By David Hargreaves
And it's such an inoffensive and, well, frothy word...
But be that as it may, the recent attachment of the term 'bubble' to the Auckland housing market seems to have caused some, ahem, excitement.
I'm not really sure why.
One problem, I think, is that some words when said out loud are heard and construed by listeners differently to what's actually been said. As one who often desperately craves solitude I am always perplexed that the word "alone" is generally heard and digested as "lonely". Not the same thing.
Likewise, I think 'bubble' when used to imply asset prices maybe getting out of line with 'fundamentals' is actually heard as 'burst'.
So, if one chooses to apply the b-word to current trends in the Auckland housing sector then what one is apparently saying is that in about five minutes time the whole thing's going to come crashing around its ears.
Well, no.
We're already there...
One thing about bubbles that I reckon stands as a truism, is that if you are talking about the possibility something's a bubble, then it already is. But that doesn't mean it is about to burst. And that's the trick/trap really. The other great truism about bubbles is that the bigger they get the more comprehensive the potential mess if they burst. Which, in a nutshell, is why the Reserve Bank is rightly concerned about the Auckland house market.
Prime Minister John Key's authoritative response has been a letter-writing campaign. It is to be presumed that the formation of a committee will come next.
If we cast our minds back to the early and mid-2000s we can probably just recall that the then Labour Government blithely ignored warnings of a 'bubble' in the finance company sector. How much money was lost for good in the carnage that followed is not abundantly clear, but it was billions, and the misery visited on those affected was (and probably still is) extensive.
In denial
In the same vein I can't recall too much official acceptance at the time of the New Zealand sharemarket's bull-run of the mid-1980s as a 'bubble'. Two generations of Kiwis basically shunned share investment altogether after the 1987 crash, which was more disastrous in this country than possibly anywhere else on the planet.
But no, when asset values are riding high, people like trotting out excuses such as a 'new paradigm' and talking about permanent changes in how assets are valued. Permanent that is until the asset values crash.
So, Auckland.
I don't want to seem like I'm picking on HSBC - because I don't see what they are saying as markedly different to some other market participants - but I thought the reported comments from their chief economist Australia and New Zealand Paul Bloxham rather aptly demonstrated 'bubble denial' thinking.
Bloxham was reported as saying the pace of Auckland's house price rises was "unsustainable" and prices were "excessive", however, this was not a "bubble".
I'm sorry, don't the terms "unsustainable" and "excessive" rather imply "bubble"?
Bloxham's reported explanation for why the Auckland prices were not a bubble was because they had mostly been driven up by "fundamental factors".
"Demand is strong and supply is weaker than it needs to be. There is strong inward migration…and interest rates are still below neutral and foreign money is flowing into the market as well," he is reported as saying.
So, okay, we now accept do we that high and ongoing inbound migration, strong investor demand, interest rates below neutral and foreign money "flowing into" the market are 'fundamentals' of the housing market?
Well, excuse me, but these all sound like temporary things that could reverse. Even the shortage of supply might be remedied at some point and cease to be a 'fundamental'.
Accept it
The point is, I don't think that accepting something as a bubble means it is about to burst catastrophically. For what it's worth I think global sharemarkets are currently in a bubble, inflated by the climate of practically zero interest rates. The Kiwi dollar is in a bubble for pretty much the same reason.
Are share prices about to crash? No, I don't think so because there's nothing on the horizon at the moment that looks like a pin that will prick that bubble. And the Kiwi dollar? Again nothing looming imminently that will change things there - even the thought of higher interest rates in the US is still not an absolute definite in the near term.
But would I be betting on continued high share prices and continued strength in the Kiwi dollar? No, I wouldn't. I would be real cautious.
What is really needed here is for people to accept the b-word and embrace it. Realise that 'bubble' is not a synonym for 'burst' and that just because something is given that label this doesn't mean that crash city is just around the bend.
But what accepting a 'bubble' does mean is facing up to the fact that something has to be done about it.
The Government has chosen to, erroneously in my view, and for political expediency, make Auckland's rising house prices all about supply. Therefore it is solely targeting that.
Operation Bubble
Well, the demand is clearly there and it needs tackling. Operation Bubble is required.
There are some pretty interesting ideas floating around.
I still think a capital gains tax would be, sorry, fundamental - and yes, I can hear the screams out there as I write this. I find it interesting that the CGT naysayers always look at places like Britain (which has one) and point to its high house prices. What they don't and can't say is how much worse the house prices in Britain might be without one!
Certainly a CGT is not a panacea, but I think an essential foundation, a place to start, in levelling the playing field between investment in housing and other asset classes.
...And then you could put some other things in on top of it.
I'm loving the idea of a land tax on undeveloped property and can't think of anything that would better apply to the situation in Auckland.
We do need buying restrictions and/or taxes put on offshore-based investors. I read somewhere this week suggestions of an infrastructure tax on offshore investors. This sounds like a fiendish plan that would certainly help out with what is a very contentious (IE who pays for infrastructure on new developments) issue.
But of course, we need to get past the politics of such issues - which is why I think Gareth Morgan's idea of an independent tax authority is an absolutely splendid scheme.
The nuclear option
We already have an independent Reserve Bank of course - much to this Government's apparent chagrin.
It does occur that the RBNZ would have a 'nuclear option' available if nothing else was forthcoming - and that would be to break away from the international regulatory framework for the banking sector by bumping up the risk weightings given to residential mortgages, bearing in mind that at the moment banks only have to count something like 30%-35% of the value of their residential mortgages in their solvency calculations.
Imagine how much capital they would need to raise if that was bumped up to 100%!
Yes, that last one would be pretty drastic. But the point is, there are things that could be done about the errant Auckland housing market.
Accept that is it a bubble. And get on with it.
17 Comments
... ah geeeez , not the CGT again ?!?!?!? ...
Hasn't worked anywhere else on the good planet earth ... but folks keep extolling it as a virtue for New Zealand ...
... couldn't be that we just need to increase supply , to build more houses , apartments , and condos ?
And that we need to address the principal issue of exhorbitant land prices ?
... CGT ! ... oh dearie dearie me ... where's the brandy ... we needs a triple !!!
you are being far too kind - too gentle
The subject of CGT and it's weakness have been canvassed here at interest.co.nz for the past 5 years - long detailed dissertations - and yet the stupid subject keeps popping it's head up repeatedly - and now, suddenly the academics and supposed intelligentsia are waking up and having a go - where have they been since 2008
This is just like the Anti-Money-Laundering Act which New Zealand and its lawmakers took 10 years to implement and they only implemented it when the Eurozone and the Eurocrats pointed the bone at New Zealand and black-listed it in a couple of areas.
The pity is interest.co archives are hard to search and retrieve archived material
New Zealand needs Muldoon back again. About 1980 he unilaterally introduced a regulation (because he governed by regulation) a tax-law that clawed back all interest deducted on investment properties sold within 10 years of acquisition. No mucking about. He just did it.
Try this simple solution
We gazette from tomorrow a regulation that from the date of announcement, any property purchased on or after that date, interest paid on any loan or mortgage that exceeds 40% LVR will be disallowed for taxation purposes. The lot. Not just the excess above 40%
The regulation will have a sunset clause of 24 months
Guess what would happen to property prices in Auckland
No Big Kahuna, no Gareth Morgan CCIT, No CGT etc etc etc
Too easy
No, it would be assessed according to the entity or the property itself, over which the mortgage is registered, regardless of the number of beneficial owners. ie a Company or Trust would be considered single entities. In the case of a partnership with any number of partners would not escape, it would be the partnership and not the partners.
........................bottoms up Gummy....it is a sad time when journalists fail to understand that humans are the only people who have to pay taxes to be on the planet and then actively encourage further rampage on the private individuals work by encouraging new taxes........bottoms up again!!!!......
If we collectively acknowledge there is a bubble then we lay the foundations to pop it - which is why many will stop us from acknowledging it in a hurry .
One of the primary drivers blowing it is a belief we have a severe housing shortage that grows worse by the day. This removes doubt and worry about declining prices from first home buyers and motivates them to buy in advance for increasing prices. It also convinces and reinforces investors to buy for further capital gains.
The charge that there is a severe and growing shortage of homes is a carefully scripted and probably coordinated effort by property investors, estate agencies, both their respective industry associations, and media that heavily rely on residential adverting. The reality is that while Auckland started with an inbalance supply in 2010 which has grown into a moderate under supply the shortage should have been accountable for around 10-20% price appreciation since then - not 60% (rents have not grown at the same rate - have they?). Therefore the balance is an interest rate driven speculative mania that has left home prices dangerously over valued and overpriced.
Once this carefully crafted veil of a severe housing shortage has been lifted and understood by the market people will start to realise there is no fundamental basis for further price increases and rather understand that they may fall. People will stop buying as quickly as they once did, which will weaken the trend. More people will place their homes on the market. Which will weaken the underlying trend. And before you know it the housing cycle will turn into a steep and total reversal.
And man - can you imagine what would happen if net migration flicked and started falling away rapidly as it always has and always will...that would remove then the last of two crutches holding up prices (the other being interest...)
Geez. Simple answer - Bill English gives every one a $1000 tax credit. This allows the RBNZ to put interest rates up to where they should have been all along.
We have a dopey system where the RBNZ has been pumping credit into housing which unexpectedly led to a house price bubble. Who would have thought? Obviously not the dopes at the RBNZ.
National are deluded that the country is doing just fine and its because they are very clever (nothing to do with the insurance money flowing into Christchurch and the new arrivals flowing into Auckland, of course) when in fact the productive sector is going bust rapidly. Dairy farmers cannot say "Help, we are going bust" because then their farms would be worth less, but if it costs you $6.50 to produce something worth $4.50 you don't have a business for long. Same with logs.
Dopey, Dopey and Stupid.
We certainly DO NOT need to "do something about it as well."
The market is mutual gains from voluntary exchange. Willing buyers and willing sellers.
Nothing needs to be done. (Except perhaps shut up the moaning mob on interest.co.nz who keep wanting a house for cheap and expecting others to pay for it.)
Looks like Your Landlord you may be in for some competition.
http://www.3news.co.nz/business/nz-property-promoted-as-an-investors-dr…
In logic the HSBC economist's argument is not necessarily incorrect. In saying the pace of increases is unsustainable, does not at all mean prices should come down in his view. Rather they just won't keep going up at the same pace as in the past. No surprises there, or argument from anyone, I would have thought. Then using the word excessive to describe prices, begs the definitional question: "how excessive do prices have to be to be a bubble?" 5% to 10% too high is probably not a bubble, and if prices deflated to that level, the only people losing any equity at all would be those who bought in the last year.
Separately, if as many of us suspect, a good number of the recent buyers have been foreigners- Chinese in particular- then their fundamentals in terms of yield, cost of funds and reasons for buying, may well be different to traditional NZ buyers. They may well have cash, might wish to own a bolthole from China, could have access to funds at say 3-5% and so are happy to accept a yield of somewhere in that vicinity.
So we may not have a bubble, and or our prices may have little to do with supply and demand here. Nevertheless the things that may cause a significant price decline could far more likely be prompted by a Chinese bubble- either debt, or property- popping. The significant drop in the NZD that Wheeler would like, (but does nothing about) would cause a paper loss to foreign investors. If they in turn are debt funded would that cause a run of some sort?
I'm not convinced the Chinese authorities are going to pop their bubbles; rather they will keep printing money to bail most provinces and businesses out. Further USD appreciation against the yuan could cause stresses, but even then, the Chinese have a huge current account to buffer any effects, and can print till the cows come home.
If their bubble doesn't pop, ours probably won't either. It will just stop expanding. HSBC could be correct.
The trouble with a bubble is the far-reaching long term consequences, mainly from the inevitable burst when it happens.
When the end comes, the world will see NZ's residential housing bubble drag the local economy down to a point from which Kiwis will fondly remember the heady days of the Great Depression.
Property spruikers right now are dislocating their lips as they attempt to deny such facts but it's already way too late to talk it away: The bad times are coming and we all know the longer they take to arrive the worse it's going to hurt when they do.
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