By Keith Woodford
House-price inflation is New Zealand’s hot-fire issue. Look back a year and very few people were predicting the fire. Now we have a fireball.
Quite simply, house-price inflation is driven by citizens’ loss of confidence in fiat currency. Having money in the bank has become a mug’s game. As long as post-tax interest rates on savings are well below inflation rates, then the fireball cannot be doused. Investors have to find somewhere for their savings.
Prior to COVID19, there was a valid argument that urban planning rules combined with high immigration were the key drivers of house-price inflation. Those urban-planning issues had been in the background for many years but were then fanned by high immigration.
However, it is COVID-19 and the reactions of the State, particularly monetary policy under the control of the Reserve Bank, that have created the current fireball.
The current Reserve Bank inflation mandate belongs to another time
The Reserve Bank Governor has made it explicit that house-price inflation is not a central issue to the Reserve Bank mandate. In a technical sense, that is correct. However, house-price inflation is central to the future of New Zealand, and any sense that we can be a property-owning team of five million.
As long as monetary policy was focused on flattening short-term business and spending cycles, then independence of the Reserve Bank using standard monetary tools made a lot of sense. Some things are indeed best left out of the hands of politicians. However, monetary policy has strayed into areas well outside historical norms.
Interest rates have been declining globally for much of the last 20 years. That aligns with global growth rates declining everywhere. China is the outlier, but even there, economic growth as a percentage of the economy has been declining, and so have interest rates.
Since COVID-19, the extraordinary measures of quantitative easing have been extraordinarily successful in artificially reducing interest rates even further, particularly across the Western World. And there lies the issue.
Back in June I wrote about the flood of capital entering the market via the Reserve Bank’s quantitative easing programme. I tried to forewarn of the risks from excessive quantitative easing. However, at that time, most people were focused on more immediate issues relating to COVID-19 and jobs. Right through to the election, the issue of house prices remained in the background.
It is now no longer possible to obtain a bank interest rate that protects against inflation, yet the Reserve Bank is trying to increase inflation further. To at least some of us, it is a crazy world.
The increasing growth of digital block-chain currencies is another sure sign of a global loss of confidence in fiat (national) currencies. These digital currencies, led by bitcoin but with others in the wings, are highly speculative and have no inherent value. However, with confidence in fiat currencies declining, the search for alternative nest eggs expands. Hence, people are drawn to these digital currencies. Once again, it is the consequence of a crazy world.
The rush to investment properties
Here in New Zealand, the rush by investors to purchase investment properties is not driven by any fundamental wish to be landlords. Rather, it is driven by a belief that there is nowhere else to go. Accordingly, under current place settings, there is still a long way for house price inflation to run. There are still many billions of dollars – indeed approximately $200 billion - sitting in current accounts and term deposits with the citizen owners of those funds now becoming very scared.
Unfortunately, the Reserve Bank has very limited expertise when it comes to behavioural sciences. Their only tools for assessing behavioural changes that lie outside historical norms are to operate through a rear vision mirror. Accordingly, they have been and continue to be badly caught out as to what they have created. Their response is that the housing crisis is a ‘first class problem’, largely outside their mandate.
If ‘first class’ problem means a huge problem, then it is hard to disagree with that assessment. But if it means something else, and the evidence is clear that Reserve Bank Governor Adrian Orr does indeed mean it in a different context, then once again it is evidence of a crazy world unsuited for a team of five million.
House inflation does not soak up excess money supply
Very few people recognise that house-price inflation does not soak up the excess money that the Reserve Bank is creating. Every time someone buys a house there also has to be a seller. Money simply flows from one bank account to another. The same principle applies with shares. It helps explain why bubbles keep growing until they pop.
This fundamental fact as set out above is why there is a fair chance that we are still in the early stages of the house-price inflation firestorm. The only qualifier on that statement is if there is a change of Reserve Bank policy in regard to quantitative easing and hence interest rates.
In the meantime, there is nothing to stop house price inflation from continuing as savers flee the banks.
Band-aids focus on the wounds rather than the cause
Some may think that the firestorm can be controlled by other means such as rent freezes and extending the bright-line taxation test for investor housing. But they are mistaken. Such measures focus on outcomes rather than cause.
Rent freezes are extremely bureaucratic and can lead to multiple unintended consequence. It takes one back to the Muldoon days of wage and price freezes. These measures can douse a few flames but the flames soon return. This is because the fundamental issues lie elsewhere.
Increasing the bright-line period for capital gain taxation may also slow things down a little, but as long as savers have nowhere else to put their money, then the effects will be limited.
If bright-line is to be extended then it needs to exclude newbuilds. Quite clearly, there is a need for newbuilds to continue.
Increasing loan to value requirements will surely have some effect. However, the likelihood is that it will affect first home buyers more than investors. The Reserve Bank could limit new restrictions to investors, but that would imply that the Reserve Bank was acting in a social context rather than a financial stability context. And that is on not how the Reserve Bank Governor thinks.
The Reserve Bank Governor has now asked for debt-to-income tools to be made available to him. That tool, if granted, is likely to constrain first-home owners much more than investors.
There are no painless solutions to self-created problems
If the Reserve Bank really wants to control the so-called ‘first class problem’, then it has to rein back severely on its quantitative easing (QE) programmes. Reining back on QE means less digital money creation and thereby leaving more Treasury bonds out in the market place. At that point interest rates will stabilise and in high likelihood start to drift upwards again. Some savers may then begin to think that their bank deposits have some safety.
Of course, higher interest rates will be very unpopular for those who now have big mortgages. That illustrates that there are no painless solutions. Accordingly, our politicians have good reason to be cautious of declining house prices. However, the immediate aim is not to drop house prices. It is simply to put out the current inflationary fire.
Quite simply, the longer the fireball continues, the greater the long-term pain must be. And the more that any notion of a team of five million can only be an irony.
Interest rates cannot be changed in isolation
If the Reserve Bank steps back from QE but does nothing else then there may well be some damaging effects. In particular, there will be an inward flow of speculative funds from overseas and the exchange rate will rise. That will have to be addressed.
This illustrates how over the last thirty years New Zealand has become closely integrated within the American and European international financial system. Arguably, that has worked well, and has helped create financial responsibility here in New Zealand. But these are now very different times. It is a strange world where our physical economy aligns primarily with the East but our financial systems align with the West.
One ready tool the Reserve Bank does have to sit alongside the reining in of the QE system is to require New Zealand banks to place increasing reliance on NZ-resident funds. That is simple; it is just the stroke of a regulatory pen.
Nothing will change without a change in the Reserve Bank inflation mandate
The current actions of the Reserve Bank all stem from the specific mandate that requires them to keep consumer price inflation between one percent and three percent, and with a long-term aim of two percent. This target is a consequence of a deep-seated belief within mainstream economics that inflation of this level is necessary to somehow stimulate productive investment.
An alternative perspective is that these mainstream economists have got confused between cause and effect. Even then, the relationship belongs to another time.
I have previously argued that reducing the inflation target by one percent, so as to lie within a range of zero to two percent would have a transformational effect. That is where the target used to sit twenty years ago.
It would immediately mean that the New Zealand consumer inflation rate was within target and therefore QE could be reined in. To the extent that economic stimulus is still required, it would also place the emphasis firmly back on fiscal policy. But most importantly, it would be the first step to prevent saving behaviours being a mug’s game. And that would take a lot of heat out of the housing market.
A New Year’s wish directed at Grant Robertson
I hope that Grant Robertson will spend the summer break reflecting deeply on the long-term impact of the current Reserve Bank mandate.
The consequence of that mandate is that pathways for young people without parental financial support to become part of a property-owning team of five million have largely disappeared. Accordingly, major social inequalities are being further institutionalised. For a Labour Government, this must be a real irony. Grant Robertson is the only person who can change that.
*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at kbwoodford@gmail.com
128 Comments
20 years. HC.
The locking in low productivity seems to be Helen's work. While she always said increase productivity, the actions were to trap people in low wage work.
2005:
The big new investment coming out of last year's Budget and projecting forward is in the Working For Families Package, at an annual cost of $1.1 billion when fully implemented.
From 1 April this year, 300,000 low and modest income families with dependent children will get significant boosts to their incomes, - and that comes on top of increases in support for childcare and accommodation costs which began last October.
2006: 30,000 families added.
2005
https://www.nzherald.co.nz/nz/emhelen-clarkem-moving-towards-a-better-n…
2006
https://www.nzherald.co.nz/nz/emhelen-clarkem-we-need-higher-productivi…
Her nine years look like they really messed up the thinking, created dependencies - employee & employer.
2002-30 - the Welcome Home Loan. They were intended to even the playing field for FHB, but were wildly badly thought out (quelle surprise). The sums thus made available far exceeded the price of grotty 'Needs TLC' first homes. It was $100K in Christchurch - twice the market price of said shacks.
So the main effect of the loans, rather than assisting FHB's, was to send a Universal Price Signal to sellers. Overnight, in Christchurch, every single sale price had a 1 in front. The loan values became a price floor for every and all sale thereafter.... In Auckland the figure was circa $350K IIRC.
And the secondary effect was that, as the price floor locked yet more FHB's out of the market, the WH loan figure was .....Increased. Another, higher minimum house price ensued, FHB's locked out as before. Wash, rinse and repeat seems to be all that Gubmints seem capable of....
TTP,
Well, a new year hasn't given you any sense of perspective has it? For you, me and a good many others, the asset bubble is making us significantly wealthier-at least on paper. I saw my net worth increase by some 20% over the year. But what about those on the other side of this equation? Too many of those aspiring to get a foot on the property ladder-just somewhere to live not as an investment-are watching prices accelerate out of range, while further down the financial scale, foodbanks are struggling to cope. I saw this at first hand over Xmas as i helped my wife's church deliver food parcels.
yes, NZ is a lucky country, but not for everyone and sadly, the economic divide is growing ever wider.
Interesting views. I always assumed that this was due to the decline in per capita productivity measures, that's the root cause of why we are in a deflationary holding pattern. Why should we reasonably expect better quality of lives and standard of living if we are unwilling to change and invest? We need to give ourselves the tools to be a more productive society be that motorways, railways, affordable housing, education, low cost energy etc.
"In the long run, [productivity] is almost everything." - Paul Krugman.
Agreed. What 'should' be happening is that low cost of debt should lead to a boom in house building, infrastructure construction and business investment i.e. monetary policy should be connected to the real economy. But it is not. It is leading to asset price booms. I think it is a bit simplistic to blame the problem on monetary policy when we should be looking at why the overall policy framework of the country is not working to provide equitable opportunities like it has in previous generations. For instance. NZ has very low per capita infrastructure spending. Amazing considering our high population/immigration growth numbers. Government could change that - they should use the low cost of debt to make productive infrastructure investments. The government is not building as many houses for low income earners like they did in the past - we could change that. The country has a lot of planning regulatory barriers to build - we could change that. We do stupid things like allow local authorities to tax buildings and improvements through its rating system - we could change that. And so on.
Yes I agree. But both left and right governments like high immigration. For GDP reasons as far as I can see.
Businesses love all the cheap/free labour. No need to train staff, pay high wages or anything. Treat them like crap and then fire them and get new staff. Easy.
The lefty softies love all the multiculturalism. Auckland's already an ultra-diverse city. So that can't really be 'improved upon' by more immigration, but you know, hugs and kisses.
I have no issue with multi-culturalism, my own grandchildren have benefited hugely from a couple who brought a culture of circus with them, set up a school and are inundated with kids busting a gut to bust an arm doing all sorts of amazing things, but I do have an issue with mass immigration. Mass immigration means hordes of adults needing housing then and there as opposed to a bit of baby boom, which you can project will be needing "x" numbers of houses in a couple of decades.
It will come as no surprise that I am left leaning
Sure, why not? Move to interest only repayment terms and effectively your just renting your house off the banks who, in turn, are financed by RBNZ either indirectly through ZIRP or directly through FLP.
Eventually this becomes a problem because assets on reserve bank balance sheets have a deflationary effect.
Right... 2mil.. 7 years from now?
You need to provide a time frame otherwise ur comment is meaningless.
You also need to comment on whether wages are also going to double in this time period. Or are you suggesting kiwi households to double thier debt instead. Again without this your comment is just noise.
People like to view nz in isolation. But this is a debt bubble & it's global, happening in many places around the globe.
There is 1x driver for this out of control inflation. Credit growth. Thats it. No lowering interest rates, no more house price growth.
https://www.forbes.com/sites/investor/2020/06/26/inflation-baked-in-as-…
All good. Nothing to see here. 2mil houses! Yay I'm rich!!?
Yvil
I recall a front page Sunday Times article in the late 1970s incredulous at villas in Devonport going for $100,000. What are they worth today $2m plus? At the time it would have been inconceivable that they would ever top $1m one day.
So yes, it’s hard to get ones mind around what future prices could be in the long term. While families are together for Christmas, it would be well worth asking grandparents what their first house cost them.
The reality is that property market is volatile - and as you will have also experienced - it can fall in the short to medium term. However, the long term has shown steady growth but with periods of both decline and rapid growth.
Although volatile, I see statements such as “seven year property cycles” or “houses double in price every ten years” as simplistic and naive.
My outlook is that while we have had two decades of very strong growth we could now be entering an extended period of more modest growth due to the influence of affordability issues. However, I also see RBNZ endeavouring to take action to avoid a significant bubble burst for economic stability reasons.
These two past decades (from memory I recall that the period of highest annual growth was in the first decade and not this most recent one) will go down in economic folk lore. In the future we are likely to not see property price increases dominate BBQ discussions as they have been currently doing - or at least for some time.
Yvil... but the pertinent thing to remember is that it is almost impossible for house prices to go past 12 or 13 times annual household income. So yes houses may at some stage be $10M but average household income will have to be at least $800K PA. It is all relative.
Funny how the cause of housing inflation according to a agricultural scientist is all monetary stimulus and not at all about fixed supply. Even though the scientist is from Christchurch which in the last decade saw a demand shock from the 2010/11 earthquakes which showed the initial effect was increased prices and rents and when the supply response kicked in then prices and rents stabalised. Also nothing about the government/reserve bank signals that housing is a one-way bet - prices can rise but not fall - which is fueling capital gain expectations in the housing market.
Also house prices and rents are only going up more in supply constrained locations (not so much places like the West Coast, Southland or Auckland CBD with its lack of overseas students and tourists) and if the problem is an out of control fiat currency (presumably meaning Zimbabwe or Weimar Germany) then why aren't all goods and services experiencing hyper-inflation. And even in asset classes it is quite specific - why aren't farm prices inflating for instance. Have Canterbury diary farmland on a per hectare basis inflated 20% since May?
The long-term aspect started thirty years ago which means it is a present-day problem that allows the likes of monetary supply policies to have the effect they are having.
Without the lack of supply issue, then these other 'accelerants would have little to no effect.
Houses are the fuel.
Lack of supply/restrictions is the ignition to price rises above inflation.
Monetary policy etc. are accelerants.
Accelerants don't work if the fuel has not been ignited first.
However accepting the fuel has been ignited and burning for some time to become the fire shit storm it has, in trying to put it out, the first thing you stop doing is dosing it in accelerants, and look for a short term method to create a fire break or back burn.
Maybe we should hand over monetary control to the fire service and arrest the pollies as arsonists?
Exactly Dale. Fires require a fuel source, heat (ignition) and oxygen. Fires have multiple causes and there are multiple means to attack fires - from attacking the fuel source (fire breaks), removing the heat (dousing with water), suppressing the oxygen ( foam fire extinguishers).
NZ's Housing Crisis is a similar problem - it has multiple causes and multiple solutions. some better than others, but a range of demand and supply remedies is probably required.
No one is saying that cheap credit doesn't stimulate house prices or removing credit will have the opposite effect. But if it is the only solution used - what will the cost be?
Sometimes the side effects of a cure is worse than the illness itself.
Dale,
Monetary inflation always has an impact on land values.
Land has the very unique quality of being a finite , fixed supply.
Layered on that are the laws and regulations that determine the allowed utility of any land.
The utility value of that land is a function of demand, which itself ,in regards to monetary values , is a function of money + credit.
I have a nz book that shows a land price index of 100 in 1950 and in 1975 it was 1500 ( book was written in 1978).
Just my view..
Land is not that unique in being fixed. The resource that is most immediately important to us, Air, is also fixed, BUT of course, if it is free available in the context of when we need it, it has no cost to us.
Therefore in the context of land in NZ, it is available enough in real terms to be not fixed in supply relative to demand, but because of nominal man-made restrictions, it is limited.
In jurisdictions with fewer land restrictions, monetary policy does not destabilize the price of housing with the house price being approx. 3x median income and stable over time.
Also where land value has risen, this might not have anything to do with any underlying restriction, but from merely adding value-added amenity costs.
Get ur head around that Brendon.
Without monetary inflation , for any sector to go up in price , another sector would have to go down in price.
The nature of monetary inflation is like a rising tide that lifts everything that is in demand.
There are no rules as to how monetary inflation manifests in an economy... ( In Nz, it shows up mostly in house prices. Collectable cars are another mkt that is booming. Maybe farm prices will go up as well?? )
Throw on top of that the issues that u articulate and also throw in the rotation of investors out of term deposits and into real estate.
I tend to agree with Keith, that unless Rbnz changes course, we will have an ongoing crack up boom... That will end badly.
Rbnz has seriously misjudged the impacts of their actions. ( To me, it looks like they responded to covid 19 as if it was a financial crisis, like the GFC, which it was not . Ie there was no private sector credit contraction that threatened financial stability )
Roelof I think the RBNZ made a mistake removing LVR restrictions - especially on property investors. But I do not think they were wrong to reduce interest rates in response to a 1 in 100 year global pandemic event. I am though disappointed when the RBNZ feared a housing market downturn (including construction) they acted in days/weeks to remove lending restrictions but now the market is going the other way it is taking them 6 months to reinstate them. I think the RBNZ actions alongside the PM public statements have created the impression NZ authorities will protect house prices from falling but not rising. I think this has added to the investing public belief that housing is a one-way bet. This further fuels the public's house price increase expectations. Regarding inflation - expectations is always a big part of the problem and removing inflationary expectations is a big part of the solution.
Government's penchant is for attention-grabbing matters which spruces up one's global image. So a matter as distant as climate change is viewed serious enough to be declared an emergency. But, bread-and-butter issues that are closer home and more immediate eg house price inflation raging out of control???? Mum's the word. RBNZ & government passing the buck back & forth.
The BEST article of 2020!!! Congratulations Keith for your outstanding piece, which clearly but simply and eloquently lays the blame for surging house prices on interest rates. As you say, all the other factors/solutions are "band aids" and in the end trivial. As you conclude, the ONLY way to stop house price inflation is for Robertson to change the RBNZ's mandate so it will stop doing its best to further reduce interest rates. Is this likely to happen ? I for one, think not
Yep agree. My hope is that next year Covid is no longer an issue, tourism etc returns, we have a labour supply shortage that creates inflation, and the RBNZ has to hike interest rates.
Unless we get some inflation soon I really think they will continue on this pointless path forever. The rest of us have worked out that low interest rates do not create inflation, but until someone writes a book about it the RBNZ is still in the dark.
As soon as tourism, student education and mass migration resume rents are going to skyrocket.
At least with the borders closed and building going full steam we are likely to get a balance between supply and demand which will put downward pressure on rents and eventually house prices. Most investors need a tenant to pay the mortgage.
Jimbo
While agreeing with your sentiment, unfortunately I think you may have been a week or two too early in your posting. :)
Save it and repost early in the new (2021) year . . . . then your “hope for next year” re Covid and tourism returning etc may be more of a realistic hope. Unfortunately looking like same old, same old until widespread vaccination are carried out.
Anyway, keep positive and have a Happy New Year.
There is plenty of money sitting in the banking system as debt.
It's the greatest trick they have, ie convince people to pay twice as much as a property costs to produce, and then lock this 'made up' money into a legal obligation that in the increasingly likely event the property price falls, the debt obligation remains.
And if the money tap is going to be turned down, what does that turn down have to be to have the outcome they are after? The reality is they don't know, just like they didn't know their previous response would result in house prices going up so much.
They have lost control.
Except that within the modern banking system money and credit are indistinguishable. When a bank creates a mortgage for $100,000 it electronically creates and deposits $100,000 into the borrowers bank account. This "money" then moves from the buyers bank account to the sellers in settlement of the house purchase.
Assuming the seller has a NZ bank account the $100,000 remains in the NZ banking system. The only way this "money" can leave the banking system is if it's transferred to an overseas account, either directly or by proxy by importing goods or services. As a result as credit grows so do bank deposits.
The problem we have here is that all this credit creation is being used to bid up asset prices, specifically houses, rather than developing productive businesses that increase our per capita gdp.
Unchecked this cycle will continue until the debt can no longer be serviced, either due to interest rate rises or an internal/external economic shock. At this point the housing ponzi will collapse and OBR will be implemented to avoid a collapse of the banking system. Who know what comes after that as we will be in uncharted waters.
There is no way in the world that interest rates, or lack of, would make a blind bit of difference unless there is a shortage of supply or a surfeit of demand.
There is no way this influx of people needing housing at a greater rate than it is being provided can have no effect.
Given house inflation now, if you can afford it, you don't even need to let it out, anyone doing that should be severely punished, that will be in the mix, but not to extent that demand is.
I would not sell my home now, it is too difficult to secure something else, there are some bloody evil people out there rorting the hell out of the situation.
Once the covid thing is over, there could be an exodus back to wherever all these people have come from, especially those who were not born here, many with, I believe, citizenships and residencies of convenience, and at the moment those are proving very convenient.
The biggest downward land and property price correction in the last 1000 years was caused by the sudden 30% drop in population as a result of the Plague. Hiking interest rates in the middle of the Global Covid Recession would have a similar mix of providing a property price correction but at a cost that no one fully aware of all its effects would voluntarily choose to incur.
And the recent election 'mandate', resulting in no effective MMP - one-Party rule - also means that whatever hot mess eventuates, there's no cover, no rug to sweep it under, no recalcitrant second or third coalition partner to blame.
Bring popcorn (after going long on its supply chain)....
Interest rates have been declining globally for much of the last 20 years. That aligns with global growth rates declining everywhere.
where is the inflation?
https://phoenixpress.com/2020/08/24/wheres-the-inflation/
Definitely more ways to slow down house price inflation and incentivise supply
-For investors: Existing houses require 70% deposit, new builds 15% deposit
- Interest tax write offs only available for new builds and limited for 10 years from purchase
- No rates relief on developable land in urban areas - similar to what Chch council is doing
- 10 year Brightline on existing houses. 2 year Brightline on new builds
Thoughts???
At face value, all suggestions (including other commentator suggestions) would seem to have merit, BUT they all overlook two immutable laws.
The first is, all savings in a system get captured and added to the value of the most restrictive part/s of the system, in housings case, this is the land followed very closely by council time and consenting delays because these also involve land.
Any savings by lower interest rates, or Govt. subsidies like Welcome Home pack etc. only serve to increase the land price and thus the total price, and because it can be leveraged they act as a multiplier which an earlier article on Interest.co.nz has covered.
To counter these restrictions one solution tried is to add a financial disincentive ie cost into the system. What this overlooks is an added cost normally ends up being added to the end price so it only costs the purchaser more.
The real solution is not to have the supply restriction in the first place, everything else only ends up exaserbating the situation.
Very few people recognise that house-price inflation does not soak up the excess money that the Reserve Bank is creating. Every time someone buys a house there also has to be a seller. Money simply flows from one bank account to another. The same principle applies with shares. It helps explain why bubbles keep growing until they pop.
The creation of bank credit is the driver of household residential property price inflation.
Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $292,645 million (59.71% of total lending) as of November 2020 - source.
But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)
We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?
Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link
It's not. House price inflation has far outpaced banking sector asset growth. The two correlate as they are intermediation assets. Bank credit growth is not the fuel.
Hence why nominal GDP is so suppressed relative to property prices, and why nominal gdp moves in line with money supply growth.
And if interest rates rise, then house prices could also drop. Except that they won't because they will find another way to fuel the, such as increasing migration again, or allowing overseas buyers in, or decreasing supply. There are all these conditions that affect house prices that can be adjusted to keep it creating wealth for anyone who owns a house, from thin air.
It's not, I have the numbers to prove it. Banking sector growth is driven by demand for property assets. Money supply growth correlates to capital gain, but is not causal. Source: myself, I work full time on this topic and have looked at that in depth, property is not driven by credit creation.
Credit creation is driven by property demand.
Property demand is not driven by a physical supply demand imbalance either - it is to a degree, but that is nowhere near the same degree that is assumed currently.
I agree, otherwise how else do investors attain additional lending through "equity leveraging"? Demand drives the price up, yet somehow when the price goes up enough investors can go "no dollars down" borrowing off the "perceived" difference between the debt and portfolio value.
Credit creation is driven by property demand.
.. the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky. Link
"Quite simply, house-price inflation is driven by citizens’ loss of confidence in fiat currency. Having money in the bank has become a mug’s game. As long as post-tax interest rates on savings are well below inflation rates, then the fireball cannot be doused. Investors have to find somewhere for their savings." Exactly this is what I said a few days ago, however money in the bank is money and its sure better than no money in the bank. Rather than just making more money, many are simply looking at diversifying and reducing their risk in the current uncertain economic times. What I have noticed is those with nothing are holding out for the great "Reset" in the hope that everyone is placed in same the financial position.
If the Reserve Bank really wants to control the so-called ‘first class problem’, then it has to rein back severely on its quantitative easing (QE) programmes. Reining back on QE means less digital money creation and thereby leaving more Treasury bonds out in the market place. At that point interest rates will stabilise and in high likelihood start to drift upwards again. Some savers may then begin to think that their bank deposits have some safety.
Large US banks just cannot get enough sovereign debt on their balance sheets.
You don’t give a damn about sorting out what might be good for PDCF, or if the cash borrower can access it. Give me Treasuries, or nothing! And in the worst cases, such as October 2008 or March 2020, give me OTR UST, or nothing!!
The PDCF in this instance is beyond worthless, even as the Fed kept thinking it was rock solid. What would it matter if Lehman could borrow from it? That solves nothing because the issue isn’t Lehman, it’s collateral systemwide – collateral that is multiplied six maybe eight times via repledging and rehypothecation.
What we’re talking about is ages-old currency elasticity, except the currency becoming inelastic isn’t cash nor bank reserves, it is collateral. Yes, currency-like collateral.
Link
What do NZ banks need most to secure a share of the $28 billion cheap FLP loan facility offered by the RBNZ?
Exactly - Repo Eligible Securities.
Who is issuing the most at this time? - the government.
Everyone take a deep breath. Lower interest rates has led to house inflation which has led to consumer confidence which has meant the terrible recession and unemployment numbers never came to fruition. As a result of increased house prices, there is currently a boom in residential construction (develops can see a margin) which means that the supply side of the equation will soon counteract the upward bias in pricing. How about we all congratulate the government (yes that's hard for me to say) and the reserve bank governor as we are currently doing very well despite what things looked like earlier this year. Furthermore, with the economy doing much better than expected, it is likely our debt won't blow out as bad as first predicted.
Home ownership rate has fallen to its lowest since the early 50s, but the major problem is ownership among younger people and how much older they are tending to be before owning, THAT is the one that will tip the scales massively in the not too distant future.
When we were young, it was quite normal for people in their twenties to be living in their own homes, it certainly isn't now
My friends sons bought first houses, under 600k, no family help. Now they are working on their homes long hours in the evenings to renovate and adding value. Hate to say but there's an ethnic divide too which is why I think the tribes have a responsibility to use their lands.
Hi Flying High, couldn't agree more. There has been a gradual decrease in the number of "Hands on" people that have an aptitude for DIY home improvements or even as I discovered recently in a new house, the ability to even fix a toilet seat. I remember some 20 years ago a guy at one place I used to visit actually did the math and worked out he was better off to quit work for a year to work on his house then to continue working and pay someone else to do it. Those people with a can do attitude and much lower initial house expectations are still the ones going to make it in the long term.
There are a lot of exemptions where a building consent is not required that allows you to make improvements to existing homes. And even if one is required for minor changes you can apply to the council for a waiver. Also a non-licenced landowner can build their own consented home if it is for personal use and they don't repeat the process regularly. The negative and fatalistic views sometimes expressed here are way off the mark.
A utopic interpretation that does not take account of the collateral damage that low interest rates unleash upon the poor majority.
In March 2017, former Treasury and Federal Reserve (Fed) official, Peter R. Fisher, delivered a speech at the Grant’s Interest Rate Observer Spring Conference entitled Undoing Extraordinary Monetary Policy.
Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.
There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?
There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.
The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.
When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.
But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.
But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.
https://www.grantspub.com/files/presentations/FISHERGRANTSREMARKS15MAR17...
The unemployment etc hasn't occurred yet. But the problem has been kicked down the road like a can. Someone ends up paying in the longrun and it is often older savers that lose their money when things go bad. Currently they are losing money due to inflation and interest rates being so poor.
Matthew the Dem.. Yeah congrats Adrian and Jacinda. I bought a house in Feb. Have lots of shares too. The house is probably worth $200K+ more in 10 months. Shares have increased hugely as well. Thank you Jacinda, Grant and Adrian for intervening in the economy to ensure my wealth is protected(and expanded). Everything you have done seems to revolve around protecting those like me who need it least while doing as much damage possible to the people who are already struggling. What a coup for you when the very ones you are hurting the most still feel you are on their side.
Spot on re: QE causing housing (and share) price growth. It is obvious to anyone with a basic understanding of how the real economy works that swapping Govt issued bonds for Govt issued cash would lead to increased investment in more speculative markets (see boom in property *and* share prices).
I would question the idea though that 'citizens' are abandoning fiat currency to spend money on houses (or bitcoin!) We just have a price inflation feedback loop with a growing number of 'citizens' with a LOT of equity, reasonable disposable income, and an investment option (houses) that you would have to be an idiot to ignore in the current low interest / high growth confidence market conditions. We then have investment fund managers who are flush with cash from selling Govt bonds back to Govt (at inflated prices) looking to put money into larger property deals and reasonably safe option shares.
I am a bit surprised there isn't some form of group setup to support first home buyers to lobby the government. It is partly first home buyers that are helping to push up prices imo , especially at the lower to mid end, due to lack of supply and the ability to pay more. Investors will generally pay less than FHBs as their decision relies on the numbers, except for those mum and dad accidental landlords who are buying today who maybe cashed up with money in the bank looking for what they perceive to be a safe investment with capital gains.
The fact is that the capital gains of a property shouldn't be making more money than the owner makes working full time in a productive job. We are creating wealth out of thin air and showing people that unless they own properties, they will miss out. This is all so wrong, especially as it involves a basic human need, which is shelter.
Which brings us back to the argument that the banks need to be reined in, and minimum deposit levels raised therefore lowering bank risk, and long term bank profits. The old adage neither a borrower nor a lender be has a certain amount of truth behind it.
After many years of living in this world, I have developed a loathing for bankers, perhaps my opinion is biased ... ?. :-)
I think ANZ is starting to see that things could be heading towards a major car crash. Fancy a bank taking the lead and imposing LVRs due to the risks they see, overriding our own central bank, who shouldn't have removed them in the first place IMO. But that was back when they saw a 15% house price fall and there was also talk of removing the foreign buyer ban. Just hope it wasn't all for show.
From the quantity theory of money: MV=PQ ie money supply x velocity = price index x real GDP. The great mystery of our times is how money supply can be continuously increasing while the velocity is continuously tanking? It seems intuitive, to me anyway, that a quiet loss in confidence manifested by purchases of gold or real estate would naturally reduce the velocity of money. The problem is that MV constitutes a huge number multiplied by a small number. When the general masses actually start losing confidence in the dollar and velocity actually starts increasing, then things will get out of control very quickly. It's not a linear system.
See my 'Welcome Home Loan' (2002-3) note above. This doubled lower-quartile house prices at a stroke of the pen. And then bled sideways into all house houses as relativity effects took hold.
Unintended consequence, for sure, but perfectly predictable from behavioural economics.....
I'm not sure what the rationale was on putting a ceiling on how much one could spend on a first home in order to get the low deposit rate of 5%? And I agree with you - the ceiling only served to boost prices at the lower end. Makes you wonder whether that was actually the intention.
This calls for a song (from 1982 no less): Diggin' Uncle Sam's Backyard (Paul Geremia)
Some people got too much
Others got nothing at all
I'd telephone the White House
But I can't afford the call
So I'm standing here and shouting it out
From right here in Uncle Sam's backyard
Thanks Keith. You have identify the true issue of why many of us ex-kiwis are forced from our motherland...that the rich and wealthy, treat property as investments to make more wealth through property.... and leaves the have-nots to struggle just to make ends meet. The brain drain and middle class drain is about to happen as Aust offers so much support and opportunity to NZs young workforce who like me, could only hope of winning lotto to get a house. NZ society has cut off the nose to spite the face.
Not to worry, eventually the expectation for "capital gains" will butt heads with "yield". Yield being what the market can afford. The investors caught in that overshoot where they have inadvertently mispriced their investment, buying at the peak and then dealing with vacancies, going "Dutch Auction" until they can secure a tenancy.
Keep an eye on such properties. A lovely property might I add, I even saw this "couple" standing 1 metre apart posing for the real estate photo congratulating them on their new "home". Keys not even in hand, and it's out for rent. Except in the past 2 weeks the asking rent has gone from $780 to $750.
https://www.trademe.co.nz/a/property/residential/rent/listing/289506025…
Check out the price history on this one;
Sold for 1% above 2019 RV in October 2019.
Flipper does a do up.
Then sells for 42% above RV four months later.
Flipper gross profit = $150K
Rent increase post reno and purchase = 45%
And the website simply adjusts the new 'market' prices (both for rental and sale) in accordance with the latest sale price.
https://homes.co.nz/address/lower-hutt/wainuiomata/55-hair-street/lj7Lx
https://www.realestate.co.nz/3916523/residential/rental/55-hair-street-…
For the rent of $580 per week to be affordable (i.e., no more than 30% of household income), that household income needs to be $100,000 pa.
https://www.calculate.co.nz/rent-affordability-calculator.php
And another good one.
This just sold this month (December 2020) - but the price paid has not yet been updated by LINZ and hence updated in the homes.co.nz system.
So, the homes.co.nz site still has the pre-sale rental estimate as: $570–$790/week
Yet it's been listed at $870/week - a 30% rise on the previous mid-point of the rent estimate.
https://homes.co.nz/address/lower-hutt/hutt-central/87-kings-crescent/p…
https://www.realestate.co.nz/3916508/residential/rental/87-kings-cresce…
Wellington needs #rentcontrolnow.
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