By Bernard Hickey
Prime Minister John Key has defended the Reserve Bank's attempts to slow riskier mortgage lending, saying it was ultimately necessary to slow down Auckland's unsustainable house price inflation and avoid fast interest rate increases for everyone across New Zealand.
Key told Local Government New Zealand's annual conference in Hamilton he still thought first home buyers should be exempt from the Reserve Bank's proposed 'speed limit' on high Loan to Value Ratio (LVR) lending, but that the Reserve Bank needed to slow down Auckland's housing market.
"You can't afford to have housing prices going up 20%. It's not sustainable and it's actually not the right thing to do for the country," Key said in his most detailed comments in months about Auckland's housing market.
"So we do need to deal with that, and the government's response is through the supply side, but the Reserve Bank does need to look at the demand side and they'll need to work through the equity and fairness of that," he said.
"My view is that first home buyers should be a priority within that system, but overall they (the RBNZ) need to take a bit of steam out of that train in Auckland, and hopefully that's what will happen."
Key told the conference that taming housing inflation and avoiding its wider effects on the economy was a major priority for the government.
"You're going to hear a lot about housing, mark my words, over the course of the next 18 months," he told the gathering of more than 200 mayors, councillors and council staff.
"We live in a property-owning democracy. People either own a house or fundamentally want to a buy a house. That is the default position of most New Zealanders," he said.
He described house price inflation in Auckland of 20% over the last year as "a hell of an uplift." Inflation in Christchurch had been in the double digits and he said he suspected prices in Hamilton and Tauranga were already beginning to move as the Auckland effect started to spread.
The government could improve the supply side of the housing market and was working with councils to form Local Housing Accords, he said. These accords would allow councils to approve housing consents for greenfield developments with at least 50 properties and brownfields developments with at least 5 properties within 6 months without referral to the Environment Court, he said.
Auckland was currently building 3,500 to 4,000 homes a year, but needed to build at least 13,000 houses a year to 'stand still' with a growing population. "We can't afford to build 12,000. We need to build 39,000 over the next three years," he said.
But the problem was not just a supply problem, he said.
"The other part of the debate is around the demand side," he said, referring to the Reserve Bank's proposals to limit the growth of high LVR loans and his own views that first home buyers should be given priority.
"But I think it's worth putting some context around that. Absent of any other alternatives...if those macroprudential tools were taken off the table...the only alternative for the Reserve Bank is to raise interest rates for every mortgage holder and business right around the country," he said, referring in particular to Tim Shadbolt's city of Invercargill.
"You're having to pay higher interest rates because of a housing problem in Auckland," he said. "It's also going to put a lot of pressure on the exchange rate and we're an export driven economy."
"Our interest rates are likely to go up anyway. The question is how quickly the Reserve Bank Governor needs to raise rates."
US housing bubble
Key then talked about the risk of a housing bubble bursting and hurting the banking system in the same way it had in America.
"The very people that tried to get into these homes paid far too much, borrowed far too much and when the bubble burst they had negative equity," he said.
"That is a serious issue and that's why I don't think it's a simple thing for central government politicians to say: 'ah well we can afford all these things.'"
(Updated with more comments from Key)
63 Comments
Rapidly growing cities benefit from scale economics. As a city grows, it spreads the fixed costs of providing services across more units, thus lowering unit costs and enabling taxes to stay low. This is doubly true as cities spread into undeveloped “greenfields,” where there are few legacy costs. This can make cities look well managed when in fact they are simply benefitting from growth.
The real question is what happens when the growth cycle ends and unit costs either flatline or start going up. Can the city find sustainability demographically, economically and fiscally without growth as a fuel?
One city facing this challenge is Charlotte, N.C. The Charlotte Observer recently took a refreshingly candid look at how rapid population growth and annexation had enabled the city to spend more money without raising taxes. But that free ride is coming to an end. “We are in a different universe now,” Republican city council member Warren Cooksey told the newspaper. “Cities have identifiable growth cycles, and Charlotte is entering into a new one.”
Cities have long maintained that they needed to annex land to ensure that “people were paying their fair share,” said John Hood of the conservative John Locke Foundation, based in Raleigh. “They denied it was a way to get more money. Now they say because we can’t annex anymore, we have to raise taxes. That gives the game away.”
Not only is Charlotte now limited in its ability to annex, but it is facing an overhang of capital upgrades to bring many areas of the city up to par in services. As a result, taxes are going up.
This is not to say that Charlotte is poorly managed. But the transition from thinking about managing rapid growth to thinking like an operator is a tricky one. Even many companies fail to make it. Retailers, for example, frequently fall on hard times when they reach the point where they can no longer simply open new stores to meet financial targets.
Cities that are benefitting from strong growth have the wind at their backs. But it would be naive to assume that they must be doing something better than everyone else just because of that. Places like Chicago and New York were the Charlottes and Houstons of their day, right down to their laissez-faire economies. But they eventually hit the limits of growth and had to wander in the wilderness while trying to reinvent themselves.
http://www.governing.com/blogs/view/col-charlotte-cities-illusion-growth-economics.html
Horse might be tricky, but check out the mortgage - it's $1370 a month for a $280,000 apartment:
http://www.trulia.com/property/3099616969-Apartment-New-York-NY-10023#p…
That's a convoluted way of describing the
(a) Law of increasing returns, followed by the inevitable
(b) Law of diminishing returns
As you expand, at some point the law of diminshing returns kicks in .. displaying itself in such a way, that the impact of adding one additional unit is not only negative, but also begins to reduce the utility of all the earlier units that previously produced increased utility. Unavoidable really.
Look up the "Law of Diminishing Returns" and Utility. It's all been defined.
Was going to reply yesterday on that and your earier post, then thought better of it. Have been commenting on here for nearly 4 years on "your" topic of interest. When you stated you are "unconvinced" by my arguments and coupled with the basic thrust of your area of interest, I wondered whether you are open to being "convinced"
Any reply I could give would tend to be academic which would be then open to a deluge of prejudiced and differing views. Thus I have no wish to engage in an academic debate in public which could turn into a public game of ping-pong.
If you have a background in economics, have an investigative interest, open to persuasion and wish to provide an email contact I will engage with you.
I genuinely wanted a reply. I admit I have a particular world view but am willing for it to be challenge by some good evidence. My economics is pretty rusty, have been doing other stuff for 20 years. You can email me at b.harre@hotmail.co.uk
This is not to disparage any contributor on this site but .... you might find this of interest. http://www.theatlantic.com/business/archive/2013/06/should-we-trust-eco…
I think you mean its actual fixed costs are hidden by the fact its adding new and expanding existing due to growth needs. ie a 4inch pipe nearing the end of its service life has to be replaced by a 6inch pipe which fortunately for the council/existing ratepayer a developer / new owner gets to foot the bill for. The problem is once there is no more growth and hence replacement paid for by others the true cost of maintaining what there is becomes apparent and taxes have to rise Worse of course when the contributions for new are higher than actual costs and the difference or "profit" was folded into opex or the rates revenue stream, a double whammy unfolds.
regards
Mr Key clearly has no idea... Does he honestly believe the housing bubble is only the result of first home buyers rushing into the market and buying up $650k houses? What a joke... That $5k kiwisaver subsidy is going to go oh so far when 1st time pitchers need a further $95k to buy a half a million sh*t box in Otahuhu!
First home buyers buy the bottom of the market, their ability to pay determines that price.
Lets show it as a simple model and how it multiplies,
In OZ they have a first time buyers grant, that I think was $8k, so that 8k is effectively cash for the seller who leverages it as part of thier LVR for their next place. 8k at 90% LVR means 72K more the seller can now pay for the next house. The next seller now can do 72k as a 90% LVR which means they can pay, 600k more.
Same with allowing first time buyers ever higher LVRs....90%, then 95%, now 96%? and 30 years? how the banks must love locking some poor SOB into debt for 30 years, especially as these are "full recourse" loans.
regards
John Key knows what to do all right, he is not that stupid.... ...its just that to solve this, does not suit a majority of his voters, the bankers, big business mates, real estate agents, over-leverage property investors and various other groups with a "vested self interest".
To start, my solution (for the Auckland Council area only) .... no tax concessions on mortgage interest payments on ANY sort of residential property. There is none for current homeowners/occupiers, so they will be fine.
Before I hear the SCREAMS OF PROTEST from all the landlords out there, who are going to say, but were a business !!
Well, I will ask you and to ponder on this ....how many people do you pay a wage to ???
You already claim back for labour and materials costs ie maintenance, gardens etc already, which is fair enough ...BUT YOU ARE NOT PRODUCING ANYTHING ! and before you mention it, commercial property creates an opportunity to start up and grow new business, as well as business expansion.
Sure YL..... but you will limit your tenant market and people next door etc will complain about the noise etc
Anyway, my idea comes from a situation I heard of ...an apartment in AKL was for sale and of course the vendor wanted far too much .... anyway, in a nutshell, after 7 weeks with no offers, a PI bought it .....and not too far off the list price, so not a bargain.
As this PI already had multiple properties ie way over 25 ....all he was doing was taking out a 100% mortgage and running it at a loss, to claim back tax on his other properties.
I'll give this PI some credit, as all he was, was just another pathetic, greedy property investor taking advantage of NZ's tax laws ...the real villian are the tax laws of this fine country that allow this...... that this Government choose to ignore or want to change.
Goodonya YL !! ...a true legend of the property spruiking, "ponzi" game, at least you are honest and tell it how it is ...I salute you for that as well !! :)
This stupid Government is right behind you, as it is in their "vested" interests to do so..... so glad I already have a property in Auckland, but as an investment I would not pay these prices for the rate of return.....therefore they are only being bought for "potential" capital gain ...good luck with that , you are a true champion !!
Crazy Horse it isn't a "ponzi" scheme.
Just good solid and sound investing principles in an industry that is almost 'god's work' ie housing people... providing shelter... providing a home.
Property investors in New Zealand have a lot to be proud of.
I reckon that, because you own a property, you will gradually realise that sense of pride in the industry most people have.
YL, Your investment is harmful in the sense that you can and do pay more for the property than a first time buyer can afford to service the mortgage for and at the very least delay them achieving their aspired home.
I would accept that if you acquired land and built and sold for a reasonable profit, then you contribute to the economy. Currently you suck the blood from the renter and to some extent the taxpayer through the supplements paid by us all.
But Basel, I am just a poor property investor so I can't afford to pay more than a first-time buyer.
In fact too many of those first-time buyers beat me to the purchase.
Sorry but I have never "acquired land and built and sold" for a "resonable profit" or indeed any profit.
Tenants stay in my properties so I reckon they don't think they are having the blood sucked from them.
YL, your investing methodlogy is most definetely not "solid" or "sound" because you ignore the first, most basic principle in investing, diversification. That doesn't mean that it hasn't worked for you, it clearly has and thats a good thing, you've obviously worked the numbers right and have worked pretty hard to make sure that your places are tenanted and up to scratch etc, but saying it is very much a prideful profession is hubris, you're in it for the money plain and simple and if you refer another post of mine, you are taking away properties that first home buyers could potentially live in, amping up the market for them. I'm not saying being a landlord is bad, we live in a capitalist society so by definition its not, what I'm saying is you may think you're thinking of other people, but you're not.
Not only is it a profession one can feel pride in being involved in, it is also a profession highly regarded by the public. So well regarded in fact that a hell of a lot of people actually want to be involved in it.
So they go and buy a house and get stuck in.
Good on 'em I think. They do good things for other people and get the pride of involvement in the industry.
Because this is 'god's work' god makes it worthwile by allowing a good profit for the people involved.
I think they are all thinking about other people when they think about leasing out their houses.
Whatever you are smoking YL, I would like you to send me some. I don't think I've ever heard someone describe property investing as God's work. If it were God's work, you would be donating all your profit after tax! I'm struggling to think that you actually believe you are doing God's work!
you are right Crazy Horse .. you see these landlords pontificating on about the benefits they provide to society .. but funnily enough they never ever discuss the fact they are in the tax avoidance business .. have you noticed that other muscle-bound property investor kimy has disappeared since he was asked how much income tax he pays
Such vitriol two otherguys.
How can you think this way about property investors, who we all know perform a vital service to the community.
After all, what's more important than providing a place for someone to live in... a roof over their heads.
Certainly food is just as important.
But PIs are, lets face it, doing valuable work housing people. There isn't anything much more important than that is there?
Yet you grumble about a "tax avoidance business." Eh?
Fine, heard that argument before (http://www.youtube.com/watch?v=JAIWTLal9e4), but how about thanking your tenants also? Without them or their ability to pay you, your properties would be nothing but a herd of white elephants, and a maintenance black hole.
No-one's success comes without the help of others.
YL, when I was first starting out in the world I couldn't afford and didn't want to buy my own place for various different reasons, so I rented. I rented a nice place in a good area and was quite happy with the deal I got from the landlord. I was provided a service, which I paid for, simple. Unfortunately there are far too many people commentating on here who are either painfully stupid or to blind to understand these simple relationships.
If all there investors left the market there would be a cronic shortage of rentals. The problem in Auckland is supply, of both rentals and homes to own, to fix the problem increase the supply. Simply pointing the finger at one group of people shows a lack of understanding of the whole problem.
I think people are getting annoyed because renters are being treated like 2nd class citizens. Just look at the show Renters. It might sound quacky, but what I believe is happening is that renters are being treated this way to pressure them to buy property, to keep the whole thing going. If buyers drop out prices will drop out, and the industry as a whole does not want this to happen. Same reason why we have shows on TV like Mitre 10 Dream Home. Which would you rather be in, Mitre 10 Dream Home or Renters? In France, as has been mentioned before, most people rent, it isn't looked down on.
They are a business, they are in effect self-employed ppl using their capital to earn a living under their own power.
The ppl they pay a wage to are themselves all of 1. A self employed plumber also pays a single wage. A landlord probably outsources functions like plumbing and electrical repairs rather than employ his own directly.
Get real to the fact that its almost impossible to differentiate between one business and another like this.
On top of that some ppl want to and choose to rent, stopping landlords deprives them of that choice.
Now sure I think we need a land tax and a CGT tax to make sure we have a level playing field so ppl dont choose one busness based on tax advantages.
You want to cure the problem, not the symptom.
regards
Crazy Horse - the houses are the stock. There is no difference between housing stock and other stock.
You state that landlords are not producing anything - they are providing accommodation just like a hotel or motel but on a more permanent basis. Do you want people sleeping under bridges or on the streets and park benches?
Landlords are also very necessary at ensuring that property is closer to a true valuation. If Investors aren't buying then it is probably not a good time for anyone to be buying as the market could be overheated and over-supplied.
Most people value a property on what they can afford to pay which is completely different to what a property is actually worth.
notaneconomist - with all due respect, I am not that stupid that I don't realise that there is a natural demand for renting residential property....my concern is how it is treated by the current government and the tax legislation thereof....it all points to the fact the Government and Reserve Bank have no intention at all of addressing any of the demand side of the equation...
While any effort on their part of the supply side of the equation is just weak and if it does happen, is years away anyway...
Also if you refer to my previous post at 11.42am above, who was the purchaser of the mentioned property ??? .....it was a property investor whose offer was accepted ....not a home buyer.
Crazy Horse - You can't look at one side of the taxation system and think it is unfair in someway.
There is an enormous cost to business in using acountants and completion of all tax obligations that are legislated. There is also normally a large cost to the business owner in time and money in ensuring tax obligations are met. These costs along with others that are legislated for are what is making NZ business inefficient and putting prices up.
Business doesn't have the same luxury as employees who don't have to do anything or complete anything in regards to taxation as their employers are paying those costs.
One thing the NZ Government hasn't done is record the amount of homes that are off-shore owned. Those PI will not be paying income taxes in NZ if the country the PI lives in has a tax treay with NZ. If there is something that needs changing it is these tax treaties and I can't see that happening anytime soon.
Fixing the supply side is actually quite easy - cut out the bureaucratic red tape BS of Local Government for one.
The IRD are very strict on NZ business and compliance and I will give you an example. If you have a death in your family and don't furnish your GST on time you will pay penalty interest on any amount outstanding and if you haven't filed the appropriate paperwork on the due date of the return you will also be penalised.
One day late with PAYE paperwork even if you paid the PAYE taxes on the due date will see you pay $250.00 in late filing fees.
I am sick of people whinging about what they see as a a tax dodge when they have no idea about business taxation and the burdens of the costs of compliance to business. If you want more houses built and to bring them in cheaper then taxing the living daylights of PI is not going to achieve that.
"All the investors out the market"
Where will people rent? Surely you don't assume that everyone can afford a deposit mortgage? What about those with no savings, 100% mortgages? What about those that don't want to rent, e.g. going overseas soon?
You must see how naive you sound.
I make no suggestion (unlike your assumptions) that all landlords would go to market.
However enough pressure would see some liquidate part or all of their holdings which in turn allows some (but not all) aspiring home owners in.
All market pressures and results are grey, not all black or all white.
Here's what Labour leader David Shearer has to say:
John Key must be kidding with his claim today that first home buyers are a priority for the National Government, says the Labour Leader David Shearer.
“The dream of home ownership is already beyond the reach of hundreds of thousands of Kiwis, and when the Reserve Bank introduces limits on high Loan to Value Ratio (LVR) lending things will only get worse.
“John Key’s Government gave the Reserve Bank the power to use LVRs knowing full well it could add $50-60,000 to the deposit for an average Auckland house.
“Who will be able to afford to find that sort of money? Certainly not first home buyers.
“John Key wants the New Zealanders to believe that the problems facing first home buyers are nothing to do with him. In fact they are a direct result of his inaction.
“The National Government has failed to address the real issues in the housing market. John Key’s out of touch, and he’s put the interests of property speculators ahead of people looking to buy their first home.
“Labour will roll up its sleeves and tackle both supply and demand. We will build 100,000 affordable homes over 10 years for first time buyers. We’ll tax property speculation to take the heat out of the market. And we will protect first home buyers with an interim exemption from LVRs until the rampant housing market is brought under control.
“Labour’s plan will give first home buyers hope, and a realistic chance to get into an affordable home that they can call their own,” says David Shearer.
At last some sense out of a politician.
The balance between supply and demand is crucial.
Supply is slow and inflexible and individual policy steps cannot offer a useful correction to this rampant market.
Demand can be altered with the stroke of the government pen through taxation to release both investment property and land banks into the market at more manageable prices for those wanting their own home. Further, if done properly, those investors who step up first will incur the least damage to their portfolios.
Do I hear moans from those holders? They need reminding that they have fewer votes than the group who want to own their own home and cannot. In fact the overseas speculators do not have a vote at all, do they?
C'mon Shearer is being opportunistic here and misses the point completely , new building ( materials ) costs have only risen marginally above inflation since 2008 , but house prices have escalated 20% per annum in the same period .
You have to ask why ?
My view is its a shortage of affordable land in Auckland causing the problem and nothing else .
Shearer proposes excluding first timers under $500k from a deposit , which will simply distort the market up to $500k further
Nothing opportunistic . The shortage of affordable land is real. The pressures from immigration is real, not only the Asians who seem to be so visible but returning Kiwis from Australia and UK , the Chch refugees, and outward the oldies selling up and heading to Tauranga or even Tokoroa.
Shortage of physical land is not real but costly land can be made less costly under pressure to get it released and the best way is to make it more costly to hold.
The implicit assumption in all this is that the banks are incapable of lending prudently so that a bubble never arises. I think, sadly, that the regulator is right in this case. Banks lending criteria too heavily focus on security value (however inflated by debt-fuelled speculation) rather than actual capacity to service.
Need to get back to basics of business here. Some posters simply do not understand markets, supply and demand, Government National and Local influences, RMA, Tax Treaties etc.
If people wish to live in the most expensive city in NZ then you are going to have to pay the prices pure and simple. The housing shortage is an advantage to you at the moment as it ensures that your value will increase. Saving for deposit is relatively easy if you knuckle down and that means giving up a few luxuries for a while.
If people put more emphasis on the fun side of saving instead of thinking it is a painful exercise then they would save effortlessly. Saving is a fun game if you play it.
Well heck scarfie, providing shelter for people is something talked about in the bible.
It's as fundamental as providing food, after all.
And god must approve of it because he rewards those who do it with profits. So property investors can always feel good about their contribution to the economy and society.
I know some on interest.co.nz don't think investing in property is a good idea - because they are uncertain about the economics of it I guess - but no one can argue it is not a valuable service to the community.
So for people well enough organised, it becomes a worthwhile activity. And people derive a great deal of joy from the activity too... just look at how many become property investors.
God does not reward LL's with profits, the NZ government does.
In NZ, a landlord both denys someone from owning a home a home, and means that the rest of us pay more than our fair share of tax.
Far form being "a valuable service", or even "approved by god", a LL in NZ is best described as an "unessisary evil".
Btw LL, there's several books on "god", it may be prudent go read one of them before equating profits with his/her approval.
Nonsense notch.
As a Land Lord I don't deny anybody a house. I actually offer people a house.
And housing is a valuable service. If not, then where do you propose people live? In caves?
And there is nothing to stop them buying or building their own if they want to, is there?
Providing shelter is as fundamental to life as providing care... food... companionship. Why do you slag off Land Lords who provide something so fundamental to life? At some risk to themselves financially I might add?
notch, you should salute property investors and encourage 'em. Lots of people get involved in property investing so that means is is a highly thought of activity. People are proud to be property investors.
Time to re-examine your way of thinking .
Sorry, but the scales need tipping again to favour people being able to buy their own homes, especially those where rentals are at almost saturation point - yes, basically the poorer people.
It is no co-incidence that standards, morals and behaviour have slipped almost in time with the lessening of home ownership among the lower classes, having to rent is a huge contributor to societal break down in my view.
"Tipping again to favour people able to buy their own homes?" Eh?
With interest rates at record lows for some years now... houses in many "lower class areas" (to use your phrase) at the same prices or lower than they were 6 or 7 years ago... banks falling over themselves to find people to lend to...
And you say the scales "need tipping again."
What more can the market do to signal people can go and buy houses?
Hi notch.
Not sure what you mean by a "troll." But I am not knowingly one.
I have owned and rented out residential property since the 1980s. I have, over time, bought more properties.
This is how I earn my living. And a damn fine living it has been too. I 'walk the talk' notch.
I reckon I do it well too. Many people stay in my properties a long time. I have had several tenancies last six and seven years. One lasted 10 years.
Like all PIs I provide a necessary service to the community. Shelter. And renting is a cheaper option so PIs must be doing a fine job. You have to acknowledge that, and salute PIs.
How can I be deluded about my actions?
How much of the Auckland/NZ ecconomy is bootstraped off it's own population growth? In the long term this is unsustainable and the longer it goes on the bigger the crunch will be at the end. At that point the extra people have to produce real exportable goods and services to pay the overseas loans for what has been in effect a ponzie scheeme. Bottom line is that the lion's share of our national income is driven off the back of agriculture and tourisim, and the last thing we need is a whole bunch of no export earning extra people just to keep an elaborate ponzie scheeme fueled.
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