By David Hargreaves
The confirmation in the latest Real Estate Institute sales figures that the New Zealand housing market was generally subdued through March makes it likely now that things will stay quiet up till the September 23 election.
In 2014, even though there were fairly clear signs from early in the election campaign that a National-led Government would be the outcome, there was a very substantial pause in house market activity in the election run-up. Then after a National-led Government was indeed confirmed, things went nuts again.
This year there's no John Key (sorry Bill, but that's going to make a huge difference) and therefore a far more inconclusive election outcome with Winston Peters featuring prominently (and the lighted match near fireworks-type unpredictability that promises) is entirely possible.
Combine such possibilities with the fact that winter's approaching and with it the natural time for the housing market to take something of a breather (though not always in recent years) and house prices are likely to somewhat mark time.
The Reserve Bank, which for a while last year was looking short of ammunition to fire against the housing market after the failure of its Auckland-specific LVR measures, will be relieved. Notably though the RBNZ has not been declaring any sort of triumph.
Flat prices
The new REINZ House Price Index (HPI) formulated in conjunction with the RBNZ showed national house prices exactly flat between February and March.
This suggests to me a market entering a period of lull rather than one that's set to start heading backwards.
As I said, for the RBNZ, which looked almost a bit desperate when clamping 40% deposit limits on investors, this will be a relief. But it will be a relief I suspect tinged with realisation that the 40% deposit rules have been far from the only influence on the market in the past few months.
The banks have been happy to some extent to hide behind the RBNZ's new rules while implementing their own tightening of lending criteria - 'credit rationing' as they have styled it. And then there's the difficult to quantify impact of a pullback in offshore buying.
So, the RBNZ's 40% deposit rule has definitely had a helping hand in terms of a cooling of the housing market.
What about the politicians?
What then does the prospect of a cooler housing market in the run-up to the election campaign mean for what the political parties say about housing and the types of policies they outline?
Politicians will always gravitate at great speed toward 'hot' issues. I don't think it's unfair to describe New Zealand as a housing-fixated country, so in a sense, housing will always be an issue of some magnitude.
It is, however, an issue that doesn't have easy political solutions and perhaps more to the point doesn't tend to have solutions that are popular with the electorate.
By getting rid of the title of Housing Minister altogether Bill English telegraphed that he was very keen to play down housing as an issue in the run up to the election campaign. That's understandable. This Government made much of the housing issue being all about supply - particularly in Auckland, but now the efforts to ramp up supply in the largest city are flagging.
In recent months the annualised number of consents for new dwelling construction has stuck at around 10,000. Now, that is quite high by Auckland's historical standards - but so's the growth rate of Auckland's population at the moment. Between immigration and births the Auckland population may have grown by something in the order of 55,000 in the past year. That 10,000 new homes is a drop in the bucket next to what's needed.
Perhaps not surprisingly therefore the Government's not quite as vocal these days about its efforts to fix supply.
The Government's gamble
As for demand, well, it has never been keen on tackling that hot political potato. The Government took a calculated risk by shutting down the RBNZ's efforts to have debt-to-income ratios installed in the 'macro-prudential toolkit' this year (albeit with a promise not to use them at the moment).
So, the Government will be mightily relieved the housing market is behaving itself and will presumably continue to do so till the election.
I reckon that the Government will have had further measures ready to go this year, or at least announce in the run-up to the election, if the housing market continued to overheat. But, I think now that it's all gone quieter on that score maybe those measures - whatever they might have been - will be put on ice.
So, what about the efforts of the other political parties to make housing THE election issue. Well, Labour's certainly been making a lot of noise, but I wonder if it too will be lured into focusing on other areas if there's no housing measures announced by the Government and the housing market itself stays relatively quiet.
People are fickle. And if their trousers are not on fire they will be less interested in hearing about increased staffing levels for the Fire Service. A slightly tortured analogy there, but hopefully you get the point; if house prices are not rising every five minutes this year people may become somewhat less concerned about it - particularly if the Government can keep pushing a 'move on, nothing to see here' housing stance.
A waste of breathing space
All of which moves me to say that, worryingly, if we do go through an election campaign without concrete policies from the major parties to tackle the structural housing problems in this country the current 'pause' in the housing market may be a wasted bit of breathing space - with consequences down the line.
Come the dawning of 2018 as things stand right now Auckland will still have new residents pouring in (though whatever changes the Government makes to immigration settings will be watched with interest), Auckland won't be building enough houses and our young people will still be taking on eye-watering amounts of debt - with no controls on debt-to-income ratios in sight. In terms of the more nationwide picture housing as an asset class is still going to enjoy taxation advantages over other asset classes - so, will continue to be the preferred option.
The banks are 'rationing credit' at the moment but, frankly, nobody should ever depend on the banks to keep doing the 'right' thing. If they had been doing the 'right' thing all along then we wouldn't be looking at a situation where reportedly 51% of household income is getting sucked up by the mortgage payments on an average new purchase in Auckland - at a time of historically low interest rates.
So, in short, the 'pause' of the housing market may just make this a 'do nothing' election as far as housing initiatives are concerned.
And that could be a very bad thing indeed.
58 Comments
The trousers were on fire back in 2007 when John Key initially called the housing crisis and how National were going to make housing more affordable. Since then Auckland Prices have increased by 1/2 a million dollars. https://www.youtube.com/watch?v=qEcmkmaD3ro
Now the "underpants are on fire" and if the government doesn't put out this fire we will be in the Accident & Emergency Room.
Wake up Prices are over a Million dollars, just because they are not rising for a few months doesn't mean we are not at a Crisis Level. It was a Crisis back in 2007 when prices were half what they are now.
Here is a better video -it only has the 4 minutes or so where John talks about housing back in 2007.
https://www.youtube.com/watch?v=cWPgoAI1cLE
I like how he talks about how bureaucratic the Building Act got, which is correct as it got really bad with the changes to the 2004 Act. Then National turned around and intentionally made things even worse with their changes to the Building Code. There's more red tape and Council hostility as a result of National's actions.
The cost of obtaining a building consent blew away my prediction which was much higher than feeble prediction of a 10% increase in cost put forward by PWC when the Building Bill 2003 was in front of the Select Committee. The increases are more like 300%. That does not factor in the massive delays that have been added to the building consent process. What would take weeks can now easily take months.
Maybe John Key should have taken his own advice.
Labour are the only party looking to tackle the demand Crisis. The fact National got rid of the housing minister speaks volumes and shows you they have little interest in the biggest issue facing Kiwis.... TIME TO GO
"Labour’s ban on foreign speculators purchasing existing houses will be based on the Australian policy. Under our policy only citizens and permanent residents will be able to buy existing homes. The ban will also apply to foreign trusts and foreign corporations. " http://www.labour.org.nz/cracking_down_on_speculators
How could John Key think it was an Issue at 1/2million in 2007 yet in 2017 at a Million dollars in Auckland it is no longer a crisis?
Really ? well Stats would suggest otherwise, pricing on houses has inched up in March.
source REINZ, info here http://bretglazer.co.nz/news/
Housing will be one of the burning issue along with immigration and surely national will try to do some cosmetic cover up but do not think that people of NZ can trust national specially with their arrogant approach for everything that Kiwis are concerned about and have had enough of their policy of : Denial, lie and manipulation.
Election approaching and national will try to backtrack but will be cosmetic with no intent and solution and hopefully people area able to see through and vote for change
http://www.cbc.ca/beta/news/canada/toronto/real-estate-market-housing-m… Meanwhile in GTA city of 6 million
Oh the property market will go backwards alright ...eventually. This is not the same market that previously existed This time there's a ton of Foreigners spec cash involved. Far deeper and wider than the time HongKong people were buying a bolt hole to run to once China took over from Britiain.
More work is needed to control housing prices that have grown well past the mean for a long time. National have refused to take any significant action and it's only because it the run up to the election they are taking action to appease voters. When what really needs to happen is the worthless old farts that are trying to keep their seats need to go. They are filling their pockets while things keep getting worse.
All they've done is make business more difficult with idiotic regulations. It got to a point where the DIA wrote the Loopy Rules Report which included all the of stupid rules made while National were in power and asleep at the wheel.
Then we have the US State Department that paid $2m to the NZ Government to amend Section 92B of the Copyright Act. This was just to keep the MPAA and RIAA happy. Of course it also tied into the Kim Dotcom disaster. National, or more specifically John Key, does appear to have inappropriately influcenced the Judge on the case. Either that or the Judge is an incompetent moron whose decisions are repeatedly overturned in the Appeals Court. It gives the appearance that our Judicial system is corrupt or has been made corrupt by the National Government for political gain (or some bribes).
The housing crisis also ties in to increased poverty and homelessness. We've become a shitty country with shitty attitudes. Neoliberalism has become a mental disorder instead of relevant economics. Greed at the expense of those at the the bottom of end of the economy.
Things will change no matter which party is in power, it's just if National remain they won't clear out all the defective idiots that have risen to the top of the party. Those idiots are getting in the way of improving the country and it's not just a matter of housing or immigration.
Also suicides are increasing, just another sign of success according to Bill English.
http://www.stuff.co.nz/national/health/91653540/suicides-in-care-reveal…
Dictator - for what little my opinion is worth, I think you've hit he nailed on the head. What has suprised me is the 'head in the sand' attitude that those in positions of influence have taken - and equally those who perceive that they are benefitting from the situation (which is a fallacy in the long term because of how unsustainable the situation is and that debts do have to eventually be paid).
Reading a number of books by the likes of Shiller and they talk about the denial/behavioural attitudes of people (and the stories that they tell themselves) involved in market booms/bubbles. And we're witnessing it first hand. Confusing and disappointing from the perspective of someone who is priced out of the market and who is at risk of losing hard earned savings if there is an OBR event - a risk passed to me indirectly because I've been cautious, not greedy, and avoided getting caught up in the hype/irrationality.
In a sense - I think we deserve a crash because of our greed and mismanagement of the situation. It's going to cause pain - but how else do people learn?
Greed is not necessarily synonymous with good fortune. I don't believe that property bubbles are attributed to the motivation of consuming more than one should. Greed describes people such as Nicolae Ceausescu, not necessarily people's whose homes have doubled in "price" in a short space of time.
I hesitate to generalise. There are selfish people everywhere, because selfishness is a condition of the human heart. Evil is not gender based, or particular nation states, or skin colours, or political beliefs.
Edit:
“Gradually it was disclosed to me that the line separating good and evil passes not through states, nor between classes, nor between political parties either -- but right through every human heart -- and through all human hearts. This line shifts. Inside us, it oscillates with the years. And even within hearts overwhelmed by evil, one small bridgehead of good is retained. And even in the best of all hearts, there remains ... an unuprooted small corner of evil.
Since then I have come to understand the truth of all the religions of the world: They struggle with the evil inside a human being (inside every human being). It is impossible to expel evil from the world in its entirety, but it is possible to constrict it within each person.”
― Aleksandr Solzhenitsyn, The Gulag Archipelago 1918-1956
Perhaps that's just your perception ZS. If grounded people stay the same/centered in an extreme situation, those around them that have actually changed perceive others to now be extreme because of their own shift in attitude/character. Just something to ponder.
So for example, 15 years ago, the average kiwi would help his neighbor, who wasn't greedy, wasn't a property speculator out to make a quick buck or two would have said that if that if NZ were selling it's self out to foreigns/speculators/landlords in order to make some capital gains - well that would be outrageous. And that the average house price in Auckland would soon be $1,000,000 and that's a sign of success - and that the markets only just getting warmed up - well that would be quite rediculous.
Jump foward 15 years - now a lot of those same people are financially benefitting from it think its great and keep quiet. They've changed in character and have become greedy and self-centered. Their perception of reality has been warped. Others who have remained the same speak out against it but get called extreme or told they have a bad attitude, or that they worry too much...
Too many have changed and not for the right reasons...
Yes indeed. Reminds me of my favourite Julius Evola quote: My principles are only those that, before the French Revolution, every well-born person considered sane and normal. I have often thought, while watching a maudlin ANZAC ceremony, that if the Glorious Dead arose and looked about them they would immediately march on Parliament with bayonets fixed.
Reminds me of this classic:
Indeed - not to start into intergenerational warfare again, but something strange happend to the boomers. And not a good strange...A need to own everything, even if they don't need it. My parents are clearly materialists (boomers), my grandparents were more spiritual and lived in terms of needing only enough to be content.
Something that's evident in the older and oldest generations is their tendency to marginalise the opinions of others. You'll note that this is especially the case when no discussion or points are made.
There are certainly a lot of people wrapped up in materialism and consumerism. What I'm seeing increasingly in the US is the younger generation moving away from both concepts. The lack of jobs and debt burden from huge student loans is changing their perception and seems to be having a debt deflationary effect. I'm interested to see how this affects us here.
The banks are 'rationing credit' at the moment but, frankly, nobody should ever depend on the banks to keep doing the 'right' thing. If they had been doing the 'right' thing all along then we wouldn't be looking at a situation where reportedly 51% of household income is getting sucked up by the mortgage payments on an average new purchase in Auckland - at a time of historically low interest rates.
Exactly David. Although it seems our esteemed former Reserve Bank Governor is still in denial.
Remarkably he refers to Bryan Gould as "peddling nonsense" and then promptly goes on to confirm that banks do indeed create money. The tortology of an individual bank, banks and the banking system is disingenuous.
Is it any wonder we're in such trouble when we have such a level of obfucation.
He refers to Brian Gould as peddling nonsense, because he is.
Brian Gould is sensationalising the subject of fractional banking - something he is specifically incentivised to do to further his rhetoric.
Yes, banks create money.
Is it unlimited? Most certainly not.
Can it be modeled dynamically? Yes.
Is it thus controlled for? Yes.
For some reason there is a misconception that banks provide no benefit to society. Such a position could not be further from the truth.
The only obfuscation (apart from your spelling) is in that people listen to the sensational and ignore the fact.
Nymad, perhaps have another think as to whether “intermediation” and “fractional reserve” are useful perspectives: (see Bank of England paper here)
In the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet. The bank therefore creates its own funding, deposits, in the act of lending. And because both entries are in the name of customer X, there is no intermediation whatsoever at the moment when a new loan is made. No real resources need to be diverted from other uses, by other agents, in order to be able to lend to customer X. What is needed from third parties is only the acceptance of the newly created purchasing power in payment for goods and services. This is never in question, because bank demand deposits are any modern economy’s dominant medium of exchange, in other words its money.5 Furthermore, if the loan is for physical investment purposes, this new lending and money is what triggers investment and therefore, by the national accounts identity of saving and investment (for closed economies), saving. Saving is therefore a consequence, not a cause, of such lending. Saving does not finance investment, financing does. To argue otherwise confuses the respective macroeconomic roles of resources (saving) and debt-based money (financing).
Peri,
You forget that what banks create is credit.
It is an IOU note that must be honoured at the end of everyday, thru the payments system.. ie. they are still intermediaries, as much as they r creators of credit. There are limits to how much credit they can prudently create.
I'm sorry, I miss your point.
As per Peri, below, there is a limit and debit/credit entry for each transaction.
Also, as per you comments below - why are you quoting economists from 70 years ago on the topic of banking?
Surely you realise that these were asserted in before dynamic equilibrium models were available..?
Nymad - that is funny.
Controlled because it is modelled "dynamically" ???? That is pure delusion. Who oversees this model? The banks are all interdependent and rely on each other judgements re creditworthiness ...
There is no real limit on the money (ie debt) banks can create - but as todays debt must be repaid by tomorrow's "labour" (read energy) , banks have to make assumptions around the (energy) available to service it.
The banks have to assume the energy input is available, is cost effective and it is growing. Its a flawed assumption.
It seems that Don Brash has forgotten how banking works, or perhaps he never knew?.
To paraphrase JM Keynes in referring to another banker:
Practical bankers,like Dr Brash, may believe "that for the banking system as a whole the initiative lies with the depositors, and that the banks can lend no more than their depositors have previously entrusted to them them. But economists cannot accept this as being the common sense it pretends to be. I will, therefore, endeavour to make obvious a matter which need not , surely be obscure.”
“It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books, which is the equivalent of a deposit”
Henry D. Macleod (1856),:
“Nothing can be more unfortunate or misleading than the expression which is so frequently used that banking is only the “Economy of Capital,” and that the business of a banker is to borrow money from one set of persons and lend it to another set. Bankers, no doubt, do collect sums from a vast number of persons, but the peculiar essence of their business is, not to lend that money to other persons, but on the basis of this bullion to create a vast superstructure of Credit; to multiply their promises to pay many times: these Credits being payable on demand and performing all the functions of an equal amount of cash. Thus banking is not an Economy of Capital, but an increase of Capital; the business of banking is not to lend money, but to create Credit: and by means of the Clearing House these Credits are now transferred from one bank to another, just as easily as a Credit is transferred from one account to another in the same bank by means of a cheque. And all these Credits are in the ordinary language and practice of commerce exactly equal to so much cash or Currency.
“These banking Credits are, for all practical purposes, the same as Money. They cannot, of course, be exported like money: but for all internal purposes they produce the same effects as an equal amount of money. They are, in fact, Capital created out of Nothing ”
Schumpeter (1954):
“this alters the analytic situation profoundly and makes it highly inadvisable to construe bank credit on the model of existing funds being withdrawn from previous uses by an entirely imaginary act of saving and then lent out by their owners. It is much more realistic to say that the banks ‘create credit’, that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them. And the reason for insisting on this is that depositors should not be invested with the insignia of a role which they do not play. The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fully fledged capitalist society and the true role of banks in capitalist evolution”
Davenport (1913) and Howe (1915):
“…banks do not lend their deposits, but rather, by their own extensions of credit, create the deposits”
Swedish economist Gustav Cassel (1923):
“In practice, deposits are also created and constantly fed by the bank's granting advances to its customers, either by discounting bills or by making loans and then crediting the clients with the amount in their accounts”
I find it really interesting that some people, who often clearly don't understand it themselves, will quote other people, some of them long dead operating in another financial system of yesteryear, to try to discredit a reasonably modern central banker who was very well respected in financial circles.
I find it interesting how economists have forgotten the basics, and are now only relearning it. See for example the recent papers from the Bank of England.
http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp…
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin…
From the Bank of England (2014!)
"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits
http://www.dailymail.co.uk/news/article-4420012/Australia-headed-devast…
We will have National to thank for the Bubble they allowed.... ignoring demand totally and focussing just on supply
Don't make stuff up. NZ DTI levels are not higher than for Australia. Facts are something you should respect.
The latest DTI for Australia is published by the RBA and it is 188.7%
The latest DTI for New Zealand is published by the RBNZ and it is 167.9%.
You can see both series charted here.
So what is graph 1.8 showing then? https://www.rba.gov.au/publications/fsr/2017/apr/pdf/global-fin-env.pdf
Also (I believe) the DTI ratio is talking about all mortgage debt, as a ratio to current incomes. Whereas 'dwelling price to income ratios' is talking about the ratio of CURRENT prices to current incomes. So it could be we just haven't traded as many houses (yet) at the stupid prices - if the price to income ratio stays the same for the next decade, the overall DTI ratio could increase.
NZ house prices now average 6.5 times annual household disposable income which is very high by International Standards (Australia has a ratio of 5)
Good Graph Mamba, (1.8) NZ leading the way for all the wrong reasons.
https://www.rba.gov.au/publications/fsr/2017/apr/pdf/global-fin-env.pdf
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