthy in many countries is proportionately less than that paid by lower income groups. There's a lot of stuff published about this in the US. There are also large subsidies of the rich hidden in the current account deficit - the poor subsidise the rich because the rich are the ones who can "afford" the multitude of luxury items including travel abroad. The foreign rubbish sold cheap by the Warehouse is not much more than the crumbs on the floor.
This particular article points out why the correlation between 0.945*M3 and GDP is almost unity, while the exponential growth curves of those variables are different. So you are right .. one has to be very careful with the correlation/causality issue. The "test" as you call it is there for all to see, I would have thought.
Yes dh, I agree with you that the inability of mums and dads to buy a house is about growing structural inequality. Most real incomes in NZ have been stagnant for decades despite a lot of accumulated productivity growth. (It's much worse in the US)
It seems to me there are several sources of structural inequality. The first is the mechanical transfer of income, as I understand it, from debtors to depositors in the form on unearned interest income. Secondly the unidirectional changes in tax law that have seen taxes on business and upper incomes decreased while those the majority of income earners have increased. We no longer have a progressive tax system - in fact the total tax paid by the wealthy in many countries is proportionately less than that paid by lower income groups. There's a lot of stuff published about this in the US. There are also large subsidies of the rich hidden in the current account deficit - the poor subsidise the rich because the rich are the ones who can "afford" the multitude of luxury items including travel abroad. The foreign rubbish sold cheap by the Warehouse is not much more than the crumbs on the floor.
This particular article points out why the correlation between 0.945*M3 and GDP is almost unity, while the exponential growth curves of those variables are different. So you are right .. one has to be very careful with the correlation/causality issue. The "test" as you call it is there for all to see, I would have thought.
yep - Lettavia is right on all counts. Worth remembering, though, that the glossed-over Warehouse comment, actually represents another level of the hoover, from the bottom up to us, who then get sucked by the 1%.
But those who don't earn - and there's more than you think, not just bankers/investors - are, if they are still buying, displacing someone somewhere else in the game. This is musical chairs, now. We started say 10 generations ago, with 10 players and a hall-full of extra chairs. There are now 70 players, and approximately half the chairs are gone. These are being removed - as has been noted - not one-by-one, but in a 2-4-8-16-32 sequence.
HP
"Should be going in at about" is not good enough in my view. I am a builder among other things.
I know exactly what it costs to build a modest house (i only build modest ones).
Your term "ALL UP" hides a multitude of "sins" (or should I use the word "expectations") doesn't it?
Give or take, the median building cost is around $1800/m2 and believe me that does NOT include a lot of fat either for the builder or for the client's quality of fittings.
Can we do better than that? Do I do better than that? Hell, yes. But that's not what the article is about is it? The article simply says the building costs are more or less "given" (give or take the "savings" you or I might be able to make).
The article seems to be saying the problem is with the land "value" that is a proxy for the size of the investment pool.
Fantastic Paper. Agreed with nearly every word of it. Only the solution to fix the exchange rate may not be optimal in my view. There may be better options.
My favourite lines:
The most practical way for New Zealand to manage property inflation in the absence of broad financial reform is to stabilise the current account and begin reducing foreign ownership of the domestic economy.
Due mainly to the current account deficits, the investment sector has grown at 5.9%/year while nominal GDP has grown at 5.2%/year over the same period. That is why prices in the non-productive investment sector are “overvalued”.
Debtor countries themselves, not the foreign investors, pay for the foreign ownership they cede on their negative current account. Very few people understand that, because few understand how the foreign exchange process works.
or the investment pool M3 itself needs to be reduced through progressive debt retirement, starting with foreign debt....makes more sense because it removes a primary source of the structural asset “bubble”, namely the persistent growth of foreign ownership through the current account.
Reversing that growth means managing the exchange rate, but the government and it advisors like the Treasury and the Reserve Bank of New Zealand claim there is no viable policy tool available to do so. They are wrong.
Am not sure the country needs another political party, but if there were one, have often thought one called Camelot (for the Current Account Matters a Lot), would be a good starting point. Seems to me the author of this paper would be a sound advocate for such a party.
Lettavia.
Lowell Manning advocates the following:
The government could easily set up a variable and tax neutral Foreign Transactions Surcharge (FTS). The FTS is an automatically collected levy on all outward domestic currency transactions passing through the foreign exchange interface. Its effect is to increase the aggregate cost of repatriating domestic currency offshore and lower the aggregate cost of using domestic currency locally.
I confess to not fully understanding who in practice would pay this levy in what circumstances; and what if any consequences, intended or otherwise, would be likely from the levy. Given Manning makes a lot of sense in the rest of his paper, it could well be a good idea.
Other options: If you accept that the current account deficit is the cause of the need for foreign money; which in turn causes real estate prices to bubble, as well as the exchange rate to be too high, then taking steps to fix both the current account and the exchange rate would also help.
A good start in my view would be to not have the Treasury fund their fiscal deficits offshore. The Reserve Bank funding some or all of them directly would have no more impact on the money supply than foreign money, but would avoid the double whammy of the exchange rate effect, and therefore keep the current account deficit down- our own trading industries would take up the slack.
Similarly selling any state assets where there can be any leakage at all offshore is just a free gift of those assets offshore- I believe this paper makes that point well. So stop doing that.
We could impose some capital controls on the banks discouraging foreign financing of their increase in debt and money supply. If that reduced money supply and activity locally, we could either print to fund the deficit; print to fund the banks (QE UK or US style), or lift the OCR, using more local savings. The latter would almost be a favourite except for the need for tight capital controls, which may be unrealistic and or undesirable.
Some supply side fixes in property may help a little, in that if property was not seen as a one way bet, foreigners would avoid it, although I agree with Manning that they would likely still just pump up land prices in desirable places- unless the current account is fixed. I note this isn't foreign xenophobia and is more concerned with foreign funding of the mortgage market (which is where most of our loss of sovereign wealth has gone), than of specific properties being sold to foreigners.
Thank you Stephen L.
Check out the Foreign Transactions Surcharge (FTS) paper on the Sustento Institute website for more detail. The FTS IS a kind of capital control operated through a fiscal mechanism (if that is not too double dutch-sounding). That's why it is, from what I have read, a unique proposal.
The government funds some of its borrowing offshore because it is cheaper. Recent governments seem to have little understanding of the long term effects on the economy of taking that "easy" road. That's why the banks do so as well! As I wrote in another comment I have friends who like the idea of monetisation of the foreign debt, but I've spent a lot of time on that, and I don't think it works in the medium to longer term because inflating domestic prices cancel out the apparent effect of the devaluation. The government apparently tried this on a small scale last month with no effect from what I hear (mind you it was far too little far too late).
That IMF comment reflects an ideological bias against housing because surplus bank deposits have a similar effect on all other non-productive investments too, including share market equities. That is why there are regular share market collapses!
There is something I'm not following in Lowell's argument. Surely if the RBNZ put up interest rates by 2% it would change the preference to bank deposits and from housing. More dosh would be saved, and that nasty foreign debt would get paid off pdq. After a bit of instability in the foreign exchange department the steady flow of repayments would cause the exhange rate to go down and the trade surplus eventually leads to a current account surplus. If households, business and government are all net savers we must run a current account surplus. I thought that was an accounting identity.
This would clearly cause inflation in everyday stuff and deflation in house prices, so is unacceptable politically, but is my argument flawed (I know it is a bit wooly)?
You may be right, that's why I was asking Stephen cos he has a better grip on this stuff than I do. To me,foreign debt is not at all the same as local savings, they are quite different animals, that is my point. An increase in local savings means a decrease in foreign debt since one substitutes for the other.
Roger, due to the fact that all foreign sourced non NZD borrowings are swapped into NZD, the liability is that those lent NZD have a credit risk attached to the banks' ability to meet the swap repayment covenants which are completely different to the legal liability attached to domestic NZD deposits.
The major problem is that domestic bank funding does not match that of outstanding bank claims, hence the inevitable need for our local banks to source hedged (currency swapped) foreign borrowings - see my comments further up the page -time stamped: - 03 Jun 13, 12:16pm.
Aha, yes I see your point. This is the area where the RBNZ would appear to be derelict in their duty. FX swaps are debts and should have a suitable (25%?) capital requirement, rather than being stupidly treated as "risk free". "Risk free" as in a "nobody saw it coming" admission of stupidity.
But the assumption here is surely that the appetite within NZ for debt, is insatiable?
It would be all very well to argue that if we set interest rates at 20%, we'd have a flood of international investors sending money here to take advantage of it, but how could you assume that Kiwis would still be borrowing it as fast as the international investors wanted to lend it?
There has to be some correct, balanced level of interest rates at which Kiwis will be incentivised to save and disincentivised to borrow; and I would argue that interest rates need to go UP until that point is reached.
The point at which Kiwis are incentivised to save and disincentivised to borrow, is also the point at which our banks cease acting as a conduit for overseas investors, because there are not enough Kiwi borrowers any more.
Bingo - and at the moment the marginal utility of more NZers borrowing is met from cheap swapped wholesale foreign borrowings - saves the banks from raising local deposit rates to attract the capital to lend - this is where the RBNZ should step in to force the issue - but laissez faire dogma prevents them from doing so and besides there is pressure from politicians seeking re-election.
But the credit rating agencies see a risk of extended bank wholesale foreign borrowing undermining our overall ability to settle the nation's debts.
Don't forget a cultural element. NZers seem to value present spending over saving. We spend first and save whats left. if any. That japanese housewife saves first and spends whats left. To make bold generalisations . if that cultural pattern changed. How would it go then.
Thanks Phil, that's exactly my point. There must be a point where the interest rate makes saving preferable to borrowing. Also, I was bundling in the point that a sudden large change in interest rates is more likely to change behaviour than a number of small incremental ones. Trouble is it also provokes a backlash. Incremental changes also just hands over money to the momentum chasing foreign exchange dealers/banks.
If you read Lowell Manning's other work you will find that in his view interest rates are the cause of what he terms "systemic inflation". Though his views may not yet be mainstream, there is growing acknowledgement that using interest rates to "kill" inflation works by depressing the domestic economy thereby masking the systemic inflation.
The ability to use interest rates to manage inflation has all but disappeared because the total debt levels (domestic credit plus non-bank secondary debt) are now so high that a small change in interest rates is enough to drive the economy into recession. That's why central bank rates in US, Japan, and Germany are practically zero. In NZ a 1% rise in interest rates will create a burden of around 1.5% on the productive economy. That's enough on its own to kill off most measured economic "growth" here.
It seems we have to find a new way to manage the economy and the financial system.
My question there would be what activity gets killed? Surely the activity that gets killed is the least productive activity; golf courses, sports stadia, gambling complexes, mansions for the rich and famous, overpaid government officials, financial scam artistes, academics whose "research" is sponsored by vested interest perhaps.
Lettavia, read the quote I posted below on this thread from a paper by Prof. Nicholas Crafts.
Monetary easing in the 1930's in the UK, went into HOUSE BUILDING, not land price inflation, because as he says, "the excesses of the Town and Country Planning Act were still in the future".
Also read the quote from Ed Glaeser, re the difference that free market automobile based development made to economic cyclical stability in the US economy in the decades after WW2.
Actually Phil, I think Lettavia has a point. There are finance issues here as well as supply ones. If we had a more responsive system then a glut of finance would produce a building boom like the commercial building boom in the 1980s. The difference is we would now have a lot of empty houses rather than a lot of overpriced and cold, damp, rotting ones.
I understand that there is far more complexity to these issues than what is ever teased out on this forum, more's the pity.
There are 2 kinds of "overbuilding" episodes you can have. One is the kind that occurs sometimes in Texas and Georgia. Prices do not inflate by much and there is no speculative mania in land or existing housing stock.
All that happens is people in the building sector, making money the honest way by actually supplying stuff and going for "market share", can end up building a few too many houses because obviously there is a bit of a lag between shifts in demand and winding down work in progress.
Some developers may go broke, but there are not massive amounts of bubble equity wiped out everywhere. The price of land was already low and cannot fall by much. The price of houses in the entire market may fall to "even more affordable than ever" for a few months. But we are talking about a fall from an average value of something like $150,000 to something like $130,000.
What happens then, is that a bit of quicker household formation and in-migration mops up the overhang of houses and the market reverts to its normal mean.
The equity lost, even on forced sales by lenders, is minimal relative to the big picture.
Contrast this with what we have - every property in the economy inflated in value by an average of $200,000 or more. That is hundreds of times as much potential loss of equity in a bust, as a few too many houses getting built.
The second kind of overbuilding episode, is a combination of both price inflation and oversupply of houses. The only reason this can happen, is that the "supply" of housing was still being fed out by "quota", even if it ended up being too much. Ireland and Spain seem to have done this (it is not true that Arizona and Nevada did it, contrary to popular myth). Government itself generally has become an active participant in the mania, chasing revenue from "planning gain" - just as we see Akl Council trying to do now.
It is quite possible that a mismanaged "release of land for growth" in generous but still quota'd (and hence land-bankable) quantities, could give us the worst of all worlds. Unfortunately our understanding of these issues is light years behind where it needs to be. I say only total liberalisation, plus MUD financing of infrastructure, is guaranteed to solve the problem - and I would impose a progressive land value tax on rural land as well just to make sure. That is, the tax would be zero for true rural land values but a steep rate would kick in on any land that has inflated in value to much above double true rural land values.
The acceptance you show there Phil is that monetary policy does actually cause bubbles, the debate is simply about where they happen :-P Put it this way, all that money is looking for a source of unearned income, so when you bring up Houton the question that keeps coming to me is where did that money seeking a home go instead if not into housing? I would like to see a comparison done with Auckland on that basis. The money will have found a home and at the end of the day us muppets at the bottom have to supply the unearned income one way or the other.
Excellent questions, Scarfie.
Where did the money find a home if it did not sink into land price inflation?
I suggest (in no particular order):
Investment in productive capital.
Investment in shares and bonds (some of this investment productive, some not)
Discretionary spending of all kinds.
Home maintenance, upgrading and replacement (always horrendously deferred in inflated land price markets)
Debt was paid off faster or weekly payments reduced in size - so more discretionary spending.
Self-employment startups
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I agree on principle, with the "Austrian" economists, that artificially low interest rates lead to "malinvestment". But I suggest that nothing is as destructive of an economy as credit being sunk, dead, into inflated cost of something you already had (land), and the productivity of which is unchanged.
I say that economists have mostly missed the fact that the severity of economic busts is made far greater by the involvement of land, than by the involvement of financial instruments. The 1930's Great Depression was actually the last major bust that DID involve LAND VALUES. Most of the developed world escaped land price bubbles and busts for several decades following WW2, although there was still cyclical volatility in shares etc. I say (and none other than Ed Glaeser has clearly agreed recently) that it was unrestrained automobile based development that brought about this new era of stability in land prices.
The mania for growth containment planning growing stronger from the 1970's onwards, merely restored the pre-1930's condition of economic volatilty, where urban land prices are heavily involved. And the volatility is very much greater for it.
The UK provides the outlier example that proves the rule - they started containing urban growth in 1947, and have had inexorable inflation in the price of urban land (per square foot) ever since, and cyclical volatility that was absent in the US, Canada, Australia, France, Germany, Italy, etc etc etc.
INTERESTING graph HERE re Australian land values:
http://www.macrobusiness.com.au/2013/06/the-history-of-australian-land-prices/
The author of that article is one of the most enlightened minds in the world on these issues.
RW
Perhaps you could help me by explaining how foreign debt is to be paid off? It is true that increasing interest rates might tempt more depositors to hold on to their deposits ... but I doubt it ... the result is that speculators would pay correspondingly more to attract non-bank investment while the banks would certainly be asking more in interest! The upshot of increasing interest rates is that the GDP growth will fall. I
At the moment I see only three main options:
a) monetisation of the foreign debt (I have friends who think this is a good idea). Thats printing money (just like US, Japan, Europe). It can only lead to domestic inflation because of the way the foreign exchange process works. The poor pay for the effects of inflation, and I suggest, would be further subsiding the rich .... maybe you're OK with that but I'm not in as far as that would be a discretionary policy
b) the infamous "export led recovery" that never happens, but is promoted like the holy grail by both the government unistripes and business. It never happens because much, if not most of the productive economy (other than the primary sector) is already foreign owned or controlled AND, at least in the medium term, a balance of trade surplus is "lost" in reducing the current account deficit. NONE of the surplus results in increasing the wellbeing of the NZ people .... it just nominally reduces the accumulated foreign debt exposure. Just like using your extra pay rise (if you are lucky enough to get one) to pay off your mortgage a few years earlier.
c) the kind of "direct-action" option referred to in the article that physically manages the current account on a tax neutral basis.
Thanks for the reply Lettavia. I was just trying to follow the thinking of the article and consider whether a simpler, more forceful action might be more effective. My suggestion to put interest rates up two percent now could have been better presented as normalise interest rates now, much as Rodney Dickens has suggested.
I like Lowell's thinking that asset prices are all about preferences, Richard Koo has said a similar thing. Money in the financial system is largely separate from money flowing around the production consumption economy. So my thought was, well, in that model what happens if you just change the preferences using existing methods that we are all familiar with, but do it more forcefully, rather than in a reluctant manner spread out over time. Booms and busts are all about lags in responses to changes in supply or demand - the bigger the lag the bigger the boom and bust. I may be being simplistic, but if saving (ie household, plus business, plus government, you know, like, all of us) is encouraged by favouring saving over borrowing (ie higher interest rates) then the current account deficit is forced to turn into a surplus. Yes, there will be difficulties and supply side reforms are essential too, but sometimes simple is best. Particularly as the global financial/economic/academic tendency is for obfuscation, delusion and complexity. Complexity above all else, since it is most favourable to the protection of their interests.
This monetary-policy focus on urban land prices is nonsense, as every land economist in the world knows. Land economic theory and what happens in real life are actually complementary.
In real life, in undistorted land markets, the value of land in an urban economy will be set by the value of the land in the highest-volume "next most valuable use" (i.e. farmland) plus a premium for "location efficiency" derived from the savings made in transport costs and time. And in real life, this is precisely how the value of land in the urban economy IS derived - in cities like Houston, Dallas, Austin, Atlanta, Charlotte, Indianapolis, Kansas City, Oklahoma City, Philadelphia, Raleigh, Des Moines, Omaha, Nashville, Salt Lake City and dozens of others. The value of land for growing wheat or producing milk from cows does not go up and up and up to match "what people absolutely have to pay for bread or milk" to be able to survive - it USED to do this back in the era when transport was so primitive the volume of bread and milk that could be supplied to a city was limited to the amount of land immediately around it. The reduction in real transport costs ended "monopoly rent" in land for producing food and other essentials. Nor does the value of land for growing wheat or producing milk from cows does go up and up and up to match the expansion in the supply of money. Nor does the cost of resources utilised to produce a wide range of goods for which there is now "consumer surplus", which we take for granted. The reduction in real transport costs is perfectly capable of doing the same for the cost of land for housing and other urban use; and this is precisely why land in cities with no UGB, stays so darn cheap. NO "land banking" oligopoly surrounding Houston could have prevented George P. Mitchell from developing "The Woodlands". The sums involved in cornering the entire supply of land within a 100km striking distance of a city, to eliminate "leapfrog development" bypassing your land banks, simply wouldn't make sense. Nor did the expansion in money supply in the US, mean that "the Woodlands" was just as inflated in raw land cost as a development in a growth-regulated region like California. Nor any other non-growth-regulated region. The amount of land actually needed for urban growth, relative to the amount economically accessible to the urban economy by modern transport systems, is piddly. When "splatter" development is not effectively banned by central planning, this is precisely how a city does grow. Developers watch rural land sales advertisements and buy it at rural land prices, through blind trusts. This is what happened with "The Woodlands", and that is just "normal" over there - nothing exceptional about it at all. Explanation HERE, of the planners fallacy that zoning "x years supply" of land will allow for affordability: http://www.macrobusiness.com.au/2013/04/sa-property-council-has-no-shame/#comment-233659 Sure the owners of land slowly surrounded by "splatter" development, will reap a higher value on selling the land eventually one day. But that higher value will still be nothing LIKE what land owners expect when a UGB hands them an exploitable oligopoly position. The "land rent curve" in these cities remains so shallow from "rural" land to CBD, that the land value even in the CBD itself is often still lower than the value of zoned greenfields FRINGE land in a city with a UGB. The LSE's urban economists refer to the massive step up in the land rent curve where a regulatory UGB exists, as a "discontinuity" in the land rent curve. In London, the value per square foot steps up by a factor of about 6,000%. Looking at the graph of this alongside the graph for Houston or even New York greater urban area, speaks volumes. Literally every city in the UK, not just London, has higher land rent in its CBD than Manhattan has. This is not economic strength or amenity value - it is straight-out corruption long enabled by "planners". It is certainly nothing to do with the supply of money in the UK versus the US. I can provide references to literature backing all this up - it is just that "urban planning" is such a dishonest, ideologically-driven, and vested-interest-serving profession, that it deliberately ignores objective research. The world's most distinguished urban economists can publish and publish and publish, and it will make no difference to "planners" and bureaucrats and politicians serving popular but false manias. http://www.performanceurbanplanning.org/academics.htmlThe home page here touts this article as:
There's no such thing as affordable housing
A look at the RE sites in dozens of US cities will quickly disprove that nonsense.
The Demographia Reports will show you dozens of cities with median multiples stable at around 3 for years. In any of these cities, decent family homes 1/3 the price of Dorkland are all over the place - both new and second hand.
Comparing apples for apples, even in the upper-crust locations, they are $400,000 versus well over million here for something comparable.
And the fixer-upper dumps at the bottom end of the market, that are still over $200,000 here, can be found for $60,000 over there.
If they build row-houses over there, they are $80,000, not $300,000 plus.
Here is a paper from a Prof. Nicholas Crafts of the University of Warwick:
http://www.voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-escape
He points out that monetary easing in the UK in the 1930′s, WORKED because it had somewhere productive to GO, and it did NOT go into land prices:
“…….Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975).
Why was house-building so responsive in the 1930s? Two factors stand out. First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending.
Building society mortgage debt rose from £316 million with 720,000 borrowers in 1930 to £636 million with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes. In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years reducing weekly outgoings by 15% (Scott 2008).
Second, houses were affordable to an increasing number of potential buyers.
85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come……”
This aligns exactly with what I have been saying for some time. It also fits with what Peter Hall says about urban development in the UK – much of the housing stock of bigger and better suburban homes – automobile based development, in fact – date to THAT era – i.e. the 1930’s…… the Town and Country Planning Act 1947 killed the UK’s automobile-based-development economic booster and stabiliser that should have lasted several decades, as it did in other countries. Ed Glaeser’s recent paper, “Nation of Gamblers”, suggests the significant role that automobile based development played in the unusual new cyclical stability in urban land markets following the 1930′s crash. This is a most heartening sign of mainstream awakening; this too is something I have been trying to suggest for a while.
The distinguished Prof. Ed Glaeser says, in “Nation of Gamblers” – 2013:
“……Almost everywhere, prices in 1970 were below 1950 prices plus this construction cost related price increase. Even after the most stupendous change in America’s mortgage history, and a post-war economic boom, housing prices had gone up less than construction costs would warrant.
The natural explanation for the missing boom in prices after World War II is that there was an enormous increase in housing supply over the same time period. During the 1950s, America permitted 11.84 million housing units, which is roughly the same as America permitted during the twenty-six years from 1920 to 1945. The construction was disproportionately on the urban fringe (Jackson, 1979) and disproportionately in the Sunbelt.
The post-World War II era demonstrated exactly what textbook economics predicts should happen when robust demand meets relatively elastic supply. Quantities rose and prices stayed relatively flat. The relatively elastic supply owed much to the rise of automobile-based living on the urban fringe, which can be seen as either a shift in housing supply or a change in supply elasticity. For example, in an open-city formulation of the Alonso-Muth-Mills model, with supply costs that increase with density, lower transportation costs will increase supply but not change supply elasticity. Yet it is possible that the automobile made supply more elastic as well. On the urban fringe, lower cost, low density housing can be built in massive quantities, essentially using a constant returns-to-scale technology……
“……..The missing post-war price boom is not a problem for conventional economics, but it does present a challenge to those who seek to explain bubbles as the outcomes of a stable process where readily observable exogenous variables translate into the presence of a bubble. The 1950s had easier credit for homeowners than the 1920s and economic conditions were at least as good. Any model that suggests that there is a stable relationship between either of those variables and price bubbles has difficulties with this epoch……”
Brilliant piece, agree all the way.
I believe cost reductions are allways possible but with housing those reductions cannot keep if with rising prices.
Land,
People say "they don't make any more land"
This is not true. When buildings are layered (multi-story) they are building more land to build on. It may be concrete instead of soil but you can build on it.
It may be posible to mass produce houses in a factory and reduce costs
Mike, read what I wrote at 1.36PM above.
NZ has millions of acres of land in uses that leave the land priced at around $10,000 per acre.
Why does this land have to escalate to hundreds of thousands of dollars an acre, at the exact location of a regulatory urban growth boundary, given that real costs of transport to access super-abundant quantities of that $10,000 per acre land are so low?
What does the interest.co.nz editorial team think of my arguments against that? including at 1.36pm above? Now they have picked MikeB's comment as "editors choice" top comment....
I am saddened that interest.co.nz positions itself largely as a forum for the vested interests, including the theoretical shenanigans like those of Lowell Manning that give aid and comfort to the vested interests. Elder statesman urban economist Alan W. Evans in his books, talks about having to combat such people in hearings and official inquiries in the UK. Every contortion of theory imaginable is trotted out to allege that urban planning is nothing to do with land on one side of a boundary being worth "X" and on the other side being worth "X" times 60 to 120.
If we could start comparing the ratio of GDP to land value in data sets around the world, it would be interesting to ask these theorists to explain how their theories fit the massive disparities in outcomes, in which there will be nil correlation whatsoever to be found with THEIR theories. Remember "one block of land in Tokyo being worth more than the entire State of California...."?
The gross outliers will be the NON growth contained cities in the USA. The fancy theories that ignore the freedom of supply of land, can NEVER explain these.
I do not believe any New Zealand economist cannot be aware of the impact of inelastic versus elastic land supply for new housing. There has been a massive debate about this issue in New Zealand for several years.
The Finance Minister wrote the introduction to the latest Demographia survey discussing this exact issue. This survey clearly shows some cities truly have affordable housing compared to others. That the common factor explaining the difference in affordability is not money supply or the price of oil or declining EROEI but whether the cities have permissive or restrictive planning processes for new housing.
I know this and I changed from studying economics to nursing 20 years ago.
I think this means Lowell Manning is promoting a vested interest agenda. Maybe he wants to be the chief economist for a big bank or his firm does a lot of 'consulting' for the banking industry. Read BH article about the challenges New Zealand will have financing new housing http://www.interest.co.nz/opinion/64720/bernard-hickey-points-out-big-planned-additional-supply-houses-will-raise-debt-levels-.
"I do not believe any New Zealand economist cannot be aware of the impact of inelastic versus elastic land supply for new housing."
.......
but isn't the debate over whether inelastic land supply is an appropriate model?... since this isn't just about space but about infrastructure and energy? The debate is also about leaving it to a profit motive or intelligent design (e.g) Susan Krumdiek's idea of an urban eco village in Riccarton (Chch) versus curly/worly subdivisions etc.
I happen to know about Susan Krumdieks idea because I'm from Christchurch. The flaw in her plan was who can afford to purchase all those properties to convert to a higher density urban village. With house prices at 6 or 7 times medium income the Council certainly cannot and I doubt a private developer would take on such a risky venture.
But if house prices were 3 times medium income then it becomes feasible, especially with say some support from the Council or University if student accomadation was part of the development. Post earthquake the University is really struggling due to the high cost and shortage of rental accomadation.
This issue is wrongly depicted as sprawl versus densification. When it is really about affordable housing for all types of development or not.
Krumdiek is probably smarter than either of us. But you only get out - from the smartest computer - the best based on what went in. She can't avoid the underlying problem, any more than the dumbest person can.
She doesn't appear to get the link between energy and money, or if she does, she keeps it quiet. Maybe she's sugar-coating the pill, putting up the brightest options. Maybe she's middle-class and there's a bit of denial, though I doubt that. In the case of the report she did for the DCC into Peak Oil, it was all about transport. That's not the half of the implications; infrastructure is more than transport.
There's no way around the problem, Brendon; if you put more and more people into a space - whatever the space - and use more and more of scarce resources, cherry-picking the best first to house them, then you will end up competing more. Whether you see that as overshoot/habitat, or 'too expensive for a growing number, starting from the bottom-end', that's what it is. Wait until all our farmland is foreign-owned, and you can't build past their guarded fences. How far away do you think that day is?
Did YOUR famous lifestyle block cost you several hundred thousand dollars an acre?
Would another one in your region cost me several hundred thousand dollars an acre now if I wanted one?
If not, do you understand WHY not?
Why do you not understand that the price at which someone is able to RACKETEER land in a particular location for, is NOTHING TO DO with "peak oil" and resource scarcity?
Those prophecies might be a pretext for the planners lines on a map that ARE responsible for the price increases, but those prophecies themselves cannot possibly BE the CAUSE here and now for those price increases.
The fact that those price increases have NOT taken place in those cities in the international data set that do not have those planners lines drawn on maps, is sufficient evidence for anyone who claims to follow scientific objectivity. Scientific objectivity does not apply only to molecules, heat transfers, DNA , radioactive decay etc etc
Purchasing all those houses is a big ask. If they were leasehold as in Singapore it would be achieveable I would have thought. However why would farmers want to sell as population expands. Why would they not act rationally in their own self interest?
Footnote:
The people of Christchurch voted for a compact city with a lovely green belt. The government voted for population increase (after intense lobbying). Hugh P tried to over turn the ruling of the Counci; will of the people (those who made the effort to vote).
JH we are where we are. So your leasehold land comment is just wishful thinking that bears no further thought.
Re why farmers would sell, think how many farms are between Kaiapoi, Rangiora, Rolleston and Lincoln. There must be thousands and all closer than the commuter townships which people are actually moving to. Because there is so many farms a large number come up for sale for usual reasons retirement, death, divorce, change in life circumstances etc. Normally these farms would be sold to other farmers at rural prices on a willing seller willing buyer basis. If the planning rules allowed property developers to buy this land and convert it to housing as outlined at the end of the thread on Bernards article http://www.interest.co.nz/opinion/64720/bernard-hickey-points-out-big-planned-additional-supply-houses-will-raise-debt-levels- then housing would be significantly cheaper. See the figures in the above article. It would take time for this to affect Christchurch house prices but eventually it would and then city renewal projects like Susans become possible (assuming PDKs overshoot doesn't catch us out first). I actually think projects like that in high demand areas such as the University/Riccarton corridor could work if they got the economics right.
The local democracy issue is interesting. I have been living on and off in Christchurch for 30 years and have been promised great things in the way of public amentities because of the green belt and I cannot see the improvement. The gain always seem to be in the future but the pain from the restrictions are now.
Having said that I am a believer in local government. I am sure Phil, Dale and Hugh are going to roll their eyes and think you soft hearted git when I say this. And they are welcome to rebut me. But I think Central government should have negotiated Local government Accords that in exchange for giving local government tax raising power, local government would stop using planning as a revenue tool and allow MUDs to be used in their regions. The tax raising power would allow the Councils to provide high quality amentities that voters actually voted for (as you pointed out), which was the start of the problem. But this assumes both parties can act honourably. That could be a naive hope. It could be argued giving tax raising power to local government would be like throwing good money after bad. That you are rewarding bad behaviour. That in the future Councils can make all sorts of promises, create a great big mess and then expect Central government to fixed it up.
So where does this leave us now? Can central government demonstrate how these housing reforms would work? Managing the process from Wellington with special housing areas. Do they have enough time in the electoral cycle to do this? Given they have done nothing for one and half terms it does seem that whatever is done will be a rush/panic job.
Brendon, welcome to the forces of light. When we have got most of the contributors to this forum agreeing with the following, reason supported by truth will have won out at last over the vested interests and ideologically based irrationality.
".......Because there is so many farms a large number come up for sale for usual reasons retirement, death, divorce, change in life circumstances etc. Normally these farms would be sold to other farmers at rural prices on a willing seller willing buyer basis. If the planning rules allowed property developers to buy this land and convert it to housing....... then housing would be significantly cheaper.........
"......local government should stop using planning as a revenue tool and allow MUDs to be used in their regions........"
Brendon
The article clearly discusses relativity in property prices. The effect of the money supply is "in aggregate". There is little or no contradiction with the BH article you refer to.
If you read some of Lowell Manning's other material posted on the Sustento Institute website you will see that he has no "vested interest agenda" . He appears to be uncomfortable with a lot about current banking and financial practices, as I suspect many readers of interest.co.nz . They may not be very willing to front up and say so but from where I sit, they sooner they do the better.
jh - actually, it represents a lack of available resources - which is exactly what the no-limits approach runs into. He's not really worth debating with; no believer in narrow gospel ever is. In this instance, the prophet associated one thing (a growing population) with growing wealth, and 'standards of living'). Failed completely to identify the driver (it wasnt the birth-rate, it was the amount of energy being applied, it always is).
Inner-city living can be very pleasant indeed - but it always requires outside grunt, it's never self-supporting. Some folk describe CBD's as 'the powerhouse of the economy', whereas it's always a drain on resources. Hard to understand how they can't understand.
"......Inner-city living can be very pleasant indeed - but it always requires outside grunt, it's never self-supporting. Some folk describe CBD's as 'the powerhouse of the economy', whereas it's always a drain on resources. Hard to understand how they can't understand...."
PDK, I agree with THAT 100%.
If you actually read some of my stuff sometimes, you would know that that is exactly what I say about inner cities and CBD's.
So why, why, why do you always leap in to these debates on the side of Len Brown, Inc and their plans for intensification and centralisation and CBD-centric mass public transport "investments" - and their shallow, cargo-cultist assumption that the entire economy can subsist on urban "services"?
Why do you not support my criticisms of this, and the resulting land-price racket that results, seeing you see CBD's and the urban services economy the same way as I do? I also see them as disgraceful rent-seeking vested interests who are largely responsible for the racket.
Because what you and your mate Hughey advocate, is just as stupid.
You never get the fact that money is a proxy. You never get that it's a proxy that is expected to be exchanged for 'bits of the planet' (unprocessed as in 'land', or processed as in 'houses and their contents'. That requires extraction of the 'bits'. The processing requires work, in the physics sense. That requires energy - in vast amounts (you use it like you had 300 slaves, no food no sleep no upkeep, working 24/7).
Those of us who track energy, knew the bubble had no valid replacement (at current rates of usage), wasn't going to ramp much further volumetrically, and was on the decline quality-wise regardless. We knew that the more you push it across the top of the gaussian, the steeper the drop-off. We examined efficiencies (my specialty) and worked out they can't pace (let alone outpace) the descent.
We then worked out that not all of the 7 billion can get 'bits of the planet' in the quantities you can.
You, on the other hand, think that everyone can have unlimited space, unlimited food, unlimited access to bits of the planet, that it's not your resource-sucking lifestyle that creates the Bangladesh factories, or the Middle-East invasions, or gets Ken Sarowiri hung. You think (?) that somehow more consumers will give us more bits of the planet each, and that more proxy will somehow deliver this result. You do this by ignoring every parameter (food-producing support land per sprawl-inhabitant being a classic) you don't want to address. Texas had abundant, local energy. It had flat arable land, and a large aquifer. The first is being drawn down in a one-off spree, the second is contestable and finite (ask the bison) and the third is being drawn down in an unsustainable manner.
Texas therefore is unsustainable in present form, even at the top of the resource-suck feeding-chain. Kind of like pointing to how rich Kerry Packer was, parked under the Bridge in 0/0/2000. Correct as far as it went, but ignored his reality.
We will hit (are hitting) that reality, with most of the existing housing-stock extant. There we part company. I avocate new-builds having to be resilient, as self-sufficient as possible. I advocate retro-fitting the older stock - cherry-picking the easiest steps first. Solar water-heating, etc. It may just have to be done, given that the current fiscal system has to haemorrhage. That is the last interaction I'll bother havingwith you, unless you can move on from the narrow, all justifying focus on one particular deckchair.
PDK, we have never had an argument about money being a proxy. I actually agree with you 100% on that too.
You need to read and reread and reread my comment elsewhere on this thread about economic land rent, the price of bread and milk, and the price of housing - until you understand it.
If you ever "get it", you and I will be useful allies to each other.
I fully understand what you are saying about energy and transport underlying "everything being cheap". But you do not understand what I am saying, which was common knowledge in the classical economics era, about land rent.
Karl Marx wanted all land nationalised, because the owners of it could charge what they liked for its produce, because in the pre-modern transport era there was always a shortfall in "supply" over what the residents of an urban economy "demanded", especially as some of them had rising incomes and others did not.
If the real cost of transport ever does return to the level that the supply of everything for people in urban economies is less than what they might demand, we will experience a repeat of the historic condition where most people have to pay most of their income on food and necessities just to stay alive, and the owners of land within access of the urban economy, will capture the "super profits" from having a monopoly on supply of wheat, milk, wool, whatever.
But why would we impose that condition NOW rather than let everything adapt gradually? Of course the owners of land for producing food and necessities might quite like to be made the new super rich by having regulations enacted that will deliver them a monopoly NOW. But the people would not stand for the cost of food going up to whatever they could "stand" because they HAVE to live - would they?
What I am saying is that this is what is going on in land for housing, and we should not stand for it, any more than we should stand for it in food and other necessities.
It is not helpful to long term economic resilience that the only choice is to "go survivalist" like you - and buy a lifestyle block at a few thousand dollars per acre miles and miles away from town; or pay hundreds of thousands for one eigth of an acre inside some arbitrary growth boundary. Can you not see that there is a LOT of "happy medium" adjustments in lifestyle being prevented by this? Someone might want to give "sustainable living on 2 acres, at the urban fringe", a shot. They can't, under the current rules.
I am saying that the cities where people are more highly dispersed already, and already do NOT work mostly in wealth-consuming and wealth-transferring sectors, are already MORE "adapted" towards your survivalist ideal than the "planned" Auckland that you seem to me to be perpetually sticking up for. It is a dense CBD and a rail loop that will be an utter anachronism in a post-energy future; and it will be people who paid the highest proportion of their incomes out in "economic rent" (i.e. pure price inflation that does not pay for any THING) who will starve to death first.
Sure money is a proxy, but there are better ways to make people consume less "stuff" than to allow one class of people to take increasing proportions of others incomes in return for nothing. We are entitled to be suspicious about the motives of people who support the regulations that lead to this being the "solution" rather than an honest tax that at least stands a chance of being used beneficially to all, in contrast to the wealth transfers that possibly get spent on executive jets and holidays in the Bahamas instead of having been spent by families, on their children; or on double glazing; or on insulation; or on low energy appliances; or on a more efficient car.
Allow others to live the way they want to live too. Its called "respect".
..........
Choice in this instance is a bit disingenuous as one system tends to knock out the other and so the choice to live in an intelligently designed city is denied to all but those who can afford it.
Len Browns' idea of choice: Low-density for the rich - high-density for the poor.
How about letting people build new (low-density, if they wish) satelite townships on the fringes? Considering that most of their traffic will be localised to their township, we can hardly say they're cramping Auckland's style.
Like Hugh says - respect them. Understand that it's not "your" city - it's other people's lives.
Chew on this, charlatans:
In Austin: decent suburban house: $185,000
http://www.trulia.com/property/3116284850-4501-Dorsett-Oaks-Cir-Austin-TX-78727
Absolutely HAVE to live downtown on a budget? See what less than $100,000 gets you:
http://www.trulia.com/property/3039999946-1800-Lavaca-St-205-Austin-TX-78701
Bottom end of the market: would you rather be a poor person in Vancouver, or Auckland, or HERE?
Look for yourself at what you get for WELL UNDER $100,000……..
http://www.trulia.com/property/3110047250-5914-Hidden-Valley-Trl-Austin-TX-78744
http://www.trulia.com/property/3113538430-2318-Deadwood-Dr-Austin-TX-78744
http://www.trulia.com/property/1093930854-6812-Pondsdale-Ln-Austin-TX-78724
If you can only afford $28,500:
http://www.trulia.com/property/3113382458-Branch-Creek-12609-Dessau-Rd-469-Austin-TX-78754
Now look at Vancouver: cheapest RE advertised: just under $200,000 for a one bedroom apartment:
http://www.point2homes.com/CA/Home-For-Sale/British-Columbia/Vancouver-Coast-Mountains/Vancouver/-PH3-1503-W-65TH-AV-Vancouver-BC-CA/31162500.html
Using the "sort by price" function, see what you get for your money. EVERYTHING UNDER $500,000 IS A B-----Y APARTMENT....!!!!
TWO bedroom Condo: over HALF A MILLION
2 BEDROOM CORNER UNIT: $400,000
Oh great, found a separate home at last: $700,000 - with TWO bedrooms, 1 bathroom, "needs renovating":
Texas has the lowest regular gas price in the USA. This morning regular gasoline is $3.20 gallon. http://fuelgaugereport.opisnet.com/index.asp
On median household income it ranks 25th out of 50. http://en.wikipedia.org/wiki/List_of_U.S._states_by_income . Overall Texas has weathered the GFC better than most other States.
Gee,
Such cheap housing.
Such expensive property taxes.
Wonder how many owners in NZ would appreciate paying the same level of taxes as Houston gathers from it's property owners.. Guess that the NZ solution would be just to increase the level of Accomodation supplement to both renters and owners.
Good try.
There is no correlation in the States of the USA, between the level of property taxes, and the price of housing:
http://www.macrobusiness.com.au/2011/08/a-housing-whodunit/
There are high-property-tax, expensive-housing States.
The only factor that correlates with housing unaffordability, is anti-growth restrictions.
So in the period Dec 07 till Jun 09 in New Zealand, when house prices fell by 8-10% (QV data) there must have been a brief period when anti-growth restrictions were lifted is that right? And then after that they were quickly re-imposed while no-one was looking? Because as you say the only factor that correlates with housing unaffordability is anti-growth restrictions?
Might have been a few other things that correlated with the movement of house prices around then eh? Interest rates hiting a peak in late 2007 maybe? Interest rates being slashed down to a minimum early 2009? And then maintained at emergency lows ever since? Contraction of available credit due to the GFC in 2008? All irrelevent in PB land.
But as you say anti growth restrictions are the ONLY thing involved, right?
That is called a "crash" after a "bubble". Everyone understand this.
The "bubble" was caused by the growth constraints.
Do I have to spell out everything semantically?
I have often said, going back years, that growth constraints make prices "higher and more volatile".
The bubble-and-crash phenomenon is one major negative unintended consequence of utopian growth containment urban planning.
Data on "cost-of-living adjusted discretionary income" for US cities HERE:
http://www.openteams.com/pdf1.pdf
(Scroll down)
Gee, it looks like the cities with unaffordable house prices are really, really doing their residents a favour, eh, cough, cough......
Every urban economist discussing these issues, says that the US should increase the petrol tax, not "plan" for more compact cities, because the latter has unintended consequences, and will take a century to work even if it does work.
Taxing energy use and allowing all the independent actors in a market to decide how to adjust their behaviour, is the only rational and intelligent approach.
Low density housing can be extremely “sustainable”, there is a lot more potential for things like solar panels, wind turbines, geothermal heat pumps, composting, using wind and sunshine for HEVAC and drying clothes, burning biomass, collecting rainwater, reusing grey water, growing your own food, etc etc etc.
The urban economist Anthony Downs suggests that trying to affect energy use by changing urban form is like moving the living room wall instead of moving a picture on it, when you don’t like the position of the picture.
Actually, the correlation between urban density and energy use is explained by discretionary income, not efficiency of form at all. There is a negative correlation between density and housing unaffordability; all the most affordable cities are low density. Therefore, households consume more energy because they have the spare income, not because the urban form is less efficient.
PhiBest
Those arguments of yours don't wash. You have to think in aggregtate. And relative.
I know of a large industrial property in Wairoa (its a long time ago) with substantial though old buildings on it that sold for $2. There was a house a few years bank in Southland somewhere I think that sold for $1.
Until a few years back you could buy property in Rataehi for very little, and quite a good house in Wanganui for around $70K.
Of course there are wide discrepancies.
There are also wide variations in the "culture" of investment. Some countries have a much broader manufacturing and equities base. We in NZ have relatively little because past governments have not protected our industrial base by managing the current account and resulting capital flows, as the Manning article points out. That means there is relatively little to invest in!
Sure, there might be valueless buildings SOMEWHERE in ANY economy.
Your argument falls over when you consider the massively disparate performance in urban land prices, between cities in the USA that are under identical federal monetary and fiscal policies.
My point always has been that some urban economies have anti growth regulations and hence all housing, whether fringe or central, is grossly expensive. This has unintended consequences that are worse than the consequences of just leaving the city free to grow.
There are far better ways to address excessive resouce consumption. The people who insist on blunt intrument anti-urban growth regulations are either economically illiterate or have vested interests i.e. they own property that is inflated in value. That is actually quite a lot of people. This is moral rot in our society - stuff the young, we'll get rich from property Ponzi on their backs.
Phil,
I think you underestimate the shift towards living in cities (some 70% of the global population will be urban by 2050). That's where people want to live because that's where the action, creativity and innovation is and where it will continue to be. Urban living doesn't have to be shoebox style but, if well designed, can be very attractive, to young and old.
Let's face it, who wants to live in Texas? :-)
That's not to say that supply is not an issue, but it is going to take a very long time to new supply to actually lower general prices. How many homeless people are there? I'm not sure there is a massive shortage of housing, but new supply will certainly help keep a lid on prices, but only to some extent, as infrastructure costs negate soem of the savings from cheaper land.
Lowell's focus has been on the mechanism of financing and clearly that's where the money comes from. The correlation of M3 and house prices is pretty clear (some may disagree on the causation!) and the way houses are valued and financed creates a reinforcing cycle.
I'd like to add another piece into the discussion: leverage. Pre-deregulation in the 80s, you could generally borrow 2-3 times your salary to buy a house. Post the 1980s, the equation shifted to where you could access interest only mortgages and over time that became the metric for borrowing. Can you service the loan? (This is where the whole world became a ginat asset swap market). They key factor now was cashflow. Add in mortgage insurance, in case you lost your job or died, and the leverage kicked in to the point where you didn't even need a job (NINJA loans). This extending of leverage was responsible for the massive run up in prices (and yes this is related to M3), as people could "afford" to pay more and the banks were happy to keep extending the credit juice.So the fact that housing started going up 10% a year was not related to supply at all, it was related to the fact that people could pay more and demand was huge in certain areas, thus lifting the whole property boat.
Could extra supply have helped? Marginally. They're not making any more houses in Herne Bay, Chelsea or wherever the high demand areas are.
So to conclude, it's clear that housing supply is a major issue but housing is not a homgeneous good (demand varies wildly from place to place). Historical policy (Green Belt etc) may have played a large part in creating the platform for high demand and high priced housing but finance, and the ability to service debt costs only, has been the clear culprit in housing booms of the last 20 years (Fred Harrison has done some great research on the boom/bust cycle going back 300 years).
Policy response:
We need to examine BOTH the supply of housing AND the financing of it :-)
How about a simple choice to illustrate which is the more powerful factor. Work this discussion in reverse.
Phil you have two tools to bring down property prices in Auckland, choose one :-)
1. Eliminate development restrictions
2. Eliminate interest and/or leverage in lending
Eliminating development restrictions would definitely bring prices down regardless of how loose mortgage credit was, just as the price of cars and TV's does not go up and down depending on how loose credit is. Suppliers of cars and TV's compete with each other for market share, which is what keeps prices down. This is what keeps the price of housing down in cities that are affordable.
Your option 2), I am not sure if I understand you. Eliminate interest? What do you mean? Money cannot be lent at all, or it is supposed to be lent at zero interest, presumably by the central bank, to stimulate the economy? Don't laugh, central bankers are talking about this.
If money cannot be lent at all, the following is how the market will work if supply remains constrained by planning. The prices will always rise to the point that some percentage of people will remain priced out of home ownership, period, because they can never save enough money after their living expenses are deducted from their incomes. This is precisely why illegal slums continue to exist in some parts of the world - "supply" of formal housing is so inelastic and riddled with corruption, that the prices end up at a median multiple of around 12 to 15. And this is with no mortgage credit at all available to most people.
Here is an excerpt from the introduction by Paul Cheshire and Edwin Mills (Eds.) to “The Handbook of Regional and Urban Economics, Volume 3: Applied Urban Economics” (1999)
".......housing demand parameters are remarkably similar among most countries, even though purchasing power and housing costs differ greatly. Housing supply parameters differ greatly among countries, depending of course on technology and materials availability, but mainly on the extent to which governments have permitted conversion of land from rural to urban uses, housing development, and housing financial institutions. These are the keys to understanding why housing quality varies more than can be accounted for by income variation and why house prices vary among countries from 3 to 15 times the annual incomes of urban residents......”
“.......Urban housing prices and rents are typically much higher relative to incomes in developing than in high income countries. The reasons are counter-productive government housing policies. Some, such as controls on conversion of land from rural to urban uses, are shared with developed countries. Others, such as a lack of legal infrastructure that permits binding contracts between landlords and tenants, the refusal to permit private financial markets to develop enforceable modern mortgages, land use controls that prohibit the only housing that low income residents can afford, and restrictions on development of private housing development companies, are more specific to developing countries. Governments, as they traditionally do, blame high rents and prices on greedy landlords and speculators......”
“.......More estimates of demand for aggregated housing ought to be assigned low priority in many countries. More important is what governments should do, or stop doing, to improve the functioning of housing markets. Many scholars worry about the availability of housing that relatively low income earners can afford.....But.....there have been far fewer studies of how governments cause housing costs to be excessive: greenbelts, growth controls, other land use controls, rent controls, controls on conversion of land from rural to urban uses, excessive restriction on private housing finance organisations, failure to develop legal infrastructure for housing property rights and contract enforcement, and so on........”
South Korea in the late 1970's and early 1980's, is an example of a country where there was little mortgage credit available, but housing supply had been reasonably elastic and young people did successfully save up for their first home. But in the 1970's they imposed growth boundaries and green belts, and the median multiples inflated to 16 in Seoul - without any expansion in debt at all.....! In fact national savings increased because young people were saving desperately towards a rising target. Marriage and birth rates dropped and became a national crisis.
The South Korean government has since been experimenting with demand side subsidies and systems of mortgage finance, the loosest of which still require a 50% deposit....! Yet they have toughened up the deposit requirement again because debt expanded alarmingly as house prices remained in the stratosphere.
They have been offered endless good advice by economists such as Mills, Malpezzi, and Kim; but as usual, no-one listens to the land economics experts.
Removing restrictions bringing prices down is not a definate, it would only bring down prices if there was a flood of supply. If however we remove the assumed council limits and then the land bankers and developers controlled the release of land, nothing would change. ie the developers would price the houses at the point where they thought ppl would pay and since they control the monopoly, nothing will change.
regards
You say, "who wants to live in Texas"?
Ask the people who have made it the fastest-growing State for the last 2 decades.
California did not have a problem with housing affordability until they started to enact anti growth regulations. LA grew faster 1950 - 1960 than Houston is growing now. Neil Diamond actually sang in the early 1970's, "LA's fine, the sun shines most of the time.....And the feeling is laid back......Palm trees grow, and rents are low......."
Do you argue that California's climate became more pleasant in the 1970's and this is what pushed prices up?
You can make the prices bubble in ANY city by imposing growth boundaries. Every city in the UK - who wants to live there....? is grossly unaffordable regardless of how much pokier and lower quality its housing is. The UK's rust belt cities have houses 3 times the price of those in the USA's rust belt cities, and the houses are half the size on average, on a fifth the amount of land on average, and are several times as old on average.
Portland was affordable until it imposed its growth boundary.
Phoenix and Vegas were affordable and rapid-growth until the developable land that was not owned by Federal and State government agencies ran out. These government agencies land holdings act like a growth boundary - and these cities house prices bubbled from median multiples of around 3, to over 6, in just 3 years. But up till then, they had been mocked as unpleasant desert cities, which "explained" their affordability....
There are grungy areas in LA, and the houses there are still 5 times the price of the ones in grungy areas in cities with affordable housing.
Admit it. Arbitrary containment of fringe growth is the causative factor everywhere we look.
If I worked for a hedge fund and I learned that an affordable, fast-growing US city like Austin or Atlanta had imposed an urban growth boundary, or were surrounded at some distance by government land holdings, first I would pile into land banking there. As soon as my land banks were selling at around 3000% capital gain, I would pile into existing property using my profits. Within about 5 years, possibly less, the median multiples will have exceeded 6. This is the point at which I would unload my portfolio, having made around 100% on it. I would then wait until there were signs of an overhang of properties for sale, and an increase in mortgagee sales, and give it about 1 more year; I would then start shorting mortgage backed securities for that city's mortgages.
I believe there are hedge fund operators out there who are this smart already - read "The Big Short" by Michael Lewis. Some of these guys will know more now than they did in the era the book was written about.
a good piece from Mr Wilson
http://www.stuff.co.nz/business/money/8741752/When-ones-apartment-is-ones-castle
Aj - you hit the nail on the head.
There is a small cohort - less that 20%, perhaps only really 10% - of the global human population who are hoovering up the rest's resources. Even that small percentage have hit the limits for some resources, and are near the limit for others. They deny it, of course. You have to. Imagine admitting it! The folk who live on top of the resources are therefore called 'terrorists' if they hit back, or 'communists', or whatever (they had the target dead right with 9/11 - exactly what was screwing them out of their major resource) while the in-denial sucker-uppers demand 'respect'. Go figure.
Now, even that 10% are out of options. This is the second biggest trading bloc on the planet, building-wise:
Kinda reinforces what folk like me were warning of pre '05, and have been pointing to since.
What can you do, en masse, which equates to housing, when it comes to paying for housing? It was always a bootstrap-pulling chimera, and overall growth disguised the reduction in per-head, until it could do so no more.
Please explain why these effects have caused housing to be unaffordable here, and in Vancouver, but not in Austin, Houston, Dallas, Charlotte, Des Moines, Nashville, Indianapolis, Raleigh, Philadelphia, Salt Lake City, and dozens of others I could name... especially seeing that going by the environmentalists litany, these low density, automobile dependent cities should be suffering the most about now, not the least........
Otherwise, stop wasting our time on this economics and finance forum.
So what - in the desirable locations they are still a fraction of the cost of the equivalents in cities with unaffordable housing.
There are grungy areas in LA too, and the houses there are still 5 times the price of the ones in grungy areas in cities with affordable housing.
California did not have a problem with housing affordability until they started to enact anti growth regulations. LA grew faster 1950 - 1960 than Houston is growing now. Neil Diamond actually sang in the early 1970's, "LA's fine, the sun shines most of the time.....And the feeling is laid back......Palm trees grow, and rents are low......."
You can make the prices bubble in ANY city by imposing growth boundaries. Portland was affordable until it imposed its growth boundary.
Phoenix and Vegas were affordable and rapid-growth until the developable land that was not owned by Federal and State government agencies ran out. These government agencies land holdings act like a growth boundary - and these cities house prices bubbled from median multiples of around 3, to over 6, in just 3 years.
The UK's rust belt cities have houses 3 times the price of those in the USA's rust belt cities, and the houses are half the size on average, on a fifth the amount of land on average, and are several times as old on average.
Admit it. Arbitrary containment of fringe growth is the causative factor everywhere we look.
Fear not Andrewj, BIS, the world's bank for central banks captures the essence of the preferred solution in it's latest quarterly review entitled: Markets under the spell of monetary easing.
Absolute rubbish piece from Michael Wilson.
It should be headed “Perpetuating propaganda on housing costs”.
The same sort of garbage we routinely get from Len Brown: Manhattan, London and Hong Kong are dense and have lots of apartments, therefore we should too.
Their apartments actually do not make them "affordable". In fact they are 3 of the most expensive places in the world, where few people can afford to live.
The fact that they are dense, high income, and very expensive in their housing costs, is a legacy of centuries of historical accident.
If Auckland had been the main arrival point for the first several dozen waves of immigrants to a "new world" growing into a global superpower, and then ended up the preferred location for the industries now known as "Wall St", Auckland might stand a chance of "being" Manhattan.
If Auckland had been the capital city of the world's largest empire for centuries, and had been where Europe's great financiers had all fled at various times of upheaval in their own countries, and had ended up today the location of the world's largest clusters of finance firms and media firms, Auckland might stand a chance of "being" London.
If Auckland had been made an outpost at an important fringe of the world's greatest colonial-trading empire for centuries, and run by an economic libertarian colonial administrator, and as a tax haven, Auckland might stand a chance of "being" Hong Kong.
Expecting to "be" like those cities by drawing urban growth boundaries, forcing everyone to build "up", and by throwing truckloads of taxpayers money at commuter rail, is intellectually akin to headhunter tribesmen in Papua New Guinea clearing airstrips in the jungle like they saw white men do, because then the gods would send the magic flying monsters down to make them wealthy too.
Yep, Michael Wilson is another adherent to the "cargo cult" school of urban economic management. NZ has them like a cancer.
At what point do employing organizations start deciding that in order to allow their currrent and potential employees an opportunity to obtain affordable housing they should be moving their operations to provincial centres?
Here in Wangavegas $350,000 buys a very nice house in a good area. High speed broadband being installed outside my Springvale house as I write. Excellent schools within 2km and Michael Laws for entertainment.
There are many very attractive options around the country.
That is a question that has occupied many urban economists. There is a kind of "gravitational mass" that counts in a city's advantage. It is hard for a smaller city, like say Hamilton, to take growth off Auckland.
If Christchurch went "pro growth" it could easily become NZ's Houston.
Economists in the UK have been trying for years to persuade the local government in just ONE city, to abandon their blanket growth containment policy and "go for growth", for the benefit of the entire country.
The problem over there, and here, is that every little Hicksburg goes anti-growth as soon as a bit of construction starts happening. So any businesses that relocate will end up stranded in a town of sub-optimal size, and housing will be expensive anyway.
What NZ needs is a regulatory framework under which new towns like "the Woodlands" 30 km from Houston, can get built, far enough away from existing inhabited areas to not arouse NIMBYism, but still close enough to major ports, transport routes, industrial agglomerations, etc to benefit from the regional agglomeration effects.
Often, this might only need to be "2 minutes drive" away, to be out of sight, out of mind of existing residents.
There is also the point that "new towns" can have instant jobs-housing balance. The developers of "The Woodlands" actually gave sites away for free, to significant desirable employers that they wanted to attract into the town.
This is the sort of thing that is possible when the land is purchased for $10,000 per acre or less. Anything you sacrifice for attracting employers, or providing amenity, or for schools, or green space; adds negligible amounts to the price at which every developed site that is sold, needs to be sold for. Suppose the developer sacrifices 3/4 of the land to "amenity" etc - then he needs to recoup a raw land cost in the sold bits, of $40,000 per acre.
But when a developer has been forced to pay $1,000,000 per acre for land, if he is required to sacrifice half of it for schools, green space, whatever, that makes the raw cost of land needing to be recouped in every bit that is sold, $2,000,000 per acre.
Second question
What happens in 5 or 10 years, possibly even just 1 or 2, when the Lucky Country's dream ends in Chinese collapse, parched farms, drying rivers and permanent bushfires?
500,000 Kiwis looking for a home.
Then there's the other 500,000 Kiwis in Europe, Asia and North America. Their options are looking precarious too.
Invest in sailing ships. :)
yes and those kiwis abroad who have paid no NZ tax here could well come back and demand welfare.....wouldnt that be a gas. Personally I think we should have legislation in place that says if you have not paid NZ tax in 2 years (say) as you have been abroad you cant claim welfare.
Problem with sailing ships is they are a slower transport, but there is no reason why not....the pace of life has to slow this would be just another facet of it.
regards
Great Article...
I agree with him...
I would also throw in ...what some economists call... wage rate arbitrage.
ie. the deflationary forces on average wages because of Glaobalization and the emerging economies.
So... We have a trend of declining wages ( in real terms ) and inflationary pressures of forever increasing Money supply (M3)
the current glabal Monetary system was never designed for the current "Globalization" and open capaital flows.
My understanding of Bretton Woods was that the exchange rate mechanisms would balance trade... ie. it would not be possible for any country to run either chronic trade deficits nor trade surpuses.... Same with Current acct deficits.
Changing our exchange rate mechanism is not just a good idea..... it is probably the most simple thing we could do that will bring a ..."structural change"... to what we are doing now.... and the direction we are headed in.
Economic growth thru credit growth... is a game that has limits... and at some point change will be "forced " on us.
I hope Lowell Mannings article ends up being read by the likes of teh Treasury and Reserve Bank.
Bretton Woods?
http://www.odt.co.nz/opinion/opinion/34180/hard-times-here-stay
enjoy. :) Meantime, there those who think that the human brain can transcend energy availability, and that by focusing on micro-selected aspects of a a blip in time, we can re-write the laws of thermodynamics. Go figure (they certainly aren't!).
The Keynes proposal at BW certainly suggested a balanced global trading system but the US insisted on the US$ as the center of global trade and dismissed the UK's approach. As we can see now, that was a terrible error. The US has flooded the world with $ for decades, creating an out of control and instable financial system.
All NZ can do is try and look after itself and that means getting the current account deficit down and restoring balance in trade and capital. The sooner we do that the better.
This article simply demonstrates how much impact this problem has on the housing sector and how it is not simply a question of increasing supply. It's not like we have thousands of homeless people looking for a place to live!
Raf... That would require a "paradigm shift" ..... and yes.. the sooner the better. ... but the chances of anything changing.. before we "hit a wall".. are pretty small.
We would have to embrace ...... a period of decline... a change in lifestyle.... where we reach a natural level of economic activity... that is "drug free".. ( ie. not driven by credit growth)... Sustainable would become the "buzz word".. ( as growth is the buzz word now)
Thou... I suppose there are ways to minimize the "pain".. as we make the adjustment... eg monetize some of our debt by printing money ...in an equitable way that disadvantages no one in NZ.
Raf... In regards to housing... Lowell is simply saying that Monetary Inflation is more than just the CPI.
Central Banks ..around the world... have been horribly remiss... in largely ingnoring the credit aggregates... ... and being fixated on the CPI...
A better way to show the correlation between House prices and the M3 growth may be a chart showing the changes in $ terms over the last 40 yrs...
I recall seeing somewhere... that the compound rate of growth for M3 has been 6%...and for houses... about 5-6% also.. over the last 40 yrs ( I'm just guessing..from memory )
Thou... I suppose there are ways to minimize the "pain".. as we make the adjustment... eg monetize some of our debt by printing money ...in an equitable way that disadvantages no one in NZ.
Hhmmmm
So I got to thinking, maybe this increase in debt and no cost monetization via the central bank thing will work. But if it does, let’s use this moment to really rid ourselves of the most pesky of income adjustments – personal income taxes. Read on
While I accept it was the terrible error you describe Raf, I don't see that is was a mistake for the USA. Don't you think they have had a great run at the expense of the rest of the world? I actually see a direct link between the decline of resources (in EROI terms)and the removal of the dollar from being backed by a resource.
Interesting exercise I have done this morning as a result of this thread is to look at the cost to New Zealand of imported energy. My calcs came out at $4B, which is a significant percentage of the current account deficit. Be good if someone else could run those numbers to confirm. If the rest of the world stops lending us money then what do we have to give up so we can keep the oil flowing?
Yes, it was great for the USA, which became the global military and monetary hegemon. As Kondratiev would have probably predicted, this has lasted 70 years and is now unravelling. The major challenge now is shifting to a more multipolar monetary system. It's hard to see that happening when national self-interest is at the fore. It's still a race to grab resources and cheap labour without a care to the impacts.
Global surpluses will still slosh around the global market, looking for the best yield it can find. NZ will continue to be an attractive place to fund, as it has a decent resource backing, though, as you note, it is highly dependent on imported oil (recent report I saw said $7b). If the flow of capital stops, we will be able to import less. That's probably a good thing, as it will re-drecit resources towards domestic manufacturing and development of local energy technology.
I think somone above used the metaphor of the drug dealer. Withdrawal is tough but someone has to pull the plug.
Good to see these issues being debated, although I have a few misgivings about the idea of simply linking M3 to house prices in this manner - and of the suggestion that a financial transaction tax will help. I've tried to flesh them out here:
http://www.tvhe.co.nz/2013/06/04/careful-how-we-treat-the-economy/
Here's the problem, eloquently put:
http://www.peakprosperity.com/blog/81081/current-way-living-no-future
"but it’s actually worse than that. The built environment is as immersive for people as water is for fish, and the immersive “ugliness” of most places around the USA is entropy made visible. It indicates not simple carelessness but a vivid drive toward destruction, decay, and death – the stage-set of a literal death trip of a society determined to commit suicide. Far from being a mere matter of esthetics, Suburbia represents a compound economic catastrophe, ecological debacle, political nightmare, and spiritual crisis for a nation of people conditioned to spend their lives in places not worth caring about".
"Alas, our drive-in Utopia was designed to run on cheap oil. Hence the clear implication is that Suburbia has rather poor prospects going forward. I would actually go further and state categorically that it is a living arrangement with no future".
another rare form of beauty, Scarfie - wordsmithery at it's best.
I agree with that assessment, if resource runout is eventually a reality before technology has solved the problem - as far as it applies to urbanised areas and high density, sterile suburban development of the kind that results from inflated land prices (developers unable to sacrifice space to amenity).
But the author is flat wrong about the survival prospects for LOW density suburbia.
There is no correlation between urban form and its dependency on cheap energy.
High density, CBD-centric urban areas will be devastated in a post-energy future - and you yourself believe this. It is not that they depend on cheap energy for their daily existence - they depend on the wealth transferred from the sectors of the economy that do.
The transition, if it is necessary, will need to be to lower living densities. Higher living densities are only a "solution" from the point of view of resource alarmists like you, if you are deliberately trying to engineer the largest possible die-off of humanity.
You are either this nasty underneath, or you are not sincere at all. Just be upfront about it so we all know where you stand.
You've gone back to the cranial dyslexia.
You accepted that money is a proxy. right?
Hold that thought.
If it's a proxy for everything purchasable - housing materials, big/ag food, cunsumables, cars - yet none of the proxy is underwritten without those things being produced, by using the energy itself, why keep reverting to 'cheap'? And why 'wealth transferred'? It's neither. It was high EROEI energy - easily-gotten and abundant. The fact that you saw/see it as 'cheap' means you've mentally transferred the usefulness of the energy, to the proxy. No energy, no proxy value. The energy is the driver.
Yes, we need to look at lower-density housing, but not tract-size, not random-facing, and not ticky-tacky. We also have to retro-fit the existing stock, given that we are into the scarcity/fiscal decline era now. There simply isn't the time, or the energy resource, to replace it. We are going to - concurrently - see the demise of globalisation and BigAg.
How much land does a person need for food? Averagely, 2 acres, long-term, is my best guess. Nobody - but nobody - is adding up that requirement alongside the extra housing numbers. Apparently the suburbanites don't eat? So - does the 2 acres attach to each house, do we do village-green/allottment stuff, or does a village cluster own the farm surrounding?
Technology has already failed the chase - we'd have moved off fossil fuels by now, and now is already too late. I also have no answer to the global population overshoot (nor did I create the problem, why blame me for scare-mongering? Blame the ignorant folk who had too many kids, BE for example) - but NZ doesn't have that problem. Yet.
And as usual, you mistake warning for wanting. But you still think the planet is unlimited, don't you? Even as you think we should carve into the DoC Estate? Some thinking to do, and some untangling.
I don't really accept that money is a proxy.
I think the defining qualities of money are such that ... money is money...
The qualities that give something the ability to be used as money are :
1/ It is a unit of account...a unit of measure
2/ It is a medium of exchange
3/ It is a store of value.
If u are using the dictionary definition of proxy.... then only something that has the above qualities could be considered as being a proxy for money..... and even then... unless everyone will accept that proxy as money... it ain't...
You lose me when u say no energy..no proxy value.
I could say ..No Sun...No life..
Roelof - I'm guessing you're economics-trained?
I could be smart-assed and say: try living in it, eating it, or stuffing it in your tank. That's about the size of it.
Forget 1 and 2 - that's barter territory.
on to 3 - If there is nothing to be bought, your 'store of value' is of no vaue, correct? If there is lees to be bought, there's a bidding-war, and your 'store of value' would be of lesser value, in terms of what it could buy, yes?
Everything, on every shop shelf everywhere, is produced by the doing of work, and therefore by the using of energy. By tracking the flow of global energy, then, you can pretty accurately judge the amount of activity going on. Certainly it's a lot more real than 'GDP', as a measure.
Those of us who realised that the energy-flow would peak (had to, the increase was exponential so it was just a matter of when) realised that activity (work) would peak, and that growth would be seen in the rear-view mirror. Yes, I'll grant you efficiencies as a mitigation, and they're what I'm about, bt they don't do enough to mitigate the depletion.
So - I don't care how much proxy you have, or how much extra they print. I can track energy use (China's reducing coal consumption, for instance) and know - far more positively than someone relying on GDP's, Dow's or Exchange Rates, what is actually happening. So sure is the engineering/data/math, that we can even rubbish the claims made of 'a new Saudi Arabia in the US'.
It's a long road from there, though. Come out of the physics class, and you hear people who don't get the correlation at all. Folk who think the money - the proxy - drives the activity. Aparently all you need is capital, and you can make/build/growe anything. Except when you can't live in it, eat it, or stuff it in your tank.
The best link (I've put it up too many times) is Chris Martenson, the trouble with money. You'll get there. :)
PDK... No.. I'm no economist... Son of a Dairy farmer... Worked in Dairy Factories and the Steel Mill and now involved in the clothing industry....age 51yrs
I just have an interest in economics ... in regards to "first principles"... and common sense.
Much of what u say I agree with.
In regards to your view of money... I have found it more useful to define it by those 3 qualities .. ( which does not negate ur views on energy or sustainability).
I only brought it up because I think u could lose some people by calling money a proxy for everything...
Like most things... economics has been corrupted by special interest groups and politics.
Fiat Money has become a cusre.. ( as the founding fathers of America forsaw )... Fiat Money is at the root of the increasing division of wealth in the western world.
Regarding choice where will the cheap suburbs be where people can ride a bike? I have a friend with a young child. Her husband biked to work leaving her free to use the car. Now he works a night shift. She doesn't want him to ride his bike at night so he takes the car but now she can't go out. She is japanese and if she was in japan she could carry the kid safely on the mamchari. Look around and there is no choice once cars reach a critical mass.
Affordable lacks choice:
An interesting follow-up to this saga, from the minutes of the Ricc-Wigram Comm Board mtg of 13th Nov:
The Chairperson raised the matter of pedestrian and cycle safety on roads and footpaths in the Noble Subdivision, Yaldhurst Road. The Board considered that the narrowed section of Jarnic Boulevard may not meet safety requirements and that the Council should not be accepting a development which has unsafe pedestrian and cycle provisions.
The Board decided to recommend to the Council that:
(a) An independent safety audit be carried out on the "narrowed section" of Jarnic Boulevard addressing pedestrian and cycle safety issues in particular, along with remedies.
(b) The newly formed section of Jarnic Boulevard not be accepted/vested in the Christchurch City Council until all safety issues are met and the road meets all New Zealand and Christchurch City Council safety standards and is fully compliant.
http://spokes.org.nz/article/ccc-noble-village-meeting-22312
As it stands, assuming a population of 4.5m, we each have the following land per person:
- 2.34Ha of pasture (high- and low-grade)
- 0.09Ha of horticultural land
- 0.44Ha of forestry
Theoretically, we have enough land to feed everyone. However, transporting food is the main problem. In the Cuba Special Period, the BigAg model fell apart without oil to drive the machinery and delivery trucks. Many town buildings were permanently abandoned. People were relocated to the country and were allocated parts of larger farms that could then be worked by hand.
With a third of our population in Auckland, we will have a distribution problem,
Indeed.
So logically, Auckland shouldn't be allowed to expand, either geographically or numerically, at all.
The Mayor talks of barbed-wire and population control - and he isn't far wrong.
Wait for the screaming if you suggested that. From developers, builders, free-marketeers, respect-demanding cornucopians, Metiria Turei, the Shearer, the Sallies, the.......
We aren't going to go there until we're forced to go there, are we? And then it'll be too late. Sigh. Don't say some of us didn't try and raise awareness.
The Canterbury Plains are 750,000Ha of excellent farming land and could easily feed twice the population of Christchurch with short distribution chains.
If this was a forward-looking government, they should be freeing up the land in Christchurch to allow it to grow and attract population internally via cheaper housing and more businesses. Their special earthquake powers would allow this.
These comments are also posted at
http://www.tvhe.co.nz/2013/06/04/careful-how-we-treat-the-economy/
where Matt's comments can be found in full for those who want to follow this discussion.
****************************
Matt
Thank you for your response above to my housing article. Much of my work is available from the Sustento.org.nz website. The latest versions of all that work is available from my brother's website www.integrateddevelopment.org Those files are presented in html so they can easily be read by anyone around the world with basic computer technology.
I'd first like to address the most basic point you raise (issue 3.5), that of causality, before briefly touching on the other matters. My simple debt model derived from the Fisher Equation of Exchange satisfies the basic accounting equation. Perhaps the best of my theoretical papers to start with are "The DNA -f the Debt-Based Economy" and "Capital is Debt". I think the double helix of the financial DNA will surprise you and maybe shock you. The present interest-based debt system grows endogenously. The debt "monster" has to be fed before any economic "growth" can take place. No new debt, no new growth. Insufficient debt to feed the beast, the economy will go into recession. Too much debt to both feed the beast and growth within economic resource constraints will produce a debt bubble leading to debt default and collapse. Having been through the US housing bubble, the world is being forced to the other extreme euphemistically called "austerity" with obvious outcomes. This happens because current orthodox economics depends on rationalising the irrational. It is based on faulty assumptions instead of working from first principles.
I try to work from first principles. I will just provide one example here. ORTHODOX ECONOMICS DOES NOT SATISFY THE BASIC ACCOUNTING EQUATION. Economic policy in recent decades has been founded on the Friedman Money Rule (monetarism) and Taylor type inflation targeting rules (neo-liberalism). Neither of these satisfies the basic accounting equation. (I have almost finished an article concentrating on this point - though I have discussed it exhaustively in the theoretical material, including my response to the recent IMF working paper by Benes and Kumhof on "The Chicago Plan Revisited"). The world economy has been wrecked for decades because orthodox economics has failed to add simple numbers and has overlooked the endogenous nature of interest-bearing debt growth. So, yes, of course there must be willing lenders and willing borrowers. If they are not willing they have to be enticed literally by hook, or as we have seen in recent years, by crook. Demand must be created (advertising and the like) but demand can only be created when incomes are sufficient to purchase the goods and services the economy creates. Hence Keynesianism/neo-Keynesianism styled economic stimulation. Incomes have not risen in real terms for the vast bulk of the population because of the endogenous transfer of income and wealth from income earners to deposit holders in the debt system.
It used to be that income redistribution "levelled" the playing field, but in recent decades the "trickle down" myth has intensified income and wealth inequality instead of reversing it. My work demonstrates the underlying mechanisms at work in this process and quantifies their effects through a debt model that satisfies basic accounting rules. Steve Keen, in a recent post, seems to now realise how critical basic accounting is to macroeconomic modelling. Hopefully others will follow quickly. The present system is amoral (probably immoral) because it "force fits" economic decision making to arbitrary assumptions. To do so it requires all the concepts we read so much about .....profit, economic "growth" at all cost, self-interest, greed, "externalities", enclosure of the commons, and all the rest. In respect of the housing article I am saying the present debt system is incompatible with affordable housing.
Here are a few very brief notes on the other points.
1. My work, unlike orthodox economics, gives the "why".
Unfortunately that was a bit much to cover in a short article. I agree the "why" is not a balance sheet, but the explanations must satisfy the accounting equation (its even provided at RBNZ Table C3 current ...)
2. I agree with you about relationships, but I do invite you to reconsider the whole issue of causation.
3. Yes, agreed
4. The way I see it, orthodox economics has created unimaginable world-wide misery. It is incompatible with human happiness and wellbeing and even with the survival of the planet! It worked for a while when debt levels were small, productivity increases large and when economic activity could be easily monetised. But you can't "take lower output to meet some social needs" in the present system. You can only redistribute output, and we as well as others are spectacularly failing to do that .... think education, health, housing, child poverty and the like.
Next note: Foreigners must invest here if we have a negative NIIP even if, in the limit, it is just lending to our banks on an arbitrage basis. Foreign debt = foreign ownership, pure and simple. You are asking too much of my article to cover all of the issues relating to foreign debt and "the prices of non-housing goods" but I can offer simple responses to the issues you raise.
Issue one Relative Prices
Figure 1 and the text below it very briefly acknowledges the point you are making. Most of M3 makes up the investment pool. There are several ways to invest that money. The largest single segment is (I think) passive hoarding in interest-bearing bank accounts. The next largest is the property sector. Once reason the property sector is so large is that NZ has (no thanks too recent governments that have all failed to tackle the persistent exchange rate/current account problem) a very low industrial base and therefore a relatively small equities sector. There is always a balance among investment options that varies somewhat according to the financial settings and regulatory provisions. Figure 1 in the article reflects that clearly.
Issue two Building Costs.
Of course we agree building costs have changed but they are not driving property "values". Your point about "real terms" is stretching the point, though, because most property transactions occur in the TA's where prices have risen. Naturally there are resource constraints affecting building prices ... perhaps you might like to consider why it is that all existing property prices rise in sympathy? That's all about "expectations" and ability to service loans, isn't it? The bottom line is the available investment pool choices. People choose to invest in property when they think they can get more "profit" there than from other forms of investment.
Issue three M3
The main drivers of M3 are the CA and the systemic inflation of the debt system. The productive sector itself uses only a small part of M3 (about 5.5% of GDP in NZ on my preliminary figures). Of course some of that M3 growth is represented by net capital investment in the first instance. The shocks to the system arise largely from misdirected monetary policy ... like a 1% increase in interest rates will collapse nominal GDP growth by around 1.5% in NZ. So interest rates are no longer a useful tool for monetary policy as can easily be seen in US, Japan and Germany where the central bank rates are already zero. I've touched on inflation targeting above.
Issue 3.5 is already dealt with above.
Issue 4 regression
Yes, one has to be careful with the regressions, but I chose to use the scatter diagram (figure 2) to demonstrate the correlation. Then I have used Figure 3 to show how the correlation arises and why the exponentials are different. I think that's fair enough.
Issue 5 Non-productive is not a nice term
The stream of "housing services" are like heaps of other things. They are not measured in GDP. I agree that GDP is a terrible measure of economic performance because it lumps in heaps of "bads" as goods, while leaving out (apparently more than half of all) goods and services like unpaid work, use of the commons, non-mometised resource consumption and a host of other items). Orthodox economics forces us to watch just the cash register ticking over and I don't think it is appropriate to say housing provides uncounted goods and services unless you also consider the much broader perspective as well.
So let's change the change the measurement and the financial system so it serves us instead of enslaving us?
Issue 6 Foreign Ownership is not the source of the bubble
Yes it is in substantial measure. Every dollar of money used to fund the accumulated current account deficit (use NIIP if you like) must be created domestically. It is included in domestic credit. It is then "spent" to buy trinkets from China. Since nobody wants to hold NZ dollars (Stephen Hulme is right of course in his comments on my article, but I was trying there to keep the issue easily understandable) that flow offshore is offset by "return capital flows", that is, (mainly) foreign ownership of NZ productive capacity and resources. A little is invested in new production and a little in land. Having given away our productive capacity for trinkets the foreign owners get their pound of flesh by repatriating interest and profits offshore. it's a self reinforcing nightmare. As others like Preston has said the bulk of today’s CA deficit is the funding cost of foreign ownership. If we do not deal with this immediately we will be approaching financial collapse within the next decade or two .... owned by the company store, as it were.
When foreign investors buy up NZ inc, the sellers are left holding NZ$. Those dollars are part of the investment pool and therefore available to purchase existing assets in NZ pushing up their prices. I think you are very seriously underestimating the impact of the CA and find that a little strange given the compassion and concern you express elsewhere for community and the public good. That foreign ownership has to be satisfied in terms of profit ... it’s a first mortgage over our economic output!
Issue seven Conclusion
Just a little on the Foreign Transactions Surcharge (FTS) that you seem to have misunderstood. The FTS paper is available at both the websites I listed at the start of this post. It is unidirectional. It applies to ALL outward transactions across the Forex interface, not incoming ones. The revenue collected from the levy is ringfenced to reduce domestic taxation (so it is tax neutral) other than for any amount set aside to repurchase alienated assets.
Yes, there will be some losers (mainly importers) but nearly everyone else will be a winner because the current subsidy of foreign exchange users by foreign exchange savers (read largely lower income groups) will be corrected. There is far too much to the proposal to go into here... I suggest we take the matter up again after you have found time to read the paper. The FTS will change the SHAPE of the NZ economy as well as correcting the CA and the exchange rate.
Lowell Manning
Mortgages only on improvements and not the underlying land or perhaps limited to 25% on the land. Banks would hate it. I read recently that banks would only lend to Iwi to build homes on their land if they were removable as the underlying land was owned by the tribe and leasehold and they cannot use it as collateral.
The underlying demand is driven by trendiness, status, lifestyle, proximity to work, climate and speculation but the means to support and fuel these is credit. No easy credit means no widespread ability to bid up prices and stops the self reinforcing cycle in its tracks. Flip side is you can buy a large section in Southland for $5000 but would you build even a starter home on it if existing properties are only fetching $70,000?
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