By Bernard Hickey
Where's the real estate shock?
The blast waves from the Labour-Green electricity policy bombshell reverberated further out into the business and political landscapes this week.
The sense of shock and anger deepened among many in business. Business NZ and chambers of commerce protested publicly to Labour and the Greens that a return to such state control would have a chilling effect on investment and massively destroy shareholder value.
It was as if there had been a death in New Zealand's economic policy family.
For almost 30 years a generation of bureaucrats, politiciians, lobbyists, business leaders and policy wonks broadly agreed de-regulation and unfettered markets were forces for the greater good.
Parties of the centre-right and centre-left often bickered over the details and how quickly to drive this forward, but there was never any real debate about a full reversal.
The business community is now well into the second of the classic five stages of grief - first denial, then anger, followed by bargaining, then depression and finally acceptance.
The first response from share-brokers and fund managers was to deny that such a policy would actually be enacted, either because a Labour-Green government would be unelectable, or because they wouldn't do it even if they made it to government.
Now the anger is welling up as business leaders realise the policy is broadly popular with the voters who will decide the election and that National doesn't have any MMP mates left. Many muttered darkly this week about foreign investor flight, capital starvation, higher interest rates and power blackouts.
Yet interest rates have actually fallen, the New Zealand dollar has strengthened and the overall stock market has surged back to record highs since the April 18 announcement.
However, there have been real and significant drops in the share prices of Contact and Trustpower.
The share market isn't universally popular with investors, but it is very good at price discovery after news. Investors can buy and sell in reaction very quickly, easily and cheaply.
Verdicts take minutes rather than months.
The real estate market is much less liquid and harder to read in the short term.
It can take many months for a shock to go through the meat grinder of sales campaigns, auctions, settlements and be mushed up with a moveable feast of other factors such as interest rates, foreign investor demand and housing supply.
But even with that, I'm surprised we have seen so little shock and anger from real estate investors at the prospect of a Labour-Green government.
Both remain committed to a Capital Gains Tax. Both want to launch massive state house building campaigns to add new supply to an under-supplied market, particularly in Auckland.
Both are eyeing reform of the accommodation supplement, which is a massive subsidy for private landlords.
Labour and the Greens are also determined to rewrite the Reserve Bank Act to extract economic policy from its current Catch 22 situation where a high New Zealand dollar helps keep interest rates low and reassures foreign property investors they are onto a one-way bet.
The Greens and NZ First would also push for a ban on non-resident purchases of local houses, as well as for land.
The combined effect a capital gains tax, more housing supply, lower rents, less foreign investor demand, fewer rent subsidies and potentially higher mortgage interest rates would have at least a dampening effect on house prices, if not worse.
Yet there is not a whisper of this in the auction rooms and open homes around the nation, and certainly not in Auckland, where the market is in full boom mode.
How long before the denial, shock and anger we've seen this week from business leaders extends to property owners about a Labour-Green 'attack on property wealth and its chilling effects on private investment'?
Perhaps what is needed is a joint press conference and a combined policy news release, just as we saw on April 18. That is bound to come before the November 2014 elections.
-------------------------------------------------------------------
This article first appeared in the Herald on Sunday. It is used here with permission.
34 Comments
In the original NZ Herald article there is a comment from ''economist'' that suggests he/she will divest of all rental properties so creating a shortage of rentals.
He/she seems to think that wizards that they are, the current sell off by landlords following his cue, will make those properties vanish into thin air.
In reality of course the properties become available, possibly at better buyer prices than the present market is offering.
Property Investors won't divest of their properties as it will attract tax (if CGT is implemented). Most investors don't sell their properties anyway. If the CGT excluded their personal homes, then that opens a loop hole in which property can be sold as and if/when required.
Historically a Labour led government is a good thing for investors, so no issues if Labour etc do get back in.
In short, there is really no concern whatever they do, they can't really affect the property market. If they build more houses in Auckland, will that really change anything? All it will do is attract more people.
What I find interesting is the number of houses for sale in Auckland. Is there really a housing shortage? Who are the sellers? Are they all property investors? I don't think so.
There will need to be more dramatic policy put in place to bring down house prices than anything Labour etc implement.
If you really want to bring down house prices and rents, then remove any source of income. e.g. look at some of the regions that have or are becoming ghost towns. The problem is, this brings with it other issues.
Its like Business NZ and chambers of commerce advocates of market activities, don't see their "market" is changing... We see them as so one-dimensional and it reflects poorly on them and the folk they represent. (We know FF can slip up too).
These guys need think of changing with the times, then they can run the agenda.
For example, its not a question of market verus govt intevention, its continue market path with an adequate regulator and Ombudsman, Commission against Corruption, Competition Commission, etc. (even stock markets/exchamges have rules).
Problem is if they are not to change, someone else with provide the agenda and rule book.
Firstly speculators do not create a market, they buy when prices are going up removing what little supply there is and they sell when the market starts to turn down adding supply when it is not needed. So when the market desperatly needs sellers they are buying and when the market desperatly needs buyers they are selling, they are hindering the market and exagerating price swings they are in no way "creating a market".
Long term investors are always land and home banking, instead of adding supply by building new homes they invariablly are tieing up existing first time buyer properties and locking them out.
Regarding your three years comment, most property investors and home buyers are looking forward much further than three years when deciding if it's a good investment. If you expect the market to only wake up the day it all takes effect you are very much mistaken.
From the archives - a voice in the wilderness
Bernard Hickey - NZ Herald - What was the electricity industry thinking?
Did it think it could keep getting away with generating super profits from a "network monopoly" forever without a political reaction?
In the world of corporate and government relations there's a vague concept referred to as a "licence to operate". It means that large companies or departments know there's only so far you can push the public and politicians before they react by, in effect, removing that licence to operate and regulating profits lower.
http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10878726
The first response from share-brokers and fund managers was to deny that such a policy would actually be enacted, either because a Labour-Green government would be unelectable, or because they wouldn't do it even if they made it to government.
Many previously intact reputations are now shredded for eternity due to petulant outbursts.
Adam Smith established the notion that while there is a "free market" or "laissez faire", there were still 3 essential services that the "free market" will never provide and it falls to government to provide those essential services out of taxes (a) Defence (b) Health Care (c) Education
That was in the days before electricity existed, and, before it became an essential service
Generally, an industry that generates super profits will attract new entrants. Unless of course the costs of entry are prohibitive. If new entrants are not appearing then it can be deduced that entry costs are too high, and therefore a monopoly. It is a widely accepted fact that monopolies need to be regulated.
You don't see these captains of industry and the sharebroking crowd bringing new entrants to the market do you? The ones who are now complaining. Let them build these investment vehicles themselves.
Have you ever wondered why they haven't? And don't? And won't?
Well, think about it.
For the record
Adam Smith (5 June 1723 – 17 July 1790)
The world's first power station was built and designed by Sigmund Schuckert in the Bavarian town of Ettal and went into operation in 1878
The first public power station was the Edison Electric Light Station, built in London at Holborn Viaduct, which started operation in January 1882
Scarfie
Far from being too far behind we were right there! As far as I know John Chambers corresponded with Edison and its still in use today <a href="http://www.historic.org.nz/TheRegister/RegisterSearch/RegisterResults.aspx?RID=31">installed in 1892</a>, wonder what the cost per KwH is?
C'mon Bernard, take the buggers to task, give them a poke in the eye
You don't see these captains of industry and the sharebroking crowd bringing new entrants to the market do you? The ones who are now complaining. Let them build these investment vehicles themselves.
Have you ever wondered why they haven't? And don't? And won't?
Bernard:- take a moment
On Journalists and Journalism
Where angels Fear to Tread
We are the public's eyes and ears, we are their conscience. If we don't shine a light, who will?
Donald Mackay was a furniture shop owner in the NSW town of Griffith when he reported on the activities of the mafia and the grass castles which they built from their drug earnings. This stand was to cost him his life. Mackay was murdered in 1977. His body has never been found. The towns-people erected a memorial to him.
On his statue in Banna Street is the following inscription:
"All that is necessary for the triumph of good over evil is for good men to do nothing. Donald Mackay was a man who had the courage and honesty not to look the other way."
That is a straight copy - I think she meant - the triumph of evil over good - is to do nothing
For society to enjoy the benefits of a free press, then its journalists must have the courage and honesty not to look the other way.
http://www.smh.com.au/comment/where-angels-fear-to-tread-20130503-2iy8a.html
This speech was delivered by senior Herald reporter Kate McClymont at the Australian Press Freedom Dinner on Friday, hosted by the Media, Entertainment & Arts Alliance and Walkley Foundation for Journalism
"Bernard Hickey wonders why the Labour-Greens housing policies haven't been subject to the same pushback as their power policy"
Because under Labour/Green, there is no such thing as private wealth, all will be nationalised and owned by the state. Where as electricity is just another commodity to be consumed by everyone, hence the State can control the price.
My opinion is that while the markets can well and truly see how the Labour/ Green policy could effect power profits, they do not believe anything could be done about housing. I'd put this down to a combination of reasons- a general belief that you can't go wrong with property, that the New Zealand market is different to the rest of the world, that the Reserve Bank has issued ineffectual warnings often enough to give the impression of impotence, and National expressly saying that there are no effective interventions that could be made. Add in a few other beliefs like it being politically impossible to touch the accommodation supplement so it can go on forever, and you get to a state where you believe nothing can be done.
Bernards article and following comments all neglect the facts of the extraordinary privileges of the primary investment bank with the international banking license in receiving a small fortune for guaranteeing to bring 'liquidity' to the listing should it lack investor interest;
The creation of bonds is similar to the creation of stocks. Generally, a firm that wants to issue bonds will go to an investment bank for one or more of the following services:
- expertise and advise in creating the issue, including determining the yield and maturity;
- the investment bank may buy the whole issue as firm commitment underwriting, or may use a best efforts approach to sell the bonds;
- the investment bank may form a syndicate and/or a selling group to help sell the bonds to their institutional investors and to the public.
http://thismatter.com/money/bonds/primary-bond-market.htm
thus the fundamentals being so much bantered about are a sideshow to the main game.
Now lets examine how these 'underwriters' obtain their 'liquidity' to that gives them a piece of the action of every joint stock owned public exchange listed company and please give me your opinion of how this can equate to a generative step up financial service and is not just a plain old pyramid scheme;
Professor David Miles, Monetary Policy Committee, Bank of England;
"The way monetary economics and banking is taught in many – maybe most – universities is very misleading and this book helps people explain how the mechanics of the system work."
http://www.neweconomics.org/blog/entry/the-big-questions-on-money-and-banking-we-should-all-be-asking?
The reason the workings of our monetary system are taught incorrectly is that the details of how it operates in practice are too complex for students to study in a reasonable period as part of an undergraduate course. Instead they learn an oversimplified cartoon version of reality. Teaching simplified models is not necessarily a bad thing so long as the choice of simplifications are well made. It is done all the time in physics and chemistry without problem. Unfortunately the choice of simplifications made in the teaching of our monetary system have led a great many economists to some disastrously wrong conclusions about the behaviour of money.
http://www.positivemoney.org/2013/01/money-how-it-works-video/
Here's a hypothetical for you.
Imagine the generators are stand alone, seperate from transmission and retail.
Suppose the generators are all of equal size, equal generating capacity, etc, etc
They sell into a single competitive national energy market.
They're all fully privatised and listed on the NZX
Suppose 40% of their capital is owned off-shore (not that that means anything)
Now just suppose, through mis-management, or
Just before one of them is about to rollover some huge long term debt, another GFC happens
And they can't refinance, their lenders won't refinance, or they are insolvent
If they are insolvent, they can't continue trading - directors liability
They have to cease operations immediately
The other generators don't have the capacity to pick up the slack
GUESS WHAT HAPPENS:- TBTF:-?
bail out anyone?
What happens Iconoclast is: Shares have no value at all and holders lose out completely. Receiver sells it to me for one dollar. Or if there is bidding, to you for two dollars. The new owner sells electricity for a really cheap rate because they can. The market balances it all up and unit prices drop 60%. Which it should in New Zealand.
Only reason it hasnt happened already is lack of market, cosy cronyism with govt, and protected monoply.
KH, that does not happen because as I explained in my previous post the 'underwriting' of the 'markets' by the those with the international banking licenses is far from fair but rather the greatest central interventionist planning ever - its a financial free-raid and no where near fair-trade.
Scarfie
And <a href="http://www.historic.org.nz/TheRegister/RegisterSearch/RegisterResults.aspx?RID=31">this one</a> is still in use, installed in 1892, wonder what the cost per KwH is?
See you and raise ya, six years (Bullendale, 1886).
The Lure of Gold has driven many things....A distant uncle by marriage made his fortune during the Depression by diverting the Kawarua through a tunnel, and washing out the exposed beach.
He never had to work again, bought a brand-new Ford V8, which he kept on blocks in a garage because he couldn't drive......ah, the good 'ol days.
It is interesting to note some of the blinkers that your readers wear Bernard. I do agree though, excellent piece.
The issue for the country is that neither power nor real estate create any real wealth for the country. The difference is that unlike real estate Power Companies do have the potential to support companies who do create wealth by manufacturing something that can be exported.
A profit driven power company has the same value as real estate investors. None!. It only serves to undermine real industry that creates real jobs and real growth.
If the power brokers of the business community were as smart as they think they are, they'd understand this and work to keep power and real estate as cheap as possible to support their other real wealth creating ventures.
I believe the reason the market didn't react to the Labour's and/or the Greens housing policy is two-fold:
1. Their respective housing policies were not a joint annoucement. Labour and the Greens announced their housing policy separately and the polices are different (albeit with similaraties). So the annoucements' effect on the market were diluted by both in the dis-jointed timing and the varied content of the annoucements.
2. The stakeholders (buyers) in the housing market are very different from the stakeholders (investors) in the energy market. The energy market stakeholders are investors, who will generally do their homework (or at least read the full investor statement provided by Mighty River) before making a decision. And they have the very easy option of walking away should the investment not stack up.
House buyers are mainly private individuals/couples who will generally not be tooled up or even bothered to properly analyse the effects of the Labour and Greens housing policies. A lot housing buyers are blinkered. They are not motivated by normal investment parameters. They have a specific requirement to buy a house and they're not readily swayed away from that requirement.
Bernard - who are you talking about?
"The business community is now well into the second of the classic five stages of grief - first denial, then anger, followed by bargaining, then depression and finally acceptance."
'What you hear depends on who you listen to'
http://www.johnwalley.co.nz/202-what_you_hear_depends_on_who_y.aspx
"A recent article featured on Stuff.co.nz highlighted the real difference in views between NZMEA and other broader based Associations. What you hear depends on who you talk to; I only talk to manufacturers and exporters, others have to listen to memberships whose interests are skewed to the domestic economy."
And then this comment on that blog article:
"Ross - Is O'Reilly (and others) really that stupid that he can't see that this is a bad thing? That the high dollar is driving exporters out of business or New Zealand and losing jobs."
Sadly Ross on it goes with yet more protection for the status quo from those who claim to know better:
Yep Bernard, it'll surely not belong before the PI lobbies et al will be called on to deploy their WMDs - Weapons of Mass Distraction/Disinformation.
Cheers, Les.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.