The Dim-Post

February 5, 2015

Correction

Filed under: Uncategorized — danylmc @ 8:38 am

Via the Herald:

Reserve Bank governor Graeme Wheeler today raised the risk of a “sharp correction” in the housing market.

He warned that “the more that house prices get out of line with historic relativities, the greater the risk of a sharp correction, leading to financial instability”.

Wheeler listed rocketing house prices in Auckland and Christchurch as one of the main risks to the economy.

Though expectations were that house prices in Christchurch would eventually settle, “in Auckland, much more needs to be done”.

All the serious, smart people are saying that Auckland house prices are a bubble, that we’re like Ireland, that we’re heading for a ‘correction’, a collapse, the threat of negative equity etc. I’m just a humble blogger, but it seems to me that the supply of Auckland housing is still incredibly limited, and the fierce demand is driven by a combination of population growth, migration, low interest rates, tax loopholes and various other demand-side factors that aren’t going to change in the foreseeable future.

When I was in Ireland in, I think, 2005, their property market was insane. People were building vast Spanish style beach resorts on the coast of Donegal, where it rains for about 350 days a year. That was a bubble, and it burst because those holiday homes purchased at over-inflated prices with 100% mortgages were more or less worthless. But how is Auckland property a bubble? If the price of a scarce resource that loads of people want to buy is increasing, that means that the market is ‘working’. Why would it correct itself?

52 Comments »

  1. Fucking economics, how does it work?

    The Irish beach villas may be a useful symbol of the Irish real estate collapse, but they are not its cause. Unless you think that there is no literally no ceiling on what people are able (to say nothing of willing) to pay for homes in Auckland, or that the market will suddenly correct itself when it sees that ceiling approaching, the bubble’s going to burst eventually.

    Comment by kalvarnsen — February 5, 2015 @ 8:45 am

  2. How is it a bubble? If some vital medicine becomes scarce and the price soars, and nothing happens to fix the scarcity is that a bubble which is going to burst?

    Comment by danylmc — February 5, 2015 @ 8:53 am

  3. Do they teach the laws of supply and demand at Reserve Bank governor school?

    Comment by Bill Bennett — February 5, 2015 @ 8:58 am

  4. People are betting that the government won’t fix the problem. Some of the high price reflects supply and demand, but some of it represents speculation on future rises too (i.e. a bubble). If it were just supply and demand you’d get rent and house prices rising at the same rate.

    Comment by pete — February 5, 2015 @ 9:11 am

  5. Thank you Danyl for pointing out the conundrum at the heart of the Auckland property bubble: why has the supply remained so restricted? As you point out Ireland, Spain & the US all had large building booms accompanying their bubble. Yet supply in Auckland never accelerated during the boom even though economic theory suggests it should have done.

    That’s not to say a crash won’t happen but it seems unlikely until significant changes happen on the supply side.

    Comment by TerryB — February 5, 2015 @ 9:15 am

  6. Problem is that the houses bing built are large bespoke housing, when with an ageing population there will be massive demand for smaller housing.

    Comment by max — February 5, 2015 @ 9:28 am

  7. Also I lived in ireland in 2005/06 and it was seriously insane, not just for housing but anything consumer related. There was a fair bit of corruption added to the mix as well

    Comment by max — February 5, 2015 @ 9:31 am

  8. Okay, let’s say Auckland house price rises are sustainable at say 2% per quarter. That’s a doubling of prices every 9 years. So to sustain that, you need a constant supply of buyers who have twice as much money available to spend on housing every 9 years (assuming interest rates at our current comfortably low level – otherwise it’s worse).

    Or put another way, let’s also say average income growth at 3% per annum, a house that costs 10 times average income today costs 20 times average income in 9 years, and 46 times average income in 20 years.

    (or to push it out too far, in 100 years, while a $50,000 income becomes $373,000, a $500,000 house now costs $463 million).

    Surely there’s some point where you run out of buyers. No matter how much they *want* to buy a house, the funding is not available. Could you buy a house that costs 46 times your annual income?

    / Caution, my maths could be wrong!

    // However, plot any 2 different exponential curves with different growth rates against each other, and it becomes obvious that the gap between them becomes astoundingly huge.

    /// Yeah, I’ve omitted inflation, but again, so long as the growth rate of property prices is greater than the growth rate of income, the difference still becomes unsustainable.

    Comment by rickrowling — February 5, 2015 @ 9:37 am

  9. Yet supply in Auckland never accelerated during the boom even though economic theory suggests it should have done.

    Some kinds of housing supply did increase. A lot of residential high-rise was built with funding from property development finance companies that subsequently collapsed. The comparative lack of stand-alone residential property development during the boom was partly because all the builders and tradies were working on apartments.

    Comment by Phil — February 5, 2015 @ 9:45 am

  10. It’s a bubble because house *prices* are increasing at a rapid pace, but *rents* are not increasing at nearly the same rate. Which indicates that the demand for housing as an investment is increasing way ahead of demand for housing to live in. That’s my understanding at least. (Obviously there’s always going to be a mixture of excessive demand and insufficient supply…)

    Comment by Harry Chapman — February 5, 2015 @ 9:49 am

  11. But it seems to me the problem here (among all the particulars Danyl mentions) is not just the supply-side but the amount of debt people are now leveraged with in order to buy housing in Auckland? If something happens in the economy (i.e. a recession) and income falls some people won’t be able to pay off that debt. I lived in the US during the 2000s and people *literally* left the key in the front door and walked away from their houses (and thus debt obligation) because they couldn’t afford the mortgage. People were buying McMansions many times beyond their means. I distinctly remember a colleague in early 2007 saying, “the thing with houses is people buy them to live in them and thus they will never go down in value.” In that instant I realized something bad was going to happen.

    Comment by Alabakiwi — February 5, 2015 @ 9:58 am

  12. Walking away from the house doesn’t release you from the debt in New Zealand. The bank is free to come after you for any shortfall, if they can be bothered.

    Comment by Conrad — February 5, 2015 @ 10:08 am

  13. Oh, and I’ll defer to all the smart people who know about this stuff and say there is a bubble in Auckland. And when the merry-go-round stops (as it eventually will) all the people on the edge are going to get thrown off violently.

    Comment by Conrad — February 5, 2015 @ 10:13 am

  14. +1 Pete @4.

    A he succinctly points the asset inflation bubble is more the result of gambling that current policy settings (low LVR requirements, no CGT, no Stamp duty, no penalties for land banking, tax loopholes etc.) won’t change in the medium/long term rather than purely focussed on short/medium term market signalled supply and demand factors (historically cheap mortgage credit, immigration etc.)

    Comment by Gregor W — February 5, 2015 @ 10:15 am

  15. @Danyl: A bit late, but to answer your question: The bubble comes when the ceiling of what people are willing to buy is reached, and people who had made investments or taken out debt on the basis that the ceiling wasn’t coming any time soon (or if they’re particularly naive, that it was never coming) find themselves with assets that they can’t liquidate. Their inability to recoup their investment and/or service their debt is the bubble “popping”.

    Comment by kalvarnsen — February 5, 2015 @ 10:18 am

  16. @GregorW: “the asset inflation bubble is more the result of gambling that current policy settings (low LVR requirements, no CGT, no Stamp duty, no penalties for land banking, tax loopholes etc.) won’t change in the medium/long term rather than purely focussed on short/medium term market signalled supply and demand factors (historically cheap mortgage credit, immigration etc.)”

    Not just that. Governments are setting policy to avoid fixing the problem, or at least to avoid fixing it very well, because so many people are out there betting their future lives on it not being fixed, or trying to deal with the consequences of those people doing what they’re doing.

    Comment by izogi — February 5, 2015 @ 11:42 am

  17. I think you can have a housing bubble even with people living in converted garages out the back of other people’s houses in Manurewa, if the houses being invested in are pushed up to way higher prices than the people without houses can afford to pay for them.

    Comment by Can of Worms, Opened — February 5, 2015 @ 11:49 am

  18. True izogi – there is the ever present voter effect.

    Comment by Gregor W — February 5, 2015 @ 11:54 am

  19. As others have mentioned, if there was a housing supply issue in Auckland rents would have gone up, which is what happened in Christchurch after the quakes. In Auckland rents have remained static–therefore there is no housing supply issue. It is all media bs. What you’ve got in Auckland is a classic speculative bubble fuelled by cheap credit.

    Comment by Hamish — February 5, 2015 @ 11:59 am

  20. interest.co.nz has this piece on the effect of Auckland house prices on the NZ median price. http://www.interest.co.nz/property/73856/want-see-what-movement-nz-median-house-price-excluding-auckland-would-look-all-reveal In short without Auckland the NZ median house price would be $115,000 less ($335,000 vs $450,000)

    Comment by TerryB — February 5, 2015 @ 12:07 pm

  21. When you borrow money to invest in a non-productive asset the price of the asset has to go up for you to make a profit. When lots of people borrow money to invest in the same asset type this artificially increases demand beyond the normal requirement for that asset, thus a bubble begins.

    The crash comes when ordinary users of the asset type that is under speculative attack can no longer afford buy the asset.

    The banks are the gatekeepers of bubbles because they decide who to lend to. A solution to the problem may be to disallow borrowing to buy secondary houses beyond your first.

    Comment by Korakys — February 5, 2015 @ 12:12 pm

  22. I think the process for a bubble is that the prices advance beyond what supply/demand can explain. An indication of that is when, as noted above, house prices are increasing much faster than rents. That indicates that it isn’t demand for housing to live in that’s driving up prices (or at least, not mostly), but demand for housing as an investment. All the taxes and regulatory changes in the world won’t change that, what has to change is people’s expectations of return.

    The nature of many financial markets is to go in swings. Once something becomes popular everyone piles in, interest rates are cheap, houses keep going up, the neighbours are all making money and I don’t want to miss out. Then some sort of trigger event happens – something that causes a small swing in prices. Maybe interest rates go up, maybe there’s a small recession, maybe there’s just some bad press. And then it turns out that a lot of people own houses that they can’t afford – the rent isn’t paying the mortgage, they have out of pocket expenses, interest rates just went up. All it takes is a few foreclosures and mortgagee sales, and prices start to drop. Once they start dropping, people panic, because logically they could fall all the way back to the point where the rent is paying the mortgage. In Auckland at the moment, that’s a long way to fall.

    That doesn’t take away from the fact that there is also a shortage of housing in Auckland, and that shortage is also a problem that needs correcting. And as always, despite people worrying about housing affordability, there aren’t many people who would vote for a govt or a council that had an explicit policy of reducing house values. Affordability is good, so long as it applies to other people’s houses.

    Comment by PaulL — February 5, 2015 @ 1:18 pm

  23. Anne Gibson Property editor of the NZ Herald
    Property magazine targets Chinese buyers
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11391731
    won’t the Chinese just keep paying whatever it takes ?

    Comment by Cnr Joe — February 5, 2015 @ 1:26 pm

  24. “there aren’t many people who would vote for a govt or a council that had an explicit policy of reducing house values”

    Does this remain true if most people who vote don’t own houses? Also, is it a realistic possibility that this might happen if it’s not already the case?

    Comment by izogi — February 5, 2015 @ 1:28 pm

  25. All the taxes and regulatory changes in the world won’t change that, what has to change is people’s expectations of return.

    The first leads to the second though. If there is no profit to be taken, investment doesn’t occur.
    Irrational exuberance can only take place when there is no regulatory framework to prevent it. Otherwise the magical market will continue to operate on its own inexorable logic as you have described – prime mover’s profit, the herd emulates, smart money exits, panic, crash, repeat…

    Comment by Gregor W — February 5, 2015 @ 1:31 pm

  26. won’t the Chinese just keep paying whatever it takes ?

    Apparently, if you rub a chinaman’s head at a property auction he shits silver taels.
    True story according to REINZ.

    Comment by Gregor W — February 5, 2015 @ 1:34 pm

  27. Most of the funding is coming in the form of deposits from the residents of low-interest rate countries taking advantage of the “carry trade”. This involves a natural holder of e.g. JPY instead depositing their funds in NZD, earning maybe 4% more interest. Of course, this relies on the NZD holding its value and not falling against the JPY by less than 4% (approx) over the year – if it falls by more than that, the depositor loses out.
    This is why banks are able to offer lower rates on fixed terms than on floating (this is called an inverted yield curve and is unusual, especially for an extended period as has happened in NZ).
    Should these foreign depositors decide that this trade is too risky (having lost out through currency depreciation, as has happened over the last few months) then the relatively cheap finance which has driven prices to current levels will disappear and we could be looking at 10%+ fixed rates.

    Comment by richdrich — February 5, 2015 @ 2:04 pm

  28. @Gregor: no, I don’t think there’s ever been evidence of government regulation stopping or preventing a bubble. Sure, hard to prove a negative, but the problem is that we start with a market that has a return, some people make good money in the good times, and then a lot of people pile in forgetting the good times.

    Government regulation to prevent this would either need to make sure there is never any profit (and I know some on the far left would like this, but I’ll assume you’re not one of them), or make sure that there is never any variation in return so that there aren’t any ‘good times’ (note that this means removing all risk, which I think isn’t a business govt should be in).

    I don’t think the problem is that the government hasn’t intervened to confiscate the profit. The problem is one of naive investors who will get burned. They’ll never stop being naive investors without getting burned once or twice.

    Comment by PaulL — February 5, 2015 @ 2:46 pm

  29. The problem is one of naive investors who will get burned. They’ll never stop being naive investors without getting burned once or twice.

    Interestingly, the Financial Markets Conduct Act and other related pieces of legislation coming into force have tightened up the market for financial products and locked-out the sharks from offering wholly unsuitable products to the retail market. An unintended consequence may be further house price rises because retail property is the last refuge of dumb money.

    Comment by Phil — February 5, 2015 @ 2:54 pm

  30. “… because residential property…”

    Comment by Phil — February 5, 2015 @ 2:55 pm

  31. Some kinds of housing supply did increase. A lot of residential high-rise was built with funding from property development finance companies that subsequently collapsed. The comparative lack of stand-alone residential property development during the boom was partly because all the builders and tradies were working on apartments. (Phil @9)

    Perhaps but the other factor restricting supply was the leaky-buildings fiasco (which is still going on http://www.interest.co.nz/property/73909/building-consultants-recommended-residents-leaky-apartment-building-be-banned-using-t ). It would be interesting to know how many extra homes could have been built had the leaky building issue not occurred. Probably not enough to really alter the supply-side equation.

    Comment by TerryB — February 5, 2015 @ 3:12 pm

  32. @ PaulL #26: I see what you are getting at and yes, it’s hard to prove a negative.

    I think though that there is a pretty clear link between the opportunity for returns not being challenged by policy settings, and the propensity for people to indulge in behaviours that they see as generating them a return without taking into account downsides – at least that’s what I was led to believe in my behavioural economics lectures at any rate (i.e. one man’s market inefficiency as a result of regulation is another mans sensible policy setting to control prices).

    Comment by Gregor W — February 5, 2015 @ 3:49 pm

  33. “They’ll never stop being naive investors without getting burned once or twice.”

    The very same ones who lost the lot in 1987, because they’d drunk too much Moet & Chandon or Muller Thurgau to make rational decisions?

    Comment by Kumara Republic (@kumararepublic) — February 5, 2015 @ 3:51 pm

  34. What Harry said! I read somewhere recently that 40% of purchases on the Auckland market at the moment are investors. Investors are buying at an annual loss on the assumption that in the long term rents will rise and capital gains will occur. For the last three years that was a great bet, but it is becoming more marginal. The only people in the market at the moment are investors, new migrants and upsizers sat on the proceeds of their big equity rises and getting greedy for more. First home buyers are negligible.
    Several economists are forecasting a 2-3 more years of reasonable growth followed by a longish period of price stagnation or perhaps a big drop. Seems a reasonable projection. Think 2017/2018 – most of the medium density developments now in the early stages start to come online boosting supply, the Aussie economy picks up from its dip and the net migration across the tasman (by far the biggest migration flow) switches back to it’s historic outward trend, an incoming Lab/Green government talks up the introduction of cap gains and changes the rules on writing off rental property losses against income, oil prices rising back to thier long term trend and other inflation factors cause the reserve bank to looking to raise interest rates putting the squeeze on anybody carrying too much debt to income…

    Comment by Richard29 — February 5, 2015 @ 4:23 pm

  35. Well, I’m not entirely convinced that it’s the job of govt to protect reasonably wealthy people from themselves. I’ve seen companies around Auckland offering people investment opportunities in property. They help you find the house, they help you with your taxes for the negative gearing, they help you rent it out, they sell you insurance against it being untenanted. They make it all sound foolproof – except their numbers seem to start with the basis that the rent won’t cover the mortgage, they ignore that interest rates are historically low, the tax deduction only gets you back 33% of the money you lost (losing money to get one third of it back seems poor economics to me), and they don’t mention what happens if you don’t get capital gains of 9% per annum, which seems to be the break even point.

    In short, it has shades to me of shop keepers and gold rushes – i.e. only the shop keepers got rich. But I’m not sure you can sensibly regulate against gold rushes.

    I guess let’s try the counter factual. If there were different policy settings, in particular say a capital gains tax (which seems to be what people are getting at), would it stop the bubble? The UK had a massive property bubble with a capital gains tax in place, as did the USA. And whilst we could have rules about LVR, seems that would work very much against first time home buyers – means they’d need a much bigger deposit. And I’m not sure it’d stop the naive investors (those who mortgage their first home to get the deposit for their rental property), whilst it would impact the handful who are building a massive property pyramid on very small deposits. Would taking those buyers out of the market make any difference to property values?

    Comment by PaulL — February 5, 2015 @ 4:30 pm

  36. I guess let’s try the counter factual.

    Without being able to demonstrably prove it, I think there are a whole raft of other obvious setting in the NZ context, including some or all of the following:

    1. mortgages based on earning ratios rather than value ratios, and not just a guideline
    2. legislative change to punish lenders rather than defaulters if loans were deemed to be fraudulent or suspect
    3. stamp duty on property transfers but not new builds
    4. limiting non-citizen investment to new builds
    5. pursuing CGT as it stands under statute for people who flip property in under 2 years – i.e. as income, not windfall – plus resetting CGT to a greater proportion of any surplus ex. inflation.
    6. creating a WOF regime for investment property which precludes its rental until minimum standards are met.
    7. elimination of treating interest payments for investment property as an expense (or alternatively, ability for non investors to claim interest against income)
    8. tweaking the RMA \ local body rules to reduce compliance costs as a proportion on new builds

    I suspect you would see significant real estate asset deflation as money sought more straightforward returns.
    It’s the loopholes and simplicity that make property investment attractive, not that it’s a substantially better asset class over, say, joint stock in the long run.

    Comment by Gregor W — February 5, 2015 @ 4:59 pm

  37. In terms of your suggestions Gregor, my view is:
    1. Maybe – but what difference would this make?
    2. Yes, or even rules similar to the US in which if your mortgage goes under water, you can send the keys back and not your problem. That would make banks perhaps much more careful on lending. But really, I think the problem isn’t banks as much as investors – the banks aren’t making people borrow money from them
    3. Maybe to stamp duty, but in Australia stamp duty has been seen as a very inefficient tax that leads to people over capitalising on their home, and restricts people from moving to seek work. Basically it adds to the cost of swapping my current house for a new one – so it makes me more likely to invest in my current house (even if it would make more sense to buy a new one), and it makes it harder for me to sell my current house and buy a new one closer to work. No doubt it would also impact commuting times and CO2 emissions
    4. Maybe on non-citizens, but I reckon they’re just a convenient scapegoat. Logically this would push non-citizens towards new builds, and therefore push citizens towards buying used houses, but given that citizens vastly outweigh non-citizens in the market as a whole, prices would still have to level out – we wouldn’t end up with new houses more expensive than existing ones (at least not more than they are already)
    5. Yes, this should be done. No point in having a tax on the books if it’s not collected
    6. I’m not at all sure that this would make a difference, other than as you say a paperwork difference. The vast majority of houses would meet any sensible standards, and if we set standards that most houses fail, then I’d argue they aren’t sensible (if we’re setting a standard that rented houses must meet that most houses in NZ don’t meet….what the hell are we up to?). The only “benefit” would be the paperwork and pain, and creating bureaucracy just to discourage people from buying rental properties seems like a non-productive use of people’s time.
    7. Strongly disagree with this. If you do that, you’re creating a world where the rent you receive is taxable, but the interest you pay is not a deduction against that tax…..that makes no sense at all. You can also deduct interest against loans you take out for buying shares…why aren’t people worried about that inflating share prices?
    8. Yes, absolutely to reducing compliance costs for new builds. This is a large part of the barrier to building new houses, along with zoning regulations and various nimby rules that prevent densification. The point of a strong urban limit is to force densification and a tighter urban form. If we let nimbys prevent the densification, all it does is result in scarcity. We have to either allow sprawl or allow densification – preferably for me allow both and let people choose (I feel like govt shouldn’t stop people from making a choice to commute long distances so that their kids can have a decent size back yard)

    To me, I think part of the cause of people’s investment in property is that, in NZ at least, it’s a very easy investment as compared to the alternatives. In the US you can easily buy index tracking ETFs with about 0.1% management expenses per annum. For someone US based they provide a good investment with very low risk. Try to do the same from NZ, and you end up with a unit trust with about 2% management expenses, or you end up buying local companies in a very shallow (and arguably heavily manipulated) share market. I’d perhaps look towards a) better financial education for people, and b) initiatives that made it easier to bring international investment products to NZ with very low fees. Perhaps recognition of certain products that are approved under US regulation as being OK for NZ without further paperwork?

    Comment by PaulL — February 5, 2015 @ 5:35 pm

  38. Some ideas to tackle the bubble:
    Most importantly, disallow borrowing to buy secondary houses beyond your first.
    Large buy-ups and also some build-outs of residential (and maybe commercial) property by central and local government to then rent out at non-market rates and mix in long term land leases (where the improvements including the house are 100% owned by the residents).
    Legislate against negative gearing on residential property (ringfence profits and losses from other unrelated business/income).
    Phase in a high warrant of fitness standard to rental properties.
    A capital-gains tax (of the same rate as the corporate tax rate) on non-owner-occupied properties and a tax on unoccupied buildings/apartments and undeveloped land.
    Banning non-citizen or non-resident ownership of land.

    Comment by Korakys — February 5, 2015 @ 6:54 pm

  39. What seems to be missed in most reporting on this is that a significant driving force behind Auckland’s property prices is returning Kiwi expats who’ve amassed a house-buying warchest off their UK/Asia/Aussie mines salaries, and have been prompted by the GFC to make good on that “someday” return to the motherland.

    I reckon this largely explains both the rent/house price differential in Auckland, and the significant difference between, say, Ponsonby and somewhere like Drury. If you’re a couple coming back from a stint in Hong Kong, you’ve got $200k in the bank and one or both of you has a good professional career, you’re not going to want to buy in the outskirts of Auckland. You want a house in the central suburbs, thank you very much, and dropping a million on it isn’t as much of a big deal as it would be to a couple who haven’t spent the last five years earning the equivalent of $200 or $300k each. So you are prepared to spend the money. And so the bidding goes higher and higher, and Kiwis who’ve earnt Kiwi salaries their whole lives wonder who the hell has the money to pay these kinds of prices.

    In Auckland at least, the problem kind of *is* migrants, but it’s not just the Asian-language-speaking variety that middle NZ is so afraid of.

    Comment by millajulius — February 5, 2015 @ 8:02 pm

  40. There are over 1 billion Chinese. If a small fraction of that desires property in NZ the demand and desire to own NZ property will never cease.
    There will never be a so called correction. Young NZers wishing to own their own house would be better off making their future outside Auckland.

    Comment by bosun — February 5, 2015 @ 8:13 pm

  41. bosun: it’d have to be backed up with regional development initiatives, since jobs are a big factor in people moving to Auckland.

    PaulL #37: the loudest NIMBYs right now happen to be well-resourced blue-rinse hoiti-toities. Not least of all ACT’s sole MP David Seymour, who wants it both ways with the RMA.

    Comment by Kumara Republic — February 5, 2015 @ 11:56 pm

  42. @Kumera Republic: of course. A large proportion of nimbys are always wealthy people in flash suburbs. Although in my experience a lot of them are chardonnay socialists as well. Just because they live in Epsom doesn’t mean they vote ACT.

    Comment by PaulL — February 6, 2015 @ 9:00 am

  43. PaulL: it’s far more hypocritical when it’s ACToids who oppose intensification, because it’s a statist anomaly against their supposedly free-market principles. I suspect it’s really about Auckland Grammar zones, the suburb-as-gated-community dogma, and of course self-interest in the housing bubble itself. In short, it’s a bit like an economic cartel model, but for housing.

    In fact, a number of public figures have remarked that ‘RMA reform’ begins in Epsom…

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11320770
    http://garethsworld.com/blog/uncategorized/jafas-roll-bombay-hills/

    Comment by Kumara Republic — February 6, 2015 @ 3:21 pm

  44. Further to my point (skip the video to 10:30):

    http://www.tv3.co.nz/THE-NATION-The-Nation-Sunday-June-8-2014/tabid/3692/articleID/100347/MCat/2910/Default.aspx

    David Seymour: “And they do not want their neighbourhoods intensified with eight story towers next to their homes…”
    Julie Anne Genter: “So this is interesting, because this is supposedly the free market party arguing for regulation of higher prices where land values are high, where people want to live…”
    Seymour: “What I’m arguing is that the people of Epsom have bought into certain property rights and the character of their community…”

    Comment by Kumara Republic — February 6, 2015 @ 4:17 pm

  45. I’m just a humble blogger, but it seems to me that the supply of Auckland housing is still incredibly limited, and the fierce demand is driven by a combination of population growth, migration, low interest rates, tax loopholes and various other demand-side factors that aren’t going to change in the foreseeable future.

    But what happens when demand falls and supply increases? What happens when interest rates go up? What happens if there’s a recession?

    “The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion.”

    http://www.investopedia.com/articles/07/housing_bubble.asp

    Comment by ross — February 6, 2015 @ 6:43 pm

  46. It’s an enormous issue to try to tackle. I don’t think anyone can really claim to understand this market’s extraordinary capital growth, without the benefit of hindsight. Even if you buy into supply and demand as a useful explanation, the lack of “enough” supply is only half of that story – why is demand so high? What really is so insanely awesome about Auckland compared to 10 years ago? Having lived here continuously during that period, it only seems to have been chipping away at more awesome. It’s definitely not twice as awesome, even though my house has doubled in value. The house itself is virtually unchanged, just a minor kitchen do-up, and some paint.

    That many people who have similar credentials to claim to understand this stuff substantially disagree with each other makes me think that in reality it’s not well understood, even by experts. This could even be the perfect example of market efficiency theory in action. If the price really is correct, then its future movement is virtually unknowable, because all future outcomes that have decent evidence have already been priced in. After the fact, their hindsight will naturally be 20-20.

    It seems to me that predicting the future of the Auckland property market is at least as hard as predicting the future of the world’s big stockmarkets, and the direction of all the major currencies. Because those movements will affect the Auckland market. I don’t know anyone on earth that I’d trust to predict all of that. And if there was someone that trustworthy, their predictions would correct prices by themselves until their oracular power faded.

    Comment by Ben Wilson — February 6, 2015 @ 7:24 pm

  47. Korakys@38 “disallow borrowing to buy secondary houses beyond your first.”
    So what happens to the tenants in those properties…? To have a functioning rental market, you need landlords. And few landlords could buy an investment property without a mortgage.

    Comment by Clunking Fist — February 8, 2015 @ 11:22 pm

  48. Auckland builds social housing (increasing supply), raises rates on businesses instead of residential (reducing demand), removes regressive fuel tax or tolls in favour of progressive rates (reducing speculative capital), stops directing vast funds to an over developed CBD (for rent seekers like Skycity) and opens areas of the surrounding countryside to building (stops rewarding land banking rent seekers).

    Comment by unaha-closp — February 9, 2015 @ 10:07 am

  49. @ Paul #37

    1. Earning ratios vs. asset ratio – this might force the lenders not to indulge in overly flexible lending conditions which support asset inflation. By removing some of the buyers by fixing the maximum lending ratios, some of the demand pressure may reduce.

    6. Building WOF – you are discounting the general improvement in housing stock that would result, though admittedly, this is a fringe benefit as opposed to a driver in terms of reducing asset inflation. Also, I don’t understand your point around setting standards “too high”. The intent should be to bring existing stock up to as close to new build standards for insulation, heating etc. as possible in order that they can be rented without harming the tenants health (which of course we as taxpayers end up subsidising through the health system) At worst I’d rather subsidise landlords to make healthier homes.

    7. I believe you can only deduct interest (and claim losses) when buying shares if you are a registered investor as opposed to being an amateur landlord. There are also some rules (I think) about whether the stock is bought for capital gains purposes – to sell – as opposed to yielding dividends but I’m not sure of the ins and outs. Also, try getting a loan for stock versus rental and see how far you get.

    My overall point is that a combination of some or all of these mechanisms could be used to make investment in real estate comparatively less attractive than productive assets in line with your closing comments. The alternative is go sit back and accept that its all too hard and that the market will sort itself out eventually. In all likelihood it will but in will cause enormous pain across the board if rapid price deflation eventuates even for people who have made sensible decisions to invest in their own home – not to mention giving a free ride to any sharks who happen to smell blood in the water when panic selling sets in – when a more managed correction might be possible.

    Comment by Gregor W — February 9, 2015 @ 11:04 am

  50. @gregor
    mortgages based on earning ratios rather than value ratios, and not just a guideline
    Lenders already do this. There a line from a banker I once spoke with that goes something like “It’s not the car that pays back the loan”.
    All the banks operate sophisticated models to assess income and calculate affordability. A Bank doesn’t “win” or benefit if you default on your mortgage. It’s a huge cost to them and a pain in the arse to deal with, so they’ll do everything possible to ensure you’re ability to repay a loan before lending you a cent. Low-doc and NINJA loans don’t exist here, and never will.

    creating a WOF regime for investment property which precludes its rental until minimum standards are met.
    I like the intent of this, with some caveats. In the short term, the first and biggest effect this will have is to reduce housing availability – a whole bunch of rental properties cease to be available to tenants because they’re not fit-for-purpose. That’s going to bid up the price of houses that meet or exceed the minimum standard. The ideal time to implement a policy like this is when housing affordability is very high (i.e. prices are low and outlook is benign).

    Comment by Phil — February 9, 2015 @ 12:24 pm

  51. On Building WOFs, is there documented evidence that rental homes are generally of lower standard than owner-occupied homes? To me this is a critical thing.

    My introspective impression with renting is that it’s often very hard to assess a home for certain critical things like insulation/heating-bill, dampness, etc, in the 5 to 10 minute inspections that are usually available. Granted this was the same with buying a new home (as we’ve recently done), but rentals come with the added issue that there’s often little incentive for an owner to improve certain things, very possibly because they’re so hard to assess (or it’s easy to make them hard to assess) in a typical assessment, so they’re less likely to make a rental home worth more. At least with an owner-occupied home, there’s a clear incentive to fix stuff properly once you discover it, because there are long term benefits.

    With rentals, if there’s even an option for tenants to pay for improvements so they don’t have to live with low quality homes, it’s normally fairly dumb to do so given a landlord could choose to kick you out on a whim once the lease is up, with standard 1 year leases, and then you’ve just improved their investment for nothing.

    Comment by izogi — February 9, 2015 @ 3:09 pm

  52. A Bank doesn’t “win” or benefit if you default on your mortgage. It’s a huge cost to them and a pain in the arse to deal with, so they’ll do everything possible to ensure you’re ability to repay a loan before lending you a cent.

    @ Phil – Sure, but they are keen as mustard to have you leverage the arse out of your income in the form of maxed mortgages and credit cards etc.
    I just think that having some hard ceilings on borrowing – say a max of 5 * nett income over 20 years – might help take some of the heat out of demand.

    Comment by Gregor W — February 9, 2015 @ 3:23 pm


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