January’s North & South magazine is headed “Is the Housing Market Rigged”?
The article goes into depth on the resurgent property market and whether the take-off in prices is like constructing castles of sand.
It compares New Zealand with the US and all those economies in Europe that have had property booms and an almighty bust as a result.
As we all know New Zealand has had the booms but nothing like a bust – there’s been a “gentle settling” we could say.
As a result, property prices here remain massive compared to household incomes on any international comparison.
The two questions of course are whether our property prices should or will fall (or in economics parlance, “correct”)? When in Opposition the politicians are more prone to advocate the tax loopholes on capital ownership be closed, but when in power their conviction evaporates.
One thing the North & South article – which is otherwise excellent and comprehensive – doesn’t cover is the consequence for New Zealand of our ingrained over-investment in property.
I have pointed this out before – it is a misallocation of investment on a national scale where the investment pattern is driven more by tax and finance availability than by economic or market fundamentals.
Everybody agrees that it is a major distortion.
The consequence of this investment misallocation is that the economy is not as large as it otherwise would be, incomes not as high and jobs not as bountiful. You would think then it would be a no-brainer to fix the distortion, to remove the shackles from economic growth and employment – and for that matter, the tax base of government.
Oh we could be so lucky.
Perhaps the most frustrating aspect of the North & South opinion survey is that everybody is agreed about the disease, even on the causes of the disease. But we are either too intellectually lazy or politically cowardly to fix it.
It will persist until this crisis manifests itself in a form that cannot be avoided.
An economy that continually performs below its potential either ends up generating an inflation, balance of payments, or unemployment crisis – or all three as we saw in the 1970′s. Once one or any of these get serious enough adjustment occurs for sure – even if it doesn’t involve correcting the actual cause of the distortion.
For example a general outburst in inflation will spark the Reserve Bank into action raising interest rates and crushing economic activity across the board as inflation is brought back; a balance of payments blow out will see the currency fall and produce inflation or a recession (if the Reserve Bank reacts to the inflation) and will move resources into the export and import substituting sectors, which could well be irrelevant to the fundamental distortion, and a rise in unemployment is generally met by a raft of part fixes to stimulate the demand for labour.
In summary all these policy reactions address the symptom not the cancer.
So the obvious question is why don’t we address the drivers of the property market distortion – the tax break and the preference for mortgage lending that the Reserve Bank requires the commercial banks to have?
The tax question scares the bejesus out of the politicians who are terrified their careers would be terminated by taxing the benefit property ownership confers on owner-occupiers. When in Opposition the politicians are more prone to advocate the tax loopholes on capital ownership be closed, but when in power their conviction evaporates.
So the real answer on tax then is that New Zealanders will not support a change in tax on property until the crisis gets a lot more serious than it is currently is – most people have jobs, enjoy life, so who cares?
How far away could such a cliff lie?
No idea – the overseas precedents suggest we need the equivalent of a local “Global Financial Crisis (GFC)” until any commitment would emerge.
Meanwhile we’re more than happy to see the disparity between rich and poor keep growing – another outcome from the favours conferred property owners.
And on the Reserve Bank’s preference for mortgage lending over any other form of loans? The Reserve Bank is at least talking post-GFC more about its responsibilities around prudential supervision and managing better the exposure of the banking system to sector risk.
But it still doesn’t get it – there is no acknowledgement that the systemic over-investment in property that has been with us now since financial deregulation is a direct result of its risk-weightings, that the resultant mis-allocation of investment around the economy inhibits incomes and jobs.
The Reserve Bank doesn’t care about that – unless there’s a crisis in the banking system there is no problem.
It’s a depressingly sterile central banker view on life to ignore the fact that the arbitrary numbers it imposes on risk-weightings to mortgages is distorting the economy.
Why successive Governors have not got off their butts and corrected it is a direct result of a lack of accountability for the outcomes its policy settings fosters.
So in summary N&S are on the button – they record that those in positions to make change recognise the enormity of the problem and they identify the causes.
Small beginnings I suppose. N&S adequately summarise the political and bureaucrat resistance to correcting it.
But we should be in no doubt over the ongoing damage such negligence by those in a position to do something, is imparting on the lives of all New Zealanders.
It’s inexcusable.
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Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his new blog garethsworld.com and is reprinted here with permission.
63 Comments
From the politician's point of view it's better to let a crisis "just happen" and express surprise and exclaim "no one saw it coming" or it's "the market" not our policies. A crisis of some description is inevitable again whatever is done. No party wants to pre-empt it and be blamed for "causing" it. Human nature meets political expediency.
Third parties should be positioning themselves to come to the fore with radical new policies after the crisis. Your Big Kahuna falls into that category. The MSM and the governing elites will successfully ridicule or ignore them up to that point. Most of the population also generally hate someone who is a party pooper and "told you so". Depressing, thankless hiding to nothing.
WTF - The Big Kahuna website states: "All capital should make a minimum required return, and that should be taxable—every year. No exemptions for your home".
This Satement is naivety at its best and shows a very low level of knowledge on different business types of activity. Try telling exporters for instance that they must make an annual minimum return on Capital when offshore markets have so many variables which cause price fluctuations which causes income fluctuations.
Take the items in say a dairy conversion which are currently considered Capital items and taxable, how the heck can the dairy farmer obtain a minimum required return on capital invested. Items like capital fertiliser would be required to provide a minimum return YEAH RIGHT. Or what about the purchase of say a new Tractor it is a capital item, yet both the fertiliser and tractor depreciate and have a shelf life which can't provison a return.
The Big Kahuna should be placed in a box and buried 6ft under.
Its only an idea that contributes to debate. I agree its too difficult to measure all manner of "capital". I'm sure there are plenty of options though to the current status quo and its complexity that needs legions of accountants and lawyers to assist minimisation/avoidance.
What about getting rid of all taxes and deductions apart from a FTT of 5% on every transaction in and out of an account? Very small IRD, no need for accountants or lawyers, instant low cost unavoidable collection by banks as per tax on interest. Wages get clipped 5% leaving the employers bank, and 5% entering the employees. Buy a house the buyer and seller pay 5%. An importer pays 5% on his purchases, an exporter 5% on his sales. A speculator would have to "invest" for longer than ten minutes to get a greater than 5% return to break even. Might pick up some of the estimated $10b black market too
"I have pointed this out before – it is a misallocation of investment on a national scale where the investment pattern is driven more by tax and finance availability than by economic or market fundamentals.”
Absolutely and unconditionally agree under this circumstance.
"The consequence of this investment misallocation is that the economy is not as large as it otherwise would be, incomes not as high and jobs not as bountiful."
I'm trying to figure out why the average American is not over the moon now that their property crash is behind them
MikeB: pretty simple answer to that .. the "financial engineers" and "financial wizards" have been assembling vast sums of money in collectives and hedge funds and going around vacuuming up existing homes that have been foreclosed. They are buying off the banks who are holding the paper, while the evictees are still left out in the cold. So, they, the average american, the ex-homeowners, ain't feeling so good just about now.
It will take a generation to alter 30 years of indoctrination that the best outcome for a nation's economy is the aggregation of individuals acting purely in self interest and that greed and unbridled "growth" is good. There are alternatives besides socialism and neo-liberal fundementalism.
The RBNZ has the responsibility of Financial Stability and any decrease in home values would have been seriously destabilising. We have to remember that the Government put the Depositors guarantee in place for protection which averted all kinds of negative scenarios that would have been seriously destabilising to the NZ economy.
Councils control the land supply, are responsible for the RMA process, and just about everything else in regards to housing. How Councils interpret the legislation that Governs them is varies across all regions.
Government controls the taxation system so yes taxation has implications on where the investment capital is likely to be placed. One thing that Gareth has completely missed is that majority of people who purchase a house pay for that house with taxed dollars from their income, ordinary wage and salary earners would be further disadvantaged under Gareths proposal of taxing the capital.
Gareth also fails to mention that savers are heavily penalised when interest rates are so low and then taxation is applied to any interest accrued. Savers are basically losing money and housing is seen as a safe haven to protect any savings a person may have.
Mis-allocation of investment will continue while we have such convoluted tax laws and the few collecting the taxes for the benefit of the many. Smaller Government tied to a lower percentage of GDP spending, Less Legislation, Councils restricted to basic service provisioning would be a superior place to start if you want cheaper housing.
Maybe the 'disease' is the mistrust in most investment vehicles, investment fund units, finance company deposits, shares etc in NZ, .... so by comparison direct ownership of bricks & mortar is seen as something that can't be stolen from the NZ public (other than a default by over-extension).
We can't possibly have something that the average punter can buy and it actually increase in value. No - we must have it governed by corporates & Govt so that avenue of wealth growth is prevented. It's not fair that people can own something by themselves - it goes against the whole EU/world socialism that must control every aspect of our lives
Problem is property isn't a free market. The PM has explicitly stated they don't want house prices to fall. Apart from his explicit support for Telecom/Chorus shareholders, what other market gets such open backing? Imagine him saying we don't want the sharemarket to correct - wouldn't that create a sharemarket bubble? As noted above the RB is only really interested in bank stability. As bank solvency depends so heavily on property values they also have an explict intention of keeping the property market bouyant. If a big property correction comes it will be despite the best efforts of a National/Labour govt and the RB. Hardly a level playing field in terms of investment.
Trust is an issue with some of these options but the real reason people invest in property over "investment vehicles, investment fund units, finance company deposits, shares etc " is the returns. With property you can borrow at 20 - 1 so say you have $50k a year ago and bought a house in Auckland for 1m you would now be $100k better off tax free. A 200% return! If you put your $50k into stocks and shares you could borrow, maybe, another $50k and over the last year you would have made $20k (if invested in the NZX50). The return from deposits and cash is so low it's not worth mentioning.
On the risk side that $20K you made in the stock market could very easily dissapear next year and then some. At which point you'd find yourself facing a margin call. Your Auckland house is very unlikely to drop at all, in fact under current conditions it's likely to keep going up.
If the government does successfully reduce the amount that Kiwis invest in property won't that just create a bubble elsewhere... Anyone remember the late 80s.
You've just made the main case for why the property market is rigged. Explicit government support, implicit RB support, easy access to credit and high levels of leverage, low enforcement of capital gains and speculative impulses. No other form of speculation/investment has equal advantages. Can't get much more rigged in property's favour.
If property was on a level footing with shares in terms of tax and ease of credit and was allowed to rise and fall without support, would it be as popular? If property corrected 50% like the NZX50 in 1987/88 wouldn't a whole generation swear off property as a speculative vehicle?
What if we removed all taxes and just had a single "land tax" with no exceptions and no tax deductions.
All councils could move from a property tax to a land tax and collect all the taxes. Each council could pay a set percentage of those taxes collected and give it to the government. The government could then shut down the IRD.
Maori, it seems would like to run their own affairs, and so they could collect the taxes from all Maori owned land, and from land owned by all Maori. They could then run their own government, schools, hospitals, welfare and so on from their own taxes. However, Maori would first need to have their own referendum as this would have to be binding on all Maori. The referendum would have to be a choice between
a) Collect their own taxes and run their own affairs
b) Be part of the rest of New Zealand and be treated the same as everyone else, and of course that would mean ending the Treaty of Waitangi.
Just a thought
Gareth you are being manipulative. We all see the problem with housing and the politicians are too cowardly to do something about it. But the solution is not to cut back on property lending but to ease the restrictions on residential land supply. That is what the Productivity Commission found.
Gareth solution would have all sorts of unintended consequences such as Christchurch not being rebuilt because the banks were restricted on how much to lend for housing.
Brendon - that's bollocks. The Productivity Commission - like Gareth - fails to step back and take in the big picture. Some of their report made sense - the 'land supply' bit was pure bollocks.
And the big picture is:
Economic growth is based on consumption, and most folk are spatially-confined to consuming in/via their homes.
Consumption is 'of resources'. They - and this includes land - are either finite, or constrained in rate-of -supply, mostly the former.
Those resources are procured/produced/proffered by the doing of work, which means by the using of energy.
So both Gareth and the Productivity Commission should have ascertained the energy underwrite, before blabbing. In that, they're in significant company - the CSA did a study into 'child poverty', without reference to that which brings the bits of planet to the kids - after all 'wealth' is just the ability to buy bits of the planet.
We have the global ability to 'build' about as much infrastructure as we have already; but that would assume no maintenance on an ever-aging existing portfolio, and would anticipate zero activity thereafter. Note that even doing that, you'd only get one 'doubling' from here.
Pick your % rate, and you have an end-date. Won't happen, though. A growth-based system won't survive the last 'doubling-time - given that it's actually a 'last-half' equalling'time', based on the dregs of resource-supply.
We all see the problem? please dont use "all" as I dont agree with you at all. btw if so why do we wait for the Govn to fix it? What you state here allowing land to be freed is your solution, certainly not my one....In the US they have far more freedom to build, yet had a huge bubble which has now partially collapsed causeing mayhem...
regards
This opinion about housing is by a man who, when the Reserve Bank Act was introduced in 1989, said there was no reason to buy houses for investment because the Act would stop inflation and so too rising house prices.
Since 1989, houses have increased in value by what...four times on average across New Zealand? Something like that.
Gareth Morgan knows as much about housing markets as he does about football.
The problem is that Property has only been the only investment for Kiwi's. If house prices continue to rise, then we can expect G Wheeler to step in and raise rates by the middle of the year to prevent an all out bubble becoming too hot regardless of how well the economy is doing. The boat will be needed to be steered in another direction, this is so that later on NZ can have a soft landing in house prices rather than a hard landing. If we look 5 years from now rates could be substantially higher with all that excess money printing and if borrowing costs in the USA go up for being downgraded then the rest of the world rates will go up. NZ and Australian rates could go up faster than we think. At least for the next few years rates will be relatively low but after this rates could get more painful for borrowers. best to reduce pain with a quarter percent rise in the middle of the year to tame price gains. Then we can expect everyone to run to the door to fix rates causing banks to find it harder to get cheaper cash.
That's the problem though. Housing gets preferential treatment. Why should the RB and politicians engineer a soft landing for property but be hands off on everything else? It's only because they have let so many people borrow so much money against property that they feel the property market is too big to fail. Classic moral hazard.
WTF - in case it has escaped your attention everyone needs a roof over their head. A classic moral hazzard would be to have tent cities where the poor and destitute have to live because the banks failed and people lost that roof over their head.
I dislike interference in any market and the system is far from perfect but you can't whip the rug out and create market failure to correct the problems as this will place many many people into poverty and no one is a winner if that happens.
The houses wouldn't disappear. The banks would and many properties might get new owners at lower prices. Maintaining or exacerbating a situation because to correct it is unpalatable only makes a bad scenario worse. The US housing bubble blew so large because the Fed tried so desperately to ease the pain of the tech crash. Every time there looks like being a recession, reserve banks everywhere try to encourage people to borrow more just to maintain economic activity. At what point is debt saturation reached and the whole thing collapses?
WTF - you might like to consider the effects that would have happened if we had had bank failure. All mortgage owners would have had been called up to pay their debts. Depositors would have lost their savings. Business failure would be extremely high as few people would have resources to buy anything, unemployment would be horrendous and many people would be saying hello to their foreign based landlord.
The biggest problem NZ faces at present is actually Government debt which will undermine NZ business. The Government has to find ways to cut its expenses as NZ business can't keep funding the ever ending increased costs. You have to allow business to get on with its job of creating employment. Government keeps picking up the tab for increasing Social costs and business is struggling to fund this expenditure. Government debt is the one we all need to keep a close eye on as it is this debt saturation point which causes a collapse.
I think people should be looking at those Politicians who were in power and created all the rules and legislation that led us to this point in time for they are the individuals who created the situation. I would also be looking at every Civil servant who has been advising Politiicians as they have failed also.
So, in your world, we should forever pay more money to the foreign banks so that the market never goes down - that is long-term poverty.
A thought experiment for you: If everyone spent half as much on their mortgage as they do now, what would they do with the extra income (assuming you cannot put it back into more housing). Either spend on goods and services (restaurants, holidays, boats, cars, clothes) or invest in an asset that provides a return (businesses, plant etc). Both of these will provide more jobs, increase wages and increase standards of living.
Kiwimm - In my view it would have been better to not have had the Labour Government coalition during the 2000's who directly allowed this housing event to happen.
I wrote about increased housing vlaues in The Trans-Tasman Comparisons Magazine early in the early 2000's when property values started to lift and the housing debt that was increasing. I was very disillusioned when Helen Clark said something along the lines of.... all NZ'ers were better off as they were worth more because their houses were worth more.
The Labour led Government did nothing to alleviate the restrictions on land supply.
Roll forward to the GFC and a change in Government and the real mess unravelled. If land and housing prices had fallen over believe me there would have been enormous issues of povert that would have had long-term impacts.
In regards to your thought experiment that you suggest I undertake - spending half as much on mortgage servicing could only occur if the house prices hadn't escalated during the 2000's. None of us can change the rise in house prices or debt after the event has happened. If people had started in large numbers defaulting on their mortgages believe me our Country would not be looking the same as it is today. We would have far higher numbers relying on welfare for a start off. The business sector would have been under enormous pressure with many closing their doors for trading and many ending up on welfare as well. Government revenue would have shrunk so much that severe austerity measures would have had to take place.
When large numbers of small to medium sized business's fail many people are placed into poverty. If property values had dropped, less money would have been available to spend and less business's would have been employing people. If people want job security in NZ they need to start ensuring that business is doing well and that Government behaves in a responsible manner towards business and that will in return raise the living standards of everyone.
By artificially inflating the property market and letting the boom continue, the successive governments will create greater poverty than a one-off correction. We have had 10 years now of overinflated prices. That's 10 years of lost productivity. The longer this is kept going, the bigger and harder the fall will be. The conditions you mention above will be multiplied. Instead of a 1980s style crash that righted itself in about 5 years, we may have a 1930s style crash that affects us for decades.
I agree with Steven that deflation is the most likely outcome. Our current activies are stealing inflation from the future thus reducing our ability to recover.
Kiwimm - The evidence is pouring fourth that the property market was rigged.
If we have a hard landing what is to stop those who bought houses and are affected by the hard landing from taking legal action against the Government, RB and Councils or any other Government organisation that may have played a role?
Tax and Ratepayers would be hit in the pocket again if the Courts ever ruled in favour of affected parties. A hard landing will have many ramifications that most people haven't even thought about.
Government, Reserve Bank and Councils along with many other Government Organisations all own property. These organisations have all received enormous benefits from the property increasing in value. Were any of these groups manipulating for the advantage of the assets they were managing?
I don't like the BS that appears to have gone on. But if the markets have been rigged then that could suggest that documents have been used for say something like pecuniary advantage or other criminal type activity. Opening this kind of can of worms could make the Treaty Settlements seem like petty cash payments to the tax and ratepayers. It doesn't matter what happens soft or hard landing either way the people pay for the mistakes of those in charge.
All Governments and Bureaucratic Agencies need to keep out of normal business activity as they cause issues such as the housing problem. You simply can't have these organisations writing legislation and policy that can directly affect the assets they are looking after as it is open to mischevious undertakings. You cannot apply private enterprise business skills of growing assets to a public entity.
Given that tax cuts for the rich that National seem to proclaim is the solution always, no actually it probably would have been worse. What we would have seen is the excess money poured into housing while lower income earners with less money to spend would have seen us contract in othr sctors...something similar to what we are seeing now.
Now yes Labour were and are in-competent. No leadership ie too frightened to take steps to control the stupidity due to potential vote loss....but really to suggest Natioanl would have been better is farciacl.
regards
Steven - you appear unable to grasp the effects of taxes on the economy !
I have to remind you that middle and low income earners are the majority and they swing election results in every electorate. Low and middle income earners are also in the main not in business and therefore do not share in any of the statutory compliance that is required of any business. In fact many of these people are completely blind to what the effects of policy will have on business.
Business is the backbone of the country, without it there is no way to fund the Government and its spending.
Redistribution of wealth is a complete and utter failure and simply doesn't work in raising the wealth of those who are the recipients of that wealth. Improved living standards is not real wealth if the person with the improved living standard has not generated and secured his/her own financial future with handouts.
You obviosuly see income tax cuts for the rich (as you put it) as not being a good thing. Well first of all, How did the rich get rich? Can they generate more wealth? Will they spend and generate employment? Most wealthy people get wealthy because they take risks. NZ needs these wealthy risk takers and their expertise and business experience more than ever. So yes National was correct to cut income taxes. Its just a shame they didn't cut them right out.
No, I am unable to grasp your belief on the effect of taxes on the economy, of much else of your fantasy.
From what I can see busnesses or specificially NZ owned and operated businesses are like PAYE and pay the rump of taxes.
How etc is well commented on...you are not interested in listening / reading anything that doesnt agree with your view anyway.
regards
Steven - he makes the prima facie mistake of thinking of 'the economy'.
The reality is that 'wealth' is the ability to but 'bits of the planet'. Off the supermarked shelf, as a car, house, appliance, toy. His reduced ability to buy 'bits of the planet' is curtailed by increasing population, resource depletion, available-net-energy supplies.
If they were not factors, there would be unlimited opportunity to all become infinitely wealthy, while paying infinitely exorbitant taxes. In short, he's blaming the deck-chair attendant for the fact that they're sliding. Wrong target - wrong mind-set.
PDk - One doesn't have to buy "bits of the planet" to be wealthy ! This might be your mind-set of wealth and this is where you are gravely mistaken.
Investors can expose themselves to bits of the planet without having direct ownership and the market to do this is enormous.
If you think wealth is the ability to purchase consumables then you are seriously mistaken. An investment (real wealth) gives a return which then allows you to buy some of the consumables that you talk about. We exchange time for earnings regardless of whether we are an employee or an employer and this will never change.
Many people get possessed with ownership that they don't consider the return on their investment. If you're in business you know you have to make a return, the buck stops with you. If you're in Government or Council etc you don't have to perform and make it work as you have a fall back position of taxes andd rates and this is pure laziness.
In your analysis on resource depletion have you ever considered the fact that changes in technologies change resource use?
Notane - there is your cranial problem, clear and simple.
You think that holding some kind of proxy - shares, bonds, bank deposits, cash - guarantees the ultimate ability to purchase at some point, yes?
Purchase what, and where is the guarantee that the processed resources will be in the shops?
I' don't give a rat's arse how long folk store 'wealth' in such form, nor do I care what numerical 'value' they put on it. $1, or $1,000,000,000, it's only a proxy. A hose isa house is a house, a ton of copper is a ton of copper is a ton of copper, regardless of your artificial,stored, numerical expectation. If the house or the ton aren't there, your 'wealth' is worth exactly zero.
We have alreadfy seen that 'exposure without owning' - and it's not underwriteable in any meaningful way as of 2005. Possibly even as early as 1980, some would argue. That numerical debt has to either be forgiven (what will that do to understood valuse?) or has to be inflated away. There isn't the real planet-bits underwrite for all the expectation.
We have been describing it here for some time, as musical chairs.
You haven't read my posts properly - I've long pointed out that displacement of a finite resource by another, only staves off the ultimate scarcity problem. Also that trying to 'grow' the rate of activity speeds the arrival of the inevitable. Also that 'efficiencies' are capped at a theoretical 100%, in reality never get there, and are cherry-picked first.
Agreed, investing options in NZ are limited. But is this due to the distorion of historic investment. If there was money looking for good opportunities then entrepreneurs will come forward to fill those gaps. Before the new equilibrium can be found, you can invest it overseas which will cause income to flow back into NZ in perpituity (or at least until you need the capital back).
The only investment yes...safe as houses, if the the late 80s the Govn had put in place regulations to stop the crash happening again ie protect mom and pop investors (to some degree) then the market would have been somewhat more balanced.
The rest of your post places in the austrians camp ie inflationistas which I think is extremely unlikely, deflation first anyay is far more likely, almost certain in fact.
BTW Property isnt over-heating in all areas, just some, if Mr (DR?) Wheeler raises the OCR then I expect we'll see similar effects to other attempts ie rapid reversal as the economy collapses.
Inflationista have been promising inflation and rising rates for 4 years, its no where to be seen. So now the switch seems to be oh lets raise it because sometime in the future inflation might go up. Problem is the signs are at present its dropping. 0.8% CPI is pretty low...for a control system at this point you would be lowering....if nothing else its far easier to lower for safety and raise quicker if needed....
regards
Rather polarised argument here folks.
Gareth's point about the misallocation of resources is well made, as is the TBTF view of the banks (see also the IMF view in the Interest articles).
But conceiving of the problem as an either/or (Either you have high house prices and misallocation, Or low house prices and failed banks) is quite simply a mis-framing.
Banks are simply an intermediary for (as David P Goldman puts it) the fact that older folk tend to have lots of $ invested but little energy to do productive stuff with it, and younger folks tend to have energy and ideas but lack the $ backing to realise much of it.
In an InterWeb age, where it's easy to match up supply and demand, it might conceivably be possible to match up old $ with young energy in ways other than yer local branch of the TBTF Banksta.
Just sayin'....
If only they were just intermediaries between savers and borrowers. That would require 100% reserve banking and assets would have to fall to zero to wipe out a bank. Our banks have zero reserve requirements and very low Tier One capital. Without the RB's emergency liquidity loans in 2008 and the govt guarantee of deposits they were toast.
Agree that in the current internet age borrowers and savers should be able to be matched more easily without bank involvement. The rationale for banks is that they have the expertise and prudence to properly evaluate business ideas and credit worthiness. GFC should have been the final nail in that argument. As long as you had a property banks would let you borrow against it to do anything. After all its only a book keeping entry to them.
Gareth,
GK Chesterton used the analogy of a doctor to describe the problem. People from all walks of life and every end of the spectrum can agree on what is wrong with the patient.
The problem is there is no agreement as to what state the patient needs to be returned to before we might say he is "healthy". With respect, economists as a group have propose a range of solutions so wide as to include complete opposites.
What is required is not a doctor to diagnose but a philosopher to proclaim vision. In the absence of the philosopher we will remain trapped in the curse and compromise of what is "politically possible".
Wrong Ralph. We're going to have this debate in this country this year.
We are trapped by the limits of a finite habitat, and we are a species in overshoot.
One of the biggest mass delusions of all time, has been the transfer of the mental image of the purchase (the real wealth) to the proxy. We seem to have a majority who believe that if dollars are held, the desired item can be gotten. Unfortunately, that was only a fact on the way up.
GK Chesterton: "In the heart of a plutocracy tradesmen become cunning enough to be more fastidious than their customers. They positively create difficulties so that their wealthy and weary clients may spend money and diplomacy in overcoming them".
The Queer Feet. para 3.
(NZ ?)
Key is quite remarkable in his blatant and open support for the banks via the property market and more recently his support for Chorus over broadband consumers by saying he wouldn't do anything that detrimentally affected their shareholders! If the banks and Telecom have the PM's ear and support you have to wonder what other major company does too. Think its called crony capitalism.
There is absolutely no doubt that the property market is comprehensively rigged (at practically all levels). The most fundamental laws of ecconomics tell us that in a free and open market even a small price rise will increase supply and return it to a stable equilibrium. The fact that the opposite is occuring tells us that we have a rigged market.
All political parties are implicated in this (which should be a crime) and the fact that none are attacking each other on the dishonest market manipulation reflects this. It is high time that these matters were bought out into the open, independently and comprehensively investigated. Thanks Gareth for keeping the pressure up, we need lots more.
GM is on the money when he talks about the RBNZ's risk weighting rules. As I understand it banks have to set aside less capital when lending money against property and more capital when lending money to the productive business sector. This means that a bank earns a higher return on capital for home loans than it does for business loans. These rules encourage banks to lend money to the non-productive property sector at the expense of the productive sector (businesses). Go figure??
The Bank of England is already planning along those very lines. They are jawboning the banks now. The RBNZ is like a shag on a rock when it comes to such intervention. But, then they are handcuffed by the TPA.
The Bank of England's Financial Policy Committee (FPC) (on Monday 14 Jan 12) will increase the capital which banks hold against real-estate assets, derivatives and bonds. The FPC warned British banks will be asked to hold extra capital to keep the financial system safe should they be judged they were too liberal with home loans that risk fuelling a future housing boom. Property booms and busts have been behind many of Britain's economic downturns over the past few decades. Bank of England to prevent future property booms
Andrewj, what a lucky friend - John Ward from The Slog sees a different outcome for the rest of us.
Gareth is correct, but only in the economics of property inflation.
we must not forget most people like property inflation. Owners of course the first.
Politicians like it because it goves confidence to owners and the general business community likes it because of its wealth effect. even renters would like it if they can get goverment rent subsidies. Banks like it because it strengthen their business model not to mention their business profits.
This is why property booms goes on for a long time and takes a long time to unwind.
all over the world we hear warnings of high property prices and its ill effect (this is pre GFC)
but hardly anything is done to correct the inbalance until it is too late. alan greenspan even said a bubble is good, and its only the mopping up after the burst that is bad. Ben Bernarky even said there is no bubble in housing even when it is on the verge of crashing a few month later.
The property bubble in NZ is small in camparison to that in Asia. NZ property has "only" increased by tens of percentage points while that in asia has increased by hundreds of percentage points the past decade.
But we all know that bubbles has to end, whether ifrom the bubble itself or from its ill effect on the general economy. There is really no solution to bubbles other than letting it collapse by itself. ALL goverment when faced with bubbles professes to want to deflate it "gently" but is actually reluctant to do anything to it. Reason being the first paragraph.
China is a classic example. It allowed a huge bubble to accumulate in its property and even admitted to its existence. But its attempt to deflate it caused even more unrest and unhappiness that it is unable to proceed with their attempt to deflate it. The bubble is seen to be growing again.
Singapore's housing bubble is even higher than China's in terms of income multiples.
Their attempt to deflate if is even less successful than the Chinese goverment. Prices now is even higher than when they first tried to slow price growth.
But property bubbles will collapse as all bubbles will collapse. This is basic law of economics. When things cannot be sustained it won't. Our only prayer is that it doesnt grow as large as the Japanese bubble of the 80's and collapse like the Japan's bubble. (BTW the Japanese bubble is still collapsing after 25 years)
There is a very simple reason why politicians have rigged the property market . The majority of people own a property. When the number of people not owning goes up, so will political motivation to fix the problem go up.
At present, in Auckland, 60% or less of people own. The number is in severe decline. It would be far lower without the sfatey valve of our poor young people having to move overseas to live a decent life.
In a few years in may well be 50% home ownesehip. It is then you will see the politicians magically find and quickly implement the solutions.
But by then it will be too late. We are heading for an insoluble crisis. We will have too big a debt payments to offshore banks for our shrinking incomes, which will stay low until (as Gareth Morgan says) our investment is better allocated.
Debt is a drag on the economy if the what is produced from the debt is less than the cost of interest. If debt is spent on unproductive assets, like each other's houses, it accumulates faster than incomes to pay it off.
What is the most rigged is the 'Financial Services Sector' Morgan is an able representative for that sector and should maybe direct his energy there. Vast reform is needed. 'Mums and Dads' direct their investment to housing because it is very sensible to do so - Entering the financial services sector does have an almost guarenteed outcome - you will get screwed.
Fix that for us Gareth.
The idea that aligning taxes across different classes of investments will somehow 'fix' the property market is silly at best.
There are plenty of countries that have CGT in place that have seen significant increases in property prices - so the idea that introducing a CGT will somehow fix the problem is simply wrong - there is plenty of evidence to show that a CGT may have some transitory effect but not lasting effect on investment decisions.
The fact is that New Zealanders like and prefer to own detached and largely bespoke houses - this makes hosuing more expensive in New Zealand (holding everything else equal) becuase it is a small market and the economies of scale are limited - housing in NZ is largely provided by sole traders (builders etc) and not my large scale developers.
So housing in NZ is expensive becuase we prefer it that way - its a cultural preference, if you like. Council planners and mad mayors may prefer high rise and intensive housing becuase it is cheaper and more efficient, but that's not what people want. And to the extent that the housing market works, its clear than buyer preferences on the type of properties in New Zealand win out.
Don't forget that higher incomes are readily available offshore if you are prepared to live in smaller dwellings and in high rise buildings - think Hong Kong. A fair number of New Zealanders self selct that lifestlye and leave - but a far greater majority self select to stay and pay the price of expensive houses in New Zealand; for the lifestlye.
And becuase that's what people want (rightly or wrongly) that's waht the politicians serve up; we live in a demorcacy after all and one of the prices of having that freedom is that sometimes not everything about the country/economy is as efficient as you would like.
Gareth is at best being disengenuous about the Reserve Bank - the capital adequacy rules are set by a group of international rules known as Basel II, soon to be superseeded by by Basel III which govern how much capital our banks have. The banks in NZ favour housing becuase the Basel II rules make them favour it.
Now we could argue that our banks should irgnore the Basel II/III rules, but what would that mean? A massive increase in the cost of funds for the banks which would be passed onto customers via higher interest rates - so not olnly would it stuff the housing market but the productive secotr of the economy too... And that has hihgly negative implicaitons for employment and incomes - not keen on that outcome at all...
The New Zealand policy setting may not be perfect but they are also a long way from the worst of all possible worlds.
Well done Gareth
You have the "Step up" award of the year so far.
The "Step up" award is for people who are able to do something about the situation and do.
There are far to many so called leaders who do nothing about a situation they know is wrong. Maybe they are weak, or scared, or lazy, or greedy, or just not worthy of there presumed status.
So lets have some more Step up Contenders.
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