Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.
Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.
See all previous Top 10s here.
1. Out of ammo?
Michael Sauga and Anne Seith have written a long and fascinating piece in Spiegel Online about the eroding power of central banks.
They look at the contrasting views of Richard Fisher (of the Dallas Fed), Mark Carney (of the Bank of Canada and lately the Bank of England), and the ECB's Mario Draghi.
But they also take a close look at the influence of Claudio Borio who is the chief economist of the Bank for International Settlements.
It is Borio who is the most interesting and influential. He is the one those senior central bankers take notice of.
He has identified and tracked the 'financial cycle', something that is operating independently of the 'business cycle'.
The US Fed bought up trillions in treasury bonds, but it cannot force politicians in Washington to reach an agreement in the budget fight. The ECB has flooded the banks with liquidity, but is unable to restructure the EU institutions. In the UK, the Bank of England has pledged to keep interest rates low for the foreseeable future, but it is unable to create jobs by itself.
"Monetary policy is overburdened," says Borio.
No matter what central bankers do, the pendulum swings of an unfettered credit sector either render their impulses ineffective or amplify them to such an extent that they become a threat. "Policy has to make sure that the financial cycle is not disruptive," says Borio.
For this reason, he explains, governments must exert tighter control over banks and financial institutions, but monetary policy experts also have a role to play. They shouldn't just focus on the economy, but also pay attention to the financial cycle. This means raising interest rates when a recovery threatens to become overheated, and otherwise to remind themselves of a virtue they once practiced more assiduously: doing nothing -- and urging those to take action who can truly bring about change, such as policymakers, bankers and business owners.
Central bankers are familiar with Borio's analysis, and many agree with him. But a larger number know that it isn't popular at the moment. "Central bankers have started to acknowledge that financial cycles are important," says the economist. "But how far they are prepared to take action is another question."
2. Not optimistic
China has just completed a comprehensive survey of its soils and the results are alarming.
The survey conducted between 2005-2013, it found that 16.1% of its soil and 19.4% of its arable land showed contamination. China surveyed 6.3 million square kilometers and that 16.1% represents more than 1 million km2 that is contaminated - an area four times as large as the whole of New Zealand, or equal to about all of Egypt, or twice the size of France.
The report had previously been classified as a state secret because of its sensitivity, but it how available at this link. You will need to use Google Translate to read it, but even with that process's flaws, it is clear the Chinese leadership is shocked.
Survey results show that the overall national soil environment is not optimistic, heavy soil pollution in some areas, cultivated soil environmental quality worrying, mining and industrial wasteland soil environmental issues outstanding. The point of the total soil exceeding the rate of 16.1%, of which a slight, mild, moderate and severe pollution point ratio was 11.2%, 2.3%, 1.5% and 1.1%. From land-use types, farmland, woodland, grassland soils point exceeded rates were 19.4%, 10.0%, 10.4%. From pollution types, with no model-based, there are models, followed by a smaller proportion of complex pollution, inorganic contaminants exceeding the median point of the point total exceeded 82.8%. Situation from excessive pollutants, cadmium, mercury, arsenic, copper, lead, chromium, zinc, nickel eight kinds of inorganic contaminants point exceeding rates were 7.0%, 1.6%, 2.7%, 2.1%, 1.5%, 1.1% , 0.9%, 4.8%; BHC, DDT, polycyclic aromatic organic pollutants in point 3 exceeded the rate of 0.5%, 1.9%, 1.4%, respectively.
3. 'We are different'
Yu Yongding is the sterotypical insider of China's elite. He says, don't worry, they have it all under control.
The market is always in search of a story, and investors, it seems, think they have found a new one this year in China. The country’s growth slowdown and mounting financial risks have spurred a growing wave of pessimism, with economists worldwide warning of an impending crash.
But dire predictions for China have abounded for the last 30 years, and not one has materialized. Are today’s really so different?
The short answer is no. Like the predictions of the past, today’s warnings are based on historical precedents and universal indicators against which China, with its unique economic features, simply cannot be judged accurately.
The bottom line is that the complexity and distinctiveness of China’s economy mean that assessing its current state and performance requires a detail-oriented analysis that accounts for as many offsetting factors as possible. Predictions are largely pointless, given that the assumptions underpinning them will invariably change.
4. 'Yes we can'
In a post sure to annoy some of our readers, and brighten up others, Paul Krugman likes what he reads in the latest IPCC updates, especially the 'mitigation' volumes.
He thinks we are yet to cotton on to some stunning changes; he says too many of us are looking at the problem though backwards-facing lenses.
There’s no necessary one-to-one relationship between growth and pollution.
People on both the left and the right often fail to understand this point. (I hate it when pundits try to make every issue into a case of “both sides are wrong,” but, in this case, it happens to be true.) On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth. But there’s no reason we can’t become richer while reducing our impact on the environment.
5. A monumental distortion
Last week the RBNZ updated its M10 data series to complete the 2013 information. That showed that their valuation of all New Zealand housing is now almost a staggering $720 billion. Their companion C5 series shows that at the same year-end data we owed $188 billion to banks and non-bank institutions for housing loans.
That means overall there is a massive NZ$½ trillion in housing equity.
As an economy we truly are a 'housing market with a few minor bits tacked on'. No other industry comes anywhere near close.
It is a monumental economic distortion - all brought about over a long period because these $530 billion in 'value gains' are untaxed, unlike almost all other investment gains.
6. A crocodile in the river
Trade Me is huge in New Zealand, eBay enormous in many other countries, but the true giant of e-commerce is Alibaba out of China. It proved itself by beating eBay in China.
We'll be hearing more of the company because it is floating in New York soon - and it is choosing New York because that way it can get around some annoying governance restrictions Hong Kong has in place.
Business Insider has the 'origin story', because a film is about to be released on Alibaba's rise. See this 58 slide sequence.
"eBay is a shark in the ocean.
"We are a crocodile in the Yangtze River.
"If we fight in the ocean, we will lose. But if we fight in the river, we will win."
If you haven't seen the Alibaba website before, take a look now. You can forget any ideas of trying to fortress New Zealand. Globalisation has won. Local is so far second, it's a tiny quaint afterthought, possibly unsustainable except as a cottage industry.
btw, Alibaba is keeping Yahoo in business.
7. Off the radar
Aquila Capital is a large German-based alternative asset manager. They have a NZ country manager and have been active in investing in NZ farms, dairy in particular. Now they aren't so sure it still makes sense.
The appeal of New Zealand as an investment target "has changed in the last 12 months", said Andrew Sliper, senior manager farm investments at Aquila – and a New Zealander.
"As a result of the interest in New Zealand, land prices have gone up incredibly high," Mr Sliper told Agrimoney.com.
New Zealand farm prices were worth a 20% premium to those in Australia thanks to factors including a lack of stamp duty and capital gains tax.
"But at the moment we are seeing prices in New Zealand more than double those in Australia."
We keep detailed per hectare records of farm sales by type, based on what REINZ reports. And these records definitely don't show rising per hectare prices, even in dairy - except for irrigated Canterbury farms and those certainly have shown steep recent increases. Elsewhere though, nada. Perhaps Aquila is sensing that even the old, stable prices are too rich for them if soft commodity prices fall. Or they are finding cheaper (better) deals in Australia.
8. The material of tomorrow
Moore's Law is still valid after 50 years, which if you think about it is absolutely stunning given that it involves a doubling every two years. You would think such exponential growth couldn't continue, and even Gordon Moore himself doubted his 'law' would last as long.
But it might go a while yet, a long while.
Some people think we are about to move away from silicon as a semiconductor base to graphene, a one-atom thick layer of graphite. A core property of graphene is that it is cheap and abundant compared to just about all alternatives. It's light, transparent, conductive and flexible. What's not to like?
Nick Bilton has been fawning over its possibilities:
If you think of something in today's electronics industry, it can most likely be made better, smaller and cheaper with graphene.
Scientists at the University of California, Berkeley made graphene speakers last year that delivered sound at quality equal to or better than a pair of commercial Sennheiser earphones. And they were much smaller.
Another fascinating aspect of graphene is its ability to be submerged in liquids without oxidizing, unlike other conductive materials.
As a result, Vijayaraghavan said, graphene research is leading to experiments where electronics can integrate with biological systems. In other words, you could have a graphene gadget implanted in you that could read your nervous system or talk to your cells.
9. Rising US rents threaten middle class
Regular readers will know that not only do we keep monthly tabs on home loan affordability, we also review rent affordability each month too. And we compare the two after adjusting for rates, insurance and maintenance. Our reviews to date show that for a couple renting a house, things have been very stable for some time now, and that there are significantly lower costs for renters than home owners.
But will it last?
Apparently the situation for renters in the US is getting pretty tough. Part of that is simple economics. Between 2007 and 2013 the United States added, on net, about 6.2 million tenants, compared with 208,000 homeowners. That stat comes from a review of the growing costs of renting in a recent NY Times article:
The problem threatens to get worse before it gets better. Apartment builders have raced to build more units, creating a wave of supply that is beginning to crest. Miami added 2,500 rental apartments last year, and 7,500 more are expected in the next two years, according to the CoStar Group, a real estate research firm.
But demand has shown no signs of slackening. And as long as there are plenty of upper-income renters looking for apartments, there is little incentive to build anything other than expensive units. As a result, there are in effect two separate rental markets that are so far apart in price that they have little impact on each other. In one extreme case, a glut of new luxury apartments in Washington has pushed high-end rents down, even while midrange rents continue to rise.
“Increasing the supply is not going to increase the number of affordable units; that is a complete and utter fallacy,” said Jaimie Ross, the president of the Florida Housing Coalition. “People say if there really was a great need, the market would provide it; the market would correct itself. Well, the market has never corrected itself and it’s only getting worse.”
The Economist reckons their problem is all about supply constraints.
10. Today's quote
"I spent a lot of money on booze, birds, and fast cars. The rest I just squandered." - George Best
46 Comments
Don't be forgetting the on-going surge in US petrol prices (13 month high):
http://www.zerohedge.com/news/2014-04-20/gas-prices-hit-13-month-highs-…
Or the fact that US natural gas prices have doubled off their lows of a couple of year ago and are set to rocket as inventory is at multi-year lows:
http://online.wsj.com/news/articles/SB100014240527023036268045795076730…
Which might go some way to explaining why US March electricity prices hit an all time high for that month:
http://peakoil.com/consumption/electricity-prices-surge-to-record
But hey thats OK because the US is undergoing an energy revolution due to fracking....(apparently). Happy daze are here again......
Tell us how, O Great Fount of Economic Insight.
I think Krugman is right for once. Not that it would be easy for anyone to be wrong on this particular point, at any level of knowledge of economics and history fractionally greater than that of the Stevens of this world.
The former USSR absolutely trashed its environment to an extent orders of magnitude greater than the capitalist West, in the course of making its citizens orders of magnitude poorer; so obviously there is strong evidence that the connection between wealth and environmental damage is not a direct one.
In fact the Kuznets curve of wealth and environmental indicators is a non-controversial concept in mainstream economics and science.
And as I have said for years, actually being somewhat of an economics expert unlike certain Malthusian trolls that seem to outstay genuinely useful commenters here forever, what matters is the price of energy relative to incomes, capital accumulation, and technological advancement.
The best example, which I have given you a zillion times before, is that one can now do more kilometers by car for a given proportion of one's income, than one could have done a decade or more ago, in spite of the price of crude oil having risen tenfold in nominal terms over the period in which one can analyse the real cost of automobility.
I suspect Krugman knows this, being somewhat well schooled in economics, even if he is an advocate of Fairie gold monetary policy and big government Keynesianism when it suits him politically. But one can be either left or right in one's economics, and still understand resource economics. The good economist on the left despises Malthusians because they are human Quisling-type enemies of the working class, just as much as they are enemies of capitalism.
You certainly sound like an "expert" in economics. In the real world we have hard limits, being an economics expert you no doubt simply assumed we don't. Those assumptions are fine for economics but in real subjects such as physics we can't make difficulties in our theory disappear by assumptions, [ insult deleted. Ed].
Matt Ridley puts it best, in his "The Rational Optimist".
Worrying about the earth's resources being "finite" is like doing an afternoon's yachting off the coast of Ireland and worrying you might run aground on Newfoundland, because after all the Atlantic Ocean is "finite".
Perhaps it is not so much needing to have "economics" intuitions, as merely having the ability to get things mentally in proportion. Ridley certainly is an example of both that, and economic intuitions, going along together.
Something that helps us perhaps realise how vast the earth really is, and how little of its surface we have even prospected for resources, is how hard it is to find a missing airliner. In NZ alone, there are approximately a dozen missing aircraft that have never been found.
I make the mental transfer from this to resource vastness without difficulty. But as Ridley or someone like him said, nothing made the enviro loony movement take off like wildfire more than images of earth from outer space - dear, dear, how SMALL it is.......!!
Yeah, because I don't waste my time on post-enlightenment Malthusian echo-chamber sites like Frogblog and interest.co.nz. It is Chaston's funeral that that is what he has allowed his site to become. People should have been able to come here for enlightening economics and finance discussion, not to wade through voluminous incessant Malthusian thread-spamming.
EDIT: that is unkind to Frogblog. On the rare occasion I have commented there, I have been pleasantly surprised at the absence of the worst kind of Malthusian idiocy that one encounters here, almost as if Frogblog's moderators have higher standards in that regard. Possibly they want to avoid the damage to their own brand. Of course they are quite looney enough already anyway.
Ed - I feel bad criticising you like I have, now that you have deleted some insults against me.
I want to go on record that I never asked for the insults to be deleted or even complained about them.
I was rather amused by "pompous arse"......
One of the nicknames I acquired in High School was "P.G. Wodehouse". I was and still am a Wodehouse fan and the mannerisms of some of his characters kind of rubbed off onto me.
Hugh Pavletich says he quite liked to be told once that he was "rude but right". If I can be told I am "pompous but right" I will be happy.
No.5
"...... a monumental economic distortion - all brought about over a long period because these $530 billion in 'value gains' are untaxed, unlike almost all other investment gains....."
Why do the leading writers at interest.co.nz continue to peddle this nonsense?
There is no nation in the world where CGT's have kept housing affordable as long as there is a racket in the supply of land for urban fringe development.
I admit that it is taking a long time for the mainstream to come around all over the world, but this from
Alan Moran in “The Tragedy of Planning” (2006) includes on page 54 (61 of the PDF) a simple chart of countries with and without CGT’s on housing, along with other information.
https://www.ipa.org.au/library/MORANPlanning2006.pdf
Capital gains taxes had virtually nil effect on Japan’s famous property bubble until at the point it burst, the very high CGT rate that had been imposed by then was then blamed by some, for bringing about the collapse in values.
If someone wants to advocate the CGT level Japan had imposed by the time their prices started falling - 70% I think - good luck to them getting NZ voters to accept it. There is still no guarantee that it actually would work, as the bubble in Japan may well have been ready to burst anyway and the hiking of the CGT to 70% may have been nothing to do with it. Obviously the previous rate of around 50% hadn't been effective.
However it is also argued by some researchers that the higher the CGT rate, the more greenfields land is withheld from the market by its owners who do not wish to pay the very high CGT. Eg:
Yamazaki, F. (1999), Tochi to Jutaku Shijo no Keizai Bunseki (Economic Analysis of Land and Housing Markets), University of Tokyo Press
(Cited by Kunieda, 2010, “Speculative Bubbles and Tax Policy”)
See also: Morinbu (2006) “The Rise and Fall of the Land Myth in Japan”
It is certainly true that in the UK from 1947 on when the Town and Country Planning Act was first imposed, it included a 100% CGT on greenfields land, and the result was that no greenfields land got sold for housing development, so the tax was hastily abolished, thought to be responsible for the skyrocketing house prices that resulted. See Peter Hall et al, "The Containment of Urban England" (1974).
I have yet to see any coherent explanation from Chaston, Hickey, Hargreaves et al, that they have any moral objection to Auckland land bankers being able to sell land that they bought for $890,000 in 1995, for $112 million now........
http://www.nzherald.co.nz/anne-gibson/news/article.cfm?a_id=39&objectid…
Blindness to the real origins of these problems cannot be anything other than wilful after all these years of analysis and discussions.
The first thing I looked for on Interest.co.nz in paying it a rare visit today, was a discussion of the recent comments by the famous bubble analyst Jesse Colombo on Forbes.
But a site search didn't turn up anything, and checking likely threads hasn't turned up anything either.
Why is NZ's foremost finance and economics site so reluctant to discuss this? It has hit the mainstream media for several days running, and the comments thread on Fairfax's Stuff site has exceeded 500 comments, which is pretty major.
Hugh Pavletich has an excellent analysis just up on Scoop, confiming from a "structural" perspective, Colombo's analysis from a "financial" perspective.
http://www.scoop.co.nz/stories/HL1404/S00166/new-zealands-bubble-econom…
I actually did point this out,
http://www.forbes.com/sites/jessecolombo/2014/04/17/12-reasons-why-new-…
Its seems it got poo pooed by the property gamblers.
regards
Why is it funny putting Hugh P in the same category as Jesse C?
I would have said the absurd cognitive dissonance here was Steven on interest.co.nz actually giving Jesse C some promotion against the property spruiker class.
After all it is the Malthusian, Greenie Baptists who have given aid and comfort to the cause of the property spruiker Bootleggers all along.
Immediately prior to his piece on NZ, international bubble analyst Jesse Colombo’s most recent article on Forbes is called "Why Bubbles Need To Be Warned About As Early As Possible".
The whole point is so that governments can do something about them before they get even worse. Ironically, every time a bubble gets bigger, its deniers claim that the doomsayers to date have lost their credibility, because "the bubble they warned about hasn't burst". This is a perverse, "no winners" dismissal of an argument.
Of course after the crash, the boosters and the suckers will claim that “no-one saw this coming” except a few "stopped clocks" who had no credibility, yadda, yadda, yadda; and of course the State will be expected to bail out all the suckers, and worse - the deliberate Ponzi boosters themselves in the FIRE sector.
NZ has been warned for years by Hugh Pavletich, Don Brash, the late Owen McShane, and others. Unfortunately, the Clark government refused to act in 2004 when Auckland’s house price median multiple breached around 4.5, let alone in 2007 when it breached 6.5. This is the level Dublin – Ireland’s most expensive city - peaked at before their famous crash.
The Key government had several years during which price rises took a breather, in which to act; they too refused to do so.
Now Auckland's median multiple is around 9, (the last Demographia survey said 8 and the market has inflated nearly 20% since) there are no good options. 3-4 is historically normal. Nick Smith talking now about 4 being desirable, is like the stable boy trying to put on a happy face after the horse has disappeared over the horizon taking NZ's economic future for at least the next decade, with it - especially the future of the young, and especially the future of anyone who bought their first home since about 2005.
Jesse Colombo’s Forbes article on NZ, being written from a financial perspective - while people like me focus on the structural stuff like median muiltiples and economic land rent - highlights the extent to which NZ has become a Ponzi economy, with the finance sector absurdly large for an inherently low-income, bottom-of-the-OECD economy. Worse, in fact, than Wall Street's vampire role in the long-since infamous US bubble.
A promise of jail for finance sector executives rather than bailouts would have done wonders, in any country, for its chances of averting a bubble. You can bet that the fat-cat interests know only too well what the real problems and solutions are; there is simply no incentives for them to admit the truth or support reforms that are in the common interest as opposed to their own fraudulent, gouging, nest-feathering, humanity-betraying self-interest.
#3
"The bottom line is that the complexity and distinctiveness of China’s economy mean that assessing its current state and performance requires a detail-oriented analysis that accounts for as many offsetting factors as possible. Predictions are largely pointless, given that the assumptions underpinning them will invariably change."
So Yu's effectively arguing that predictions are pointless (the implicit statement being that "we're too complex and different for you foreigners to really understand"), and yet making a prediction himself that things will basically carry on as they have over the past 30 years.
A little exceptionalism mixed with a dash of nationalism does not prevent economic shocks...
Senator-elect Bob Day in Australia did a great TV interview a few days ago.
http://www.businessspectator.com.au/businesstv?channel=3179
Tony Recsei from SOS, Sydney, says in a circular letter:
In the interview you will see how Mr Day provides an interesting analogy with the Baptists and Bootleggers during the prohibition days in America. He says Baptists campaigned to have alcohol banned because it was immoral and destroying families but at the same time Bootleggers were making money out of the illegal liquor. So the Bootleggers also supported prohibition. He draws a striking analogy with so-called environmentalists and the land rentiers and high-rise developers.
Bob states “The modern day version is environmentalists and urban planners who have this pathological hatred of urban growth and urban sprawl and they campaign on environmental and other issues (even though these things don’t stand up to scrutiny) At the same time you have got land developers and others who are making a lot of money - state governments land management agencies,( Landcom now called Urban Growth NSW) etc. They are making an awful lot of money out of land supply and land restrictions… Has become a cash cow. Politicians and policy makers can stand on the Baptist soap box (now it is the environmental soap box) while at the same time making buckets of money”.
The result is devastating housing unaffordability, escalating unbearable traffic congestion and environmental degradation.
So it is instructive to consider this in the light of developer donations to politicians. Land and high-rise developers reap unimaginable profits from high-density policies. These developers form the largest section of the richest 200 people listed in the Australian Business Review Weekly (what is it like in NZ I wonder? - PB). They give donations to politicians. Many businesses are highly dependent on the developer industry (Including old and new media dependent on advertising revenue - PB). Academics get research grants from politicians. It will be a brave politician, businessperson or academic who stands up against these forces. Meanwhile so-called environmentalists wallow in environmental misconceptions that do nothing in the real world apart from making them feel good.
The Senator says he can build a house for 100K+ section, in Aussie.
My question is why not here + -. 10-15%
Unemployed youths there, not getting apprenticeships for building, at any price, nor entry level houses at any price, available.
Same here.
Maybe someone here should listen to him and get with the program.
The Senator says he "CAN".
They currently aren't, in Aussie.
They are cheaper than us in construction costs, building materials etc but that is not hard merely due to economies of scale. They are a distorted market 6 times bigger than our distorted market.
The problem with "sorting out building costs" without sorting out the land racket, is that any savings in building costs will end up being swallowed up in further land cost inflation.
This is how extractive economic rent works, and this was non controversial in the classical economics era. No-one contradicted Marx about the "monopoly" nature of economic rent at that time; all the controversy was over the "solutions".
Alfred Marshall was the first significant economist who pointed to falling transport system costs in real terms, reducing "monopoly rent". This argument actually dissuaded some Marxists (Ebenezer Howard, for example) from the need to nationalise land and resources.
But regulations and cartels and oligopolies interfere with the free market resolving economic rent on its own - urban planning is the most glaringly obvious example. Under the conditions now applying in Auckland, it will solve nothing if housing is built cheaper, or smaller. It will continue to cost 6 to 10 times household annual income. Perhaps more, if Hong Kong is any guide - the median household needs to pay 12 times annual income for a 40 square metre apartment.
The average UK "new home" is now 70 square metres on 1/18 of an acre, and this costs 6 to 10 times annual household income at the median. In contrast, in affordable US cities, a 250 square metre new home on 1/4 acre costs not much more than 3 times annual household income at the median.
The difference is that UK cities all have land prices between 100 and 700 times higher per square foot than US cities with no fringe growth containment. The longer that the growth containment land racket has been persisted in, the bigger the disparity has become. Back in the 1950's it would have been in the tens, not the hundreds. It is well known that the biggest family homes in the UK are those built in the 1930's before WW2 and the Town and Country Planning Act 1947, and there would have been little difference in land prices between them and the US back at that time.
Guess where NZ is headed?
Dale if National had done housing accords with every local authority with rising house prices the resulting increase in potential new residential land would have made NZ second tier towns -Tauranga, Hamilton, Nelson, Wanaka, Rangiora, Rolleston supply very elastic and some of those places would have had very affordable new builds. Waimakariri for instance asked the government for a housing accord.
The fact that National has only done accords for Auckland and Christchurch. And that Christchurch's was pathetic -180 homes, indicates National were scared of falling house prices. The intention all a long was to be seen to be doing something but not actually do anything.
#4 is only true as #3 is accurate.
To the previous generation with their $20,000 and $30,000 houses we seem rich.
Those same houses are now worth 15 times that, and will be worth 200 times that in another 15 years. And rent will be 8 times higher - and wages corresponding larger... we'll all be so stinking rich we won't even be able to afford to live inside anymore. wow!
By "wages correspondingly larger", do you mean that wage growth will have been around 15% of house price growth, just as it has been for the last decade plus?
So houses will be 200 times current value, and wages will be around 30 times current value...... meaning median multiples in Auckland of around 60?
Presumably interest rates will be 0.01% and mortgage terms will be 500 years?
interest around 5 - 7 %.
mortgage terms.... irrelevant as only existing clients will be eligible.
median multiples ... almost no local private entrants will be able to service the debt (outside high end executives ) so not really a point. You think many labourers/trade/professionals in London or HK or Manhattan can afford their land & building?
That'e what broom closets in London, HK and Manhattan are for........
And as I am saying, a site owner is quite happy to have 5000 broom closet dwellers stacked up on his site paying $300 per week rent each, when in a city like Houston he would only have 30 people with genuine choice in the matter, and 20 times as much space each, paying $300 per week.
Of course the land rentiers in any city love policies that drive their city a little closer to HK and a little further away from Houston. They also love local politicians like Len Brown, and he probably loves their donations to his re-election campaigns. I don't know why this isn't the completely clear understanding of these issues politically, and why the anti sprawl activists get away with claiming that THEY are fighting against the "capitalist" vested interests. Vidkun Quisling might as well have claimed to be a member of the Norwgian resistance all along.
Jesse Colombo is great with the comebacks, too - this is a doozy:
http://www.forbes.com/sites/jessecolombo/2014/04/21/its-not-a-bubble-un…
"It's Not a Bubble Until It's Officially Denied, New Zealand Edition"
By Jesse Colombo
21 Apr 2014
Forbes
"What an Easter weekend it’s been. On Thursday, I published a piece called “12 Reasons Why New Zealand’s Economic Bubble Will End In Disaster” in which I summarized my research on the Pacific island’s growing property and credit bubble. In just a few days, this article went viral and received over 85,000 views and nearly 8,000 shares on social media. This bubble warning created a media firestorm, making numerous news headlines, landed me a prime time appearance on TVNZ, and made the cover story of The Herald on Sunday:
My bubble warning also led to something that I’ve become quite familiar with lately: an official denial from Economic Development Minister Steven Joyce. This makes the fourth official bubble denial I’ve experienced in the past several months, with the first three coming from officials in Malaysia, the Philippines, and Singapore.
After having experienced official bubble denials before, I have stopped taking them seriously because I now realize that they are simply standard responses that add little intellectual substance to the discussion. While I bring facts and statistics to the table, the official bubble deniers typically attempt to attack my credibility and write me off as a “doom and gloomer.” In response to my warnings about credit and property prices doubling or tripling in just a decade, I receive pat answers such as “our banks have prudent lending standards” and “property prices are rising because of a shortage” (after all, it’s always a “shortage” – never a bubble). It doesn’t matter what country I’m warning about, the official bubble denials are essentially the same.
Let’s not forget that Ben Bernanke denied the U.S. housing and credit bubble’s existence just a few days before he was nominated as Fed Chairman in 2005, at the very same time that I was warning about it. Even the IMF missed the warning signs that led to the Global Financial Crisis, and these are the same warning signs that I am seeing once again in countries around the world. If former Princeton University economics department chairman Ben Bernanke and the IMF can be blindsided by bubbles, my hopes are not very high for New Zealand’s Economic Development Minister Steven Joyce, who studied zoology in university and has no background in economics before 2011.
Here is Mr. Joyce’s response to my bubble warning:
“His view on life is that the whole world is pretty much in a bubble and there’s no place he doesn’t pick on,” Joyce said. “I wouldn’t be paying too much for that level of analysis. He’s a little bit like [earthquake forecaster] Ken Ring. He’s out there predicting catastrophe at every turn.”
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“I think we’ve got to be a bit careful actually about this guy…he’s what’s known as a bubble-ologist, he sees bubbles wherever he looks.”
While it is true that I am warning about bubbles around the world, what Mr. Joyce and others do not understand is the fact that we now have a truly globalized economy that is inextricably interconnected. Post-2009 economic bubbles in countries such as New Zealand, Australia, Canada, and emerging markets, are inflating because of a common reason: central bank monetary stimulus on a scale that humanity has never experienced.
In desperation, central banks have collectively pumped trillions of dollars worth of liquidity into the global economy since 2008, which has manifested itself in the form of economic bubbles in countries that were relatively unaffected by the financial crisis. Rather than viewing each country’s bubble in isolation, my research has shown that these bubbles are actually part of a much larger global bubble – a fact that very few people are aware of, even in the economics community.
In response to my assertion that New Zealand has more of a finance-based economy than one based on agriculture, Mr. Joyce said:
“a fair bit of New Zealand’s food and beverage manufacturing is directly part of the agricultural story”.
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“If he’d bothered to look at our GDP figures he would have seen a different story.”
The reality is that I did look at New Zealand’s official GDP figures and found that the finance, insurance and business services sector accounts for 28.8 percent of the country’s GDP, while agriculture accounts for only 5.1 percent. After Mr. Joyce’s comment, I did further research and found that food and beverage manufacturing’s share of New Zealand’s GDP is only about 4.35 percent. Agriculture combined with food and beverage manufacturing accounts for only 9.45 percent of New Zealand’s GDP, which is just one-third of the finance, insurance and business sector’s contribution to the economy. Maybe Mr. Joyce should take a second look at his own country’s GDP figures.
This is not the first official bubble denial I have received, nor will it be the last. I am publishing a big report about Israel’s economic bubble in a few days from now, so don’t be surprised when it elicits a rebuttal....."It does always surprise me that Steven Joyce has much credibility on anything, but I suspect most New Zealanders like to believe we have a very competent government, of whichever hue, and that the distinction between left and right in most peoples' minds is merely minor distinction on philosophy, and not competence. Given both major parties are in reality close to the centre, it is their competence that should be most in question. Both parties have a shocking record over the last decade; but in my view Labour at least had the excuse that they were following the same policies as the rest of the world at the time.
All that is an aside.
It is absolutely clear that we have a bubble, on the basis that what cannot be sustained won't be. The big questions to me are:
What is the real underlying cause or causes, so we don't repeat them, and so we treat the causes and not some non causal correlation? and
What are the best solutions in getting out of the bubble, such that the surgery doesn't kill off the patient?
The prime cause seems clear to me to be a massive increase in money/ capital largely printed by our commercial banks, underpinned by very significant funds from offshore, both deposited into our banks and government; and directly into housing and farms. Reserve Bank passivity in many areas allows this all to happen. Land scarcity regulations underpin the nominal valuations at least until a bursting occurs, and I accept are a partial cause. (although in my view a minor one)
The one reason it could be argued we are not in a bubble, is if we continue to let more or less unlimited money be printed by commercial banks and or come in from offshore. Relative to our own population there are almost unlimited wealthy Chinese, Japanese, Germans, Swiss et al, and even if only a small fraction continue to want to own property here, or take advantage of highish interest rates, the bubble could take an awful long time in bursting. Hence in my view the main reason John Key wishes to be in denial about foreign property takeovers, which is the only way to sustain this type of bubble. The speed of takeover by foreign capital has to be exponential to keep it going.
Then all this foreign capital is betting that when push comes to shove, the NZ Government/ Reserve Bank will fold, as the surgey required to keep inflation manageable, and production not to collapse, would be impossible; and that the governments of the day will allow some high inflation. Massive moral hazard, but those seem the choices we face in the end:
1) Continued rapid foreign takeover; where we become even more so tenants in our own land, in a population of quickly 6-7 million and still growing. Even then the foreigners will insist on one of the following solutions when the SHTF.
2) Bursting of bubble, debt and finance failure on massive scale, collapse in consumption, capital flight, collapse in exchange rate; very high interest rates to combat the above; further collapsing consumption in a vicious cycle.
3) Very high inflation to allow all other relative prices to catch up with asset prices.
4) Thirty years of Japanese style stagnation while relative prices and wages slowly readjust to asset prices.
It would have been better years ago to manage capital flows and the exchange rate, at the very least for funding for the government itself; and to have the Reserve Bank have a much greater role in money creation than the commercial banks.
I can understand why you conclude that regulated urban land scarcity is only a "minor factor" because the blow-up of property bubbles simultaneously around much of the first world did correspond with the era of liberalisation of global capital flows and significant monetary expansion in many major economies (leading to exported bubble blowing).
The problem with this assumption of a "minor" role, is that there are too many counter examples in both directions. Firstly, the UK's housing market went systemically volatile and trending to unaffordability right from their introduction, in 1947, of strict growth containment policies.
Secondly, there are no developing countries with housing affordability, due to systemic corruption (an essential reason why third world countries remain third world). The lack of credit availability altogether, to most of the population, does not prevent housing median multiples from being between 10 and 18 in most such countries, for very small average housing size. And of course a significant proportion - as high as 50% - remain in informal slum housing, being priced out of the formal market altogether.
Thirdly, South Korea is one advanced nation with very strict mortgage credit availability - LVR's are literally around 50% most of the time. Yet median multiples are around 14. Again for very small average house sizes. Corruption is not the problem there; the problem is explicit urban planning modelled on Britain's system. In fact in the "Asian bubble" of the early 1980's South Korea did not even yet have a properly developed mortgage finance market, and as house price median multiples skyrocketed, national net SAVINGS increased, not debt - as young people saved desperately towards a rising target, mostly not finally buying until their mid 30's, if they bought at all - paying cash outright consisting of two decades worth of annual income diligently saved. Hence South Korea missed out on the ill effects of a debt overhang and wiped out equity as prices dipped again (not for long).
Fourthly, the several dozen bubble-immune cities (all in the USA) all share a total absence on fringe and exurban development constraints, yet all also shared exactly the same conditions of loose credit etc that bubbled California etc. Atlanta was "ground zero" for CRA-mandated lending to risky borrowers, yet prices did not bubble there. The spate of defaults that resulted from the unwise lending tended to be $100,000 mortgages to solo mums and supermarket shelf stockers, in contrast to the $750,000 mortgages to yuppie couples that were the norm in CA.
My thoughts on the impending housing crash are the following.
The baptist and bootlegger (+ lazy empire building bureacrat) argument is bang on for NZ. The key evidence proving this to me is we have more people living in lifestyle blocks paying rural prices for land on ultra low density values of typically 4 hectare or 10 acres per house than we have living in Dunedin. And that land is bigger than the rest of the urban footprint combined. Yet we do not allow others who cannot afford 4 hectares buy a smaller amount of land even if it was more environmentally friendly than a bog standard lifestyle block -say eco-village/earthship or cycle centric co-housing etc. Urban planning in NZ is not holier than thou... it is more run by devils than angels....
I think the bubble burst earlier in the US because there was more competition from middle and southern affordable cities. In Australiasia where kiwis can easily migrate there is no affordable cities. If just one city became affordable where you could buy a family home for $300K like you can in the US then the housing market would slump. I think that is why National has stopped doing Housing accords because they do not know how to politically 'sell' falling house prices.
That Key and co know all about how to restore housing affordability but believe it is better for there political careers to pretend we have a 'rock star' economy.
That NZ is missing an opportunity because the Australaisian housing market will collaspe at some point. Just like the UK housing market has had three periods of declining house prices and negative equity since WW2. If NZ was the first off the block then the financial bankrupticies could be minimised and tempered by migration of kiwis/Aussies, lower interest rates and a house building/ infrastructure boom. Like NZ did in the 1930s...
Phil,
The supply demand question for housing is I accept a chicken and egg one; and it would be fine with me if both sides were addressed. I'm not sure Hugh Pavletich's solutions are genuinely politically feasible given there are all the vested interests you allude to working against it. However an ability to pay- or lack of it- might well get a critical mass of people either moving to cheaper towns; or with interest rate rises, defaulting, and momentum could take the market lower. There could be some capital flight as a result. Or slow the capital, and the effect will be the same.
The question for politicians is whether it is now too late, and whether the surgery is too painful to wilfully employ. If it had been enacted at the time of the GFC, then the result would have been relatively benign. Now the exchange rate is so high, assets prices are so high, and debt is so high, that bringing it all down will not be easy at all, and few politicians are going to sign up to deliberately do so. They'll find a way to blame it on circumstance, and try and look like heroes in coming to our rescue after it all turns to custard. E.g. maybe it will be dastardly falling dairy prices that kick it all off; and they'll blame those, as though they were not entirely foreseeable, like gravity.
Love your comments, Brendon, you are one helpful guy.
Great point about bubbles perhaps bursting sooner if there are cheap option cities in a country. Yet LA and SF's median multiples went over 11, while Dublin's burst at below 7. Maybe what happened in Ireland is that the Eurozone immigrants stopped coming because cities like Rome and Lyon and Munich were cheaper........
+1 re great discussion Phil.
The way I see it regarding whether the surgery would be 'too painful or not' is that our current institutional setup gives monopoly pricing power to some vested interests -financiers and rentiers (land bankers and urban property owners). That like all monopolies if you change the rules to allow more competition, it brings in more employment, higher wages, lower prices and more satisfied consumers.
So our situation is that NZ has a known economic inefficiency. We know to reform this economic inefficiency will cause harm to some groups -the above vested interests. That this might cause a wider financial slump. That overall the longterm benefits are greater than the short term harm. So in a way this situation is similar to the early 80s when NZ needed to reform farm subsudies.
I believe that with the right mitigation policies -low interest and exchange rates, infrastructure and house building investments that the transition would be less painful than feared.
In summary building would be better than bubbling....
In summary building would be better than bubbling....
Yes indeed. The trouble with change is it tends to mess up everyone's arrangements, precisely because everyone has adapted to the existing rules. So there is widespread resistance to change, particularly as the damage can be seen but the benefit is in doubt.
Also Roger I have a fear that the resistance will delay the necessary reforms for so long that when they do come that they will be hurried and over the top. So instead of getting a delicate surgery that does minimal damage we will get some Douglas like hack job that will take 20 years to recover from.
Yes. The desirabilty of continuous adaptive reform rather than intermittent crisis and revolution.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10294…
No. 7: Best you keep digging .....
Could be important as these guys were/are one of the largest land owners in the country. And by the sounds of it, with further new money to put into dairy - just not here.
1. How does http://www.aquila-capital.de/en/management/andrew-watters feel. Is this also MyFarm's corporate policy? - must be if he is global head of dairy....
2. Ask them to run through their risk adjustment calculation, it could be about the weight of money and cost structure needed for a kgMS - forward looking.
The story is
Why after successful investment here, they are going somewhere else. How has here lost its mojo in their eyes.
with supplementary Q:
Do international investment funds make good (for industry) investors?
http://www.globalaginvesting.com/downloads/files/StrategisPartners-ValuingtheFarm-2014.pdf
What's Wrong with Conventional Valuation?
Under current valuation standards outlined by the Australian Property Institute, rural land values are determined by comparative analysis – essentially what farms down the road sold for. The earnings capacity of a property – the farm's ability to generate a stream of future cash flows – needs to be the new focus, not comparative property analysis. But there is a problem with conventional earnings valuation methods. It's the ‘flaw of averages’: Valuations based on the assumption that average conditions will occur are usually wrong.
One could also apply this to the residential housing "bubble". Stephen L asks above about the causes and I would argue conventional valuations contribute. Applying "economic theory" as a one size fits all is also a factor IMO. There is an underlying cause behind all of this though and that is the collective desire to be financially and materially rich, to keep up with the Jones' and to have more than others as a symbol of "success". This belief taught to society ensures that policies are implemented to support it and any solution to issues that may cause a loss in "financial wealth" will not be entertained.
You have got to worry about china but what about cadmium in NZ?
http://maxa.maf.govt.nz/mafnet/rural-nz/sustainable-resource-use/land-m…
Hey just keep adding 85kg calves and take off 220kg meat and sh'll be right.
Ex nihilo nihil fit
Compare that to the Fed. It helped usher in $33 trillion worth of goods and services – out of nothing. Yes, dear reader, that is the total amount of purchases made over the last 30 years… on excess credit.
We say “excess” because it is above and beyond the level of credit that had existed – relative to GDP – for many decades before. Roughly, from 1900 to 1970, the US had $1.50 for every dollar of output. Now, there is about $3.50 per dollar of GDP. The difference, over the last 30 years, is about $33 trillion.
Where did all that bounty come from? That is the question. Can something really come from nothing? Ex nihilo nihil fit (nothing comes from nothing). And yet $33 trillion worth of “stuff” seemed to have come from out of nowhere. It didn’t come from savings; the savings rate went down during this period. It didn’t come from earnings, either. Wages and earnings – in real terms – barely rose since the 1970s.
How about from an increase in productivity or output? Nope. As we have seen, compared to output, this “wealth” grew much faster. That leaves only one possible source…
http://davidstockmanscontracorner.com/the-feds-33-trillion-bent-spoon-t…
http://www.tickld.com/x/the-difference-between-men-and-women
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