I always struggle a bit with 'discussion papers' in terms of what I'm supposed to take from them and how 'significant' they may or may not be.
And so it is a bit therefore with a new paper from vastly experienced academic and public sector economist Andrew Coleman, who is currently working for the Reserve Bank (RBNZ). I'm going to say that this is pretty significant and contains some ideas we as a country need to look hard at.
The RBNZ has issued a wide-ranging paper by Coleman that examines the reason why housing markets have such unusual price and building activity cycles.
In among a number of things, Coleman talked about 'price backwardation' - when capacity constraints in the property construction and development industry lead to temporarily high house prices and temporarily high construction costs.
...And he made the point that central banks "could be justified" in using interest rate rises to combat high house prices.
This immediately raises a number of issues.
One issue is that a lot of people probably think the Reserve Bank already does this - or at least is supposed to. For is there not always a loud chorus about how the RBNZ 'should do something' when house prices start gallivanting away - as is an ongoing hazard in our housing obsessed population?
And I often feel honour-bound in articles to explain that the RBNZ does NOT target house prices and that is not its thing. It targets achieving 1% to 3% inflation and maximum sustainable employment under its monetary policy role, while its other major role is maintaining financial stability. It's under the latter responsibility that houses and house prices sit, since if house prices are doing things that threaten financial stability this is of interest indeed to the RBNZ.
At the moment we have higher interest rates than we've had for a while - which is being done to tackle rampant inflation. But as we've seen, the high interest rates have also knocked the stuffing out of the housing market.
As Coleman points out in his paper, central banks don't have a mandate to prevent unsustainable house prices.
But what if they did?
Effectively Coleman suggests the central bank could substitute high interest rates for high house prices during periods when capacity constraints are causing construction and housing costs to get out of whack. So, in other words crank the interest rates up to stop house prices getting too high - and have the public facing high interest rates rather than high prices, for a period of time anyway.
"For those people who purchase property at unduly high prices, or those people who are forced to sell at unduly low prices, these periods of extraordinarily high or low prices can cause considerable welfare losses," Coleman says.
"In addition, there is now substantial evidence that the risk of financial crises and particularly virulent and costly recessions increases during episodes when house prices and mortgage credit rapidly increase.
"It is plausible, therefore, that prolonged episodes of price backwardation could lead to particularly poor financial and economic outcomes in subsequent years. The rapid increase in house prices and credit during 2000-2005 is perceived to have contributed to the Global Financial Crisis."
Coleman says that unfortunately, little is known about the welfare implications that arise when property demand falls in response to high interest rates rather than high prices during periods of 'cyclical backwardation'.
"Any decision to raise interest rates to reduce house price backwardation will depend on the welfare costs of price backwardation, if any; on the importance of these welfare costs to the central bank; on the tools available to the central bank to respond to these episodes; and on the relative costs of these interventions relative to other interventions.
"High interest rates have other economic consequences that would need to be taken into account when making such a decision. They typically reduce employment and the inflation rate and lead to an exchange rate appreciation, for example. There is very little formal research on the relative costs and benefits of using interest rate changes to reduce the size of unsustainable house price changes."
So, there we go. Coleman is not seemingly suggesting this is some sort of perfect remedy. But he does appear to think we should be doing more research into the subject. Seems like a very good idea to me.
Right now the New Zealand housing market is having one of its infrequent periods in the doldrums, so it is a great time to think a bit deeper about how we tackle the housing market in future.
This country surely does not need a repeat of berserk episodes like the 40% price rise during the pandemic again in future.
Our housing market is now such a dominant part of our economy and our nation's psyche that perhaps we do have to treat it as a special case and say - well this thing needs putting under some sort of control. Now I don't mean 'control' in a regulation kind of way, but there's no doubt the RBNZ would be well able to to do something about demand.
Let's step back for a second and talk about interest rates.
I always thought it was reasonably obvious that house prices would rise when interest rates were low - but maybe it wasn't obvious.
I remember that the former chief economist at Westpac Dominick Stephens would for many years emphasise just how strong a role the level of interest rates was in house prices. And it was interesting to note that after Stephens moved to Treasury the government department changed the methodology it uses to forecast house prices by putting more weight on the impact of interest rates.
And then there was the suite of research the RBNZ issued last year, which again perhaps on one level might have looked like it was stating the obvious, but on another made the very strong point that our mortgage rates dropped by much more than many countries in the period from 2008-2021 and, bingo, our house prices rose by much more than other countries.
Maybe we just needed to see all this in black and white.
The fact is low interest rates in future again could be dangerous for us.
So, what to do?
Our housing market will not be down forever. Indeed, even as I write this I'm reading economists' notes that suggest maybe there may now be some (tentative) signs of life in the housing market. Our borders are open again. People who will need housing are again flocking in. And we can confidently expect much more of that if National governs after October's election.
We know that our housing market can turn on a dime. It did that in 2020 when the mood within a month or two switched from Armageddon talk to 'everybody get in now!'
It may just be then that the idea of the Reserve Bank doing what a lot of people think it does/should do and targeting the housing market with interest rates is worthy of serious consideration.
But would this mean we would have to tolerate higher interest rates than in other countries on perhaps a frequent basis?
Well it might.
Could it be that this might have to be a price we pay for our expensive housing habit?
87 Comments
"cheap easily accessible debt" is a key demand input.
Let's also not forget the 25% increase in NZ population over the previous 2 decades primarily resulting from lax immigration policies aimed at pumping up GDP & keeping business labour costs low coupled with supply constraints eg ever increasing local authority consent & subdivision costs & artificial restraints on residential land availability.
Let's also not forget the 25% increase in NZ population over the previous 2 decades primarily resulting from lax immigration policies aimed at pumping up GDP & keeping business labour costs low coupled with supply constraints eg ever increasing local authority consent & subdivision costs & artificial restraints on residential land availability.
Aussie uses the same playbook
Yeah - but the Australians have spent a great deal more than we have per head on keeping up with the infrastructure needed for that kind population growth, and they do have a limited capital gains tax that exempts the family home - and the world didn't end when they introduced it.
If the 2 years over Covid showed us anything it's that 25% can be negated in a heartbeat, and then added to. (PS: Sorry! I guess you meant 25% mortgage rates)
This is it.
There will be no second chance for us to rebalance our economy if we fail at this attempt.
We've made a good start - or the RBNZ have anyway, so in the mantra of "Do it right; do it once" then we have a lot further to go. That $500k you mention, should be the 'resting level' And that generally comes after it's been overshot on the downside and 'recovers' to that stable level.
That's right. Retail mortgage rates at around 7-8% for an extended period of time and inflation maybe back to within the desired range in around 2-3 years. That would be the sensible thing to do, unfortunately the central banking ninkumpoops will screw this up, likely over tighten till we have 10%+ retail rates and give us a severe economic depression to boot.
Could it be that this might have to be a price we pay for our expensive housing habit?
Blind Freddy could have told you this a long, long time ago. The problem was that the ruling elite and the sheeple thought they had discovered the elixir. This fed into the national exceptionalism hype and now it's looking increasingly likely that it was little more than a mirage.
Bigger question is if you could wind back the clock and have a more sober housing market (with the focus on housing as more of a consumption good than as a savings vehicle) with a greater focus on building a productive economy, would we better off? My intuition says yes. At the very least, you wouldn't have a good proportion of the popn living paycheck to paycheck and a greater focus on other forms of saving. When the total value of land to GDP is sitting a 5x (which is really just the result of credit creation as opposed to some inherent value), you have an issue. The ruling elite never want to talk about this.
Govt says we should save more and spend less to stamp inflation, banks want us to borrow and spend as well as offering lower TD rates than historically under similar conditions, and somewhat undermining the RBNZ through current 2-3 year fixed rates in response to latest OCR increase. Debt is no longer cheap.
Banks therefore are exposed by displaying their priorities as never-ending record profits. This exposes the contempt they have for the govt and being willing to show them they don 't have to listen to them. The only thing they really need to worry about is a potential bank run if everything hits the fan harder than expected.
We have vested interests in government, the golden goose of housing is coming back to reality and will likely drop lower than expected. Ego's will be bruised, mortgagee sales will eventuate, vultures/investors will circle and snap up cheap property with their already made gains from property thus outbidding FHB's once again, the rich will get richer, and the poor poorer indeed.
The govt will continue to refrain from taking any accountability in the matter and no heads will roll, NZ'ers seem ok putting up with this but mutter under our breath and to each other until election day comes. How long until we demand better, how far down will we sink economically before people are desperate enough to demand better of our govt. Whilst some at the parliamentary protests were there for scrupulous reasons, others lost jobs and businesses due to govt choices so acted within their rights. Society will have a breaking point, but how far will things go before we find it out. So help your neighbours, help your city, help your friends however you can, make submissions to parliament and your local MP's. Bind our society back together from the fragmentation that has been brought upon us. Forget be kind, be brave and speak your mind to those around you, discuss, educate and grow. We have the chance to demand better now, as we should. Better living New Zealand
All these highly qualified economists seem to miss the obvious.
Why are we so concerned about money printing, but credit creation is a free for all. In reality both increase the “money” supply, the latter however comes with the inflation inducing interest rates so is arguably worse.
Except the RBNZ controls the OCR, not mortgage rates. If the last 100bps rise in the OCR hasn't taught us that then nothing will.
Besides, cheap credit doesn't raise house prices, it raises asset prices, of which property is one class. The issue lies in the special treatment this particular class of asset gets, which we try to justify using sentimental platitudes like "family home" and "Mum and Dad investors". We either treat property like any other profits generating asset and tax accordingly, or start treating it like a place to live.
I'm not sure whether that's true or not, but assuming that it is, the tool then loses its effectiveness during yeild curve inversions, which is likely to be when we need it most.
There certainly is a correlation between the OCR and retail rates, but correlation does not necessarily imply causation.
I think most - if not all - countries exempt the family home. Whatever the "distortion" might be, it doesn't greatly affect the the overall tax take. There is another quite reasonable objection - people don't usually keep very good track on capiral sums like a new room over a long perod of ownership. Effectively this alters the "buy" price ....
Real world example: A few years ago mother in law became terminally sick and needed home help etc.
their current house having lots of stairs etc was suddenly unsuitable and my father in law had to quickly sell it and buy a similar house in the same suburb, but without stairs.
If he had to pay a capital gains tax ( likely 33%) on his family home at that point they would not have been able to afford to swap houses and would have had to shift out of the city they both lived in their whole lives.
This to me seems very unfair in this circumstance , but is a real world example of the effects of a capital gains tax on the family home.
Would have been easily avoided if they had downsized after the kids left home.
1. Their choice to buy a multi story home.
2. Boomers in general have not been leaving the family homes in big cities, like the previous generation did in retirement and old age, thus pushing FHB and young families into the outskirts resulting in brutal commuting.
3. They would only be paying 33% on the capital gains portion - they wouldn't be paying any tax on the original purchase price that their mortgage paid down.
Its a love / hate triangle
- RBNZ sets the cost of the credit, but has little control re how it's allocated. No DTIs
- Local Councils control supply by zoning, but are constrained by infrastructure spending and bloated balance sheets. They try to fix by developer contributions. Planners to not want spread as means more roads and cars. Up not out, Nimbys do not want up next to them.
- Central Gov somewhat controls demand via immigration and foreign ownership rules. They also set rules to try and limit investors ability to outbid FHBers ie Int rate deductions. But they also collect GST on the new builds......
Each is trying to impose rules because they are not in direct control of all the levers... IE Centrally permission to put 3 houses on an 800sq m site has passed, but councils still pushing back.
If all three work together they would have more chance of a more stable financial environment, with less boom/bust.
I still think NZ needs its own version of Freddie and Fanny so people can buy with 25 years mortgage rates.... The current system makes FHB very vulnerable.
Pragmatist I will post on another thread, yes there are risks and they need to be understood fully. But also gains. We have risks now with the current banking system and who would pick up the mess.
After re-reading the article, my summation is that we still have some very hard lessons to learn right across the anglosphere as Australia and Canada are in the same boat as we are.
We've used cheap labour in Asia to provide us with discounted goods and services (deflationary for the CPI basket of goods) and allowed us spend too much money on housing that we have no ability to pay back using our own productivity from the goods and services we produce in NZ (i.e. to create income to pay for that housing debt).
Its been a fools paradise.
I have said it once and will say it again, where were these discussions 5 years ago when we had a chance to actually stop this from happening. It is like those in charge have just woken up from a long slumber (i.e. asleep at the wheel) and discovered, oh no we let this get out of control time to actually do something.
They need to remember it is people's lives they are messing with here its not just numbers on a spreadsheet.
I've been trying to ring alarm bells for years about how bad things could get if we didn't change our policies and collective narrative on housing. But generally got ridiculed, sometimes laughed at, sometimes a bit of gaslighting from certain individuals.
Like my experience in America during the GFC, if society collectively loses the plot together, there is little you can do, even if you can see how bad things are at risk of becoming (from a financial and social perspective). People suggested I get a job at the reserve bank and try to change their policies, but having worked in Wellington already, I knew that it was pointless as government agencies were in on pumping the debt/asset bubble - they had no interest in changing until the market forced them to do so (i.e. ambulance at the bottom of the cliff stuff...)
We needed DTI limits (and the other policies Labour introduced just recently) following the GFC and learn from the experiences of other nations who had bubbles that burst - but we didn't - instead we pumped away because it was the easy option (politically and financially) in the short term.
by Independent_Observer | 19th Mar 16, 12:00pm
Roelof, there are a number of factors that could well indicate we're in a bubble.
- Look at the outside of this website. What is it advertising?
- Pick up the news paper. Read the business section. What is the dominant theme?
- Turn on the TV at night. What shows are most often on? Home renovation and Location, location, location.
- Listen to the radio. What is it playing? Advertisements for property investment coaching.
- Go to a BBQ. What are people talking about? Their property investment portfolios.
- Watch the 6pm news. What is it is saying? Historically overly priced property.
- What are the banks talking about in their public notifications. Concerns around property prices and the high level of debt we have.
- Ask the masses if they think they're in a bubble. They deny it - and believe prices will climb forever (another classic sign).
All of the sign posts are there. It's smacking us in the face every day. Don't believe it, well nor did any of the masses involved in most other bubbles. Read the works by Robert Shiller on bubbles. We have all the classic signs and symptoms. Its just a matter of whether you want to accept them or not.
World renowned economist says Auckland housing a bubble | interest.co.nz
Thanks JC - not necessarily even on this site. If you mention to people in NZ that house prices need to fall in order to create financial and social stability and that pumping an asset bubble is a very foolish and dangerous thing to do (especially housing as it will impact everyone), it is like you're the grim reaper who has arrived to end a person's life prematurely. It's just not an option. Such has our obsession been with housing and the sense of wealth (and apparently ego) that came with inflated prices.
If you mention to people in NZ that house prices need to fall in order to create financial and social stability and that pumping an asset bubble is a very foolish and dangerous thing to do (especially housing as it will impact everyone)
This is where we tend to diverge....a little.
I'm of the belief that house price crashes are bad for financial and social stability....even in the medium term. But you are correct in that doubling down on asset bubbles as the be-all-and-end-all (and pretending that it's not a bubble - it's the natural order) is foolish and dangerous.
But I'm a contrarian thinker and I will not claim that the NZ property crash is baked in, even though the probability appears to be higher now than in the past. But even if the bubble does / doesn't fall flat on its face, the damage has been done and both +/- outcomes are going to have collateral damage.
People having to take out huge mortgages just to buy their own home is bad for society isn't it? Financial stress is real.
What about falling family home ownership? Surely that is bad for society? People not having the security and freedom of owning their own home.
With the huge distortion in land prices that we have, there is going to be pain. The question is who gets the brunt of it.
I feel that the powers that be oversell the risks of asset crashes, as they are the ones who would lose the most.
Look how young folk have to have a dual income to save for 8x DTI to afford a house now days, this impacts the nuclear family element and eats away at the family unit over time. This alone will bring larger social instability and a decoupling of family values, as well as greater demand for housing as more couples split as a result.
'This is where we tend to diverge....a little.
I'm of the belief that house price crashes are bad for financial and social stability....even in the medium term'
We don't disagree on this JC. I'm with you that house price crashes are bad for financial and social stability (in the short term) - that is why it was of the upmost importance to prevent ourselves getting into this position in the first place.
But in the long run, brining house prices back to a more moderate DTI should bring about greater stability - even if it requires some short term pain.
Its a bit like the Daniel Kahneman study on whether it is best to remove the band aid fast or slow....do you want to experience a high degree of pain for a short term if you rip it off quickly, or do you want to experience a low degree of pain for a long time if you rip it off slowly?
..it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky. - Link - section II-3
When average wage couples have no hope of buying a home in many area’s it’s a sure sign house prices are way above sustainable levels we have seen 20% fall’s already from highs now over next couples of years house price’s will continue to drop. At a push average wages earners will be able to buy at around 550k so a floor will be found at this point once this has been achieved government should put policies in place so homes can only go up with inflation and take speculators out of the market.
Assuming that enough land could be zoned to make the land component say 250 of this, (which is almost impossible re current developer fees) then you would need 300 to build.
I can see older houses in rural and regional NZ at 550, but to build now in our cities costs too much for this vision to occur. Developers fees are too high, and building materials and build costs way too high.
High 6's is almost the limit right here, it will be dense, high and not that appealing as a family home. Its for this reason so many of our nurses etc are looking at what Aussie offers.
If people can’t afford to purchase then what ? prices continue fall or wait until wages for average couple goes up maybe 25% or combination of both. The main point is FHB don’t jump in to soon as by this time next year I would think house price’s will fall another 15% to 20%. I can also see a lot of developments being in huge financial difficulties.
That must mean we've experienced 4 decades of 7% inflation because over that time house prices have doubled every 10 years (because we dropped interest rates from 20% to 2%). So we've been way outside the target of 2% and may need to pay the consequences of such loose monetary policy settings.
Scarfie just sent me a message - and I agree with him.
Who was crazy enough to allow young NZers to raid their Kiwi savers to enter this crazy Housing Market, it just sent the message that you should do anything you can to get in before it was too late.... Lately most have lost all that equity.... sure some here would say its not lost.... but if your kiwi saver mgr was marketing it to market it would be ALL GONE.
Exactly. And every person who sells down their house now has extra cash to feed into the economy to purchase either services or consumer goods - as well as those who tap into their inflated equity to purchase vehicles, boats, etc. on the house.
House prices should never have been removed from the CPI. They could actually be included now, with the right weighting - which I would suggest is around 4-5%, or half the rental weighting as long-term mortgages are cheaper than renting (as long as we're targetting an inflation rate greater than 0%).
It might cause even more distortions now if we include it while prices are falling. It would add a deflationary factor to the basket of measured goods and limit the moderation of interest rates which we need to bring about balance in the economy.
Perhaps when house prices flatline would be a good time - assuming the RBNZ don't overcook the rate hikes (if they haven't done so already).
The argument id make is that higher house prices leads to inflation in the same way higher wages lead to inflation. Suppressing wage increases isn’t the reserve banks mandate but they do it because they know higher wages will flow through to producer costs which flows through to prices.
Well higher house prices require more debt which requires higher wages which as per the above needs a response.
So, obviously the reserve bank must have regard to house prices beyond financial stability. Excluding them is a fiction based on a false belief that prices can rise independent of incomes, which clearly cannot happen indefinitely.
As to what should control house prices, DTI ratios are a better solution. Keeps everything nice and even keel and works counter cyclically without adjustment. When interest rates are low the DTI ratio restricts borrowing, when interest rates are higher the DTI has no effect because people can’t afford to borrow as much.
I also want to add that house price expectations are a bit like inflation expectations - they need to be managed for financial stability reasons. The reserve banks actions the last three years, while i agreed with them, converted the last few people who believed prices couldn’t rise for ever.
We cannot build an economy by taking more things away. Granted house prices are still crazy, but crushing that section the economy on top of everything else helps us how?
We're doing our best to run our farmers out of business.
We've distorted our used car market with daft rebates and extra taxes.
Health and Safety, while well intentioned, is a huge cost for businesses in NZ that already lack a competitive edge.
Our minimum wage is how high?
We send almost all of our youngest to University why? It's a complete sham, most would be happier and better off with a trade or apprenticeship.
This country needs desperately to pick a side. If we're going to be socialist, go boots and all. I'd rather not, but at least I can leave.
Ideally, we need far far less regulation. Fewer rules. The RBNZ should have ONE mandate. Control inflation, and that's it. Nothing else.
Too late now - like an 60 year old alchoholic saying that they should be allowed to live in good health in their later years despite abusing their body their entire life.
If you want to pump an asset bubble because it is the popular and easy thing to do, then you need to live with the consequences of these actions. House prices are too high relative to incomes and it never needed to be this way.
And we will need to deal with this as a society and decide who will pay the biggest price.
1. we leave inflation very high so not too many people lose jobs but assets lose their value a lot in real terms and the cost of living remains very high so we slowly have a lower quality of life.
2. we control inflation but we cause a very nasty recession and a number of people will default on mortgages as they lose their jobs - asset prices fall a long way in nominal terms.
You can't have your cake and eat it too - even though people seem to believe this is possible because they had a lucky run for a few decades.
If we want house prices to climb at 7% p.a. (i.e. the popular narrative of doubling every 10 years) but we want to control wages to grow only at 2% p.a., then this leaves a massive whole as house prices a priced using the discounted future cash flows of our individual earnings. The maths don't add up and a comprimise is going to have to be found.
It comes as a total mystery to me why the RBNZ doesn't have different interest rate targets for different asset classes. Unlike the OCR which is blunt and ungainly bludgeoning tool, targeted rates would be much more, well, targeted. One way to manage this is to securitize the loans and then the RBNZ can intervene in the market as required to manipulate rates as it has done recently with QE and with FX rates on occasion.
Don't want to sound like a broken record...but I've been here arguing for years that based upon the risk rules of finance, that as house prices got more expensive relative to incomes, that mortgage rates should have been rising, not falling further.
That is because as debt relative to associated income rises, the risk of a default rises on those loans, so they should require a higher risk premium.
But instead we've decided that in the post GFC era that financial rules no longer apply and when risk increases of a debt default, you reduce the risk premium, not increase it. (i.e. residential mortgage rates should have been rising, not falling, the last 10 years - this would have kept house prices in line with general income inflation around 2% and avoided a dangerous debt/asset bubble).
So now we find ourselves in a very bad rock/hard place situation for acting foolishly.
Fannie and Freddie would fix this and leave Banks to take actual risks.... and make fair returns, right now how much % of profit comes from residential lending book? 50- 60%
National wont do it, Act opposed to anything not 100% free market, and Labour too thick to understand why it was needed ... unless it was called Hone and Aroha. If only Maori politicians could understand the importance of home ownership in education outcomes, self belief etc even health. What is more wrap around then your own home.....
RBNZ could keep the OCR and set the Hone and Aroha 25 year rates for owner occupied house mortgages.... done I have solved the RBNZs problem
If only Maori politicians could understand the importance of home ownership in education outcomes, self belief etc even health.
The government has signed a $55 million partnership with Māori providers which it says will build up to 100 homes Te Tai Tokerau.
The deal with Te Pouahi o Te Tai Tokerau - a collective of iwi, hapū and Ahu Whenua Trusts - would fund between 80 and 100 affordable rental homes and prepare infrastructure on 110 sites by the end of June in 2025.
Pathetic and unfortunately this is more or less a trough for Māori elite.
To be honest, what this ongoing housing market CRASH has shown is the price of houses is heavily tied to the cost of borrowing. Huge mortgages are good for bank profits, real estate agent fees and not much else.
A smart fiscal policy, from any political party, should involve a permanent minimum stress test of 10% for all home loans. That way, when the next inevitable financial upheaval arrives, the housing sector will likely continue along in good shape. And it would prevent another FOMO virus breakout.
Our housing market is now such a dominant part of our economy...
Is it? Even now it's only 15% of GDP and you can't really export houses. It's a dominant part of kiwis asset/paper wealth but housing hasn't really contributed much towards making our economy more productive and, to quote a much wiser bloke; "Productivity isn't everything, but in the long run, it's almost everything.”
bang on. Its those who are highly leveraged or have a bias that are the ones who sprout all that nonsense about it being so important.
Sure there will be a short term economic hangover from the crash in prices. but medium to long term the impacts will only be positive and very welcome.
bang on. Its those who are highly leveraged or have a bias that are the ones who sprout all that nonsense about it being so important.
Disagree. The boomers have been less concerned about income and wage growth during the enduring bubble as the house is doing the savings - out of nowhere. It's very important, not because of GDP, but for the belief that the house is doing the work.
Now, if somehow those 'savings' disappear, you have a whole new paradigm to deal with.
This is why ridiculously expensive houses are just sitting on the Auckland market in the mid 2 mils etc..... These people don't want to accept less as that means accepting a reduced quality of retirement for THE REST OF THEIR LIVES.
They are literally grieving the loss of this pot of cash and the stages of grief go denial then anger..... they are looking at someone to blame, Orr and Labour will get both barrels as it could never be their own fault.
Our bubble was unique due to losses here in the 1987 share crash, which lead to a safe as houses mentality, and the tax incentives of negitive gearing and loss transfer companies (removed 2019). I can remember at one point a bank was lending 105% so FHBers could get some new furniture to go with the new house.... FFS what could possibly go wrong with no deposit and 105% finance?.
Eventually the entire bubble wobbled in 2019 as smarter cashflow aware people started to ask questions about required cash flow positive yields and other existential concepts....but then was juiced with 2% covid sanitiser..... nek minnit + 40%
Brace for impact there is no happy ending here, if you buy a house you better really want it as in all likely hood it will be worth less next year.
Our bubble was unique due to losses here in the 1987 share crash, which lead to a safe as houses mentality
No. The bubble started in the early 90s after bank deregn and the paradigm shift towards a focus on credit creation for housing and a move away from lending for business. It's noticeable across the Anglosphere.
Here's an easily digestible timeline from the wonderful Brian Gaynor. Sure, the 87 crash may have had some impact on the sheeple's attitudes / behaviors. But without the bottomless credit pit, it couldn't have happened.
https://businessdesk.co.nz/article/the-life/looking-back-the-nz-housing…
What new 'paradigm' ?
Those that gambled their retirement on property rises will lose that portion of their retirement savings. Superannuation and any kiwisaver will still be available to them. And if they contributed to the mess by buying investment properties etc .... then there is zero sympathy.
A VERY important lesson will be taught yo them and others - being ...to carefully spread your retirement oriented investments into a well constructed balanced portfolio as if you gamble and lose. There isnt a taxpayer back up plan.
The next generation is already contributing a substantial amount of tax to paying their superannuation, and is currently trying to raise families whilst struggling with crippling inflation and interest rates and house price reduction caused in a very large part by boomers not investing wisely and being greedy with houses. on top of that the climate damage from boomers is also causing major financial and well being headaches for the next gen.
best thing boomers who are leveraged up can do - is let investment properties go asap, minimise their financial footprint, keep working and paying taxes and lobby for change to support the next gen.
I agree with the concept that interest rates are creating an economic hazard in our housing market. However, I disagree with logic that suggests the two should become more intimately entwined. The OCR has som many conflicting flow on effects (lending, bonds and currency, housing). I would suggest the opposite should occur and a tool such as a DTI could insulate the property market from OCR changes so the RBNZ can deploy it without a multitude of unwanted economic ripples also being unleashed.
No it wouldn't, as mortgage renewals would not apply unless the owners decide to sell or change the amortization of the loan.
Make no mistake - there is no way out of this housing bubble/ponzi without pain - but this is our golden opportunity to learn from our mistakes and not let this happen again.
Our borders are open again. People who will need housing are again flocking in. And we can confidently expect much more of that if National governs after October's election.
I don't vote National, but why is the author saying this when immigration hit historic highs under Labour and not National? The same is happening in AU and Canada under Labor and Liberal.
New Zealand experienced a net gain of 72,300 permanent and long-term migrants in 2016/17, which was 4.7% more than in 2015/16. This was the fifth consecutive year in which migration increased and the highest net gain ever recorded - MBIE
Tell me again, who was in government 2012-2017? (Though Covid blip aside, both major parties are as bad as each other)
Take a look at the recent data and remind me who has been in the government since 2017?
https://www.statista.com/statistics/1350278/new-zealand-number-of-work-….
OMG how many millions did it take them to work that one out, the fact that Orr sat on his hands doing nothing, with an OCR at 0.25%, and printing billions, with a government spending out of control.
All while house prices were going through the roof, defies any kind of logic at all.
I'm very much a fan of the social stability, personal security, and better quality of life that owning your own home brings, but that it's been allowed to turn in to a vast speculative enterprise of multiple property ownership is a signal failure in political leadership of all stripes.
How do we stanch the flow of productive capital in to a property market that does nothing to improve our productivity, destabilises society and deprives local enterprises of capital for development and growth? Is it time to start talking about a capital gains tax (again) on the Australian model that exempts the family home and some other specific assets?
TOP are part way there, but their too-broad, brutal humans-are-all-rational-maximisers policy, and apparent catastrophic misunderstanding of the human nature that drives markets, means they will remain politically marginal, at best - they may understand what needs to be done, but seem oblivious to understanding what is actually possible.
None of the other parties seem to have any resolve or even a plan beyond adding to the kludgeocracy with measures like this that will apparently act mostly to enrich the banking enterprises involved. Oh, super.
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