An official target for house prices to disposable incomes

Getting back to thinking about housing issues, in preparation for a speech next week, I noticed that the Auckland Council’s Development Committee had adopted a target of reducing the Auckland ratio of median house prices to median disposable income to five (from around ten at present) by 2030.

The target appears to have been adopted following the recent report on housing affordability issues by the Council’s Chief Economist. That report,  if rather patchy, has some interesting material I’d not seen previously, such as the estimated range of costs of some of the view shaft restrictions on building that Auckland currently has in place.

I wasn’t that impressed by the new target.  The report notes that house price to income ratios probably “should” be around three, and then adopts a target which, even if taken seriously, would still leave price to income ratios 15 years hence well above the sorts of levels that should be able to be sustained over the longer-term.  Targets for asset prices leave me queasy at the best of times, but set that ‘theoretical” objection to one side for now.

But what chance is there of this target being taken seriously?  It is being adopted by the Development Committee of a Council that is a year out from an election.   Five sets of local authority elections will occur before 2030.    And unlike central government there is no strong party discipline in local government, which means there is even less meaningful basis for anyone to believe that a target adopted today by a committee of the current Council will translate meaningfully into action over the next 15 years.

There is an old cynic’s line that in making a prediction one can safely offer a number or a date, but would be most unwise to include both.  Probably the same goes for target-setting.  But an alternative formulation might be that if you must include a number and a date, set the date so far into the future that no one is likely to even remember it when the date comes round, and all those involved in setting the target will long since have moved on.     Concrete targets around things the Auckland Council can actually control for the 12 months between now and the next election  –  or at a pinch the one after that, which sitting councillors might campaign on next year  –  might have been more impressive.

Targets like this have more of a feel of “virtue-signalling” –  adopted and articulated to signal that the adoptees “feel the pain” rather than because they necessarily intend to do much about the problem in question.  To say that is not to doubt the goodwill of the Auckland councillors, simply to observe that in isolation this target gets some cheap feel-good headlines (the word “ambitious” gets associated with one’s name, and not necessarily in a Sir Humphrey sense) and commits them to precisely nothing.

In fact, I was reminded of some previous targets.    Numerous governments have talked about getting New Zealand back into, say, the top half of OECD per capita income rankings.  Not that long ago there was the goal of catching up with Australian per capita incomes by 2025.  No doubt all those involved would have welcomed achieving the targets, but weren’t willing to actually do anything much themselves to achieve them.  And having served their short-term purpose (fill out a speech, fend off a minor party or whatever) the targets themselves would soon be forgotten.

Getting rather long in the tooth now, I was also reminded of the 1989 Budget.  The then Labour Government was in increasingly desperate straits.  The economy was doing badly, the financial crisis was continuing to unfold, the tensions within the Cabinet grew more intense by the day, and Labour’s position in the polls looked bleak.  The Minister of Finance needed something a bit new for the Budget, and so a serious of macroeconomic targets were announced.  By December 1992, the government  –  which looked most unlikely to be re-elected anyway –  would aim to:

  • Reduce public debt to 50 per cent of GDP
  • Reduce inflation to 0 to 2 per cent
  • Reduce unemployment below 100000,
  • And get first mortgage interest rates in a 7-10 per cent range.

This was actually the first time the 0 to 2 per cent inflation target had been given a specific target date.

At the time, the new Reserve Bank legislation was being considered by Parliament.  That legislation would give someone –  the Reserve Bank Governor –  specific responsibility for getting inflation to the target by a particular date.    And it was (over)achieved, (nobody having mentioned the need for a severe recession when the targets were articulated).

But none of the other targets was ever heard of again. No one was made responsible, no one took them seriously, and there was no reporting and monitoring mechanism established.

I hope the Development Committee’s target is the next step in a serious process of freeing-up housing supply, and making housing and urban land in Auckland affordable once again.  But I’m not convinced.  I’m still not aware of any Anglo country major city in which planning restrictions have been materially and sustainably unwound to facilitate a responsive and affordable housing market (are there such examples?)  Perhaps Auckland can be the first, but there is little sign of the vision, passion, commitment, and political leadership –  whether at central or local government level –  to really address, and reverse, these issues.

(And, of course, we could get to the goal –  and beyond –  much more quickly if the target rates of inward non-citizen migration –  being reviewed by Cabinet now –  were materially reduced.  That could be done quickly and easily –  and it has worked previously.  It might buy time for a considered reassessment of the planning rules, in a rather less-fevered, less threatening, environment.)

30 thoughts on “An official target for house prices to disposable incomes

  1. Thanks, Michael.
    That last paragraph is the critical way to reach any target that is set, especially for Auckland which is burdened by the most (perhaps 60%+ ) of the non citizen immigration.

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  2. David Reid and Michael, with $2 billion being spent on student infrastructure, you can safely bet that the 7 to 8 giant education institutions in Auckland would be marketing globally for record numbers of students year on year.

    John Key is also our tourism minister and this year we have recorded 3 million record tourists. You bet that John Key does not rest on his laurels and he would be targetting another giant boost in tourist numbers. Tourism export earnings this year has for the first time exceeded Diary as the top export earner for NZ.

    As the measure of Permanent and Long Term migrants include Tourists and students that hold a visa for more than 12 months you are effectively saying get rid of tourists and get rid of students, our top export earners?

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    • No. I’ve always been clear that my policy recommendation is to reduce the number of residence visas granted, from the current 45-50K pa to, perhaps 10-15K pa. The PLT numbers are a sometimes useful short-term indicator, but visa approvals are another matter.

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      • 45 to 45k as a target is largely a replacement policy. What is difficult to forecast is how many kiwis will decide to return to NZ, eg after being booted out of Australia as second class criminals. But it is clear the average that depart NZ is around 40-45k a year. A policy target of 10-15k leaves a net decline of 15-20k. I realise you are rather nostalgic about keeping NZ population size to 1million rather than the 4.5million we currently have but frankly who wants a country devoid of people and the corresponding decline in a aging population?

        Auckland is a fantastic place because of its population growth and its ethnic diversity. There are thousands of NZ cities like Wellington facing lack of population growth and in a slow decline then certainly go ahead and live there.

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      • It is not a replacement policy, but even if it were there is no good economic policy for a replacement policy. My interest now is primarily reducible to something like “the economic opportunities of my children” – growing the population quite rapidly, by policy (pure policy), seems to have been a recipe for gradually falling further and further behind the rest of the advanced world.

        And, yes, I do rather like Auckland, and am not remotely fond of Wellington…the public’s revenge on the public service.

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      • Michael, you need to check your numbers because NZ statistics population numbers do indicate largely a immigration replacement policy is in effect. You can easily test by looking at NZ population growth between 2006 to 2014.

        30 June 2014 NZ population = 4,509,900
        30 June 2006 NZ population = 4,184,600

        Average NZ pop. growth over 9 years per annum = 36,144

        Average NZ Natural birth birth per annum = 53,665

        Average NZ Deaths per annum = 25,925

        Therefore average net increase in pop. from Natural birth less Deaths = 27,740

        Therefore net avg increase from immigration(pop growth less net natural birth) = 8,404 avg per annum

        Immigration therefore only requires roughly 3000 houses built a year throughout NZ which is not a very large impact on housing. NZ economists including the RBNZ tend to rely on headline rhetoric rather than look at the facts. House prices are clearly not the product of immigration. Other factors like QE and other Central bank money printing offensive would be the more likely culprit. Cheap freely printed cash circulating the globe.

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      • I’m not disputing the numbers. the issue is one of interpretation. Not only is a target of 40-45K residence approvals more than replacement, but (more importantly), if we had 10-15K immigration approvals, the population would now be falling slightly and there would be no need for many new houses (net) to be built at all. More importantly, in my view, the real exch rate and real interest rates would be materially lower.

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      • Michael, in effect you are saying that the optimum number of people for a country like NZ(the size of Japan with 125million people) is 4.5 million people, beyond that and we are unable to sustain??? Zero population growth altogether. How is a population of 4.5 million even remotely a problem when a country like China has to deal with a billion people and Japan 125 million?

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      • No, I’m not.

        I have previously said that NZ’s optimal population (if that term has any meaning) might be 2m or 200m, but is unlikely to be 10m. One can either trade on the natural resource advantages (as Norway or Kuwait), or deal with small size and distance disadvantages by becoming very big, and totally changing the character of the economy/society. But more generally, I don’t think govts should have policies on rates of natural increase, so if the birth rate went to 4 per woman I’d have no view on the merits or otherwise (tho as an analyst i’d suggest it had a per capita economic cost), and (more importantly) I don’t think there is any convincing evidence that immigration is beneficial to the recipient economy/society – not just in NZ, but anywhere. A few sentences in a comment can’t explain the story fully, but (eg) there is no evidence that over the 20th C the US (with lots of immigration) did better than any number of European countries, with modest immigration (US was richer at the start and the end, but the gap didn’t grow). And when the US shut down immigration for 50 years after WW1 there is no evidence it did them any harm.

        As for China, they are a struggling middle income country.

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    • Record 118,900 Permanent and Long Term migrant arrivals this year to September 2015.

      1. A total of 27,000 migrants arrived on student visas in the September 2015 year.
      2. Migrants arriving on work visas numbered 36,300 plus 6200 from UK in the September 2015 year, Arrivals on work visas include working holidaymakers.
      3. Arrivals of New Zealand and Australian citizens, who do not have to apply for a visa, numbered
      35,500 in the September 2015 year.
      4. only 13,900 migrants arrived on residence visas.

      Therefore only a small number of 13,900 arrivals and if we less departures brings the net far lower than your desired target of 10k to15k. All the fuss over immigration unsubstantiated?

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      • but my target is not for net migration, it is for residence approvals (ie for non citizens). On the pattern of recent decades – given the trend average outflow of NZers – that would result in a trend outflow of perhaps 10-15K

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      • NZ Statistics is quite clear on this. The gross arrivals(not net migrants) on actual residence visa ie non citizens is 13,900, well short of the government policy of 45,000 per annum and well within your stated target of 15,000. The significant numbers of New Zealand citizens returning(35,500), international students and foreign workers number. Therefore all your fuss over immigration unsubstantiated??

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      • But most residence visas are given to people who are already living here – who arrived on either work or student visas. WHat visa people arrive on is rather less important than whether or not they are allowed to stay.

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      • Michael, that is why I looked at the actual NZ population growth as proven by Census over 9 years(NZ statistics have the habit of overestimating population growth eg Auckland celebrated having 1.5million people(2012) only to find after census night well short of 1.5 million in 2014). The numbers indicate immigration has only a tiny 8,404 annual average effect on total NZ population growth over 9 years from 2006 to 2014. Again all the fuss over immigration unsubstantiated??

        http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10782565

        (Auckland celebrates 1.5million milestone then ooops census 2013 confirms Auckland population at 1,415,440, somewhat short of the celebrated mark)

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      • Yes, I quite agree with the focus on population data (and have also noted SNZ’s “biases” (more just a methodology issue, in that they use PLT data between censuses). But as I noted the other day, my point is that immigration policy is the difference between net migration boosting population by 8000 per annum and it shrinking population by perhaps 20000 or 25000 a year. that is a big difference (750000 people over 30 years, in a country of only 4.5 m even now).

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      • Michael, if we went in the direction that you suggest then we would likely do what Germany is doing, ie accepting 800,000 Syrian refugees just to make up the population shortfall with the associated future problems that arises from a falling and aging population.

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      • There aren’t many protections from bad policy in future – if people start panicking about falling populations you might well be right, but people in Eastern Europe and Japan don’t seem to be panicking (and Merkel’s stance doesn’t seem wildly popular even in Germany – just another case of the elites foisting a pro-immigration prejudice on the populace. There are no particular problems associated with an ageing or falling population, at least as long as one goes into it with low levels of debt (which we do, and which the Germans keep trying to have, despite the efforts of other countries to get them to spend). For some comment on Merkel’s problems see http://nzinitiative.org.nz/Media/Opinion_and_commentary/Opinion_and_commentary.html?uid=1082

        In a way a falling population is sad – nationally or in Taihape or Invercargill. Either people have too little faith in the future to reproduce themselves (story in much of Europe) or the econ opportunities are better elsewhere. The latter doesn’t make decline less angsty – it is a reminder that one’s town’s raison d’etre is no longer there (to the same extent) but it isn’t a major econ problem (and at an indiv town level even NZ has been dealing with the issue for over 100 years – I think Hokitika’s peak population was in about 1865.

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      • Sorry. I’m not sure where you are getting your (“my”) NZ numbers from. A 20000 pa fall in population is about a 2.25% fall over five years (not too dissimilar to what the Baltics have seen – and in their cases even I might be worried, with Russia just across the border.)

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      • Sorry used your 750k decline over 4.5million. Ok 2.25% versus Japan’s 0.2%. Don’t forget Japan’s population had a population explosion from 83million to a peak of 127million before it flattened and declined slightly in the recent 10 years.

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  3. Allan Bollard went overboard with his inflation targeting that he single handedly drove the NZ economy into a recession. The NZ economy was already in the middle of a bad recession when the GFC hit. The GFC actually saved the NZ economy because it forced Allan Bollard to drop interest rates fast.

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  4. http://www.interest.co.nz/opinion/78149/bernard-hickey-argues-policy-responses-aucklands-housing-market-fire-are-now

    Finally a decent journalist that has an analysis of the impact of viewshafts on high rise buildings. Viewshafts sounds like a narrow corridor and the auto assumption is that it has a negligible impact after viewshaft is associated with a thin corridor but when you have a Mount which has a circular base, think viewshaft from which direction? ie all around Mt Eden, Mt Roskill, Mt Smart, Mt Albert, Mt Wellington…oooops that’s most of central Auckland where most cities have their high rise towers.

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  5. I read this and personally wondered if the goal made ‘economic sense’.

    As this quite good read from the RBA (http://www.rba.gov.au/publications/submissions/inquiry-into-home-ownership/index.html) in response to (yet another) Australian Parliamentary inquiry points out, the average affordability of the payments to service a mortgage is reasonably affordable. Or very affordable depending how long low interest rates are set to last – and as our Reserve Bank continues to revised down neutral interest rates perhaps this last for quite a while. The New Zealand situation is much the same.

    At the same time the percent of annual income require for a deposit is now substantially above long-term averages. Which partly explains the demand from households for lower equity mortgages. So what is affordable in a multiple of income sense is substantially influenced by interest rates, income growth, etc. This disconnect is driving much of the angst – and not just in New Zealand.

    I would have thought a better target might have related much more to variables within council’s control. Some of these are already in Auckland plans but the measurement and accountability appears quite a minefield. Very differing answers are arrived at by different assumption. One suggestion is to focus on measures that demonstrate that plans are unnecessarily influencing price by limiting growth. The Grimes-Liang measure of urban rural land price differentials springs to mind.

    Lastly, while I personally think lower house prices would be a ‘goo’ thing I wonder if we oversell the expectations what can be achieved by addressing supply constraints. From the RBA again:

    “While it is undeniable that more younger households would be able to purchase a home if housing prices were significantly lower relative to their incomes, there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment). There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can – safely and sustainably – service the obligations involved in paying the higher price. Additional housing supply ought to dampen housing prices, and more probably will reduce the growth rate of housing prices that occurs in response to increases in demand for housing. There is, therefore, an argument for government policy to avoid creating unnecessary barriers to supply. However, there is no example in Australia or internationally where supply expansion on its own generated housing price declines of a similar order of magnitude to the increases in prices seen in some Australian cities in recent years; some academic work on this issue suggests that removing supply constraints in a single population centre might not reduce prices significantly (Aura and Davidoff 2008). “

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  6. Thanks for those thoughts.

    Yes, I like the idea of targeting something like the Grimes-Liang measure. Would be consistent with the 2025 taskforce rec that local authorities should have to publish a measure like that, and then explain why they were not releasing sufficient land to close the gap.

    Not sure I entirely agree with the RBA. After all, if supply were responsive, lower interest rates should boost only land prices, which would be a small component of house prices, and so servicing “affordability” should improve. Also, the final para may be correct about the history, but I think it could probably be rewritten as “there is no example where regulatory supply restrictions have been materially eased in the decades since such planning became de rigueur”. and one partial counter-example to the RBA history is NZ from 74 to 81. There was a recession early in the period, but unemployment remained very low throughout the period: in that case supply constraint eased because population growth rates collapsed (our change in immigration policy, and the renewed outflow to Aus).

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  7. I actually support the target, notwithstanding the many valid grounds for scepticism.

    One is that having such a formal target gives pro-supply-side mid-level bureaucrats in the Council a stick with which to beat their obstructionist brethren in internal debates over fine print and implementation issues.

    Another is psychological, in that it creates a focal point for rhetoric around land use debates. In the long run rhetoric has a huge influence around what our places look like. Ten years ago, preservation, NIMBYism and heritage overload were all given a free pass and their negative consequences ignored. (A rather anachronistic throwback to that time was seen in the Herald today). It’s only in the past few years the young and unlanded have found a voice and the debate has gotten more balanced.

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    • Blair, you can add Maori political correctness to the equation in the 57 sacred mounts in terms of viewshaft height limits between 10 to 15 metre height limits which has obliterated high rise throughout central auckland.

      The sounds of the young and the unlanded will still be pissing in the wind because they do not pay rates and Council is fully aware who pays their wages ie Nimbys and Maori PC

      The rejection of billions of dollars of projects,

      1. World Cup stadium and rejunevation of the Harbour front $400million
      2. harbour port extention which would cost Auckland from being unable to host large cruise ships laden with tourists and container ships that are getting bigger and bigger $500million lost revenue
      3. Len Brown’s railway $10 billion
      4. The estimate of viewshaft costs Mt Eden $400million by itself, which means $$billions loss across Auckland economic activity

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  8. As I noted at Offsetting Behaviour, this goal, although using a different metric, is the same as the goal set out in Auckland Council’s 2012 Housing Action Plan (which is already current policy and is built into the Special Housing Accord).

    Press coverage suggests that AC will achieve this by having nominal incomes rise over time while holding house prices static in nominal terms.

    This is a particularly easy target to adopt (i) for all the (lack of) accountability reasons you outline, (ii) the government is already pre-blamed for not supporting the target enough, and (iii) the amazingly leisurely timeframe which includes a 2-5 year pause while policies and plans are re-jigged.

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  9. 1) Set up a RBNZ committee (just for Michael)
    2) Delegate the 12 month rolling long term migration rate to the RBNZ as a macro-prudential tool
    3) Have central government mandate a measure something like the Grimes-Liang measure or other robust land supply criteria as a national policy statement to the RMA (yes the problem is mainly Auckland, but all Councils should be directed)

    Will be interesting to watch what cabinet does with the migration targets.

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    • The Reserve Bank – committee or not – has far too much power already…….

      I’ll be surprised if they do anything on immigration, so strong is the elite conviction that immigration is a “good thing”.

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