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By David Hargreaves
Just about everybody knows (hopefully!) that you should never attempt to extinguish a fat fire in a frying pan by using water.
The water, so the theory goes, will splash the fat, spreading the fire and making matters far worse. Water may even cause oil to explode.
A damp cloth thrown over the pan to suffocate the fire is apparently just the ticket.
Now, I have no idea who worked out that particular dynamic, but it is to be presumed that some sort of proper research has been done into the subject, identifying all the factors that contribute to the situation and what the appropriate response should be. If you know what the cause of the problem is and the contributing factors, then you know what the solution is.
Well done if you guessed that the latter part of that last paragraph was not really talking about kitchen fires, but had neatly moved on to the housing market fire currently raging in New Zealand. What should be used for water in this situation? And, indeed, is "water" a good idea or is the equivalent of a nice damp cloth needed?
The Reserve Bank is angling to apply what looks suspiciously like its version of a damp cloth on New Zealand's (for "New Zealand", read "Auckland") over-heating housing market through the introduction of "speed limits" on high loan to value (LVR) lending. See here for articles about the RBNZ's new "macro-prudential tools". So, clearly the RBNZ sees ready access to borrowed money as a key contributor to the rising house market.
In fairness to the RBNZ we need to remember that the primary focus of limits on LVR lending is to ensure continued financial stability. And the RBNZ is very worried about that at the moment for reasons I have previously outlined. But clearly the central bank is also hopeful that constraining the amount banks can lend will also rein in house market activity, particularly in Auckland.
Slaughter at the auction
Of course, as anybody knows, that won't work, because the real reason Auckland house prices are soaring is due to plane loads of Asians arriving, crowding into auction rooms, and buying tens of houses at once all with money they brought in with them in suitcases and therefore being unaffected by LVR limits. I know this is true because a relative told me they had talked to a good friend who knew somebody who had been to an auction and seen it for themselves.
Given that this is the truth, then both the Government and the Auckland Council should be told because they have mistakenly entered into an Auckland Housing Accord in an attempt to build an extra 39,000 houses in Auckland during the next three years, erroneously believing that shortage of houses is the problem.
Meanwhile, the economics folk at Westpac have gone completely off at a tangent, suggesting that anticipation of future capital gains is actually a key driver of the house prices. Economist and fund manager Gareth Morgan has also had the temerity to make similar suggestions in the New Zealand Herald newspaper.
A multitude of ills
So, to sum up, it appears the rising house market in Auckland is due to easy access to bank loans. No, hang on, it's Asians buying houses. No, it's a shortage of houses in Auckland. Wrong again! It's investors grabbing houses in anticipation of future capital gains, secure in the knowledge that the investment playing field is stacked in their favour in NZ because there's no capital gains tax on houses.
The point I am making, tongue in cheek, is that there are actually a hell of a lot of reasons being bandied around for why the house market, particularly in Auckland, is over-heating.
The trouble is that attempts to tackle the problem so far appear to be taking the view that there is one cause. The RBNZ will try to tackle the supply of money. The Government/Auckland Council will attempt to tackle the supply of houses. Nobody's doing anything about offshore investment in NZ houses. And, likewise, there's nothing being done - either through imposition of taxes or other deterrents - to dampen the appetite of Kiwis to own houses as investments. So, that's two problems "being tackled" and two that aren't. But what about some sort of strategy that accepts there may be several causes of the heated property market?
For what it is worth, I actually do think the biggest single factor in play in the Auckland housing market at the moment is the desire, no, the need, of Kiwis to own property investments. After all, if the Auckland problem was just all about a shortage of places to live then rentals would be rocketing in line with house price inflation - and they are not.
The guessing game
But I admit, I am guessing. I also think a lot of other people are also actually guessing too when they assert why prices are rising.
There is not enough information on the dynamics driving this current market.
If we look, for example, at the anecdotes regarding offshore investors buying New Zealand houses, there is no qualitative evidence available. If the country is going to look - and I think it should - at some sort of ban on offshore house ownership, we need to know just what the current extent of such buying is. After all, if we don't have a marker in terms of who is buying property and where they come from, how are we to properly gauge the success or otherwise of any future measures put in place?
Then there is the supply issue. Logic suggests that Auckland, having gone from building about 11,000 houses a year in the early 2000s to a more recent average of only about 4000, is short of houses. But how many houses short is it? The official estimate is that the shortage is about 30,000. If we accept that estimate is correct - and I'm not really sure how accurate such an estimate can ever be unless you work on the basis of deciding there must always be X number of people per house - then it is still difficult to quantify just how much of the upward pricing pressure now is due to the shortage and how much is other factors.
Moving on up
On the demand side, there's - again anecdotal - suggestions that many Aucklanders moving up from their first homes are buying a second home, but keeping the first one as an investment. So, that's basically the same thing as these people going out and buying an investment property. But, unfortunately again, beyond anecdotes there seems little hard evidence of how widespread this practice is. Are numbers of people who own 2,3,4 and more houses actually officially collated? Presumably the IRD knows about such cases but is the information collated somewhere in a useful usable way? And how current is such information? Like with details on the overseas buyers, we are it seems very short on qualitative information on who is buying houses as an investment and who is buying to live in.
In my view we really need this information on a very timely basis, all held in one database; how many buyers are from overseas, how many people are buying for investment purposes as the properties are bought, and how many properties are involved.
Surely until reliable sources of such information are collated - and this is where the Government needs to get involved - how can we confidently talk about banning offshore based investors, or putting capital gains tax in place? And worse, how can we be so confident that ramping up the supply of houses is absolutely the right thing to do?
In all probability all of the factors mentioned here, possibly along with some not mentioned, are all coming together to put pressure on the housing market. But nobody seems to really have a handle on the extent to which the various factors are contributing. Nor has anybody to date suggested a strategy that actually looks to tackle a variety of factors - rather than just one.
Firstly, we need better information, somehow. Then there needs to be an integrated approach, with the Government getting involved along with councils and the RBNZ. These parties all need to be working together, not separately.
The frying pan's on fire but - in my view - we don't actually what exactly is in the pan and causing the fire. So, how can we confidently try to put it out without splashing everywhere and causing the fire to spread?
51 Comments
Great article. I have also heard the stories of auctions packed with Asians, cases stuffed with money, wearing fur coats and crowns. I don't think this is true.
I think it is the combo of low interest rates, banks falling over themselves (and each other) to lend, and the nasty, grubby business of buying and selling a property at an auction. This used to be a last resort - for good reason. Somehow, it seems to have become the *only* way agents are prepared to list a property and, somehow, we seem to have accepted this as OK.
I think you may need to get along to an auction rooms - you will see that very few of them are wearing fur coats and crowns.
Seriously though, foreign buyers ARE a contributing factor to Auckland house prices and this is not confined to the more expensive ones, you will not have to go far to find a tenant whose landlord is foreign and only pops in once or twice a year (no doubt because the tax dept allows it). You can go back through the articles on this very site to find a number of comments from people in that exact position as tenants.
Then there is the Bayleys radio ad seeking listings, making it quite clear that the properties will be advertised overseas, so you can just button back on the sarcasm there, please, then I will.
Foreigners, again, are contributing to this situation, and as such, something has to be done about them
Foreigners are a contributing factor to the present situation, but not because of any inherent 'foreignerness' about them. It's all about market signals, and the real estate market (along with the government legislation that provides its operating framework) is clearly sending the signal that "your money is welcome".
If you assume (and it's a big assumption) that we're all perfectly rational economic actors, who wouldn't respond in a rational way to such an attractive message, especially considering that NZ's economy and economic outlook is not too bad compared to some others in the world? Stability, a phsyical asset in a top-rated world city -- what's not to like?
Right on!
There seems to be a significant desire by our illustrious Government NOT to want to know.
Incompetence? Deriliction?
What a mess of pottage.
Let the RBNZ give us a sniff of LVRs and everything may improve.
Promise extra house building but do nothing to make it happen.
Given the track record of the lever-pullers, compiling a database is probably pie-in-the-sky for the moment. In the meantime, the logical first cut would be a "university faculty project" with students armed with questionaires (plus authorisation) to conduct and compile "exit interviews" and "entry interviews" with every buyer and every seller for every property transaction for a period of say 6 months.
I though it might a good article as above comments said so.
I then read it.
Then, it comes back to blaming Asians again for buying houses with cash stacking up in suitcases.
Come up with something new please? Your accusation is completely based on speculation.
We now have a party in office, whose member, I bet, are all landlords. You are dreaming if you expect any policy to dampen down house prices coming out of this party.
Wang Xingmo: No he's not blaming Asians. He's making a parody of those who do, and suggesting that people have their favourite hobby-horses or rules-of-thumb that they use to come up with neat solutions as to why the housing market is the way it is. Others blame urban limits, while yet others blame auctions... In summary, I think he's suggesting that the problem is more complex and multi-faceted than most of us believe it to be.
Xingmowang: you are mis-interpreting the article
and you ask "Come up with something new please" ?
A couple of weeks ago the following exercise was suggested - Two sheets of paper desk-test
Be constructive - try it - give us YOUR answers
Yes, I blame Asians.
I blame investors both local and overseas
I blame the RB for doing stuff all
I blame banks for loose money
But most I blame an incompetent Key & Co for ignoring actions that would help correct the market and outright fiddling in other vote catching areas knowing that the younger generation who will be most affected by this will either not vote in an election or waste their vote when they do.
The fact of this matter for me having attended 3 auctions in east Auckland in the past 3 months that the dominant representation of attendees were "foreigners" and they were dominated by Asian and Indian I do not need to tell you who ended up as the purchasers, your guess will be accurate!
Xingmowang. If you are a legal resident, then you are no longer a foreigner...so relax. Foreigners are the one's who have yet to arrive and become residents. As far as I am concerned, the house is full....I really do not want anymore. NZ is the place it is due to the lack of people, so now that you are here, please lock the door behind you...or it will becme the place you left.
Oh, I can smell a big, juicy data cube project for someone in all this, DH. Feed the beast with core land data outta LINZ, make it compulsory for agents to log details over the InterWebs, run it all outta the Cloud and slice and dice away wiv reports, dashboards, and alerts up the wazoo.
Services to software ratio waaay over 2. Or (Novopay) 10.
Must keep an eye on GETS.....and isn't this Exactly the sorta thing that the GCSB with its Big Data hoppers, could be quite good at????
After all, can't have then Spying on people. Collecting Useful Data - now that's a Whole other ballgame.
Using the fire metaphor, every fire needs four elements: fuel, oxidizing agent (usually oxygen), heat, and self-sustained chemical reaction. Take one away, and the fire will die down.
So what do each of these elements equate to in the real world? That's what we're all trying to find out!
No sooner asked than answered, aeronaut.
The Times link is well rotted, but here's the money shot:
"1. license housebuilding, so that no one could build a new house without a licence, or even rebuild an old house or a redundant barn.
2. encourage developers to maintain large land banks in order to benefit from rising prices.
3. leak out new permissions only after long periods of delay.
4. combine this with an unlimited flow of mortgage credit and relatively low rates of interest.
If you restrict supply below the market clearing level and increase funding, you will inevitably create a bubble and you will lock people out of the market."
I read the post on your website and agree with most of it. I think that the understanding of supply and demand is absolutely essential, as you say. It's the fundamental equation that underlies all of this, and yet some people are so passionate about their particular viewpoint (focused on supply-side problems or demand-side problems) that they forget to consider the basics.
Supply and demand is like homeostasis in an organism; the organism is always making changes to try to keep equilibrium and stability within itself (e.g. shivering in response to cold, sweating in response to heat).
No doubt that we need more supply for the projected growth rates of this city, but in what form should it be? From what I've seen, the selective densification of the Unitary Plan seems a reasonable compromise, but of course you can't keep everyone happy. I don't particularly want to see Auckland sprawl out too much further over good farmland...
Aeronaut: a welcome appearance on the side of light.
For too long the magic-mushroom supply-side crowd have been spraying their mantra of the simplicity of increasing supply, building more houses, freeing up land, removing boundary restrictions, more credit, lower interest rates.
Too often it is used as a "theory for everything", a convenient one-size fits-all fixit solution, of which they have limited knowledge of the subject. There is no "theory for everything". Translated it means there is no shortcut.
For too long I have been the lone-bleating drum-beater explaining that the issue of supply is being mis-used. It is far more complex than the writers realise.
A month ago I engaged in a series of correspondence with Matt Nolan, an economist at InfoMetrics.co.nz (and periodic columnist here) about this very subject. In the end it got too hard and complicated.
Notice that Mr Waymad concentrates only on supply-side solutions.
On 1 July 2013 this comment was posted - no takers yet
The two sheets of paper supply and demand desk-test
A simple desk-test that can provide some substance to the debate.
Take two sheets of paper, give one a heading of "supply" and the other a heading of "demand"
On the "supply" sheet draw a line down the middle
On the right hand side list the 5 topmost impediments to increasing supply
On the left hand side list the 5 topmost (potential) drivers of supply
On the "demand" sheet draw a line down the middle
On the left hand side list 5 topmost factors that are driving increased demand
On the right hand side list the 5 topmost (potential) suppressors to reduce demand
Then examine the 4 lists and assess which factors can be changed and or implemented ASAP that can equalise the two sides of he equation.
Of course, if 10 people did the task you would get 10 different sets of lists
Good article.
What are we paying taxes for ?
Boots should have hit the tarmac months ago. Information gathered and authoritive. Should only have taken a week. Then action implemented by civil servants with guts.
What do we get. Time punchers signing out at 4.30. With no greater thought in mind other than buying that Oyster Bay Sauv on the way home. It's on special.
If we could self fund such a leveraged flutter with our own internally generated savings from net export suplus receipts it would be at best OK.
However, it is sustained off the back of risky, accident prone currency swapped wholesale foreign borrowing undertaken by our banks on our behalf to mitigate the ravages of past unfunded import frenzies. That is to fund the accumulated C/A deficit until further national family silver sales are consummated.
Quite right. I guess I was sort of responding to Gareth Morgan's ludicrous idea that there are lots of other productive investments in NZ if only people were forced to invest in them. We are force fed with cheap overseas credit way beyond our ability to find a productive use for said credit.
Aggregation. The big-boys have arrived.
Quite a few here are well aware what is happening - it's not hanging in your face - but dont have to have too much brain power to work it out. Strategically Fletcher's can see what's coming, and when you have an organisation specially set up, people in place, equipment in place, plenty of capital, all ready to go, all that is needed is a place to start, how much did you want for thar property, and the one next to it. Hang on be back in a minute, just got to talk to the other guy two buildings down, got ot get that working capital cranked up and into gear.
And a nice leetle Q&D biz opportunity to prepare Awklanders fer all dese apartment buildings.
Rent a container, park it on a spare pieca Railways land somewheres. (It'll take them a few months to wake up, and containers are easily moved). Put a double bed and a PortaPottie in 'er. Furnish it from the nearest garage sale.
Sell 'Appraisal' weekends to first-home owners shut outta the current market.
Pitch: 'Experience the Apartment Dream'. 'We'll even open the End Doors twice over the period!'
Winner???? Common taters, Rate this Idea!
(And don't tell me it's already been done??? I'd be Devastated).
"Nobody's doing anything about offshore investment in NZ houses"
Darn right. John Key has an unwritten covenant with China so that we become a Cyprus to their Russia. While they keep buying our soft commodities they can keep coming here with their dirty money and buy up large. Hard to argue against really but it needs to be sorted else we (at least AKL) will end up just as a Chinese satellite. JK needs a stalking horse - someone to blame as forcing his hand and for NZ First I beleive their time in the sun has come again.
Winston I believe has one last hurrah in him and he has my vote for the first time. Speaking to a few of the Grey Power set I believe they are waiting for him to make his move. He is strangely silent...............
To any of you who think that foreigners are not affecting the Auckland market and probably elsewhere really, go to the Radio Live website and listen to Marcus Lush's interview with Sue Tierney of Sue Tierney Mortgages and hear what she has to say about foreigner buying up in the market especially the lower end stuff. The time of the interview is between 7.45am and 7.50am
Now to the govt - get off your fat backsides and do something about it!!!!!!!!!!!!!
In my experience, when dealing with a problem, it is crucial to define the problem and it's root cause accurately, and then deal as directly as possible with the root cause. Failure to do this generally has a whole bunch of undesirable side effects and you often end up chasing your tail in what sometimes becomes a mess. This applies to a broad range of realms including human and organisational issues, raising kids, mechanical, physical and biological systems.
The whole of Wellington does not seem to understand this, so we get these very broad initiatives that have all sorts of undesirable side effects.
Try the theory of "The Wicked Problem"
http://en.wikipedia.org/wiki/Wicked_problem
"Wicked Problem" is a phrase originally used in social planning to describe a problem that is difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognize. The term ‘wicked’ is used, not in the sense of evil but rather its resistance to resolution. Moreover, because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems.
Characteristics of wicked problems in social policy planning specified ten characteristics
1.There is no definitive formulation of a wicked problem.
2.Wicked problems have no stopping rule.
3.Solutions to wicked problems are not true-or-false, but good or bad.
4.There is no immediate and no ultimate test of a solution to a wicked problem.
5.Every solution to a wicked problem is a "one-shot operation"; because there is no opportunity to learn by trial and error, every attempt counts significantly.
6.Wicked problems do not have an enumerable (or an exhaustively describable) set of potential solutions, nor is there a well-described set of permissible operations that may be incorporated into the plan.
7.Every wicked problem is essentially unique.
8.Every wicked problem can be considered to be a symptom of another problem.
9.The existence of a discrepancy representing a wicked problem can be explained in numerous ways. The choice of explanation determines the nature of the problem's resolution.
10.The planner has no right to be wrong (i.e.: Planners are liable for the consequences of the actions they generate).
Conklin later generalized the concept to areas other than planning and policy.
The defining characteristics are:
1.The problem is not understood until after the formulation of a solution.
2.Wicked problems have no stopping rule.
3.Solutions to wicked problems are not right or wrong.
4.Every wicked problem is essentially novel and unique.
5.Every solution to a wicked problem is a 'one shot operation.'
6.Wicked problems have no given alternative solutions.
Where data is gathered privately, good luck to them to make of it what they will (if they can get a competitive advantage from being smart, more power to them). But where there is an interaction with the state (including local governement and land title registration) that information should be available to the public. Where a lot of state organisations (Stats NZ and some of the science groups like NIWA are honourable exceptions) fall over badly is that it in this day and age is no more work to electronically supply all records as a database dump than it is to supply a single specific record. However, actually letting the data out in a way that citizens can slice and dice it is (in many cases) actively discouraged.
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