By Bernard Hickey
Back in 2003 the Reserve Bank missed the biggest shift in the underlying economy in recent history.
House prices took off and fueled a debt-funded spending spree that undermined our export sector and loaded more than NZ$100 billion onto our national debt.
House prices almost doubled from 2003 to 2007, enriching a generation of property owners and ensuring the generations to follow will struggle to afford houses in the big cities.
Missing that shift and failing to raise interest rates early enough and fast enough eventually forced the Reserve Bank to hike the Official Cash Rate (OCR) sharply through 2007 to cool down the economy.
In his first year in the job in 2003, Governor Alan Bollard actually cut the OCR rates three times through April, June and July from 5.75% to 5%. He then held it at 5% through late 2003 despite growing signs of the housing boom.
He justified holding the OCR at 5% because a high currency was then keeping inflation pressures under control. It was the beginning of a slide in the relative performance of the export sector that New Zealand has not managed to turn around.
Fast forward almost 10 years and Alan Bollard is again arguing he doesn't need to put up interest rates because of the high New Zealand dollar. He even went so far this week as to argue he could cut the OCR if the NZ dollar continued to rise.
But are we seeing the same mistake being made all over again? Is Alan Bollard's insistence on low rates about to fuel another housing boom?
There are some worrying early signs in recent weeks that the fizz is coming back into some parts of the market, in particular Auckland.
Earlier this week Barfoot and Thompson reported Auckland house sales volumes growing at more than 20% a year and prices rose 23% in February from a year ago in the leading indicator area of the Eastern Suburbs. The BNZ-REINZ survey of estate agents out this week also picks up on the increasingly bubbly sounds emanating from Auckland with agents reporting many more buyers than sellers and prices rising. The survey pointed to the Auckland surge leading 'the next upswing in the housing market.'
Banks are out again aggressively lending to people with deposits as low as 5%. First home buyers are raiding their KiwiSaver funds and topping them up with up to NZ$10,000 per couple in subsidies from Housing NZ. They are doing confident that the Reserve Bank is reassuring them about lower interest rates for longer.
NZ$3.251 billion worth of mortgages was approved in the three weeks to March 2 and NZ$3.206 billion was approved in the three weeks to December 16. The last time we saw that same sequence of heavy late summer, early autumn house lending was in December 2007 and March 2008, just as the housing boom was peaking.
ASB's 80%-plus lending grew NZ$667 million in the December quarter alone to 19.5% of its book. Westpac, ASB and BNZ are all aggressively lending at 95% again, so much so that ANZ's CEO warned of the potential problems of such lending here.
To top it off, Wellington Apartment owner Donald Stott and his (unnamed) bank advertised 100% finance to first home buyers this week.
"With rising values, comes the consequence of rising equity levels by property owners," Stott said. "This display of confidence by one of the country’s major banks is exactly the sort of positive indication the wider property market is looking for."
If 100% lending on apartments is not enough of a warning signal, I don't know what is.
The slightly scary thing is the Reserve Bank could do exactly what it did in late 2003 - rely on a strong currency to leave rates low, or even allow it to cut rates.
Have we learnt anything?
79 Comments
Bollard just doesn't get it. The NZ dollar is not 'really strong' at all! The US FED has made the US dollar very weak making everyone elses 'appear' strong.
Bollard knows this ( i think) . He also wishes to 'inflate' the debt away via keeping the 'real' inflation rate well above the CPI (pretend) rated inflation rate. This along with the perceived strong dollar is robbing you all every minute of every day.
Savers and exporters are getting screwed to keep the property bubble alive and well. This essentially makes Bollard and the RBNZ traitors to NZ
You are playing with words.
Bollard is correct when he says our dollar is strong against other currencies and the reasons why it is strong is due to the depreciation of UDS as you state is correct (as they print the stuff).
What exact measures would you take to weaken our Dollar? Push up the OCR which will strenghten our currency more or slash it to see our dollar weaken thus giving life to the so called property bubble?
Maybe go back to pre float days and have a centrally fixed exchange rate and controls so you need to apply to banks to get a few dollars for your trip to Aussie?
What about RBNZ limiting the amount of lending and where it is directed to like pre 1984 days? You may have your loan approved by bank but they couldn't tell you when you could uplift it as your funding is in a queue with a whole lots of others?
I can give you some stories what it was like in Banking pre 1984 and it wasn't a pretty sight.
LOL, Being called an "economist" these days is all about playing with words.
Bollard should have but ONE responsibility: Keeping inflation (real inflation) at close to near zero as possible for as long as possible during his tenure.
But unfortunately Bollard bought into a property bubble orchestrated by corrupt banking practices in the US, and now our very way out (via exporters) are paying the price! To keep lousey property hoarders and "mugs" from losing money? fore if THEY lose, so do ALL those greedy Aussie banks that loaned and borrowed ALSO way beyond their means.
So....what would I do? Screw property hoarders, thus screwing the banks and borrowers! and rightfully so. Soon enough the NZD would drop like a stone
And how will RBNZ control inflation if we have amassive devalaution in our currency?
How do we control the huge amount of imported costs (like Oil and other raw materials) as well as the inflationary impact of export reciepts?
One one hand you say RBNZ single goal is control inflation and on the other hand your suggestion wil create a huge inflationary wave (drop the currency but didn't explain how)?
Or have I missed something?
Steven,
you migth want to compare and contrast the Deflation circa 1919/1920 and the lack of QE Vs the QE in japan over the past 20 years.
Empirically, letting the deflation hit hard and fast meant hello 9 to 18 months of misery in 1919/20.
There is a dogmatic belief that deflation is bad. And that there will be decades of misery.
Show me the empirical evidence to prove it.
There are winners and losers with inflation
There are winners and losers with deflation.
They ain't necessarily the same people who win/lose. And you might want to carefully scrutinize where the dogma that deflation is baaaaaddddddd and will cause decades of misery comes from.
huh? hello Great Depression....that was a decade and it took WW2 govn spending to get out.....today the debt is far bigger.
Was 1919/20 a big credit event or a market correction? the GD certainly was a credit event and thats what we have here, today.
Deflation is bad in terms of a Nation, the unemployment that comes with it is what hurts.....I dont think in terms of individuals and who profits and who loses...Now if you kept your job during the GD you often did OK...others who didnt had a very hard time.
Have you ever heard of Peak OIL? thats when crude oil production declines...and to grow the world's GDP at 4% which is what is needed we need 2.5% more energy, every year. Except after peak oil thast a -2.5% or more likely -5%...for ever....that spells 2 or 3 decades of hardship alone, let alone the debt mountain.
Dogma, no my eyes are open.....they dont like what they see....there is nothing good overall in watching losses of 10% for 5~7 years which is how long it will take to get back to fair value on every asset we see.
regards
Money Man
There are subtler ways to control these capital flows without going back to Muldoon era controls.
They include macro-prudential controls such as LVR ratios, a tougher Core Funding Ratio and higher capital requirements for real estate lending.
And then there's plain old currency interventions.
I agree cutting the OCR to drag the currency down would simply worsen the problem.
cheers
Bernard
Really Bollard just doesn't get it ? What would you do Justice if you had his powers . Do you understand economics out side of New Zealand . Bollard and the RBNZ traitors to NZ ? Untill the Country Starts to Reduce its imports to exports we are all traitors are we not ?
My rural lender told me that the growth in Dairy conversions is starting to heat up the rural market as those who have sold to dairy are on the look out for sheep and beef properties. Crazy, crazy world of bubble chasing, he thinks that we could see 70+ conversions in Canterbury alone with associated flow on effect. Just what rural NZ needs more pressure on land and our environment form unsustainable dairy production.
Interesting thing on LVR, its apparantly one of the biggest things that varying it a bit has a big effect. So the neutral rate is about 80%...going as low as you suggest would decimate the housing market overnight....its simply way to low from what Ive read. That 80% is based on texas's "success" btw.....so there is a real world example of it being about right. So if we want to give teh RB a good tool let them set a LVR...but with an LVR at 95% you cant drop that very fast...say 1% per year at most 2%....
Tax on speculation, but whats speculation? and whats sound investment?
"Heat out of the housing market"....I dont think its there....some warm spots in Auckland, yeah OK but overall NZ looks at best breaking even.....
I think of RB as walking a tightrope while us the stupid voter pokes him in the back....we'll get what we deserve Im pretty sure as yes, I think a Big Depression is certain.
regards
The way to understand the policy decision at the RBNZ is to look through the eyes of the credit creation factories...the banks. They do fabulously well in bubbles...the more credit they can flog the better....If policies in the year 2002 had slammed a lid on the property boom...where would bank profits be today...where would average property prices be...where would household debt be.
Toss on top the fact that Kiwi have been conditioned by decades of property booms to the extent that many let the greed get the better of them...and that the political parties fully support booms and bubbles because of the fake job creation that results....is it any wonder the RBNZ took a hands off approach then...and is doing the same right now.
The RBNZ is NOT independent of the govt...and the govt is manipulated by the banks...so if you want to know the where and why for the future of the NZ economy...ask the bank bosses.
It is a 99% certainty that the current property bubble will be kept intact if not blown larger on the back of cheap credit...because the media grasp the advertising dollar...and the real estate mob grasp the fees...and the people grasp the taxfree gains....and the banks are willing sellers of the drugs.
Have we learnt anything?
clearly not. I think there is the potential for things to get very ugly in Auckland. The Reserve Bank is standing idle as another mini boom happens in Central / eastern Auckland. To me its got all the signs of a mini bubble which could come crashing back to earth as China and Aus continue to weaken
The economic fundamentals are weak in Auckland - public and private sector investment is weak / weakening - yet house prices defy gravity in central Auckland. Its all a bit surreal looking at this from Aus, where weak-ish economy equals weak-ish housing
Hopefully prices will crash 20-30% this time rather than 11%, because until they do people won't change and we'll go on extending and pretending
but the rest of NZ is stuttering....when I was in Marlborough in Jan houses at $500k there were seeing offers of $360k.....if thats typical then teh RB fixing Auckalnd will badly imapct the rests of NZ.
Crash of 50% to 75% seems probable to me....then its back tot he 3 to 1 ratio.........that will cause a lot of misery.
regards
Dear Bernard,
In this article you put a lot of cause onto Dr Bollard for a housing bubble. I feel the case for this is lacking, there are several missing steps to implicate him (or the reserve bank) in this present or future housing bubbles.
http://www.rbnz.govt.nz/keygraphs/Fig7.html
First looking at this graph what we can observe is yes, the reserve bank did cut the OCR three times during 2003. What we also observe is the 90-day bill rate fell first. In fact it always moves first in either direction. Its a bit unclear why the reserve bank is so attached to the 90-day rate but it is.
http://www.rbnz.govt.nz/keygraphs/Fig5.html
What we also observe is the effect of the OCR being raised, The OCR was raised strongly in 2004, the implication being this should have caused the housing bubble to stall or even begin to deflate. I suggest you try to correlate the inflection points in the house hold debt graph with the OCR changes. Hard isn't it. What effect then does the OCR have? Of course this is the other side of a GDP transformation, but anyway.
I think there is a pretty obvious case to be made that the Reserve Bank does not have the power to stop housing bubbles. Certainly not through the OCR alone. I don't see another housing bubble forming either at present as the current one is just beginning to deflate.
What is the basis for your argument the the reserve bank can control housing bubbles?
I think I am beginning to find the motivations for RBNZ OCR policy,
http://utip.gov.utexas.edu/papers/CollapseofMonetarismdelivered.pdf
Mostly based around 10 & 11 in the above pdf.
''Debt is an internationally accepted way of spreading costs over future generations and ensuring the present generation doesn’t pay more than its share,'' said LGNZ principal advisor Dr Michael Reid.
Local government expenditure as a proportion of Gross Domestic Product, and local government expenditure as a proportion of public expenditure, were relatively consistent and clearly indicated that local government spending was firmly under control."
http://www.stuff.co.nz/sunday-star-times/latest-edition/6555817/Councils-borrowing-billions
Feel happy with people like Reid advising your local govt....!....well do you?
Absolute b*llocks....he's looking at infrastructure as in purchase it today....what about the infrastructure that previous generations paid for? that we got for "free" He's simply refusing to aknowledge the rolling nature of the business.
No I dont feel happy, but its typical, lets get a bod in to tell us what we want to hear...
This guy is a future carrot puller...
regards
The role of this housing bubble in making housing unfordable to first home buyers was significantly downplayed by the Productivity Commission in favour of ideological claptrap about metro urban limits. The Productivity Commission also totally ignored the effect of wage levels on housing affordability, but that might have been outside their mandate to consider.
Bernard, I say again, you are naive in accepting Bollards' failures (esp. inflation - see R/B's own online graph) as incompetence. Long ago I came to understand the vested interests at work (no, I'm no conspiracy waco). I personally warned him, in writing, in 2003 of the folly his monetary policy and several times since. He (and his minions) keep interest rates low and infation high (esp. house price inflation, as this has become the defacto reserve in the post 1972 Fiat era) to enrich the established banking oligarchs.
Ergophobia
I suspect the Reserve Bank knows bloody well what will happen if they start raising interest rates too much when our local economy is so tied up in housing. They'll try and maintain nominal prices and inflate away the debt as has been happening the last 4-5 years, I wouldn't expect any significant rises in OCR anytime soon...
That aside, other than housing I suspect the OCR has S.F.A. influence in controlling inflation - we are too susceptible to foreign credit expansion bidding up the prices of our exports.
The exchange rate is presumably high due to an influx of foreign capital. If the good Dr put interest rates up a couple of percent then new borrowing would stop tomorrow. Presumably that would stop the inflow of foreign capital as net saving (government plus private) replaced net borrowing.
Why don't they teach logic anymore?
We have learnt that houses are the safest asset class there is, corrections are minor BTFD. Our govt, banks and Reserve Banks are dedicated to a booming housing market, and upward prices is the only allowed direction. Capital growth is better then cashflow, and negative yields are irrelevant. The younger generations will surely do very well if they invest in property.
Don't forget, low interest rates are good for small business's, who rely on banks for growth. There are many other more accurate tools for targeting house prices then the OCR. The national average increase in house prices is below inflation. According to the RBNZ house prices are <10% overvalued and they are happy with that.
"The national average increase in house prices is below inflation."
Thats true approximately once in a blue moon,
http://www.rbnz.govt.nz/keygraphs/Fig1.html
http://www.rbnz.govt.nz/keygraphs/Fig4.html
Really channelling Ollie today arn't you.
It sounds counter intuitive…but if you want the economy to recover they have to raise interest rates and make money worth something. Lowering interest rates means government is trying to pick winners (i.e. homebuyers and spenders) while punishing future value seekers (i.e. savers and thriftier). The government is incentivizing poor spending habits.
I hate to sound like broken record but the kiwi dollar IS NOT appreciating against the greenback. The USD is depreciating against all currencies worldwide because the FED is exporting inflation and monetizing the US debt. So any inflation Mr. Bollard is trying to account for is manufactured as an import form overseas and NOT manufactured here in NZ. Historical the NZD is still very cheap. In fact, if the NZD was appreciating as fast as the USD was depreciating the NZD would be $1.35 NZD/USD. The NZD is just as cheap today as it was in 2000.
Troy
NZ$ is up against all currencies except the A$. Check out the Trade Weighted Index tab in this chart up 12% since November.
http://www.interest.co.nz/charts/exchange-rates/daily-exchange-rate
cheers
Bernard
I don’t use the TWI since it’s too relative. I look at what the NZD will actually buy today vs. what it would buy 10+ years ago…and the answer is the it buys even less today than 10 years ago. So it may be up 12% in relative terms but since everyone is sliding backwards we seem to be going backwards 12% slower than everyone else. In other words, in the race to the bottom we are losing.
Where you have a free, open, dynamic market in any commodity you will not get a bubble because a price rise signal will stimulate supply, thereby preserving supply demand balance and prevent any bubble. ECC101 for goodness sake. Fact is we have a very corrupt very malfunctioning market in the supply of building land and materials which just happens to suit the people who are in a position to address the problems.
It isn't just about supplying land, there needs to be infrustructure supplied as well. So in Auckland for example, if a whole lot of land is opened up in South Auckland for new houses, someone is going to have to pay several billion dollars for an extra lane to be added to the motorway to support the extra traffic. Should that be the council (big rates increases), the government ('why should I be paying for Auckland roads', etc) or the developers (who I doubt have a spare billion bucks lying around)?
And you think non-Aucklanders will be happy to fork out many billions for an upgrade to this motorway? I doubt it.
The simple fact is that if you account for the extra infrastructure that is needed to keep on expanding Auckland outwards, it far exceeds the cost of expanding upwards. The only difference is that the cost of expanding upwards is incurred by the homeowner through high land prices and building costs, where outwards is incurred by the government and council in infrastructure spending.
I know everyone wants there quarter acre section, etc - but the reality is there are lots of places in NZ that you can have one - Auckland does not need to be one of them.
I guesse the balanced view is "does receive more or less of it's fair share of the tax paid in the country?" About a third of the population live here so they will pay a fair wack of the tax. If you want to get worked up about Auckland however I suggest you consider how little it contributes to the income earned for the nation by way of exports. We are in the middle of significant shipping disruptions and the only sector claiming to be affected are the importers. Compare what sits on the wharfs arround the country. Auckland, largely imports, the rest of the country largely exports. You are right most people in Auckland would have better more affordable homes elswhere in the country, I would add that they would make a better ecconomic contribution also. Alternatively, maybe the country cannot support the size of it's population. Most of these in Auckland. The wider infrastructure (Power, Gas, Highways etc) and environmental costs would also be lower and we all might be better off.
The boom in Auckland is mainly about a lack of supply. Unless that is addressed, Auckland house prices will continue to increase.
- RBNZ could introduce an LVR - but all that will do is prevent first home buyers from having a chance in the market. Prices probably won't fall in Auckland because there is enough demand even without the first home buyers. I doubt first home buyers are buying in the Eastern Suburbs!
- RBNZ could increase the OCR - but that just means existing mortgage holders will have less cash and the economy will slow down.
Anyway, aren't house prices going to go down 15% from peak? Not sure what you are worried about?
I can't really remember what the exchange rate was in 2003, but I doubt it was anywhere near $0.82 US. The current rate of inflation is easily within Bollards 2-3% target range, so what's the problem?
Strengthen the core funding ratios ....draft a proposal for a short term speculative Tobin Tax of say 0.0037% in a revised format .
Full disclosure on the level of carry trade month to month...
if you have never read this ...please do..! ...skip to page seven if your not Iain Parker and you have a short term bore threshold....it will help .
Maybe forward a copy to Allan....maybe not.
http://www.princeton.edu/~hsshin/www/carry.pdf
All that said ...don't think the P.M. is gonna let anyone interfere with the pick n go market..let alone the beautiful biosphere our Bankers are living in.
I bought my first house in 1971 for $21,000.00. I sold it in 1981 for $48,000.00 when I moved to Australia where I bought a house for AUD$86,000.00. I sold that house in 1983 for AUD$106,000.00 when I moved back to New Zealand. I bought a house in 1983 in New Zealand for $105,000,00 and sold that in 1989 for $180,000.00 when I bought a house, which was only half built, for $150,000 and spent approximately $100,000 doing it up. I sold that house in 2001 for $375,000.00. It is now, according to its GV worth $650,000.00. (my current home, where I, hopefully, will stay untill I die, and which I bought in 1995 is now double what I paid for it.) Now if you extrapolate out to 2071, a hundred years from when I bought my first home then a first home buyer in 2070 would have to pay near enough to $160,000,000.00 for their first home! Apart from Australia all my homes have been in the same area of Christchurch and are of a similiar design. How their values have changed to that extent heaven only knows. But I do know that it will all end in tears.
My first house in Wellington at Rangoon Height (Khandallah), i bought it at 7 times my annually salary then. Today with it's current GV (roughly what it will be on the market), it will be 6.2 times my salary.
I take the hype with a pinch of salt. Yes house prices have moved, but so is everything else.
Your houses actually lost value in most of those transactions. Only recent ones gain value:
1971 $21,000 = 1981 $69,300 but you sold it for only $48,000
1981 $86,000 = 1983 $112,200 but you sold for only$106,000
1983 $105,000 = 1989 $188,800 but you sold for only $180,000
1989 $250,000 = 2001 $330,200 which you sold for $375,000 - a profit for first time
2001 $375,000 = 2011 $499,900 - cv $650,000
Bob: Not so. I have said it before. I'll say it again. An "investment" in property is a proxy for investing in inflation. Patricia didnt lose money at all. Her initial asset and subsequent rollovers just didnt quite keep up with inflation. For context you need to compare what her position would be had she deposited the proceeds of the sale of the first home in the bank and rented thereafter.
I never said she lost money. I said she lost value. I never said she would have done better investing in anything else. I never even said her intention was to make a profit. Patricia's point was that houses prices have escalated dramaticaly since 1971 - she can't see "How their values have changed to that extent..." leading to the conclusion that in 2071 a house will cost $160,000,000.
I was simply pointing out that in most of her examples the values haven't increased, but actually gone down.
I am very excited that you have a point to make and don't think your wrong but can't see a logical connection between your post and mine? It seems to be a jump to a completely different discussion?
No, you are missing the point. It is not about making a profit. Fewer and fewer people can afford their own home now. (I could not afford to buy my first home now if I were a first home buyer now). The price of milk is also a very good example. People with families now cannot afford to buy milk. Coke is cheaper.
Some things go up more than rate of inflation, some things go up less (or even go down). How much was a brand new TV in 1971? Or a laptop computer in 1997?
I don't think it is really any harder for first home buyers today than 30 years ago. Back then you probably needed 20% deposit and paid 20% P/A interest - now it is only 5% deposit and 5% interest.
Good luck living in a laptop, or drinking a TV. Though you can blend an ipad.
New build properties only
First time buyers only
Creates jobs and gets people out of rentals
NZ Govt?
What's the government done to slow down the housing market? nothing, they have the power to make multiple changes, but have flatly ruled out things like land tax and CGT.
The government is doing worse than, it's encouraging it, it's also knocked down hundreds of state houses and won't be replacing them.
Anyone who hasn't realised Key is too scarred to do anything that is in the slightest bit unpopular hasn't been watching very closely.
They've done something - they disallowed claiming depreciation on rentals (which is along the same lines as CGT or land tax). Result has been increased rents. Who would have thought that taxing houses to make them more expensive to make them cheaper would actually just make them more expensive?
The govt. got the approach totally wrong IMO. Ringfencing of rental losses instead of allowing them to be offset against against personal income would make a difference. Tightening and enforcing the intent rule re capital gains or revenue gains would make a difference. You only have to look at rental yields over the past decade and see that rental property investment was never based on sound cashflow/return on investment fundamentals but purely for capital gains and tax advantages. The majority of these "investors" are not providing a service and are only feeding off of peoples necessity for shelter and having a home.
Ringfencing would have exactly the same effect as removing depreciation - it increases the cost of the house to the owner. In a situation where there is a shortage of supply this cost will get passed right on to the renters - exactly as has happened with the extra depreciation cost. Why do you think rents have suddenly gone up? Clue - the extra cost of no-depreciation affects the balance sheet for the first time this tax year.
How could you still think that making housing more expensive will make it cheaper? Even BH appears to have abandoned this bizarre notion after years of promoting it.
I tried that line DC but my words are still lost in the space between Bill's earholes. He willingly twisted the market to fit his Party blather about lower paye...but now that the consequences of higher gst are showing up...he is deaf to suggestions that the govt should be doing something.
The regions are in a building sector death dive and he is blind to the event.
What would that achieve? and then that just carries on..."oh we need an exception as well" becomes the norm...........
I look at materials and conclude the mark up is obscene......way bigger than GST....
If a tool in the USA is $400US, that's $600NZ.....same tool is $1580NZ....blades $40USD, here $300NZD......I would assume that the build cost for that tool is somehwhere in the $300USD range....ditto materials...I got some wood on the weekend, I almost walked out because it was so awful....warped to buggery....I managed to find 3 straightish pieces, one turned out to be too wet inside so I need to let it dry....and this is typical of the lack of quality...
So the GST on a $600 tool is $90 ish....on $1600 its $240........now that would screw up the govn's tax income wouldnt it....
regards
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