Housing, the Reserve Bank, and an advisory

In the wake of Thursday’s Monetary Policy Statement there has been a round of further comment on house prices and the risks around the housing market.  In fairness to the Reserve Bank, it wasn’t a focus of their document, and comments from the Governor and Deputy Governor seem to have been made in response to questions, at the press conference and at the Finance and Expenditure Committee.

I had been a little sceptical of the strength of the nationwide housing market, and pressures are clearly still concentrated in Auckland and, to a lesser extent, nearby cities.  But, equally, the overall level of activity appears to have picked up.  Here is my favourite timely chart, of per capita mortgage approvals.

mortgage approvals

Earlier in the year. mortgage approvals were running no faster than they were last year.  In the last couple of months the pace has clearly picked up.  That shouldn’t be surprising, as the interest rate increases last year have gradually been reversed, but it is worth bearing in mind not only that the rate of approvals is still below the decade average, but it is barely two-thirds the rate in the peak years of this series, 2005 and 2006.  And the mortgage approvals series does not go back far enough to capture 2003, the year when national house prices rose 23 per cent.  There is no nationwide house price boom.

Housing market activity has clearly picked up.  As it should have.  I don’t think I’ve seen any commentator make the (perhaps too obvious) point that cuts to official interest rates work by a combination of lowering the exchange rate, and encouraging more interest-sensitive expenditure.  In part, that is about bringing forward some spending from tomorrow to today.  But it is also about boosting the prices of long-lived fixed assets, which (in part) encourages people to build instead of buy.  If house prices hadn’t risen to some extent  – relative to some unobserved counterfactual –  in response to lower interest rates. there would probably be reason for concern. Real long-term interest rates have fallen by around 50 basis point since this time last year (15 year inflation indexed bond).

But, of course, this brings us back to the question of what is a fixed asset.  Houses are long-lived assets, but –  in principle –  a new house can be built quite quickly.  And lower interest rates actually reduce the cost of new building a bit (finance costs are non-trivial).  Land is in fixed supply, but unregulated land isn’t particularly valuable or expensive.   Good dairy land goes at perhaps $50000 per hectare.  Lower expected long-term interest rates should raise the unregulated market price of land – at these low interest rates, a 50 basis point change in long-term real interest rates might make quite a large difference, all else equal.  The unregulated price of land is a small component in the cost of a suburban house+land.  But the unregulated price isn’t what we observe.  Instead, what has driven land (and thus house+land) prices sky high is the interaction of two policies – high levels of inward immigration, mostly under direct government controls, in conjunction with tight land use restrictions.  The combination has been disastrous in Auckland.   Non-resident purchases probably haven’t helped either.  With much looser land use restrictions, house+land prices would be much less sensitive to demand pressures (whether from population or interest rates) than they are now.

The Reserve Bank talks of the Auckland market being in “dangerous” territory, but mostly that seems to be slightly inflammatory rhetoric more than the fruit of hard analysis.  Yes, house price to income ratios are higher than in most cities around the world.  And yes, that is a social and political scandal.  But it is largely the outcome of real forces –  not underlying economic ones, but mostly government policy-controlled ones.  They also aren’t, by contrast, the result of some speculative frenzied lending binge (unlike many of the boom-bust markets in the US last decade).  Of course, many property purchases need credit, but credit growth remains pretty subdued, and housing market activity (per capita) remains well below previous peaks. And the Reserve Bank has pointed to no evidence of a material deterioration in credit standards.  If that sort of deterioration is going on, it is surely incumbent on the Reserve Bank to illustrate the evidence (as, say, Waynes Byres recently surveyed the Australian evidence).   Moreover, banks operate on a nationwide basis, and as the Governor observed the other day, the “problem” is largely an Auckland one.  That suggests looking at Auckland-specific causes –  and the interaction of immigration policy and land use restriction policy is the most obvious one.

The Deputy Governor was quoted the other day as telling MPs that “it’s always very difficult to pick the top of any asset price cycle”.  Indeed, and nor is it the job of officials to do so.  But it is also very difficult to know what the equilibrium price of an asset is, especially when the market for that asset is so heavily distorted by policy interventions, in this case policy-driven population growth running head on into land use restrictions.  Auckland prices are very high, scandalously so, but there is nothing that guarantees –  or even offers a high degree of certainty – that real house prices will settle any lower over the longer-term.  I hope they do, and I’m sure most of those currently shut out of the Auckland market do, but this is not just (or even primarily) a market process.  The same goes for Sydney, or London, or Vancouver, or San Francisco.  All the Reserve Bank should be doing is monitoring lending standards, and  –  most importantly  – ensuring that banks have ample capital to cope with things going badly wrong.  They’ve done the second part of that job, and on their own numbers they (and the banks themselves) have done it well.  Beyond that, if they can add in-depth and considered research that sheds light on the housing issues that might be welcome –  although the research resources might be better spent on getting monetary policy right – but beyond that the housing market just isn’t their job.

Just briefly, I noticed a soft interview with the Governor in today’s Herald. It is a platform for the Governor to advance his (remarkably upbeat) case, rather than an occasion when the journalist posed any searching questions. Some of it is just misleading, or straight out wrong.  New Zealand’s economic performance in the last few years has been mediocre at best –  better, certainly, than many of the euro area countries, but generally underwhelming  – poor by historical standards, and no better than, say, the United States which was at the epicentre of the financial crisis.  There has been no per capita real income growth at all in the last 18 months, and real per capita GDP is not much higher than it was in 2007.  That isn’t (mostly) the Bank’s doing, but it isn’t a good performance either.  Oh, and the unemployment rate –  had I mentioned that before –  has hardly come down since the severe recession of 2008/09.

The Governor attempts to rebut some (currently straw man) critics.

Wheeler is keen to make the point that the bank is anything but robotic with its primary focus on inflation.

Critics, particularly on the political left, have called for the bank to broaden its outlook.

“Some people say … we don’t care about growth. But I think every central bank thinks quite deeply about how the economy is going, what’s happening to demand, to investment, to unemployment.”

Perhaps, but right at the moment –  and for the last five years –  a rather more “robotic” focus on actual inflation might have produced better outcomes than we’ve seen.  The Governor seems totally unbothered about his persistent inflation errors, or about the increase in the already high unemployment rate.  As I noted the other day, at present there are no nasty trade-offs between real activity and inflation.  Easier monetary policy would be likely to lower the exchange rate –  something the Governor calls for at every opportunity –  to boost economic activity, lower unemployment, and –  not incidentally –  get inflation averaging somewhat closer to the 2 per cent target midpoint that he agreed three years ago to deliver.

And finally an advisory.  There won’t be many posts here in the next few days, and none for several weeks from next Thursday.  We are taking the kids off to see museums and art galleries (and a few other things) in the United States, and to reintroduce two of them to the land of their birth.  Despite a suggestion from one reader, I won’t be blogging about the lead up to the presidential primaries, fascinating as those races always are, or anything at all.  I’ve been quite taken aback by the level of interest in this blog, and have really appreciated the many typically thoughtful comments and questions. I’ve also written much more than I had ever expected, or intended to (and especially more than I intended to about the Reserve Bank), but it has been fun.  As for the future, I have quite a large pile of topics I haven’t yet got to write about –  in some cases ones that were on the pile on 2 April when I left the Reserve Bank –  so I expect I’ll be back writing here once the rest of the family is back to school and work on 13 October.

20 thoughts on “Housing, the Reserve Bank, and an advisory

  1. Just to echo Richard’s sentiment above, there is interest in considered opinions in NZ economics and unfortunately we’re not well served in the wider press, so your contribution is very much appreciated.

    Liked by 1 person

  2. The Auckland Property market is not in dangerous territory if we bring in the context of the Allan Bollard’s artificial decimation in house prices from 2008 to 2012 where prices were negative or near zero growth. When interest rates hit close to 10% for residential lend, builders on commercial loans would have hit 15% to 18% interest rates. Unintended consequence, raising interest rates too rapidly. Costs escalated for builders and decimated the building industry. The aftershock that followed was the imminent collapse of the lending parties, the 60 plus Finance companies that provided 2nd tier lending to the building industry with the loss of $6billion in investor funds.


  3. Watched Q&A this morning and Grant Robertson was asked what his thoughts about the high net migration gains of 60k with the implications that all 60k is due to permanent migration. He hummed and haahh over that question because it is clear he understands that the data is dirty. A aggressive response would have showed clearly a racist bias and they bombed out on the last Phil Tyford and Andrew Little comedy fiasco. Again it shows how irresponsible economic programs which make irresponsible comments can mislead the general public and our gullible Reserve Bank that do not do their research and fire off the hip comments.

    NZ statistics definition of a Permanent and Long Term migrant is incoming traveller that indicates on his travel documents that he would be in NZ for more than 12 months. This includes international students, tourists and foreign workers for the Christchurch rebuild. The high net PLT migration can easily be accounted by the record number of tourists and the record numbers of students. Auckland education institutions are some of the largest in the world and will/have spent $2billion in student infrastruction. You can bet that the marketing departments of these 6 to7 large education institutions to be marketing world wide to increase our net PLT numbers through the growth in student numbers.

    Immigration policy on real Permanent migration is a replacement policy.


  4. The chart would look different if you looked at value of mortgage approvals – wouldn’t it? Neither dataset is perfect. But remember the number of approvals aren’t the aggregate # of approvals per mortgage – as mortgages can be split (and are recorded here) by the number of tranches by fixed (usually various) and floating. The mix can change as sentitment changes towards interest rate outlook. Value is more indicative of the underlying strength.

    And you are a little bit backward looking as there is rapidly increasing strength outside AUckland and it is spreading, and accelerating. Aren’t economists supposed to be a little bit more forward looking than rear view mirror?

    Many economists and treasury wonks fall into the trap of the rate of increase of credit growth – rather than looking at the absolute relative value (debt to income) it has grown too. In my view moderate growth off an all time high value is more worrying from a financial stability point of view than fast growing from a moderately leveraged position. The fact is now that debt to income is rising relatively fast – nearly as fast as before 2008, and off a higher base, and in a nearly delfationary environment. This doesn’t seem to trouble you much??

    The simple fact is that property investors particulary in auckland are taking cues from net migration and rolling their capital gains again and again, with increasing velocity, into more investment properties, leveraging themselves as much as possible, and then rolling those equity gains again into another one. Credit metrics might look rosy now how that situation might undwind into a self reinforcing downward cycle is something I believe you underappreciate. Purely my view only, as someone who has spent some time modelling housing cycles and credit worthiness.


    • The data for NZ Household income to debt ratio is badly skewed because NZ population is highly migratory compared to most countries. 25% of our population have declared on recent NZ statistics as being a migrant ie 1 million people. The first 4 years you are not required to declare your overseas income and subsequent to that who actually bothers to? There also another 1 million kiwis living overseas who are likely to borrow and buy NZ properties. There is therefore the potential overseas income of almost 2 million people whose incomes may not be factored.


    • NZ Household net financial assets is $474 billion ie cash in bank and investments in shares exceed NZ household debt by $474 billion. If you add house and land value, that NZ Household net financial assets would exceed a trillion dollars in net assets. You can scream downward spiral all you like but Kiwis are not exactly very poor nor very highly indebted.


    • I think I made the point that Hamilton and Tauranga prices are now rising quite a bit, altho of course after 7 years going nowhere (or backwards) they aren’t remotely comparable to Auckland. And as I noted, we should be concerned if (given current regulation) lower interest rates weren’t boosting house prices to some extent.

      I’m quite open to the possibility of a very large fall in the house prices, in Auckland. That would be very tough for recent buyers, altho probably part of an adjustment that would be good for the economy. Unless the RB is very wrong in its analysis, it would not threaten the soundness of the banking system. This just isn’t a credit-driven boom, simply a credit-accommodated one, and it is the former sort that tend to end in serious financial systems problems.

      But I guess one of my bottom lines in economic analysis is how little any of us really knows, and if the RB is really concerned the easiest and least distortionary, and least-information-intensive, response would be to raise the required capital ratios even further (after an open and transparent consultative process).


  5. The more I’ve reflected on it the more what complete twiddle your chart is. The actual rolling 52 week value of mortgage approvals is now higher than at any other time. Sure you can adjust for migration which will bring it a smidge lower than 1 year only in history only. A disengenious analysis.


    • But my chart is of the number of approvals. Entirely agree that the value is at a record high, so is the level of nominal house prices. My point is about the volume of lending activity (and volume of turnover) in the housing market, both of which are nothing out of the ordinary. So I use this as one straw in the wind to suggest we don’t have (nationwide) a frenzied market or one driven by increasingly loose lending standards. Instead, really expensive houses – pushed up by the interaction of population and land regulation – need a high level of debt per housing transaction.


      • The property market is not frenzied. It is pushed along by the prospect of the Unitary Plan allowing for multi unit and multi level sites. The big boys are buying. Fletcher has a $600 million dollar fund buying up as many decent size sites as they can. It does not help that a recent project of 480 houses got suspended because Council got faint hearted and suspended the Special Housing zone for that site due to underground Maori sacred caves. That would have cost Fletcher at least $10 million in planning costs down the tube. Plus there are at least a dozen investment funds, local and overseas vying for property in Auckland.

        I mentioned viewshafts of 57 sacred mounts and it does seem small given that we usually associate a viewshaft as a limited corridor but the thing about viewshafts is from the context of which direction? And because cones are circular in nature, it means viewshafts in every direction. Vast areas surrounding each of these sacred mounts are subject to 10 to 15 metre height limits. Yes it is regulation but it is not necessarily a regulation that would easily go away as it has historical, cultural and archealogical contraints. And yes, the nimbys would be right in there with that mix to protect their BBQ patch of sunlight. Pre-1944 demolition controls make it difficult to build a highrise building when you can’t remove the rundown tin shed in the front of the site.

        Geography plays an extraordinary part. Auckland has water on 3 sides and numerous streams, rivers and gullies. Yes plenty of land, only problem is it is underwater, yes we can deregulate all you like but still a problem building underwater. Yes we could cut down a few hundred Kauri trees and build on the Waitakere ranges. Lots of land but try to even cut one tree and you will have the community out with pitchforks.

        I read the other day about the completion of one of Aucklands road of national significance. They had to build 17 bridges along the length of that road. Because Auckland is an very elongated city, travelling distance is far longer than most cities that grow in a circular fashion. We need longer roads, longer railway tracks, longer pipes for drinking and sewerage, all of which equates to expensive and prohibitive infrastructure spending. Even most of Melbourne grows in a circular fashion with a tiny corner that is a harbour. Our urban footprint might be a tiny 500skm but it is spread out a very long distance and extensive viewshafts mean that we have a very clumpy CBD, a small clump in Auckland harbour, a small clump in New Lynn, a small clump in Takapuna, a small clump in Manukau and Albany. Melbourne is 3200skm of CBD as far as you can see.

        Most of our infrastructure spend has been directed Southwards which is lousy planning. The problem with going south is that it takes us further away from our global markets. But it also makes Auckland the only major city with an international city that is closest enough to our global markets which means if you are trying to spread the jobs around to other cities, South is not likely the most preferred option when you are trying to get closer to your global markets. Planners need to get that infrastructure spend north and Winston has got it right.


      • Interesting perspectives. I’m still sceptical that possible forthcoming changes to the unitary plan will have systematically raised Auckland prices. In theory – tho perhaps not in reality – they should have raised the prices of some sites (those with the most attractive new opportunities) – while lowering overall greater Auckland actual and potential urban land prices (since the total stock will, it is claimed, be able to be used more intensively)

        I’m not sure I really get the point about expansion southwards. after all, even if Hamilton – with none of the geography problems – developed as a city of a million people, it is probably not materially further from Akld airport than, say, places north of Whangaparoa.


      • There isnt enough detail in mortgage approvals to allow that conclusion to be drawn. We simply dont know if 5 mortgage approvals are for one home, or 3, due to how mortgage tranches are split by interest rate.

        We do know from the RBNZ and CoreLogic that investors are highly geared, per one of the housing market papers put out recently, and increasingly so. We also know that debt to income is rising and quickly off an all time high. We also know that profits from banks are at all time high, not from consumer of capex lending, but because of mortgage lending – so your arguement does not pass that basic real world sniff test.

        And the RBNZ stress tests did not consider knock on impacts – they did the first house price decline analysis, which showed yes we get out okay, but not the compounding down spiral that always occurs.

        Nor did banks at the time have a demished view of the dairy impact. Credit provisioning for dairy hasn’t start yet, but is about to. Spreadsheets are worth their weight. Banks aren’t about to collapse, but the RBNZ is correct to be concerned, regardless if you like their governance or not.


      • But we do know that house turnover per capita remains well below previous peaks, so the fact that mortgage approval volumes remain modest is reassuring.

        Debt to income is not rising quickly, and is only rising from levels that had gone sideways or backwards for seven years. We have no idea what an “equilibrium” is for that ratio, but we do know that higher house prices require higher credit, (and, to get all historical, actually we also know that debt was higher in the 1920s and 30s)

        You are correct that the Bank didn’t formally consider knock-on impacts, but they assumed such a severe stress test (esp as regards the unemployment rate) that in effect they did do so.

        Re dairy, yes I’m sure you are right. But as I’ve pointed out previously, housing and dairy aren’t additive. If the economy goes into a tailspin (say associated with a housing bust) the exchange rate will plummet and the dairy exposures will look a lot less bad.

        It is good that the RB is monitoring things, although they don’t seem to be doing it well (cf say their Aus peers). governance is really neither here nor there on this issue, altho a better governance model might have prevented the Governor pursuing his personal policy agendas at the expense of the first home buyers etc. Central banks and regulators are there to ensure resilience – it looks as tho they’ve done that, but if not they should make the case for higher capital ratios, which do more to provide resilience and a lot less to impair the efficiency of the financial system.


      • The key price driver in the Unitary plan is the requirement to have a minimum 1200sqm for multilevel and multiunit site. This base requirement is on at least 40% of rezoning of the Unitary Plan. Most houses have 650 to 800sqm section. In order to get to 1200sqm you need to acquire a neighbouring property. What is your neighbour worth if you can build 18 levels of apartments?

        Even if you do not want to become another Donald Trump, the Unitary Plan allows most of new rezoning to build a second dwelling. This is a rehash of the Minor dwelling. The proviso is to have the space to allow for the minimum size of 40sqm that must be attached to the main dwelling. There is no requirement for additional carparks but you can have a separate kitchen. This would mean that the Unitary Plan would allow existing houses to add a second property with the potential for 2 separate income streams from a single property.

        Investors are prepared to pay more because the income potential can as a minimum double on any property in Auckland under the Unitary Plan but if you can get your 1200sqm ie buy out your neighbour you can have 4 levels of apartments and up to 18 levels in some locations.


  6. Useful detail thanks, but the point still holds: Unitary Plan changes won’t materially alter the number of people in Auckland or demand for accommodation, and will free up land use restrictions. Some land will become (perhaps much) more valuable relatively, but absolutely average land prices across Auckland should fall (relative to counterfactual) if these changes are expected to actually happen.

    Is anyone bidding up the price of land in, say, Clendon based on the prospect of more intensive development there? If so, (a) I’d be surprised, but (b) it would be evidence of some irrational behaviour haven’t taken hold.


  7. The property market like any market boils down to willing buyer and willing seller perceptions. When the press and NZ economists loosely bandy around 117k migrants in 12 months and net gains of 60k seller expectation is more migrants. And yes the migrant issue is a Auckland problem and not a NZ problem because of a single international airport. Real Permanent migration is a replacement policy but because the replacements come in through a single entry point Auckland grows but not as fast as people might think. I recall we celebrated having 1.5 million people years before census night shows we are still less than 1.5million.

    Eventually that supply would catch up but a yet the Unitary plan is still in planning stages. There are now 90 Special Housing zones to fast track development so your prime variable ie regulated land has been deregulated to some extent but the other prime variable is infrastructure. You cannot build if you do not have infrastructure.


  8. You need to go back to basics in terms of what drives prices. Increase demand and limit supply drives land prices up. Land supply in Auckland is limited by

    1. Geography, can’t fix, Auckland has water on 3 sides and numerous, rivers, streams and gullies
    2. Political correctness, viewshafts protecting sacred mounts, sacred caves
    3. Heritage, get rid of pre 1944 demolition controls
    4. Lack of infrastructure spending, elongated city equates to congested roads, one road in and one road out
    5. Making Council the last man standing for any developmental issues, sue the council results in duplicating up of development checks, increased costs to mitigate risk to development
    6. Regulated land, I think this is the last on the list and the Special Housing Areas and the Unitary Plan go someway to deregulating and fast tracking builds. But first we need to get the infrastructure in place otherwise drip feed infrastructure spend through rates equates to drip feed development.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s