How can you tell you are in an asset bubble?
It's a question to occupy much finer minds than mine. Economists can draw up charts. Academics can study previous trends. Figures can be moved around.
I take a very simple approach that has never failed me so far. I think we are in an asset bubble when the aforementioned assets suddenly start commanding frothy appearances on prime time mainstream television.
The fact that the housing market and particularly its unruly Auckland big brother is now attracting such attention tells me that the rising house prices have already gone too far. This issue is already becoming too big to rein in without extreme difficulty and pain.
Last week's Real Estate Institute of New Zealand figures for May provided, in my view, the most compelling evidence yet that the housing market is becoming a runaway truck.
It wasn't the fact that the Auckland house price median reached a new record of NZ$565,000. The specific issue with Auckland and its perceived shortage of 30,000 houses is well known and canvassed. Demand versus a shortage of supply will equal rising prices.
The real telling statistics in the latest REINZ figures were, for me, substantial month-on-month surges in price in areas like Nelson, Central Otago Lakes and Hawkes Bay.
The Hawkes Bay median rose 2.9% between April in May. In Nelson the median shot up 8.5% (to a new record high of NZ$353,625) during the same period and the Central Otago Lakes median surged an amazing 10.1%.
Heated activity
The fact that such heated activity is occurring now outside of areas suffering from Auckland's supply problem tells you that the "buy now at all costs" mentality is now very much upon New Zealanders again - and is spreading.
It seems very clear that the house market fire needs a hose putting on it right now. The problem is there is no sign that is about to happen.
Auckland's housing shortage will not be resolved any time soon. Assuming the Government and the Auckland Council do resolve their differences and implement the recently negotiated Auckland Housing Accord (see here for articles on it) there will be considerable lag in the new houses under that plan coming onstream.
The Reserve Bank has been constrained from raising interest rates to act as a housing market dampener by the high value of the New Zealand dollar.
Talking up
It is now talking up the prospects of putting "speed limits" on the banks in respect of how many loans they can make to house buyers with only a 20% or less deposit. Trouble is, Prime Minister John Key has already put his oar in by saying he wants such limits to exclude first-time buyers, which is obviously a very politically-driven stance on his part.
Reserve Bank Governor Graeme Wheeler has already said that first-time buyers won't be exempt. But is he really prepared to go out on a limb against the Prime Minister on this one?
The chances must now be increasing by the minute that any limits on high LVR lending will be watered down. It's even possible that if the banks voluntarily reduce the proportion of such lending (it's currently about 30% across all of them though there are huge variations from bank-to-bank) that the limits won't be imposed at all for now.
In any case, I don't think the speed limits would make one jot of difference to the house market. They might have a positive impact in terms of saving the banks from themselves and any nasty shocks to the financial system if there is a sudden rapid downturn in house values.
Find the money
But the reality is that people will still find the money to buy houses if they really want to. The only problem is how they might find that money. If high LVR limits are imposed this is just likely to increase the risky behaviour on the part of first-time buyers. New financial intermediaries lending money at extortionate rates may appear, for example. The most vulnerable buyers are the ones who will put themselves most at risk.
The LVR limits appear absolutely ripe for a whole set of unpleasant unintended consequences. And they are not going to stop cashed-up buyers from continuing to drive up house prices.
Ultimately I think the RBNZ has little to lose from biting the bullet and actually throwing in an interest rate rise now. The shock value of a rise, when the "market" is not expecting the first one till March next year at the earliest, would offer the bank its best chance of having an impact.
Acting now would also give the RBNZ the best chance of getting full bang for its bucks because Kiwis are rapidly moving to fix their mortgage rates ( with fixed rates now up to about 50% of the total), albeit mostly for only about a year. But if the central bank does wait till next year to move on rates then the vast majority of people will probably be holding fixed mortgages and therefore won't be immediately affected by the rate hike.
Worth the risk
With the Kiwi dollar having fallen recently and now looking volatile an interest rate rise might just be worth the risk.
Whatever the RBNZ decides to do, however, I hope the Government gets behind it. Too much is being left to the central bank when the Government could be taking an active role in dampening the house market itself. And it certainly has not been helpful for the Prime Minister to seek to influence the RBNZ's intended move on LVRs.
Apart from being supportive of the RBNZ, what else could the Government do?
Surely the country is now well past the point at which it can avoid any longer the impost of capital gains tax, or at least stamp duty on investment properties (IE NOT the family home). The point of such a tax would not be to generate extra revenue for the Government - because it wouldn't. The point would be to attempt to modify the behaviour of Kiwis so that they would at least consider investments in other types of assets. Very few Kiwis look beyond property investments.
Imperative
The other reason why a capital gains tax or stamp duty is now become imperative is the fact that the more other jurisdictions - and places like Singapore and Hong Kong come to mind - actively seek to dampen property speculation with tax hikes, then the more New Zealand with its easy access becomes attractive.
Which leads nicely to the other thing the Government has to consider now; banning overseas-based buyers of existing properties. They have already done this in Australia.
There is no cast-iron quality information available on just how many people buying houses here are based overseas and don't intend to live here. The numbers are probably not high as over-heated gossip would have it. But the problem is, such numbers will only increase unless New Zealand more closely aligns its investment regimes with those of offshore countries.
A capital gains tax and a ban on offshore housing investment, if signalled now, might take some heat out of the current housing market.
Sadly, the Government is probably not incentivised to do the right thing. It knows that if house prices continue to go up in the short term then everybody (who owns a house) will feel good about life, will spend money, and the economy will tick along. In such circumstances most people are not going to be thinking about voting for a new Government.
So, at some stage - and it is likely to take two or three years at least - this will probably end badly again.
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