By Gareth Morgan and Susan Guthrie*
Over-investment in housing and the lending largesse that underpinned that orgy of excess led to the sub-prime crisis in the US in 2007 which in turn led to widespread recession in the developed world, a problem which remains for most countries today.
New Zealand fared relatively well in one sense through all this – output contracted and unemployment went up, but not the extent it did in other countries.
However because of our success, unlike other countries, we failed to shake the excess out of our house prices.
Partly prompted by the devastating damage caused by the earthquake in Christchurch, house prices haven’t fallen by much in New Zealand and, if recent new loan approvals are anything to go on, debt-funded investors are at it again.
The RBNZ is worried, saying last week that “housing pressures are an increasing risk to the financial system.”
They say their concerns are shared by the IMF and the OECD.
The Reserve Bank has responded by penalising banks for providing loans that are high relative to the borrowers equity – a useful measure but powerless against wealthy, equity-rich investors looking to own more than one property.
The risks are there for all to see.
Median house prices are far higher relative to median incomes than they have been for decades. A Treasury report from July last year spells it out (see the chart).
Borrowers are surviving because average monthly mortgage payments are relatively modest, and that’s because interest rates are low.
When, not if, interest rates increase this illusion that housing is ‘affordable’ will burst.
There is no magic formula to boosting income – especially when the rest of the world is in recession – so that means only one thing – house prices will adjust.
It’s an adjustment the rest of the world has had, and is overdue in New Zealand.
House prices and debt servicing relative to gross annual income
The over-investment in housing in New Zealand has been sponsored by irresponsible tax and monetary policies and it has come at a high price: diversion of capital away from deployment in industry and income and employment generation.
The policy failings have historically been twofold:
* Turning a blind eye in tax policy to the benefits owners get from housing. While rental properties and farm are taxed as a business, the capital gains they receive are not considered taxable income. Equally important, the rental equivalent of the shelter provided to owner occupiers and the capital gains they receive are not taxed either.
* A directive to banks from our Reserve Bank to favour lending on mortgage to other forms of lending – this is effected by the lower risk weightings it deems residential mortgages deserve compared to other lending types. The Reserve Bank is tweeking around the edges with this policy – through their higher capital requirements for low equity loans – but it’s not going to get very far without support from a radical rethink on taxing housing.
But the disease remains the same; we have discriminated against productive investment in favour of property speculation. That has intensified the morbid dependency on commodity sales to sustain our incomes. If those hadn’t risen we would be another Spain already.
Why would you continue to gamble on being a one-trick pony? We have an opportunity as the economy picks itself up this time, to remove the policies that discriminate in favour of housing speculation. Why wouldn’t we do that and bring affordability within reach of many more families, like it used to be?
Or should I go out and buy another three houses now and just wait for the rest of you to bid the prices up?
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Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. Susan Guthrie is an economist at the Morgan Foundation. This opinion piece was first published on his new blog garethsworld.com and is reprinted here with permission.
45 Comments
Yet Holland's house prices dropped,
"After a housing boom lasting almost 15 years, the Dutch housing market started to become weak in 2008, mainly due to the global financial meltdown.
- In 2008, house prices fell by 5.3% (-7.5% in real terms)
- In 2009, house prices dropped by 1.5% (-2.4% in real terms)
- In 2010, house prices rose slightly by 1% (-0.7% in real terms)
- In 2011, house prices dropped by 3.8% (-6.2% in real terms)"
and 11%+ down in 2012.
http://www.globalpropertyguide.com/Europe/Netherlands/Price-History
but its different in NZ....maybe try Ireland as a comparison? 4million property mad Irish....oh wait,
"the bubble burst in 2008, it was the world’s biggest property bust.
- In 2008, property prices fell 12.4% (-13.4% in real terms)
- In 2009, property prices fell 18.6% (-14.3% in real terms)
- In 2010, house prices fell 10.5% (-11.6% in real terms)
- In 2011, house prices fell 16.7% (-18.7% in real terms)"
and 5%+ down in 2012.
So about a 60% loss in 5 years........
http://www.globalpropertyguide.com/Europe/Ireland
Not looking good....kind of the numbers I see for NZ and the worst is yet to come. Maybe Nicole Foss who suggested a 90% loss isnt that far off the mark.....ouch
for too long we have discriminated against productive investment in favour of property speculation.
Perhaps, Gareth could have said, discerned in favour of ,rather than discriminated against, but I fail to see what is wrong with the sentiment.
You cannot run an economy indefinately on Property speculation,importing every damn thing from ping pong to long johns, and believing the sacred cow is the untouchable commodity export......
For goodness sakes why do you lot insist on making the same old irrelevant attacks against anyone who points out the excessive property speculation in this country.
There is overinvestment in EXISTING HOUSING STOCK, how many rental investors do you think are building new homes?? As investors pile into existing housing stock land prices are also forced up so this form of investment does nothing to help supply. Instead tax is lost, productive investment is lost, jobs are lost and our kids can't buy a home.
Nevermind though, keep looking after your own interests and cutting anyone else down who wants the best for NZ.
Julz
Thank you for making a reasonable contribution. The exodus of young New Zealanders and the importantion of other older generations from other countries is something of a wonder to me. An experiment in Auckland on a scale never attempted anywhere else in the world.
I believe that any policy choice that ensures ever rising Auckland real estate is all that matters.
Jultz - property speculation occurs because of the supply shortage. Any policy that increases the supply shortage will drive prices higher. Hardly in the best interests of NZ or NZ'ers.
Never mind though keep putting policies in place that will ensure that those who are struggling with affording a home can never afford one.
they aren't making any more land - so if you increase population, you will inevitably increase demand.
You can't 'increase supply' of a finite resource; you can merely alter the current use of it.
It takes more hectares to support an inhabitants, than the footprint of the house.
So demand always had to rise, and the process always had to cease at some point.
The base reason folk are struggling to afford, is that there are too many folk. That's the absolute demoninator of your demand.
To use an analogy the lack of supply allows property investors to influence prices materially in the same way the power companies have been accused. In such a monopoly we all want to see more competition (supply of housing) but that doesn't mean we shouldn't also tackle the monopoly head on with policy.
Julz... who is the monopoly..??? ALL property buyers and sellers influence the price... How can they be a monopoly.
If there is a Monopoly .... u have to look at what is constraining supply.
Councils are the Monopolies..!!
I have also read that the Building materials supply industry is some kind of ogiopoly.
I might be missing something ..but it seems clear to me
Owner occupiers sell and then buy somewhere else so although they are a large part of the market they have much less impact on pricing. Even first time buyers are simply recycling properties from deceased estates.
When supply is constrained it is the investor who throws the delicate balance of supply and demand out of whack. The investors hold the monopoly on that marginal supply and they are ones that ultimately drive prices.
Have u taken into acct. population growth..???
If Aucklands population was declining... supply constraints would not be so much of an issue.
Investors don't hold a monopoly on marginal supply any more than you or I... or a foriegn purchaser.
Investors have been purchasers of Houses... long before I was born.
If there is not enough supply to meet population growth what do you think happens to property prices when investors also jump in to take advantage. The rate of home ownership has been in stready decline so investors are sucking up an ever growing portion of the limited supply.
Of course I'm not saying investors are only factor that influence prices but I am challenging the false arguments that keep coming up suggesting investors don't impact property prices.
The arguments in this thread have even gone so far as to suggest that the extra investment from property investors should be helping supply and bringing down prices!!!
Julz... overinvestment in existing housing stock...?? I always percieved "overinvestment" in terms of excess capacity or over supply...... have u redefined the word.?
How many rental investors are building new homes..??.... Maybe u have hit the nail on the head... Why aren't they..??? If prices are so high then it should be worth their while to build new houses.... ( are supply constraints an issue.?? )
gareth can't blame people for the fact that low interest rates end up Capitalizing ALL asset classes at new levels... ( lower interest rates = higher asset values... generally )
U don't hear Gareth complaining when the Sharemarket is at record highs..??
All sorts of things are capitalized into Real Estate Values..... Maybe to a chinese investor , NZs' good property rights laws are a virtue... and he is happy to pay a 10% premium on any property... ( That ends up being capitalized into all values )
I think Gareths view is a little bit mechanical and simplistic.
I do agree with him about the disconnection between House Prices and medium incomes... but I think that this is symptomic of a variety of underlying causes.... rather than just an "overinvestment" in housing. eg. In real terms... Ave. wages in the western world have been declining.
So... don't shoot us down with ur six guns.. just because we question what Gareth has said.... His solutions might just cause more distortions .... with his paradigm that our problem is simply "overinvestment" in housing.
Just as people desire to have kids..and bear the costs of that..... people also desire to own their own home .... and they have to bid the price to do that. ( as there is not a great supply of quality homes in Auckland ). whether they are wise to do that... I don't know....but that is the nature of a marketplace.
There maybe more of a disconnection between Hosue prices and med incomes ... than there is between current house prices and replacement values.
"I always perceived "overinvestment" in terms of excess capacity or over supply...... have u redefined the word.?"
This economic model works when we can easily create extra supply but doesn't work when you can't as with land. Gold is a good example of where extra supply is difficult to ramp up and we all know what "overinvestment" has done to that assets price over the last decade.
You have choices. Property or the Financial Services Industry. Any close look at the financial services should make you run screaming from the room.
If Gareth wants to divert us from property, then maybe he needs to fix financial services. Oh wait. Didn't he work there.
Pretty obvious that too much is tied up in property and not enough in productive sectors.
A demographic problem is that baby boomers who have most of the wealth, are not generally, at the age of 60, going to invest in new business, i.e. start up new companies.
(Best company to invest in is usually your own business/occupation.)
They want somewhere safe to put their money, especially with retirement looming.
Houses, shares, bank deposits and bonds seem the only options, so bubbles are appearing in houses and shares, and term deposits and bonds have fallen reciprocally.
Low term deposit rates make it easier for banks to lend money for housing, so this feeds into the housing bubble.
I don't think that if I buy a share in a pre-existing company it will help exports/employment etc at all, as I have not provided a service or created a product by buying a share.So buying shares does not help NZ's net wealth as a whole,.
IPOs are too risky for individuals to invest in, but these companies are the best for real new wealth generation.
Capital gains taxes raise complex issues, if housing is subject to CGT then capital losses and interest on loans, rates and insurance should be tax deductible, if owning your own home is a to be treated as a profit or loss making exercise/business(America has elements of these).
Countries with CGT have suffered bad bubbles and collapses.
So what is the answer Mr Morgan??
Looks to me like this government is tinkering around the edges because 'softly, softly' is the only way to address what would be a real catastrophy if interest rates increase at the same time as house prices decrease. We'd see lots of foreclosures as they did in the US and we're still seeing how long its taking them to recover from that.
Looks to me that once the housing bubble bursts (e.g. US, Ireland, Spain..) the economy in general sinks with it.
Why have we been sheltered from the burst?
I can only think it's immigration - enough foreign buyers to keep the music going - just.
The question is, what kind of government policy would force liquidation of existing assets held by the owners of multiple rental properties (as these are assets you want to make affordable and available to FHBs), without also putting liquidation pressure on owner-occupied residences?
CGT will just give these folks more reason not to sell.
Interest rate hikes will just take everyone (including the owner-occupied) down.
How about an announcement that in (say) 18 months time, the accommodation supplement will be no more.
In my opinion this would see alot of FHB properties released into the market at clearance prices. If the owners of multiple low to mid price rental properties know that the music stops by such and such a date, and the government won't be coming to the rescue to supplement what their renters can't afford - either rents will come down or properties will go onto the market.
What a win-win. Government spending down, listings suited to FHBs up, rents down. What's not to like about it?
Actually it is the opposition benches calling for the review of that supplement;
http://www.interest.co.nz/node/57062/property
Lots of landlords advise their tenants to apply for the A/S or an increase in their A/S when they inform tenents of a rent increase. I think there was one National Party MP who was reported by their tenant as doing just that when advising of a rent increase.
Opposition parties would welcome change in this regard.
Gareth has a conflict of interest I think. On the one hand he sees some symptoms, like silly house prices, and on the other he sees some policies that might be responsible. I think he is unable to see the actual causes because they are in his field - erroneous theories of economics and finance applied by self interested parties worldwide.
Personally, I think the causes of silly house prices in NZ is fundamentally unlimited credit meets restricted supply. Both problems need addressing.
Unlimited credit has its causes in the desire for a Franco-German Empire based on the Euro. The US and Britain have a long established bubble blowing "industry" so nothing essentially new there - The Clever People in Brussels wanted one of their own. This led to a massive expansion of worldwide credit. The US banks increased the credit a bit but the French and German banks mutiplied that expansion four fold. Eventually it even caused house prices to rise in Riwaka.
NZ business was not starved of finance, the world was and is awash with the stuff. There have simply been too few productive uses of capital to absorb it all. China has finished using it to build shonky buildings and bridges, which absorbed a fair bit for a while.
These comments focus on houses and that's the point Gareth is making, we need to start thinking about business again. NZ used to be a country of entrepreneurs but that spirit is disappearing; we need to make businessman/women a subject in school. We need to support start ups that aim to export; the food bowl is a good example of this and a service my business used. I'm trying to break into Asia, and have some positive leads, but the support from the government has dried up and we're on our own again. It's at this pivotal stage where we need a push to go from a small employer to a big sustainable business/employer.
Twenty to 30 years ago every married New Zealander had the opportunity to buy a home for their family. Sadly, this is not the case today. For many families, owning their own home is now no more than a dream.
Why? Simply, there is a flawed tax system that favours the rich and punishes the poor.
Today, home ownership is just over 50 per cent, whereas 30 years ago it was a healthy 85 per cent. Previously, Governments helped lower-income families with cheap funding through the Housing Corporation or Maori and Island Affairs. Not any more.
We now have a tax system that favours the investor over any family wanting to own a home of their own, regardless of price. It makes it nearly impossible for those wanting to buy their own home to compete against an investor in the housing market.
Any investor in residential real estate, as of right under our existing tax laws, can deduct against their rental income the costs of rates, insurance and maintenance, plus all interest charges on their mortgages. This applies to all property whether it is residential, commercial, retail, industrial or farms.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
The tax system is obviously flawed. Any person that can put aside their own self interests can see this. The flaws are also obvious if you compare the advantages business owners have over the average wage and salary earner.
It is not the cause of the problems though. The underlying issue is the belief that wealth and prosperity is measured by the value of houses and material possessions and the ability to consume, the complete distortion between needs and wants and the measurement of everything in $$ to the point where we know the price of everything and the value of nothing.
The planet can provide everything we need (overpopulation is straining this though), it cannot provide everything we want.
JH,
You're making up figures out of thin air.
- Home ownership peaked at just under 74% (not 85%) in 1986 after decades of Government subsidies and cheap loans.
- Current home ownership is about 65% (not 50%) - similar to most European countries.
- Investors are able to deduct costs because we provide a home for people who can't afford it. IfGenerally, we will be prepared to pay less than a home buyer as we expect a decent return. Investors who over-paid have dropped like flies since the GFC.
- Supermarkets deduct their costs too. If you think that this is an unfair advantage, then you should grow your own food.
The Savings Working Group was established by the government:
- to provide a point of reference for the government as it develops its medium-term savings strategies; and
- to stimulate a public discussion on issues of national saving in the New Zealand economy, linking this discussion to investment and growth
...............................................................
"Immigration and tax breaks for investment in residential property are being cited as the underlying causes of steep increases in the cost of housing over the past decade.
New Zealand now boasts one of the highest rates of home unaffordability in the world as a result of prices rising far faster than incomes, and the government's Savings Working Group blames that squarely on the policies of successive governments.
Although "the favourable tax treatment of property investment" accounted for about 50% of house price increases between 2001 and 2007, the working group said, there was also strong evidence that rapid swings in immigration brought about price-rise "shocks".
There was a sharp spike in immigration in 2001, 2002 and 2003 and, said working group committee member Dr Andrew Coleman, it appeared that property prices did not fall anywhere near as greatly when immigration fell again.
The report added that there was little evidence that immigration boosted local incomes. In fact, the need to build roads and schools meant that net migration contributed to the national deficit."
Gareth
And what are vehicles into "productive assets''? Given that NZ has a history of criminal finance companies, a skewed stock market that favours large investors and underperforming investment funds why wouldn't you invest in housing and farming, after all we all need shelter and food.
You may have become environmentally enlightened re climate chnage but you have a way to go before you stop singing from the "All growth is wonderfull, all growth great and small" hymn sheet.
Interest rates will not rise in my lifetime i expect and its not for the reason you might think, the world simply does not have the resources left to support a large call option on the future
Neven
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