Housing prices are so out of control in New Zealand that the officialdom is way behind the eight ball in trying to contain them. Central London is a bargain compared to Auckland. But making this the central bank’s problem looks to be a way for the New Zealand government to try to escape blame for insane housing prices rather than Doing Something.
A new Financial Times article incorrectly depicts New Zealand’s effort to have its central bank curb housing price increases as novel. It isn’t; Singapore has housing affordability as a key economic goal for many years. The central bank has strict personal borrowing limits and both intervenes to cool the market and jawbones . The Bank of International Settlement even wrote up a little case study..
Home prices have risen steadily in the pandemic, and in 12 months through to the end of January were up 19 per cent in New Zealand. The price of a typical Auckland home soared past $720,000, embarrassing Prime Minister Jacinda Ardern.
A global political celebrity, the liberal Ardern was elected on a promise of affordable housing. Fed up, her government has ordered the central bank to add stabilising home prices to its remit, starting March 1. It is novel and healthy for a politician to recognise the unintended consequences of easy money.
If this idea catches on, it could lead to greater financial and social stability worldwide. Decades of loose central bank policy have done less to generate growth in the real economy than in the financial markets — and those gains benefit mainly the rich.
This is widening wealth inequality, pushing homes beyond reach for the middle class, and not only in New Zealand. Of 502 international cities tracked by Numbeo, a research firm, prices are “unaffordable” (more than three times median family income) in more than 90 per cent. In recent years, the tiny minority of affordable cities has been shrinking toward zero.
While it sounds great that Ardern is making housing price containment a policy priority, prices are so out of control that it’s going to take more than just more stringent bank regulation to tackle the problem, particularly since the central bank was tasked only to achieve “price stability”.
Even though interest rates could in theory also serve as a tool for containing housing prices, they are too blunt an instrument. Way back in the stone ages of 2007, when the Australian housing market had been looking bubble-y for some years (only to continue its march to stratospheric levels), the recently retired head of the Reserve Bank warned that central bankers weren’t well positioned to take on asset bubbles (cynics might say just to stoke them). From the Sydney Morning Herald:
But even if we can identify an emerging bubble, it may still be extremely difficult for a central bank to act against it for two reasons.
First, monetary policy is a very blunt instrument. When interest rates are raised to address an asset price boom in one sector, such as house prices, the whole economy is affected. If confidence is especially high in the booming sector, it may not be much affected at first by the higher interest rates, but the rest of the economy may be.
Second, there is a bigger issue which concerns the mandate that central banks have been given. There is now widespread acceptance that central banks have been delegated the task of preventing a resurgence in inflation, but nowhere, to my knowledge, have they been delegated the task of preventing large rises in asset prices, which many people would view as rises in the community’s wealth. Thus, if they were to take on this additional role, they would face a formidable task in convincing the public of the need.
Even if the central bank was confident that a destabilising bubble was forming, and that its bursting would be extremely damaging, the community would not necessarily know that this was in prospect, and could not know until the whole episode had been allowed to play itself out. If the central bank went ahead and raised interest rates, it would be accused of risking a recession to avoid something that it was worried about, but the community was not. If in the most favourable case, the central bank raised interest rates by a modest amount and prevented the bubble from expanding to a dangerous level, and it did so at a relatively small cost in terms of income and employment growth forgone, would it get any thanks? Almost certainly not…In all probability, the episode would be regarded by the public as an error of monetary policy because what might have happened could never be observed….
The interest rate decision is not the only decision that a central bank has to make ….[T]here are other ways of addressing the problem. Central banks have some credibility and authority, which can be used in a public awareness campaign to make people recognise the risks they are taking in plunging into an overheated market….At the Reserve Bank, we had some success with this approach during the recent house price boom….
But that still leaves the central bank with a very limited armoury with which to fight a potentially dangerous asset price boom – the interest rate, which it does not have a clear mandate to use, and public suasion, which is of limited effectiveness. How would it cope if it faced an asset price boom of the magnitude of those that occurred in the US in the 1920s or Japan in the 1980s? Not very well, I expect, but it would probably be held largely responsible for the distress that accompanied the bubble’s eventual bursting.
Macfarlane didn’t mention bank regulations targeting lending in the bubbly sector, because as best I can tell, that falls under a different regulator, APRA. By contrast, in New Zealand, the Reserve Bank is the lead bank regulator, but a quick scan suggests that lending rules are set by a group of regulators and not just the Reserve Bank. Reader input very much appreciated.
I don’t know the particulars of New Zealand’s regime, but in general, high housing prices are the result of policies meant to encourage home ownership and (supposedly) make it more affordable. As I read it, New Zealand doesn’t provide for the big tax break we have in the US, of making mortgage interest tax deductible. However, from what I can tell, profits from the sale of a primary residence are tax exempt. Reining that in, say limiting the amount that is tax exempt, or alternatively, phasing out the exemption by the gross sales price, would help.
Another prong would be to make renting more attractive. Germany, which encourages renting as a way to keep workers’ cost of living down and hence make labor more affordable, gives renters strong property rights. A common form of contract has an indefinite term (the tenant can stay as long as he likes. Rent increases are restricted. For instance, a landlord can’t make a new tenant pay an unjustified rent increase compared to his predecessor, as in one not the result of an increase in costs.
An additional route is to promote the construction of more rental housing. Financial Times reader View360 argued:
How about supply side measures such as land release & building permits targeting a vacancy rate of 6-8 percent such that landlords are under pressure to offer tenants reasonable rents, which also keeps a lid on prices. In some markets I have looked at whenever vacancy rates have dropped say to 4% prices zoom and when they are say 10 percent they crash. Some amount of vacancy is because landlords aren’t necessarily putting the property on the leasing or sale market because they are not sure if they may need to use it themselves, so 4% vacancy is like full employment!
I would be curious as to whether readers think the New Zealand central bank will be able to get very far. Even though foreign financial experts focuses on Japan’s commercial real estate bubble, residential real estate was also catastrophically expensive before the bust. I had the privilege of seeing a luxury apartment, inside the Yamanote Line, in Hiroo Garden Hills, which had…gasp…green space and trees between the small towers, with three units per floor. The apartment I saw was at most 900 square feet, with three tiny bedrooms, one bathroom, a galley kitchen, and a living/dining room. Its price, in 1989? $5 million. The way the Japanese deal with the crazy prices then was 50 year and greater mortgages. If New Zealand does not tame its housing tiger, ugly accommodations to the nosebleed levels may be coming.
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We got some stuff from Ricardo, like the law of comparative advantage.
What’s gone missing?
Ricardo was part of the new capitalist class, and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.
“The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist
What does our man on free trade, Ricardo, mean?
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
Employees get less disposable income after the landlords rent has gone.
Employers have to cover the landlord’s rents in wages reducing profit.
Ricardo is just talking about housing costs, employees all rented in those days.
Low housing costs work best for employers and employees.
In Ricardo’s world there were three classes (the three classes upper, middle and working).
He was in the capitalist class.
The more he paid in labour costs (wages) the lower his profits would be.
He was paying the cost of living for his workers through wages, and the higher that was, the higher labour costs would be.
There was no benefits system in those days and those at the bottom needed to earn money to cover the cost of living otherwise they would die. They had to earn their money through wages.
The more he paid in rents to the old landowning class, the less there would be for him to keep for himself.
From Ricardo:
The labourers had before 25
The landlords 25
And the capitalists 50
……….. 100
He looked at how the pie got divided between the three groups.
There were three groups in the capitalist system in Ricardo’s world (and there still are).
Workers / Employees
Capitalists / Employers
Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success
The unproductive group exists at the top of society, not the bottom.
Later on we did bolt on a benefit system to help others that were struggling lower down the scale.
The Classical Economists had identified the rentier parasites at the top of society.
This wouldn’t do at all; they needed a new economics to hide this, neoclassical economics.
The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.
They took the focus off the cost of living that had been so important to the Classical Economists as this is where rentier activity in the economy shows up.
They rigged the economics, what is the problem?
Western policymakers won’t realise how our high cost of living will work against us in an open, globalised world.
The UK knew how to prepare for free trade in the 19th century because they used classical economics.
The West didn’t how to prepare for free trade in the 20th century because they used neoclassical economics.
How did the UK prepare to compete in a free trade world in the 19th century?
They had an Empire to get in cheap raw materials; there were no regulations and no taxes on employees.
It was all about the cost of living, and they needed to get that down so they could pay internationally competitive wages.
UK labour would cost the same as labour anywhere else in the world.
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
Ricardo supported the Repeal of the Corn Laws to get the price of bread down.
They housed workers in slums to get housing costs down.
Employers could then pay internationally competitive wages and were ready to compete in a free trade world.
That’s the idea.
> Western policymakers won’t realise how our high cost of living will work against us in an open, globalised world.
It won’t be visible immediately, as at any given time that the inflation starts there’s huge group of people who bought houses at the past prices and who are willing to work for few more years for salaries appropriate to past house prices, rather than the current house prices. This creates a latency between the price growth and the demand for higher salaries appearing.
They rigged the economics, what is the problem?
(Part 2)
Neoclassical economics and the missing equation.
Disposable income = wages – (taxes + the cost of living)
“Who put that other term in the brackets with taxes?” neoliberal policymakers
They thought people would get better off by lowering taxes.
The cost of living rose, so people didn’t actually get better off.
The French were so upset about their lack of disposable income they put on yellow vests and took to the streets.
Why is it so expensive to get anything done in the UK?
The UK’s high cost of living pushes up wages making it expensive to get anything done in the UK.
See where neoclassical economists go wrong?
Employees get their money from wages, and the employers pay the cost of living through wages, reducing profit.
It is the UK’s employers who pay our high housing costs, via wages, reducing profit.
Everyone that uses neoclassical economics trips up over the cost of living, even the Chinese.
They don’t know there is another term in the brackets with taxes.
The neoliberals cut taxes, but let the cost of living soar, so people aren’t better off.
Taxes and the cost of living sum together in the same brackets, so it shouldn’t be hard, but today’s policymakers don’t have the equation.
Disposable income = wages – (taxes + the cost of living)
1.4 billion Chinese people using neoclassical economics were pitted against the equation.
Disposable income = wages – (taxes + the cost of living)
They never stood a chance.
Davos 2019 – The Chinese have now realised high housing costs eat into consumer spending and they wanted to increase internal consumption.
https://www.youtube.com/watch?v=MNBcIFu-_V0
They let real estate rip and have now realised why that wasn’t a good idea.
The equation makes it so easy.
Disposable income = wages – (taxes + the cost of living)
The cost of living term goes up with increased housing costs.
The disposable income term goes down.
They didn’t have the equation, they used neoclassical economics.
The Chinese had to learn the hard way and it took years, but they got there in the end.
Its not just New Zealand, there is a huge bubble growing in South Korea. The Chinese housing market has also surged in the first quarter of this year.
As so often, the reasons are complex. Just yesterday (linked to that Singapore article) I had a friend from Asia complain bitterly to me about the cost of housing in Dublin compared to Singapore and even Tokyo. She and her friend wants to buy, but despite both have fairly reasonable middle income professional jobs, but getting on the ladder here is very difficult without parents who can give you the 20% you need for a mortgage.
And things are a lot better now in Ireland than 12 years ago as the Central Bank learned at least some lessons from the Celtic Tiger era and keeps a much tighter level of control on mortgage lending. The banks do everything they can to wriggle out of it, but its much harder to get anything more than 80% of the price of a loan, and the ‘buy to let’ sector (a huge driver in UK property prices) is strongly controlled. But still, prices are unaffordable (although it will be interesting to see if post Covid there will be a change, as I suspect there are a lot of empty apartments in Dublin). A major problem in Ireland was that after the Celtic Tiger collapse, austerity meant that there was no ‘floor’ under the construction industry (unlike in much of Europe, which took the opportunity to build more public units). So when the economy did recover, it took at least 5 years for the industry to retool itself to start building for demand.
Ultimately, countries which succeed in controlling house prices are those that focus on mixed tenure. i.e. public housing, co-operative housing, and more flexible controlled private sector rental housing, in addition to home ownership. This is the common factor in all the advanced economies that have avoided bubbles or unaffordable rents/mortgages. Economists will of course cry out about supply (i.e. they like to blame it on zoning or regulations), and while this undoubtedly has an impact at times, there are plenty of places with bubbles with no real shortage of units. If too much cash is floating into the housing market, prices go up rapidly, its that simple. You can increase money for mortgages much quicker than you can build a house.
It takes 6-9 months to build a house depending on size. A bank can print the money to buy that house in seconds. Building supply can never keep up with bank money demand. The primary cause of asset inflation is fractional reserve banking. Restrict it or expect your economy to be financialised, industry to collapse, and wealth inequality to rip society apart. Fractional reserve banking really is the evil that keeps on giving.
What is the fundamental flaw in the free market theory of neoclassical economics?
The University of Chicago worked that out in the 1930s after last time.
Henry Simons was a founder member of the Chicago School of Economics and he had worked out what was wrong with his belief in free markets in the 1930s.
Banks can inflate asset prices with the money they create from bank loans.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
“Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
https://www.newworldencyclopedia.org/entry/Henry_Calvert_Simons
Margin lending had inflated the US stock market to ridiculous levels.
Real estate lending was actually the biggest problem lending category leading to 1929.
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.
You can inflate real estate valuations with mortgage lending from banks.
You can inflate stocks with margin lending from banks.
They had both these problems that last time they used neoclassical economics.
Their diagnosis may have been correct, by their prescription was not.
The Chicago Plan, and its current versions (Positive Money, Sovereign Money) were raked over the coals right here at NC in 2018 by Richard Murphy.
The Battle for Money Has Begun
Here is an excerpt:
Yves’ intro to that article points out the politicization of the topic:
Money is just an instrument for carrying out transactions in the economy.
If everyone accepts it as money, it is.
The Government can, by fiat, determine what money is.
Bitcoin can become a new money, if enough people accept that it is money.
All sorts of strange things have been used as money in the past, e.g. shells.
Independent central banks are a concern.
They are very powerful institutions and can pull in the direction they want.
Naomi Klein’s “The Shock Doctrine” looked at how the old regime in South Africa wanted democracy without power after apartheid.
They locked property rights in place to ensure the old white landowners didn’t lose their land.
They made the central bank independent, and ensured their people were in charge at the central bank and treasury.
There wouldn’t be the money available for any democratic Government to change things.
It has worked very well; they haven’t really been able to change things after apartheid.
This is the asset price inflation that current homeowners love. It will be incredibly difficult politically to tame unless there is a bust. Following Michael Pettis I see this is also a major concern in China, but there is no serious action to curb prices.
People in my town deeply oppose changes to zoning laws and any new development that might affect their precious property values. We’ve tried several times to create a special zone in our more densely built historic center that was built up prior to zoning laws, and every time it’s the largest turnout at town meeting. Often preceeded by misinformation rumor mongering on Facebook. The goal is to allow more multifamilies where single family homes exist, ease permitting for owners of unusual or small lot sizes with the goal of creating a more walkable and pleasant village experience that might also spur more business in our central business district. But people fear that more housing will drive down prices and potentially lower the quality of the schools if our town becomes more affordable. Nicely exposes people’s true values.
In my neighborhood this dynamic is compounded by the Airbnb camel’s nose well under the tent. Enough local homes owners are so invested in this scheme that they have formed an organization called Short Term Rental Operators. Over 40 of them showed up a recent city council meeting on short-term rental permit fees. Surely they are arguing that without the substantial income generated by the day-trippers they would not have been able to participate in the American Dream of home-ownership. Of course it is obvious to everyone that they are actually business operators disguised as simple home-owners. The whole local body politic is infected by home-ownership-as-investment…a Schumpeterian nightmare.
There’s an Airbnb that’s just a block away from the Arizona Slim Ranch.
The people who own it? Investors through and through. They drive fancy cars and have made zero effort to get involved in our neighborhood association.
Such things have not made a good impression on those of us who live here.
OTOH, their tenants have been quiet and respectful. I haven’t heard a word of complaint about any of them, and, IMHO, that is a good thing.
The best price-stopper is to include a primary residence in the capital tax gain. The main problem with it is that it actually leads to housing price depreciation (in line with inflation), but the question is whethe it’s a bad thing to start with.
The goal is really to stop people thinking that the house is an asset for them to make money off.
Of course, any government that is looking at doing this is looking at something that will upset a lot of people. So it’s hard.
Its a fundamental tension for most western societies. Broadly speaking, cheap affordable housing is better for the economy, particularly those at the lower end. But for most house owners it is their largest asset. When house owners are a majority, and (I’m guessing based on demographics?) more likely to vote it makes any policy that leads to house price deflation difficult for a demoracratic government. Owners also have a greater incentive than renters to fight changes locally – this can be good and bad, but bad in this instance.
I’d be interested to know if there is a link between the culture of house ownership as an aspiration and inflation/bubbles. Don’t know how the former could be measured though…
It is just not New Zealand that is fumbling the ball. Here in Oz, the Coalition government is wanting to bring in a law to remove the onus of banks to give fair information with loans but would leave it up to borrowers to do due diligence, even though they do not have the expertise to do so. They would then have little recourse if given dodgy financial information by banks. The idea is to turn on the spigot of credit lending to give the economy a boost but America did something similar over twenty years ago which helped lead to the 2008 crash-
https://www.smh.com.au/money/borrowing/repealing-responsible-lending-laws-will-hurt-consumers-20210311-p579w1.html
“There is now widespread acceptance that central banks have been delegated the task of preventing a resurgence in inflation, but nowhere, to my knowledge, have they been delegated the task of preventing large rises in asset prices, which many people would view as rises in the community’s wealth.”
How is inflation not large rises in asset prices? Rises in asset prices (shelter prices) leave less for spending into the economy and is a paper rise in a communities wealth – if you want to stay or become part of the community – well the price goes up – if you want to monitize your part of the community wealth – sell and leave the community.
If wealth is defined by a notational value of housing stock….it’s not wealth. The abundance of housing stock does not go up…just the price of that stock.
What good does a rise in the book value of a communities wealth do for the community – make services and taxes higher? pad the real estate agents pocketbook? How does the community share it’s rise in wealth with the community by cutting and running.
Sorry for the rant on that point
If Auckland (or parts of it) has the same buyer demographics as Cape Town, not only will monetary policy have limited impact on reining in crazy house price increases, it will likely have zero impact. Raising interest rates may give local mortgaged buyers pause and the incentive to look before they leap, but rich foreign cash buyers aren’t in the least bit bothered by such machinations.
Cape town had the world’s third highest house price inflation in 2018 (and consistently maintains its high ranking in the top “performers” quartile) , all driven by surplus money in Europe and America being parked in local real estate, making properties in The City Bowl (Central Cape Town) and the Atlantic Seaboard unaffordable for all but the wealthiest locals and foreign cash buyers. Attempts to include more affordable social housing in spatial planning are bitterly opposed by the right wing municipal government in alliance with estate agents, developers and owners who profit insanely from this price inflation mania. At the top end of the market, sales jumped 166% y-on-y in 2020 (ie during the covid pandemic), driven largely by Middle Eastern and Asian money joining the Americans and Europeans in the Cape Town feeding frenzy. Any discussion of curbs on foreign ownership is met with derision by the constituencies that benefit the most from this exploding inflow of hard currency, the “scaring away investors” sound bite being the go-to scare tactic favoured by those opposed.
AirBnB also had a big part to play in all of this, so it’s quite a surprise that the article doesn’t mention both it and the crazy amounts of capital sloshing around the globe looking for cheap assets to snap up.
Rich foreign cash buyers did help drive up the market for years, but I believe they passed a law a couple of years ago that only NZ residents are allowed to buy a house. From the sound of things, that has not stopped the inflation of prices.
But what about NZ residents buying multiple houses? To become landlords?
Btw, whilst much younger, I would have considered it my patriotic duty to serve if drafted, get vaccinated, etc. because I felt grateful to a society that cared for me.
But now I’m beginning to think that, currently, patriotism (not to say righteousness) is for suckers and that perhaps the oppressed should go on a vaccination strike as a way of showing that we’re all in this together and that justice is long overdue – a form of playing chicken with the oppressed having a lot less to lose, earthly speaking, than their oppressors.
Housing prices, like many other asset classes, have been divorced from the wider economy. If the top 1% or so have enough money to own most everything, well eventually they will own most everything. They will keep bidding up asset prices amongst themselves while the bottom 90% fights to get $15/hr which isn’t even a living wage in most places.
My city has been wringing its hands for years over rising home prices and the thought was to build more supply which would bring home prices down while increasing density and preserving green areas. Well that didn’t work at all. To hear the developers tell it, there’s no money to be made off affordable rental units. What happens instead is little crapbox single family houses get crammed into non conforming lots that used to be someone’s yard and the prices continue to skyrocket with people paying way more for a lot less house.
One problem is this is a desirable area for the wealthy, being a coastal region not far from NYC and Boston. There are a lot more wealthy urbanites looking for an additional property than there are homes in the area.
The other problem is lack of planning by government. Developers looking to cram in one of this little crapboxes are never told they can’t build on a con-conforming lot and are routinely granted variances. When larger developments are built, it’s generally the luxury condo model with a few “affordable” units thrown in on the side. But the rents in even the low income areas around here are around $1500/month – you’d need a lot of roommates for that to be affordable on $15/hr. The two-unit house abutting ours sold a year ago for about $400,000. Rents were $1800/month. The owner did some cosmetic improvements (new roof, some new appliances from what I can tell, but not a comprehensive overhaul since I still see some old cracked siding, etc.), then jacked up the rent to around $2500, forcing the current tenants to move, and cashed in to the tune of $600,000 +. Kaching for him, and tough luck for the families getting the boot.
This problem can’t be addressed in a vacuum and it will take an overhaul of the entire economy to fix. First of all, you can’t expect private business to serve the public good – if contractors can make more money building luxury condos, then they’re going to build luxury condos. For truly affordable housing, the government will need to build and maintain it. Also, there needs to be a deterrent from flipping houses for quick profit. That should be addressed through taxes – some combination of capital gains from the sale, higher property taxes on 2nd homes, and higher income and/or wealth taxes on the well heeled. And if you people of lesser means to be able to afford houses, they need to be paid more at the same time the wealthy are being taxed. $15/hr minimum needs to happen yesterday with regular increases pegged to inflation – we shouldn’t have to wait decades for Congress to get around to addressing the issue. That’s just for starters.
Unfortunately, I just don’t see the political will to do any of this.
” If the top 1% or so have enough money to own most everything, well eventually they will own most everything.”
Out west the California exodus is really proving this true. Around Portland, and much of Oregon, Houses are being gobbled up by out of staters, mostly cali transplants who drop cash offers 5-10% above asking and locals who are looking to buy a home stand no chance. With these people flooding into Idaho and Montana I imagine a similar trend will show up there. Like many above have said, renters rights and making renting a better way of living can help the rest of us live well away from the big money.
Same thing’s happening here in Tucson. If you list a house that has even the slightest bit of work-from-home potential, it will sell in a nanosecond.
I think that a couple of my neighborhood’s recent sales have been to workers-from-home. One lady appears to be friendly enough to speak to the rest of us. The other guy? Not a peep from him yet.
And, yes, we do send “welcome to the neighborhood” cards to newcomers.
I’m curious how many buyers of that over-priced housing need to borrow to buy? With Powell and the Bernank flowing money out of the helicopter, fractional reserve banking, and Trickle Up ™
– sung to the tune of Skip -a-rope, btw –
there is an awful lot of money jetting around the world increasing asset prices of any class.
No idea what the wage structure and reality is in NZ, but I suspect it mimics that of much of the world… race-to-the-bottom globalization wages, and an increasing vortex of wealth aggregation to the top 10%… who buy houses to diverse their asset base.
Then, add in a bit of a disruptive technology like VRBO and Airbnb, and affordable workplace housing is gone, and local economy participants are simply priced out of buying.
Have a gander at Bloomberg Zoom-boom
Apparently the Flathead lake area in NW Montana has 2,600 housing units allocated to vacation rentals, and Gallatin County- Bozeman is close behind at 2,300.
A guy was standing on the street the other day with a cardboard sign looking for a house to rent or buy for he and his expecting soon-due wife. Self-employed sheet-rock business owner, qualified for $500K loan, had cash for a down payment, and NO housing stock, No rentals available.
https://www.bloomberg.com/news/articles/2021-02-11/the-zoom-town-boom-in-bozeman-montana
https://www.bozemandailychronicle.com/news/business/sell-to-a-local-frustrated-by-house-hunt-bozeman-man-takes-to-the-streets/article_e74265bf-98ee-5094-893d-dd07e73690db.html
We are KILLING IT.
Living in New Zealand right in the thick of this, having a) just bought my first house (leaving Auckland to do so) and b) having my current apartment put on market a month after signing a fresh lease.
It’s really insane how much property is being listed and selling almost instantly over here right now… an all time high fueled by a number of things it would seem:
– housing market in Auckland was hot to begin with
– interest rates very low (2.99 fixed for five years)
– lots of kiwis came home during covid, swelling population above 5mil
– big culture of ‘white people flipping houses’ and upper middle class rentier capitalism
Knowing other people who bought recently in Auckland what they described was sheer desperation… first home buyers being outbid by same property investors at numerous auctions… people throwing out massive offers at tender / deadline sales just to ‘get it’ – pushing crap houses in outlying suburbs up from 1.2M to 1.5M in a flash
Despite the low rates the lending environment is reasonably strict and you are almost always going to need 20% deposit, sometimes 30% as a first home buyer – so people who had been waiting for years were watching the deposit requirement on a home rise at a rate faster than they could possibly save.
Stopping the sort of blind auctions that come with tender / deadline sales would actually be a simple thing they could do to create a less seller friendly environment where people in a multi offer scenario escalate prices with wild offers not knowing the other parties limits.
Curbing rentier capitalists also essential – one study showed that over a decade there was a 10-15% shift in people from owning -> renting (15% among Maori). There’s a lot of people caught up in multiple home ownership… mom and pop / semi pro investors, a loud voting bloc, but they need a fucking haircut! There’s homes out there, they just need to be owned not rented and if the landlords are pushed into selling by conditions that make renting unprofitable/ undesirable/ unaffordable, well, bad luck! Houses are places where people live, not a get rich quick / retirement plan for boomers.
Raising interest rates (especially on principal mortgages) would pour cold water all over everything really fast but would also brutalize all the people who are already overstretched on their overpriced homes.
Better to start by edging the multiple property owners out of their rentals, and trying to slow some of the desperate price inflation via blind auction etc IMO
When / if the bubble pops in NZ it’s going to be ugly… it’s the main thing fueling what feels like an exuberant economy as far as I can tell (in the main cities…) and so many people must have bought a new car / renovated etc by extending their mortgage based on their house seemingly ‘going up’ by hundreds of thousands in every recent year.
There seems to be a general trend that for every crisis in the economy, elites and the powerful are several steps ahead in the game, ready to shape the ‘solutions’ to each crisis to only solve the problem in a narrow way, while creating a new set of problems/crises that benefit their class and cripples the general population in a different way.
The danger is choosing to rely too much on policy which is vulnerable to this. Rentals, for example (with Germany being the archetypal example in the post), are extremely vulnerable to loopholes in the law – which are being taken advantage of to enormously profitable effect, in Ireland. Planning/construction regulations/standards are also under attack in Ireland, as part of the ‘solution’ – with e.g. cohabitation and modern day tenements receiving serious consideration.
There needs to be a mix of policy, both that which seeks worthy goals but is vulnerable if relied too much on, and that which can solve a significant portion of the accommodation crisis on its own without being vulnerable.
To me, it seems that the Job Guarantee can provide a fairly good solution to this, that has no traditional vulnerabilities. What is needed is 1: An expansion of efficient/high-speed public transport infrastructure to increase the area of accessible cheaper land (the Job Guarantee and public infrastructure programs can provide this), plus 2: The guaranteed ability to participate in construction of accommodation when there is a shortage, with this being constructed with an appropriate mix of social, mixed, private and co-op accommodation (importantly, since MMT is not standard macroeconomics yet, with a high percentage of this being self-financing through sales/rent), and 3: The guaranteed ability to receive financing for a home which you have significantly helped to construct (which can be counted as ‘x’ amount of time in the JG program), with your ability to pay backstopped by you having the guarantee of a job should you become unemployed after returning to the private sector.
I really don’t see why this can’t be done. Even without MMT, this can mostly be made to pay for itself, over time – potentially being seen as a self-financing capital project, that deficit hawks would have a harder time justifying cuts to.
Ardern’s first Labour Govt. (2016-2020) did set out to tackle this problem:-
https://www.nzherald.co.nz/nz/labours-plan-to-fast-track-affordable-homes/AGJ2LLOI3L64RYASMM3AGMZWOI/
It failed dismally.
It was always ambitious but I think it failed because of a number of reasons. In part the land simply wasn’t available – it depended on local authorities zoning new land for housing which they resisted, partly because of the nimbyism of residents objecting to it, and because the land that did become available lacked the infrastructure which has to be put in first, which can take time. And although developers were offered the carrot of being able to build to few ‘profitable’ dwellings as part of the development, having to build the rest down to an ‘affordable’ price made it unattractive to the few concerns able to even consider large-scale housing developments – most NZ builders are one-man-and-his-dog affairs who’ll build you a lovely home on a site you provide but couldn’t take on a ten-home development let alone a hundred-home one.
But mostly, I’d heard, it was because there simply weren’t enough bricklayers, plumbers, electricians, carpenters etc. in the country to be tempted out of the wood-work to physically build the things – and unfortunately one of the reasons many bricklayers etc. in other parts of the world who’d love to come to New Zealand to ply their trade, don’t is because they can’t afford the housing!
This failure is the biggest black mark against Ardern and Labour in the minds of their natural constituence, and I think they’re very aware of it. I’m surprised Ardern is so set against a Capital Gains Tax and though it suits me I think it is a black mark against her political philosophy. I suspect that there will be some sort of tax on the profits from a quick turn-around of a property or on the sale of a non-domicile before too long, though, as I can’t see any other way of putting a lid on the speculation that is behind this problem.
When I lived in NZ (which now seems like a lifetime ago), NZ had a capital gains tax, but it was rather weak and not much collected, because it was defind as “buy with intent to sell”. Proving intent there is near to impossible of course.
But now I remembered another thing that was pumping NZ buy-to-rent, negative gearing. If I remember it correctly, it meant that any operational losses from your property (i.e. rent not covering the interest payments and other property-related expenses) were deductible from your taxable income. Which meant that high-rate taxpayers were effectively subsidised for owning a rental property. This doesn’t make much sense when the RE market is stagnant, but when the main thing you rely on are the capital gains from selling the property few years down the road, it’s substantial.
For the U.S. try “How Public Housing was Destined to Fail” (if memory serves, first posted in NC)
Also: realestate4ransom.com – about Australia, but Michael Hudson points out that taxes suppress land speculation.
Finally (U.K.) Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane – includes MMT, and points out that 80% of the price rise in housing stems from increases in land prices. … so… keeping speculation down is really important.
From the linked article
All I can say is that between the increasing corruption as well as the concentration of wealth and power into ever fewer hands means that we cannot get Vienna style public housing or any other kind of decent public housing.
It’s more profitable for a handful of people that many, perhaps the majority, of people especially in the United States go die from lack of decent housing than to build and maintain that decent housing.
Strange world we live in where it is deemed better and more profitable to destroy than to create.
the housing cost rises seen in NZ are seen here in Vancouver, with a rocket attached. one cannot find a lot of any size for less than 1 million dollars, likely more, anywhere within the municipal boundary. Believe you me, we looked hard in the fall, and even tear down crack shacks near homeless and drug-infested areas were over a million. We ended up buying a modest bungalow in a nearby city 16km (10mi) from Vancouver city centre, for the ‘average benchmark’ price of … no, I just can’t bring myself to say it.
The British Columbia government instituted a Speculation and Vacancy Tax and a supplementary tax on expensive homes designed to temper the housing market. Industry players predicted housing armageddon and they have been subject to lawsuits (status unknown). The taxes did have a measureable tempering effect on housing prices, they even dropped for a couple years, but since the pandemic it has gone nuts again.
typical pandemic-prompted 1.65% 5-year fixed rates (and lower from some banks) coupled with extra savings of those with stable jobs certainly had an effect. Maybe the dominant effect. those, btw, are the two reasons that finally prompted us to take the plunge and find a nicer neighbourhood for our kids.
So its not clear to me that much could be done absent nuclear-level interventions. BC’s tax efforts were savaged by business as socialist overreach (the NDP government is downright commie by US standards), though the noise has quieted down once they were seen working, but not working too well. To do a lot more would be politically very very difficult. Business, who own the media, would fire their own nuclear-level propaganda ordinance at the government that any government would find difficult to survive. (as a point of reference, the previous (neo)Liberal government basically let the housing market run amok, as the Property Transfer Tax was a major source of provincial revenue).
I suspect the Ardern is/will be in the same situation. To do what is required to bring this under control would p*** off a lot of rich people making a lot of money, and they won’t take it lying down. the best one could hope for, I fear, is a series of survivable less-than-fully-adequate steps that sum up to something that helps.
Thinking a crazy part out loud:
If one sees flipping/resale for profit as part of the problem, could higher taxation of profit on the second (or subsequent) sale of a property within a set period of time be part of the answer?
Would it be better to apply this by the property, by the seller (or buyer), or both?
Would targeted exceptions for genuine emergencies or other extenuating circumstances (death, bankruptcy, etc.) be feasible and limit or blunt negative reactions?
The Reserve Bank governor, Adrian Or, is on record as saying much the same thing as in the Australian quote (i.e., no). There was actually a (coded) war of words between Orr and the finance minister, Grant Robertson, after Robertson suggested that RBNZ be given more of an explicit mandate to control house prices. Orr claimed he had said at the time of the Covid stimulus that introducing that much liquidity into the economy was likely to have some undesirable side effects, like rising asset prices, that would disproportionately benefit the wealthy in society, and that a corresponding fiscal or tax policy response was needed in order to offset that. He is overstating the case, I think (I recall it being more of a waffly cover-all-bases kind of statement) but he’s not wrong about government needing to play a role.
A capital gains tax would very likely help. Unfortunately there was already a failed attempt to introduce one during the last Labour government, thwarted by a coalition partner (NZ First) and that generated a lot of negative press. Apparently it was an attack on the New Zealand way of life, even though the primary residence would have been exempted – having a modest second home at the beach (a.k.a., a ‘bach’) is a cherished part of Kiwiana for many, and voters in that age bracket haven’t really registered how serious the housing issue is or how mad it would be to prioritize the interests of second home owners over first, since there were plenty of op eds advocating for exactly that. The net result was that Jacinda felt it necessary to promise never to introduce a capital gains tax while she was Prime Minister, a declaration that is now coming back to haunt her.
Another thing that would help would be lifting some of the restrictions on the supply side. A notable culprit here is the RMA (Resource Management Act) which requires notification and expensive compliance work (with no guarantee of success) if you deviate from standards set down in the district plan. In theory this allows residents to prevent development that would massively impact them or change the character of an area or the like, but in practice it entrenches the status quo, gives legal force to NIMBYism, and effectively prevents cost-effective development of the kind that would be needed in order to make a dent in the problem, like intensification. District plans are incredibly prescriptive and unless you’re building a property that’s almost identical to those already there, you’re almost guaranteed to breach some element.
The opposition point to exemptions to RMA rules that were introduced in Christchurch following the 2011 earthquake and that eventually led to flattening prices there. However it was not popular at the time (Gerry Brownlee is still hated in Canterbury to this day) and it’s dangerous ground for governments. Whether it’s more or less dangerous than letting the status quo persist remains to be seen. Kicking the poor when they’re down is not a good look for a Labour government at any time, but this problem is not an easy one to solve.
Even if all of the above changes were made, as Tom points out above there are capacity constraints that will limit the speed at which the problem can be addressed – so there will be no quick fix, even if we can start heading in the right direction.
The situation in Singapore isn’t great either. a deliberate policy of including the land value of the house plus deliberately increasing the population pressure on the housing market by immigration has been making housing less and less affordable. One sees smaller and smaller places. It’s even worse in the private housing market where tiny condos are atleast 1mill sgd. have a look at PropertyGuru.com.SG and you’ll get an idea.
It’s really a question of political will. New Zealand’s Australian-owned banks, which make a killing out of pumping it up in New Zealand, charge a 50% deposit on affordable homes on the grounds that the working poor are more of a risk than the rich/speculators. People have asked Ardern’s government to offer credit guarantees to boost the affordable housing sector and the politicians have chorused, “not our job.” (With the honourable exception of a youthful Green Party parliamentarian named Chloë Swarbrick.) Ironically past NZ gov’ts used to be extremely activist in housing, but it’s as if that has been forgotten.
PS the figure of 730K is out of date or might be a USD rendering, the latest median or average house sale price in Auckland is now over a million in local currency, even in the roughest suburbs, and approaching that figure in many other places. Two or three million in local currency anywhere posh in AK. Which is completely surrealistic in view of the wage level where the minimum wage is high by US standards, about $17.50 NZ (NZD = 0.65 USD) but in a country with a sluggish economy where on a heck of a lot of people are on the minimum wage: in that context, house prices in NZ are like Weimar Republic wheelbarrow money.
I meant to say, 50% for affordable flats and tiny houses. Deposit requirements not so onerous for 3 br suburban, but by the same token, less affordable overall. PS I live in NZ. There;s a good story on this in a newspaper called the New Zealand Herald, but paywalled unfortunately.
Central banks aren’t part of the solution, they are part of the problem.
That is because they have literally built the economy around inflating asset prices.
Started with Greenspan during the 1980s.
After the 1987 crash, he made a statement to the effect that he never realized how much higher asset price flowed through to the real economy.
You get the first hand “wealth effect” – where people will spend more of their current income because they feel richer (as well as some of the capital gains).
But you also need the higher asset price to act as collateral for all the debt expansion that is also being used to fund consumption.
So in a world where assets are not appreciating, consumption is limited to “earned” income alone.
In a world with assets inflating, you get additional consumption in the form of debt expansion (spending your “yet-to-be-earned” income) and the wealth effect of paper gains of assets (“unearned” income).
This all works until the asset inflation stalls/rolls over – and then the ephemeral benefits simply evaporate.
How long can they keep the Ponzi going?
Here is a quote from Ben Bernanke that basically proves this is the Feds main strategy to “grow” the economy: “…And higher asset prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion…“ Ben Bernanke (2010)
What we never hear is the damage to the economy and reverse effects when assets deflate. But that is later, and someone else must deal with.
All you need to promote affordable housing is for the government to stop subsidizing mortgages and the Fed to stop buying MBS. And if this doesn’t do the trick, increase the down payment to 20% or more, housing will crash immediately to what people can afford.
I can’t speak to New Zealand’s circumstances, but in Australia the Australian Prudential Regulation Authority (APRA) oversees authorised deposit taking institutions (banks, credit unions etc), along with insurers and supperannuation funds). APRA is primarily repsonsible for “maintaining the safety and soundness of financial institutions”, thereby protecting the interests of depositors and the like.
It is the Australian Securities and Investment Commission (ASIC) that regulates consumer credit and any businesses that may undertake credit activities including banks, credit unions, finance companies, and mortgage and finance brokers. Any licensee must meet the responsibilites set out in National Consumer Credit Protection Act 2009 which ASIC administers. Therefore, as far as setting macroprudential policy around housing finance, ASIC is the most relevent regulator in Australia.
I’d like to mention that currently in 2021 we are in the middle of the large CHIP SHORTAGE, yet the almost-free money in the so-called developed countries goes to inflate real estate, land prices rather than to build chip factories.
In a healthy economies excess money would be utilized to create real capital – like factories. Today, among the chip shortage we have Bill Gates investing in … farmland.
Boosting the cost of farmland will boost the cost of the products of the farm…presto. inflation
I thought Richard Smiths old NC post explained why NZ RE went Booming …. de-reg kicked the door open for hot money back in PM John Keys days. This was accelerated by the first ME war which had anglos looking for bunkers with a nice view of vineyards and scenery.
Now most of NZ has been sold off to international investors that prefer the MBA equity buffing approach and the only game in town is RE that for some prefer a physical asset with income flows or balance sheet dynamics for more credit to expand in financial paper and more RE.
Up thread notes skill labour shortages … wellie you’ll get that when you gut the state trade schools to ramp up the private VET scam, which delivers useless apprentices into a market of cowboys looking for a quick buck and flog the kids to pump it out, without any skill transfer in the process. Best part is many are subsidized by the government to boot whilst working … its a self reinforceing feed back loop downwards … good luck with that …
Perhaps a return to credit guidance (differential interest rates by sector) could help make interest rates a slightly less blunt instrument?
Also, didn’t Henry George have something to say about landlords and real estate? Kind of odd to me to see such a lengthy discussion of this topic without any reference to him.
The narrative here in the NZ media never ceases to amaze me. A complete focus on “lack of supply”. But never any mention of pricing issues (ie. historically low interest rates), not to mention any broader discussion of the issues.
The Market Reigns Supreme (under the guidance of the central bank). @much rolling of eyes@