The holy grail of the 39,000 consents

Bernard Hickey points out that the big planned additional supply of houses will raise debt levels and interest rates

2nd Jun 13, 8:11am by Bernard Hickey

We need more houses. But Bernard Hickey asks if we are ready for the extra debt.

By Bernard Hickey

The Auckland Accord's target of consenting 39,000 new houses is shaping up as a holy grail for the government, the Auckland Council and, now, the Reserve Bank.

The lament is echoing up and down the country: if only Auckland could build a lot more houses the Reserve Bank could avoid an interest rate hike that hurts everyone else from Kaitaia to Bluff.

Reserve Bank Governor Graeme Wheeler even suggested this week a rate cut was possible if a 'supply response' actually happened to dampen the current surge in Auckland's house prices.

That is a big carrot to hold out in front of politicians and voters, but it relies on on some dangerous assumptions.

As mentioned in this column last week, there are real questions about the capacity of New Zealand's construction industry to build that many houses in that short a time, given so many of our tradespeople have either moved to Australia or Christchurch.

Secondly, if the required tripling of building activity actually happened, most expect it would generate its own surge of construction cost inflation, which might of itself take that rate cut carrot off the table or even force rate hikes.

But there is a third and as yet un-debated problem with the assumptions holding up the 39,000 consents holy grail. Who will pay to build and buy these homes?

The current central and local government assumption is that private individuals, either first home buyers or investors, will buy these houses. They also assume that private developers will finance and build these dwellings before selling them to individuals.

The last surge of housing developments in the mid 2000s was financed to the point of building completion by a combination of off-the-plan deposits from buyers and loans by finance companies.

That financing is now gone, particularly for the type of higher density apartments and town houses that are mandated by the Auckland Plan and likely to be the most affordable. Finance companies no longer exist and banks are now particularly wary of new apartments and town houses in the wake of the leaky building debacle and uncertainties about body corporates.

If banks do lend on these sorts of buildings it is only with big deposits, which puts them out of reach for many first home buyers and investors.

Then there is the bigger issue of how home buyers would finance their purchase, even if the housing development was consented, financed and built for a reasonable price. This is the dirty little secret at the heart of our economy.

New Zealand's households are already up to their eyeballs in debt.

Governor Wheeler pointed out in passing in his speech that New Zealand households remain very highly leveraged at 145% of disposable income.

That is higher than the 130% peak hit by American households in 2007 and is barely below the 153% peak hit in New Zealand in 2009.

New households (first home buyers) or existing households (rental property) would have to take on extra debt to buy these 39,000 houses.

Assuming they took on NZ$400,000 of debt each to buy 39,000 houses at NZ$500,000 each, that implies an extra NZ$15.6 billion of debt on top of the NZ$180 billion of mortgage debt already sitting on top of households. That would lift the household debt ratio to nearly 160%.

That's only sustainable if interest rates stay at record lows forever.

Most expect interest rates to be rising over the next three years just as these 39,000 houses are supposed to be in their construction phase.

It's also only possible if banks lend most of that with deposits of less than 20%, which is something the Reserve Governor warned in his speech he wanted to limit, or at least slow down with 'speed limits' on the proportions of new low deposit lending.

The only balance sheet with the strength right now to fund a massive increase in Auckland house building is the central government's, and the current government has no appetite to borrow to build those houses.

So we are back where we started. The holy grail of 39,000 consents is just like the one of Arthurian legend - mythical.

So what should the Reserve Bank do, if anything?

Its most effective instrument remains the Official Cash Rate and if it is serious about reducing the financial risks of a new housing inflation boom it should put it up substantially and now.

By relying on a mythical supply response to contain house price inflation, the Reserve Bank risks repeating its mistakes of 2003-07 when it acted late and let New Zealanders insulate themselves from rate hikes by fixing their mortgages for years, blunting the power of the bank's one good tool.

Right now, as the Reserve Bank and Government talk about holy grails and fret about unintended consequences, banks are offering 2 year fixed mortgages for less than 5%.

If Governor Wheeler is not careful he will end up like the Black Knight in 'Monty Python and the Holy Grail': a quadruple amputee railing at King Arthur: 'Just a flesh wound!'.

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This article was first published in the Herald on Sunday. It is used here with permission.

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51 Comments

by Stephen Hulme | 2nd Jun 13, 11:09am 1370128171

1. Mummy and daddy places a $1million cash deposit at the bank to earn NZ high interest rates.

Well Kimy, while you turned away from the game Mummy and Daddy had second thoughts, joined their Japanese cohorts and moved to the USA to achieve the same. Look here

Let's watch how high interest rates must rise to borrow enough to service the interest obligation on outstanding debt, never mind the new.

We are broke and it is now being priced since the Japanese decided so - they want higher returns to cover massively higher volatility and risk in their own markets - they believe the US is capable of such endeavour - but not NZ, unless the rewards are more.

by Stephen Hulme | 2nd Jun 13, 11:37am 1370129834

OK Kimy, thanks for the wake up call. But I thought Mr. Abe instructed Mr Kuroda to print upwards of USD 80 billion a month to double the Japanese money supply in two years. How new does money get and it's destination is the USA?

How does the saying go? - ohh yes, "don't fight the Fed" - might I suggest you add the BoJ to that.

by steven | 2nd Jun 13, 11:59am 1370131169

The problem is lots of ppl then come here with "money" which isnt then productively deployed. Its like the stern of the titanic where 1st class passengers get the deckchairs moved about, while extolling the stowage to stay where they are and carry more and more of the first class (take on more debt) as the water level rises (cost to live), aint gonna work.

regards

by iconoclast | 2nd Jun 13, 1:36pm 1370137000

Kimy: you know the problem is much more complicated than that. I have said it before. it's worth repeating. If you take your family for a day out, on a long drive in the country, and you are 200 km from home, and the car engine starts overheating you cannot fix the problem by putting more petrol in the tank, speeding up and continuing the journey. You have to stop, call the local mechanic, get it towed to base, have it examined, get a quote on how much to fix it, decide on what to do. Oh, and by the way, you still have to get your family back home.

by kane02 | 2nd Jun 13, 9:24am 1370121897

It's amazing to think that a couple of factors BH. Commented on with respect to property finance - capitalizing loans, risk premium for mezzanine finance, related party loans, appear on the face of it to stem largely from failures of central and local government. In other words I can see why finance houses needed to adopt these policies to make a loan work!

You tell me how a bank or finance company could justify chucking hundreds of thousands of dollars at a development when you are largely placing control of it with local government? It's not surprising there is a massive gap between supply and demand. This gap is the resultant uncertainty between council inefficiency, high cost of compliance, capital cost, leaky building cost, and a general mistrust of the entire building process.

All interested party's need to sort out the issues before anyone will agree to throw vast quantities of money at the problem.

by PhilBest | 2nd Jun 13, 9:31am 1370122283

What happened in NZ in the 1970′s was a lucky accident rather than deliberate policy. But a few years of high inflation at the same time as a property bubble was deflating, allowed property prices to revert to a sensible mean without anyone going into negative equity.

http://sra.co.nz/pdf/RealHousingChapterOne.pdf

By Rodney Dickens:

“…..From the peak in the national average real house price in the December quarter of 1974, the national average house price increased less than prices in general for the next five years. House prices didn’t fall over this period, but because prices in general increased significantly more, the real value or purchasing power of the average house fell 40%. The fact that inflation in general averaged close to 15% per annum over this period meant that the sins of the bubble in house prices between 1970 and 1974 could be washed away over the subsequent five years without requiring actual house prices to fall.

This experience will have helped create the myth that house prices never fall much. But be in no doubt about the implication of the 40% fall in real house prices over the five years after December 1974. Anyone buying a house at the peak of the speculative bubble in 1974 and selling it five years later will have lost 40% in terms of the purchasing power or real value of the money they invested. Again, people consume goods and services not dollar coins, so what really matters is real house prices……”

by Stephen Hulme | 2nd Jun 13, 11:07am 1370128023

I recovered some of that lost purchasing power when I bought my first house in Wellington around the 1979-1980 period.

by PhilBest | 2nd Jun 13, 9:33am 1370122398

One of the most sensible assessments I have ever read, just came from a Prof. Nicholas Crafts of the University of Warwick:

http://www.voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-escape

He points out that monetary easing in the UK in the 1930′s, WORKED because it had somewhere productive to GO:

“…….Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975).

Why was house-building so responsive in the 1930s? Two factors stand out. First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending.

Building society mortgage debt rose from £316 million with 720,000 borrowers in 1930 to £636 million with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes. In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years reducing weekly outgoings by 15% (Scott 2008).

Second, houses were affordable to an increasing number of potential buyers.

85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come……”

This aligns exactly with what I have been saying for some time. It also fits with what Peter Hall says about urban development in the UK – much of the housing stock of bigger and better suburban homes – automobile based development, in fact – date to THAT era – i.e. the 1930’s…… the Town and Country Planning Act 1947 killed the UK’s automobile-based-development economic booster and stabiliser that should have lasted several decades, as it did in other countries. Ed Glaeser’s recent paper, “Nation of Gamblers”, suggests the significant role that automobile based development played in the unusual new cyclical stability in urban land markets following the 1930′s crash. This is a most heartening sign of mainstream awakening; this too is something I have been trying to suggest for a while.

by Roger Witherspoon | 3rd Jun 13, 10:39am 1370212772

Good to have you back Mr B.

Usually a good recession cuts through some of the entangling regulations that seem to grow up like many tentacled beasts during the good times. To me houses are manufactured goods, so they should get better and cheaper with the implementation of new technologies. If that's not the case you have to ask who benefits and where are the obstacles the change?

by PhilBest | 3rd Jun 13, 9:02pm 1370250179

Thanks, Roger.

Matt Ridley actually says the following on page 25 of “The Rational Optimist” (after discussing the falling cost of most items in the modern age):

“……Housing, too, is itching to get cheaper, but for confused reasons governments go to great lengths to prevent it. Where it took sixteen weeks to earn the price of 100 square feet of housing in 1956, now it takes fourteen weeks and the housing is of better quality. But given the ease with which modern machinery can assemble a house, the price should have come down much faster than that. Governments prevent this by, first, using planning or zoning laws to restrict supply (especially in Britain); second, using the tax system to encourage mortgage borrowing (in the United States at least – no longer in Britain); and third, doing all they can to stop property prices falling after a bubble. The effect of these measures is to make life harder for those who do not yet have a house and massively reward those who do. To remedy this, governments then have to enforce the building of more affordable housing, or subsidise mortgage lending to the poor……”

But there ARE housing markets where economic rent is eliminated and consumer surplus maximised. This is why the median-multiple-3 cities in the Demographia Reports, have MUCH LARGER sections, larger houses, more modern housing stock on average, higher quality, more mod-cons; and far greater democratisation of home ownership. There really is this massive a disconnect. It is like people in some cities in the developed world are still paying “what they have to” to get bread and milk and a woolen vest, while elsewhere people are buying pies and cakes and designer-label clothing and TV’s.

Why do we tolerate it with housing? The effect of low real transport costs and indeed low real infrastructure costs, does not have to be forgone for housing, just as we would not accept it being foregone in food and clothing.

by jh | 3rd Jun 13, 10:21pm 1370254865

To me houses are manufactured goods, so they should get better and cheaper with the implementation of new technologies.

........

I happend to be looking for a borer treatment today and I couldn't understand why the time longevity of the treatment wasn't mentioned, I had a read and your satement doesn't seem to have worked in wood preservation. The most effective substances are banned for domestic applications due to leaching into the local environment etc. Neither has it worked for the energy component of concrete or plastics etc. I think you could pick just about any building component and find the opposte (or your statement ) is true?

by steven | 4th Jun 13, 10:02pm 1370340134

Once the wood is treated the treatment remains, Im not aware that there is a lifetime period.

regards

by Casual Observer | 5th Jun 13, 12:06am 1370347616

Q. How effective are the fumigators?

A. NO Bugs Bug Bombs and NO Bugs Borafume are exceedingly effective if used during the flight season which is September- March in New Zealand . For use in ENCLOSED SITUATIONS only, we strongly recommend that they be used each flight season for three consecutive years. They must be used in conjunction with long term residual sprays.

Q. How long does the fumigation last?

A. Particles of active materials work continuously against emerging borer beetles for up to 3 months.

Q. For how long will the fluid work?

A. NO Borer Ready To Use and NO Borer concentrates will last for many years (if not exposed to UV light). Deep inside the wood `2mm plus` borer larvae and beetles are controlled by dermal contact or oral ingestion effectively breaking the 3 year cycle.

How long do borer live?

2-3 years inside the wood as larvae. 2-4 weeks as adult borer beetles on the surface.

http://www.mitre10.co.nz/how_to_guides/fix_it/get_rid_of_borer/

by PhilBest | 2nd Jun 13, 9:34am 1370122475

Ed Glaeser says, in “Nation of Gamblers” – 2013:

“……Almost everywhere, prices in 1970 were below 1950 prices plus this construction cost related price increase. Even after the most stupendous change in America’s mortgage history, and a post-war economic boom, housing prices had gone up less than construction costs would warrant.

The natural explanation for the missing boom in prices after World War II is that there was an enormous increase in housing supply over the same time period. During the 1950s, America permitted 11.84 million housing units, which is roughly the same as America permitted during the twenty-six years from 1920 to 1945. The construction was disproportionately on the urban fringe (Jackson, 1979) and disproportionately in the Sunbelt.

The post-World War II era demonstrated exactly what textbook economics predicts should happen when robust demand meets relatively elastic supply. Quantities rose and prices stayed relatively flat. The relatively elastic supply owed much to the rise of automobile-based living on the urban fringe, which can be seen as either a shift in housing supply or a change in supply elasticity. For example, in an open-city formulation of the Alonso-Muth-Mills model, with supply costs that increase with density, lower transportation costs will increase supply but not change supply elasticity. Yet it is possible that the automobile made supply more elastic as well. On the urban fringe, lower cost, low density housing can be built in massive quantities, essentially using a constant returns-to-scale technology……

“……..The missing post-war price boom is not a problem for conventional economics, but it does present a challenge to those who seek to explain bubbles as the outcomes of a stable process where readily observable exogenous variables translate into the presence of a bubble. The 1950s had easier credit for homeowners than the 1920s and economic conditions were at least as good. Any model that suggests that there is a stable relationship between either of those variables and price bubbles has difficulties with this epoch……”

by PhilBest | 2nd Jun 13, 9:44am 1370123092

I am all for the most stringent possible restrictions on mortgage credit meanwhile until the supply side liberalisations start working.

“Home ownership” policy that does not address the supply of houses and the price at which they will be supplied, is NOT “home ownership” policy at all. This is the big policy "mistake" of the past couple of decades.

Subsidies to "demand" is “big property” and “finance sector” profit maximising policy.

As long as "supply" remains inelastic, roughly the same size cohort will miss out on home ownership anyway; all that demand side subsidies will do is determine the size of the debt taken on by those that DO become home owners.

Obviously, therefore, “big property” and finance are going to support the most generous possible subsidies to the demand side, and oppose freeing up the supply side.

But tough restrictions on mortgage credit, will help to stop prices rising any more, while not locking out of home ownership anyone that was not going to be locked out anyway by the prices rising faster than the credit they could get.

"Home ownership" increases will come about when the "supply" reforms are bedded in and prices are affordable again. Everybody wins except "big property" and "big finance", how SAAAAAD for them, boo hoo......

by andyh | 2nd Jun 13, 10:24am 1370125498

You have it about right here Bernard:

''By relying on a mythical supply response to contain house price inflation, the Reserve Bank risks repeating its mistakes of 2003-07 when it acted late and let New Zealanders insulate themselves from rate hikes by fixing their mortgages for years, blunting the power of the bank's one good tool.

Right now, as the Reserve Bank and Government talk about holy grails and fret about unintended consequences, banks are offering 2 year fixed mortgages for less than 5%''.

As I have pointed out numerous times in the last 3 months it is astonishing that interest rates are still set at the same levels as they were at the height of the GFC. These are rates (in NZ terms) appropriate more for imminent financial Armageddon, not for the accelerating growth (both economically and in terms of debt) we are seeing. At the very least rates should be set at neutral (about 3.5-4%). The counter arguement to this has been that this would force the currency up (the 'strong' currency has co-incidentally been keeping inflation low to a significant extent). Well it looks as though in the past month the currency issue is in the process of solving itself as the NZ$ starts to fall (due to powerful external factors which we wont go into here). This is going to feed back into imported inflation pretty quickly (anyone watching petrol move up?). Those inflation figures may turn malign fairly sharpish.

Of course the LAST thing National want to see is interest rates rising going into an election year. It is also very beneficial to them if house prices are rising (the all important feel good factor, the average Kiwi just loves the feeling that his/her house price is inflating). Now of course if we had a genuinely independent Central Bank neither of those factors would play any role in Wheeler's deliberations. But his lack of action (and indeed his general obfuscation) tells me everything I need to know about his real position. This is 2003-2007 redux.

by iconoclast | 2nd Jun 13, 11:00am 1370127617

Bernard Hickey says here

Reserve Bank Governor Graeme Wheeler suggested this week a rate cut was possible if a 'supply response' actually happened to dampen the current surge in Auckland's house prices.

meanwhile over on Stuff

Greg Ninness says

Home buyers and farmers appear likely to bear the brunt of new mortgage lending requirements which could start to take effect by the end of this year and potentially push mortgage interest rates above 7 per cent by the end of next year. One of the ways the Reserve Bank is considering reining in what it sees as risky lending by banks is by introducing what it calls Sectoral Capital Overlays (SCRs). These would require banks to increase the amount of capital they hold, relative to the nature and scale of their lending into specific sectors of the economy.

http://www.stuff.co.nz/business/money/8746026/Mortgage-rates-tipped-to-top-7pc

Are they both right or is Wheeler babbling to different audiences?

by iconoclast | 2nd Jun 13, 11:14am 1370128451

Sectoral Capital Overlays

Only in New Zealand could you find all of the people being fooled all of the time

Call it by any other convoluted twisted name

International Terminology is "Reserve Ratio" - here it is a "targetted reserve ratio"

by Stephen Hulme | 2nd Jun 13, 11:24am 1370129068

It's known as salary justification - the problem is you and I can never see the worth - it's restricted to public servants executing similar duties as those employed by the Renumeration Authority - previously known as the Higher Salaries Commission - ohh, the irony of such nomenclature.

by Von | 2nd Jun 13, 12:28pm 1370132899

Oh you are so, so, so right.

by Stephen Hulme | 2nd Jun 13, 11:13am 1370128412

Does this help to answer your question?

by iconoclast | 2nd Jun 13, 11:18am 1370128687

I was thinking of a subtle one-liner - such as "The country that eats its houses"

by Stephen Hulme | 2nd Jun 13, 11:27am 1370129246

LOL - Ohh, similar to mine here:

As you will start to note we are fueling the fires of consumption with our current monetary and fiscal policy prescriptions, but in doing so we tend to have to destroy the furniture and eventually the house of our economy to do so.

by scarfie | 2nd Jun 13, 11:55am 1370130955

Your answer there also addresses that statement well that Iconoclast makes in his subsequent post.

by JB | 2nd Jun 13, 11:02am 1370127770

Be very wary of household debt ratios ...

I queried the RBNZ on the makeup of these figures with the following question ..

Are the household debt figure ratios in the Governor's speech an average over all householders implying the ratio would be much higher for those with debt or a ratio for only those households with debt ?

Back came the following prompt response - as I suspected.

In answer to your question, the household debt ratio figures quoted in the Governor’s speech yesterday are an average over all households.

It is calculated as total household debt divided by total household disposable income. The household disposable income figure is for all New Zealand households.

Thus while correct and perhaps comparable with other countries household debt measures - it is totally useless for analysing the risks we are trying to measure as we have to remove those without debt and understand the houshold incomes of those with no debt. If this was not equal to the average - which is quite possible - that also will distort the ratio.

The facts are that the household debt to income ratios for those with mortgages are very much higher than the figures quoted and it is these we should be considering in any evaluation of risk.

This data should be segmented by loan amount to obtain a realistic meaure of our househould debt exposure ... and trust me - it will not be pretty.

by iconoclast | 2nd Jun 13, 1:10pm 1370135411

Precisely

Clever aren't they

All depends on who your audience is - and who you want to fool

To minimise the problem you use a pyriamid with weighting at the bottom

To exaggerate the problem you use an inverted pyriamid - weighting at the top

They're fooling the hoi-poloi into thinking it's not as bad as it really is

by Stephen Hulme | 2nd Jun 13, 2:52pm 1370141545

What's more those who are not indebted to the banks and are funding the banks with their deposits cannot determine the risk profile of the banks as is often otherwise stated in the one size fits all RBNZ OBR solvency reconciliation policy documents.

Creditors need to segregate the impoverished borrowers and determine how much the banks' foreign over borrowing lent to them puts the domestic deposit base at risk - are public humiliation displays of mandatory different coloured armbands for different levels of debt risk a necessity? Or can we demand and get an honest assessment of the situation from the regulator? No chance, right?

by steven | 4th Jun 13, 10:12pm 1370340765

This has been commented on before so overall it doesnt look that bad, but with the leverage ratios we now have serious stress in say 10% is serious. I think there was also a comment that surprisingly very high debt amongst very high earners so what other pockets are there that when put together in a monlithic way add up to a big problem. So yes I think there is some devil in the detail, and yes I think its being "ignored".

regards

by Matt in Auck | 2nd Jun 13, 12:48pm 1370134111

This is an excellent piece Bernard. A big finger can be pointed at the nats,who hardly did anything in their first term and are now running around in a panic.I gave all the solutions 4 years ago,including in letters to mps,and was dutifully ignored. someday nz is going to pay dearly

by Your Landlord | 3rd Jun 13, 11:48am 1370216900

The word from the boss man on high...

Oh listen all ye and repent.

by PhilBest | 3rd Jun 13, 1:46pm 1370223991

Here is Hugh Pavletich's letter to Bill English in December 2008:

http://www.propbd.co.nz/afa.asp?idWebPage=8338&idBobDeyProperty_Articles=11615&SID=945003427

by Your Landlord | 3rd Jun 13, 3:23pm 1370229799

Thanks for that PhilBest.

I always thought there was something obsessive about his focus on houses.

by Dale Smith | 2nd Jun 13, 12:51pm 1370134318

As we all do, we see our ideologies as part of the solution, not the problem.
It then follows, that when something is not working like it should, in this case truly affordable housing, our thought is not that the system is wrong, but that we are not doing it quick enough, as in the reason that there is not enough affordable housing is because there are not enough consents/building taking place.
However if our underlining ideology/system is wrong (as it is in this case), then all we are doing is doing the wrong thing quicker. This will not make housing more affordable, and this article points to some of the reasons why.
So why are they doing it? As has been admitted by council, the Unitary Plan is more about revenue raising, it’s a simple calculation, say an average of $20,000 developer contribution X 39,000 consents, that is a lot of money to pay for past gambling debts and some left over for a flutter.

by Matt in Auck | 2nd Jun 13, 12:52pm 1370134343

btw,just what did i recommend 4 years ago?
- freeing up planning controls
- bringing in lvr controls
- pulling back on immigration
- restricting non resident ownership
- build more state housing

by iconoclast | 2nd Jun 13, 4:45pm 1370148327

Why New Zealand Eats it's Houses

Just for context

The bulk of new zealand housing stock is pre-1980 (see below)

The total outstanding mortgage lending (rbnz) = $190 billion

For the purpose of this I will assume that many mortgages are of the 30 year type and going back 30 years to 1980, all pre-1980 housing stock is now mortgage free (or should be). Sure, people who were around pre-1980 may have moved on, passed on, moved up, or moved out. Mathematically that can be ignored. That works out at 70% should be debt free, while 30% is still encumbered to some degree. With ALL household debt at 145% of ALL household income, the FEW are encumbering the many. The 409,000 are mathematically carrying $190 billion of debt. Meaning the 409,000 or 30% are carrying debt at the rate of 485% of their household income. However, for the sake of saying it, with national household debt at 145% of national household income, that works out, surprise suprise, under 2:1 ratio, and well under HugeOnes 6:1 ratio. It's under his ideal target of 3:1. In fact it's 1.45 to 1

Of course, people might be re-financing their mortgages to maintain a higher lifestyle, buying cars and boats and holidays, in which case they are using their homes as ATMs to sustain their consumption. ie they are consuming their houses

New Zealand Housing Stock

Pre-1980 = 1,160,000

Post-1980 = 490,000

Total housing stock = 1,606,000

http://www.branz.co.nz/cms_show_download.php?id=753d59ddda364f574508eb6f11bd18d0c3ffc5b5

by PhilBest | 3rd Jun 13, 1:52pm 1370224335

I think your point is that concealed in the aggregate data, is the fact that there is major mortgage debt pain being carried by the more recent first home buyer cohort - I agree strongly with this.

It would be ridiculously easy for all those who bought their first home prior to about 1990 to be mortgage free by now, given the price they got the home for.

Those who bought between 1990 and 2002 are probably comfortably paying it off, and the debt relative to their income will be quite manageable.

But if the ratio in AGGREGATE is 145%, SOME poor b------y population cohort must be carrying MASSIVE and stressful mortgage debt levels, and it does not take a rocket scientist to work out it will mostly be the "since 2002" buyers.

by dh | 2nd Jun 13, 5:25pm 1370150747

Here's a house building scheme (Andalusia) I hadn't seen before. I am just imagining the NIMBY's freak out over property values if it was even to be suggested.

http://www.bbc.co.uk/news/world-europe-22701384

by PhilBest | 3rd Jun 13, 1:55pm 1370224554

You want to get Ian Abley of "AudaCity" going on the freaking-out that would happen in the UK if the "right to build" was restored to its pre-1947 condition. There are trillions of dollars of equity riding on a per-square-foot price of land that is several thousand percent higher than it might have been otherwise.

Cheshire and Mills, (eds) in the Introduction to “the Handbook of Regional and Urban Economics” Volume 3, 1999:

“…….If we compare communities in the US and UK that are as comparable as possible except for the constraints their systems of land use regulation place on the supply of land, we observe that the price of retail land is up to 100,000 times higher in the most constrained community…...."

And a further note: Just 4 families have owned most of the land at the heart of London for centuries. Hmmmmmmmm………..

by bigblue | 2nd Jun 13, 9:55pm 1370166934

NZ Govt should introduce the scheme that is being used in the UK if it wants to promote new builds - "Under plans unveiled by Chancellor George Osborne in the Budget, the Government will provide a loan of up to 20pc of the value of a new build property, provided the borrower can raise a 5pc deposit."

by robby217 | 2nd Jun 13, 11:12pm 1370171525

No.

by PhilBest | 3rd Jun 13, 1:58pm 1370224693

“Home ownership” policy that does not address the supply of houses and the price at which they will be supplied, is NOT “home ownership” policy at all. This is the big mistake of the past couple of decades, and it is a mistake that will be very costly - yet again - for the Poms.

Subsidies to "demand" is “big property” and “finance sector” profit maximising policy.

As long as "supply" remains inelastic, roughly the same size cohort will miss out on home ownership anyway; all that demand side subsidies will do is determine the size of debt taken on by those that DO become home owners, and the price level to which houses will inflate accordingly.

Obviously, therefore, “big property” and finance are going to support the most generous possible subsidies to the demand side, and oppose freeing up the supply side.

But tough restrictions on mortgage credit, will help to stop prices rising any more, while not locking out of home ownership anyone that was not going to be locked out anyway by the prices rising faster than the credit they could get.

"Home ownership" increases will come about when "supply" reforms are bedded in and prices are affordable again. Everybody wins except "big property" and "big finance", how SAAAAAD for them, boo hoo......

by steven | 4th Jun 13, 10:28pm 1370341709

Its porking the market trying to get the leverage working so there is a housing led recovery so ppl feel good, so ppl spend, so the can kicking can continue.

It just delays the inevitable pop and the inevitable wailing as property prices slump.....

Comes back to the la la land property market has to be under written by real production and that takes energy, which is now too expensive.

regards

by Brendon | 3rd Jun 13, 2:02am 1370181746

One way to decrease rising private debt levels from new housing is to transfer some of it to public debt. For New Zealand where we have high private debt and low government debt this might be worth considering.

This is effectively what Municipal Utility Districts (MUDs) do. A property developer can transfer the infrastructure costs of the new housing area to a new democratically elected municipal body that takes out a bond and rates the residents to repay the bond. Instead of charging a high all inclusive upfront section price. For Municipality Districts the purchase price of the section is lower and hence your mortgage is lower but rates are higher and there is a municipal bond to pay. So some private debt is exchanged for public debt.

The clever thing about MUDs is they make the market place work more efficiently. Developers are encouraged to sell their embryonic municipalities quickly because it is only once 1/3 of the houses have been sold and a democractically elected council is in place that they get paid for their infrastructure costs. And from that point on the municipality wants the remainder sold quickly so rates can be shared over a bigger group. Importantly this housing model avoids the problem we have with Councils charging Development Contributions, which are very opaque in what you are getting for that fee. In a MUD you can do due diligence on what infrastructure the developer is transfering to the MUD, what it cost, what the bond repaymments are etc.

I think for some, MUDs have a bad rap because they are associated with Texas, which is not seen as an enlightened place. And further it is associated with sprawl. But MUDs do not have to be used for only conventional sprawling housing estates. It is just an alternative democratic method of financing new housing and could work for high density as well as low density. Or for carbon neutral housing. Or for a grow your own village development based around communal gardens and a farmers market. The gardens and marketplace just become another infrastructure asset financed by the bond and rates. I think it could accommodate most urban models.

Of course MUDs are not the Holy Grail to our housing problem. There is still the problem of our city wide infrastructures, in particular transport. This is where the arguments begin...

But if we do not find the capacity to build 39 000 houses in Auckland then housing supply remains inelastic. That means with the expected continued high demand for housing the response is increases in price not quantity. Which will cause debts to rise probably by a similar amount but without the benefit of 39 000 new houses. Possibly demand could be reduced by more stringent immigration criteria otherwise the only alternative is the Reserve Bank removes the demand by increasing interest rates.

by Dale Smith | 3rd Jun 13, 9:53am 1370209982

Good summary Brendon – except MUD’s are not small councils with councillors etc. They are run more like a Body Corporate, and just a couple of extra points to add. One of the extra benefits of the infrastructure debt being public is that its finance cost is cheaper, so you will find most MUD rates cheaper that our present model. They are also ring-fenced as local entities so are more communal based, making responsibility for how they operate more personal and less risky. They also remove risk from the council during the early development phase (the most risky phase) of a subdivision as it is the developer and the new section owners who run the MUD. This is no different than how a body corporate is run today. In Texas, the councils have the right to annex a MUD when they wish. Naturally they only do this if the MUD is well run and ‘profitable.’ About ½ the growth of Houston in the last thirty years is by the city annexing MUD’s.
However, the financing of MUDs with public bonds is not the reason they work, they could just as easily work with private debt. MUD development land is purchased at the rural land price, they can be developed at the rate of demand, and they are independent of council and can be developed cheaper and more environmentally friendly than present council systems. All of which is counter to the ideology of present councils in NZ. This makes the likely hood of public financing of subdivisions low, unless councils could see the benefit to them of controlling the development process even more, which would mean that the other mayor benefits of a MUD would not happen. Without this, any benefits of public financing of MUD’s would be captured by council, the end result being more expensive land and housing.

by Brendon | 3rd Jun 13, 10:26am 1370212010

Dale I bow to your experience in MUD matters. But surely some of this is just words. Body corporate versus mini council, property manager versus councilor. If the point is they are appointed and represent local residents/property owners to manage collectively owned assets we should just use words people are most comfortable with. I'm happy with either.

Can I run some figures past you. Using Bernards $500,000 houses. Lets assume land costs are say $200,000. Using the MUD model, say $50,000 can be converted to public debt for infrastructure expenditure. And say due to market efficiencies land costs can be reduced by $100,000. Now the home buyer who was borrowing with 20% of his own capital $400,000 can now borrow just $250,000. So a 40% reduction in private borrowing in exchange for a moderate increase in public borrowing.

by Brendon | 3rd Jun 13, 1:02pm 1370221345

And if we take these figures to a national level private debt rises 9% instead of 15% due to Auckland's building boom. So to 154% instead of 160% of GDP that BH indicated in his article. Barely above our peak. And then because new builds are now effectively 20% cheaper. House price inflation stagnates below inflation for a period of 5 to 10 years. Kiwis do not like to realise losses on property so are likely to let inflation correct the situation. This being what happened in the 1970s.

In a decade or so private debt might fall down to US levels of say 120% of GDP.

This is big money we are talking about, 40% of GDP over a period of a decade or so. Vested interests, like the big 4 banks want the profitability that comes from high debt so are lobbying to ignore the supply side issues of the housing market. I believe articles like this one are examples of that http://www.interest.co.nz/opinion/64724/lowell-manning-says-problem-housing-stems-current-account-deficits-and-foreign-investm .

by raf | 4th Jun 13, 10:04am 1370297044

Brendon,

There are lots of different ways to fund infrastructure and it's a good discussion to have. To use Lowell's article as an example of vested interests simply shows you either haven't read it or don't understand what it says.

by PhilBest | 3rd Jun 13, 2:10pm 1370225452

Brendon - and Dale - I hope Hickey, Chaston et al are listening.

This is the sort of discussion that their forum SHOULD be getting used for.

But the prime reason for using MUD bonds to finance infrastructure is not to put debt into the public sector rather than the private.

By preventing the cost of infrastructure for new developments from capitalising into the price of ALL houses, it prevents an inter-generational wealth transfer from occurring via ALL transactions in the property market.

Consider this: if we socked $100,000 of road user charges into the price of every new car, what would happen to the price of all used cars?

If the cost of infrastructure always HAD BEEN lumped up-front into the price of new houses, there would not be an inter-generational wealth transfer effect to worry about. But our forefathers established local government to "provide infrastructure" and levy taxes. We are talking about a drastic change in the whole raison d'etre for local government.

If we really are convinced that we need to move to an "upfront" model, then to prevent the intergenerational inequity, either every single property owner should be charged the equivalent of an "upfront" fee immediately, or every first home buyer, regardless of whether they buy new or second hand, should be exempted from paying some proportion of rates for life.

by Brendon | 3rd Jun 13, 2:32pm 1370226759

You are right PhilBest. There are lots of advantages of MUDs, intergenerational fairness being one of them. I just used the public versus private debt issue because it linked well with Bernards article and allowed a good explanation of how MUDs work.

by Dale Smith | 3rd Jun 13, 3:57pm 1370231842

Hi Brendon – Yes I agree with the semantics, but in this case there is a difference, call it a council by name and it will be one by nature, ie wasteful, and slow as two attributes. Phil Best’s comment on intergenerational fair ness of MUD’s is well said. There are about ½ a dozen main components to a MUD that make them successful, and the public bonding of infrastructure is one component but not the crucial one and it is not 100% necessary to include this in a NZ MUD for them to work. However, the lack of want by councils for such funding mechanism highlights a serious lack of understanding of how land economics needs to work to make housing truly affordable, and therefore is another reason why none of the other components of a MUD are allowed. But then again, as I have quoted before, ‘It’s hard for people to understand something, when then salary is dependent on them not understanding.”
Either way, as council has already shown with access to public funding, they are very poor managers. Also allowing the present crop of NZ developers’ access to public funds, without the proper controls, would be like giving a baby a loaded gun. As much as I don’t want it to happen, I think central Government will have to step in for a NZ wide sort out of this land and building mess, which of course they are threatening to do if councils don’t get their sh!t together. Therefore, it’s a matter of when, not if.

by jh | 5th Jun 13, 9:50am 1370382635

heard Nick Smith on Nine to Noon speaking Pavletich. He couldn't make his case when Catherine Ryan asked if he could point to anywhere in the world that government intervention in the housing market (to increase supply) had had an effect. "we'll there's the U.K there doing things there" etc.

His media training is from Mr Posi-power (famous Fair Go subject).