By Bernard Hickey
Every parent knows that there's always a moment near the end of the party when the five year old has had enough chocolate cake, or the 18 year old has had enough cans of vodka and Red Bull.
Saying no to their pleas for 'more, more, more' is never an easy moment, but it's what a responsible adult does.
That adult knows that everyone will be better off in the morning.
The kids will feel better and they won't have wrecked the joint on their sugar and alcohol highs.
New Zealand's economy is at that point in the party where it's time to take away the chocolate cake and the cans of vodka and Red Bull.
Former US Federal Reserve Chairman William McChesney Martin coined the phrase that it was the central bank's job to "take away the punchbowl just as the party gets going," by putting up interest rates to slow down inflation.
He was talking in 1950s America in an era of bobby socks and slicked back hair. Back then people actually drank punch and inflation did have a habit of spiking.
Now it's time for New Zealand's own grown ups to take away the cans of alcopops from home buyers before they 'wreck the joint' and give themselves and the economy an almighty hangover.
There may not be the inflation pressures people saw in the 1950s, 60s and 70s, but there are real risks to financial stability if an over-valued housing market goes bust.
Reserve Bank Governor Graeme Wheeler spent most of the last decade in America watching just such a housing bust and the financial carnage that followed. That's why he is now collecting the unopened cans and turning on the lights with his plans to slow down rampant low deposit mortgage lending.
Thank goodness, because it seems as if all the other grown-ups have lost their senses and want to keep handing out the sugar and alcohol.
Prime Minister John Key made a spirited last-ditch attempt to keep the party going by asking Wheeler to give first home buyers an exemption, which luckily seems to have failed.
The disappointing news this week was both Labour and the Greens also called for the Reserve Bank to exempt first home buyers.
They couldn't resist using the situation to try to score some political points off Mr Key, saying he had handed a 'loaded gun' to Wheeler by allowing the bank to create a macro-prudential tool kit that didn't exempt first home buyers.
They also couldn't resist the easy appeal to the kids to keep drinking and 'Party on you young dudes!'.
Just when the Reserve Bank needed some support in an attempt to slow down the housing market and avoid the financial fallout of a possible bust, National, Labour and Greens took the cheap, easy and 'cool' option.
They acted like the middle-aged parents who wanted the teenagers to still think they were 'cool' by turning up the music and showing off their best More FM mix of dance moves from the 70s, 80s and 90s.
It's never a good look at a party and it's not a good look now.
Any political party who really wants to look after the best interests of first home buyers shouldn't be encouraging them to gear up to their eyeballs with currently easy and cheap debt.
Those first home buyers who have never experienced a sharp rise in interest rates or a fall in house prices will wish in years to come that someone had warned them and been the grownup at the party.
The sole grown-up in the room needs some help to turn off the stereo and send the kids home, not an unseemly display from a bunch of half-cut fifty year olds wanting to jiggle the night away.
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This article was first published in the Herald on Sunday. It is reprinted here with permission.
54 Comments
I suspect it will take more than a temporary change in macroprudential tools to stop this house party. The party has got too popular, the macroprudential option should have been tried in January. I think it will need the support of either interest rate rises and/or a ban on non-residents buying property to stop this party from getting out of control.
Long term the solution is supply side options but that will take time to implement. National has wasted too much time. They have been all talk no action. Key and co are desperate to blame someone else -Councils whoever. They will put immense pressure on Wheeler not to act because when he does the public will turn on the government and ask why they did not act earlier.
Wheeler should act now before the political pressure pre-election gets too great. He should also err on the side of over reacting rather than under reacting.
totally agree.supply side is the longer term option,but we need some immediate fixes.key campaigned on turning the supply side of things around more than 5 years ago,I Even correspondedwith him on it. his govt's lack of progress on this critical issue has just been awful.
Matt did you read my last week article on infrastructure? http://www.interest.co.nz/opinion/65197/brendon-harre-thinks-we-have-problem-poor-quality-and-inadequate-quantity-local-infras
What is your opinion on Adelaides infrastructure compared to Aucklands?
Hi Brendon, there is a totally different funding approach here in Adelaide / Aus. Most bigger infrastructure is funded out of a combination of state and federal funding. An issue in adelaide is local infrastructure. Development contributions are not allowed here. That's good for developers, but it puts more pressure on general rates etc.
Overall I'd say the infrastructure is similar. Auckland has a lot more motorways, a product no doubt of its larger population (1.5 million compared to 1.2 million). Like Auckland public transport here is sub-optimal, but train lines etc are being improved, electrified etc.
there is a big infrastructure build here now, Train lines, roads, a massive upgrade of the Adelaide Oval, big new park and riverside precinct developments, a new massive world class hospital and health research facility. The airport was recently redeveloped
One big problem there Matt-in-Adelaide
I have bleated on about the flaws in the supply-side argument. You acknowledge one of them. Can you guarantee that any increase in supply (in Auckland) on the fringes (or wherever) will be achieved at a greater rate than the rate of population growth in Auckland and Christchurch? and can you guarantee that infrastructure and health services and new schools will be provided at a commensurate rate?
Hi Iconoclast
No I can't guarantee those things. In fact, even if planning rules were liberalised I'm sure Auckland still wouldn't build enough homes, mainly because of the lack of scale and competitiion in the market. However, I do believe the increased supply that would result would help balance the supply/demand equation.
If you've followed my views for a while you would also know that I support demand side measures. I also support supply side measures which the free marketers don't support, such as a quite large state housing build.
Matt I agree with you. It is a combination of factors. Iconoclast I have not been convinced by the criticism of the supply side argument. Maybe if I read better criticisms...
I believe Auckland and certainly Christchurch could build infrastructure fast enough to keep up with population growth if you had Local and Central government willing to achieve that. Maybe at times of extreme growth their would be a lag of a few years. Unfortunately NZ rountinely has a lag of decade or more and Central and Local government with no will.
Iconoclast I think we are talking about elasticity of supply for new housing. "Price elasticity of supply measures how the amount of a good firms wish to supply changes in response to a change in price" http://en.wikipedia.org/wiki/Elasticity_(economics).
In simple mathematical terms % change in quantity divided by % change in price. On a graph this would measure the steepness of the supply curve. Perfectly inelastic would have zero elasticity and would be represented by a vertical supply curve. London's housing market might be close to this. Massive price increases and hardly any new housing.
Perfectly elastic supply would have a value of 1. The supply curve would be flat. There is no housing market like this but some places like Houston have big increases in supply for quite moderate increases prices.
I argue that transport infrastructure and liberal planning rules can make your housing supply curve much flatter. Given New Zealand has a low level of transport infrastructure and strict planning rules there is a big potential for gain here.
Wheras the tools Wheeler has of Marcroprudential tools or directly raising or lowering interest rates will cause a parallel shift in the whole demand curve.
This would be easier to show on a graph.
The supplysiders argue that the housing supply curve can be much flatter so that for any given increase in demand there is less price increases.
Others ignore the supply side and argue if housing prices increase excessively and endanger the financial system the Reserve Bank can intervene.
And the third group which seems to include our Prime Minister ignores both the problem of inelastic housing supply and dangerous housing bubbles.
Continuing this theme of demandsiders versus supplysiders.
It is ridiculous that Wheeler is signalling he sees it as necessary to reduce the demand for housing due to the housing bubble impact on inflation and the financial system. While the government is actively trying to boost the demand by changing the rules for kiwisaver and refuses to slow down immigration or non-residents buying property.
House prices are in decline or flatlining in all areas of NZ, outside of Auckland, & maybe Chch temporarily. Why should 1st home buyers in Palmerston N, Taupo, Gisborne, Hastings, Dunedin, Timaru, Rotorua etc be punished for an Auckland problem.
Slap the LVR rules on Auckland buyers only.
Actually MB... Why should it only be first home buyers anywhere that are punished because of speculators like you? If Wheeler is to do anything he needs to do it wholisticly and address all the issues, not just discriminate against the smallest group of buyers in Auckland who probably just want a home to live in and be ok in retirement in. Rather than the property investors who want to bludgeon every last penny out of their tenants then flick the house of for a massive tax free capital gain! Or non residents who dictate the market from foreign shores. Or the hand wringing fools who because of their own vested interest in the Auckland property bubble, refuse to refuse to use their elected power and free up land and adjust their insane resource regulations!
Auckland + Canterbury = 50% New Zealand. So it is a pretty big problem. If nothing is done it will spill over to all parts of NZ.
How many times have we seen a property boom start in Auckland and then extend to the whole country?
How dangerous for NZ would it be for house prices to inflate another 20%?
House prices are not booming or inflated. That is a complete myth.
2 or 3 select areas in Auckland maybe being bought up by foreign buyers.
Most of the housing market / prices are stagnant at best.
Mandalay: A speculator?! ha ha if only. I am a voice for the middle salary earning 'mortgagebelt' of heartland NZ. Home-owning only actually....
Bernard as you are well aware the housing market is integrated into the money supply and the economy. New Zealand IS housing, 64% of our wealth according to the National Party. So by default if you burst the housing bubble it decreases that wealth, no politician is going to do that. Housing as the major function in our economy has become too big and gone too far to deal with. It must continue until it can't.
Rest assured that at some stage the "can't" will happen.
Ngakonui - If the GFC could only cause house prices do drop 11% from the November 2007 peak then it is unlikely there is anything on the horizon that will collapse the market. We are now well above the 2007 peak so the GFC had very little impact.
The LVR rule (if it comes in) will have no impact on those with several investment properties and equity who can still buy with 100% mortgages using security across the entire portfolio. It will not impact on first home buyers with wealthy parents who can provide a guarantee etc.
A real estate slump/flat period such as the 2008 to 2012 period is usually followed by a sustained period of capital gain over at least 3 years so suspect this house price party has only just started.
The next surge in prices will come off the back of of a net migration gain of say 30,000 or 40,000 people into NZ in a 12 month period - perhaps from now until the end of July 2014.
bigblue. An 80% LVR will have an effect on those who do have several investment properties. Many of them are highly leveraged (madly over leaveraged in my view) Just go to the spruikers and hear them offer coaching in how to achieve high number of purchases for 'no money down'
Slowing that down will be a good thing.
Mortgage Belt - get out and attend some open homes or auctions on the north shore, central or eastern suburbs of Auckland and you will note that the crowds are usually 60% to 70% asian faces. Consent data if analysed would also most likely show that the majority of one-off new builds under construction in Auckland are by chinese developers.
Yes, been there, done that and the house prices on the north shore and eastern suburbs do not make sense anymore. And a major factor that is fueling it is the good school zones. You not only have families, foreign investors and local property investors looking for properties in high decile zones and paying crazy money. Look in the lower decile areas and you don't find the same pressure. We were looking at properties on the north shore and it seems the demographic has changed there considerably over the last few years.
Yeah, crank up interest rates. That way lots of hot money will flood in chasing higher returns forcing up the exchange rate. Then we'll all be able to rush of to Harvey Norman and buy heaps of imported gadgets on no deposit. See, we don't worry about LVR's on useful productive long lasting stuff like iPads and monster TV's, just worthless houses that don't serve any purpose.
And damn the farmers and manufacturing exporters. Who cares if they have a few billion less to invest back in their enterprise. Let's give it to Aussie banks and Japanese housewives instead.
Hell yes, let's do it. That way instead of paying the extra $100,000 or so up front to builders and developers and other layabouts, we can send $200,000 to overseas banks in installments over 30 years . And sure it's going to blow out to current account deficit like crazy but don't worry, As long as we can get house prices back to the magical, mystical (and mythical) medium multiple, then all will be well.
Please don't go boring me with facts about how there are thousands of houses for sale at very reasonable prices in rather pleasant locations that are not the North Shore or Eastern or Central suburbs of Auckland. I bet Auckland is the only city in the entire universe where the really choice locations cost heaps more than the less desirable ones.
And I don't think for a minute that BH's obsession with Auckland prices has anything to do with the fact that he will probably never be able to buy back into the neighbourhood he recently and foolishly sold out of without taking on an extra $200,000 of mortgage debt that he is begging to be made lots more expensive.
We got a good shaking in Lower Hutt. Easily the biggest I've experienced. Whole house was swaying, water sloshed out of the fishtank, a few things fell over in cupboards, and pictures off the walls, but nothing I'd call damage. Haven't yet heard anything about how things are in the city, or any other suburbs.
With peak accelerations about 12% in the Wellington CBD any new structures should be fine, but buildings below 33% of code could well have exceeded their ultimate limit state.
Some of the photos floating on the interweb and tele clearly show yielding. Large amounts of glass breakage and ceiling collapse indicate possible structural damage.
Should Wellington buildings over 2 levels not be closed until assessments are undertaken??
12% PGA in Wellington tonight compares to 22% PGA in ChCh CBD on 4 Sept and 60%+ on 22 Feb.
It's remarkable that 4 hours after the event, with reporters outside parliament, that we haven't had a Government Minister fronting up yet.
Surely the only sensible thing to do is a full shut down tomorrow for assessments of the CBD, and of Universities and Schools.
Are they not concerned another CTV or similar is a real possiblility??
Hi,
Im not structural enginer, but a falling false ceiling is no real indicator, often they are not put in well and are just thin formed steel or allow so buckle and fall out...ditto glass falling out, though it should not, corroded brackets or bolts is a known issue.
I suspect we'll see buildings closed for 2 days...only so many engineers capable of inspecting, if you want to be that thorough then a week.
It will be interesting to take a quick look at the reports, personally it didnt feel that bad to me. If there is widespread structural damage from an event this small, then oh dear, and our insurance premiums will rocket.
regards
Economic salvation comes to NZ in the form of large earthquakes to Wellington. Bank economists predict the rebuild for Welington, Blenheim, Picton, Lower Hutt will inject $30 Billion into the NZ economy providing amazing stimulus as we have seen for Chch.
This will cause rising inflation, increased demand, and (of course) rising interest rates (what we've all been waiting for).
'taint happening?:
New Zealand is rapidly becoming one of the top destinations for Chinese people looking to buy properties overseas, according to a major Chinese property website.
Juwai.com is the leading China-based website promoting overseas properties for wealthy buyers.
Juwai means "home overseas". It has listings for 1.6 million properties in 118 locations - with nearly 19,000 in New Zealand.
New Zealand has grown strongly in popularity on the website over the last year, and was the 15th most popular country for property searches in the last six months, compared with a year ago when it wasn't even in the top 50.
http://www.stuff.co.nz/business/money/8944788/NZ-hot-choice-for-Chinese
The government could very easily and quickly stop the housing bubble party if they wished. Stop immigration and foreign property purchases. Clearly they do not want to stop the party and by the way the that they encourage immigration and foreign property sales one has to suspect that they actually want the property bubble party to continue, despite all their rhetoric to the contary.
As with foolish parents who try curry favour with their children by behaving down at their level and are unable to provide wise firm guidance and direction, the results are likely to be bad.
Ppl coming in though raise NZs wealth....so its believed. Really makes me scratch my head on why we seem so intent on letting ppl in when we have unemployment this high...and likely to get worse. Do rich foreigners really open up businesses that employ NZers?
I really wonder......my impression would be immigration is seen as a way to keep labour costs down.....
regards
Why will politicians not acknowldge that the low deposit home advances are a significant part of the excess demand driving up prices which is very much against the interests of the first home buyers and those other buyers as well.
Long live the party poopers - may common sense and good economics prevail.
David Lee
A massive amount of lost votes to be lost, even a Govn, now what's the question?
;]
Im listening to a few whinners in work....utterly emotive, no logic and dont want to listen etc....at least one is leaving in a month, thank goodness..
PS "common sense" a term best avoided IMHO.
regards
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