Unprecedented…in a sample of four

The Reserve Bank had an interesting brief issue of the Bulletin out yesterday, reporting the results of some fairly straightforward data analysis as to how house prices (more accurately, house plus land prices) have behaved over the last fifty years or so, and how prices in Auckland relative to those in other parts of the country have behaved going back a few decades.  It is almost wholly a descriptive piece, offering no views on why things happened as they did, and little on what those patterns might mean.

The author –  Liz Kendall –  has done to work to construct a quarterly series for each TLA and a range of regional indices, using QVNZ data.  It would be nice to have those indices generally available, but perhaps restrictions on the use of the QV data precluded that?

The author identifies six distinct upswings in real national house (+land) prices since 1965, and as she notes the recent one has been relatively muted (for the country as a whole) –  despite all the fevered talk of low interest rates driving prices higher, ignoring the fact that interest rates are low for a reason (weak demand at any higher rates).

There wasn’t much of a upward trend in real New Zealand house prices, as far as we can tell, until the last 15 or 20 years.

rb housing 2

There was a huge boom in the early 1970s, as some combination of very low real interest rates and very rapid inward migration drove prices up.  But that increase was fully reversed over the following few years as credit conditions tightened, real incomes came under pressure, and significant net outward migration relieved pressure on the housing (house+land) stock.  The lack of any strong trend is consistent with what we see in the advanced countries that have a much richer longer collection of historical data –  including Australia and the United States.

Kendall illustrates that house prices in Auckland have not always been that highly correlated with those in the rest of the country.  There is clearly a common element to house prices in the country as a whole, but there are times when each region- including Auckland – “does its own thing”.  For example, in the 2002 to 2007 boom real house prices rose by materially less in Auckland than they did in the rest of the country (taken together).  And in the last three or four years, Auckland prices have risen much faster than those in the rest of the country.

The punchline of the article appears to be this chart

RB housing 1

For the period since 1981 –   only 35 years –  it shows the ratio between Auckland house+land prices and those in the rest of New Zealand, and a moving average trend in this ratio.  The trend has no economic significance –  it simply smooths through the ups and downs in the actual data, and the more recent observations might end up being quite materially revised (up or down) as new data emerge (there are always “end point problems” with these sorts of filters).  The ratio is currently 22 per cent above this particular trend line, but when we look back 10 years hence who knows how large we will estimate that gap to have been.

I had just a few other thoughts on the article:

First, it was a shame that the authors did not look at Christchurch separately.    They look at an entity called “Greater Wellington” (Wellington, Upper and Lower Hutt, Porirua and Kapiti) but it is puzzling that they don’t even break Christchurch (an urban area of a similar population) out separately (just bunching it with Nelson, Dunedin and Invercargill), let alone look at a combined “Greater Christchurch” entity (Christchurch, Selwyn and Waimakariri).  At least in recent years, it has only made sense to think of the three TLAs together –  and price behaviour in that area has been distinctively different from, say, the rest of the South Island).

Second, it might have been interesting to see whether the differences between prices in other TLAs and the rest of New Zealand (perhaps excluding Auckland) were similar to, or different than, the pattern we observe in Auckland, including whether those patterns have been changing over the relatively short period under study.

Third, I would go easy on the word “unprecedented”.  In a short article, it is stressed several times that the gap between the increase in Auckland house (+land) prices and the increase in prices elsewhere in the country is “unprecedented”.  But they have regional data only since 1981, and in that period there have been a grand total of four upswings.  It is true that there is no precedent in the data, but there isn’t much data.

Relatedly, the article highlights how ill-served New Zealand is with historical economic and financial data.  That isn’t the responsibility of the Reserve Bank –  largely a policy and operational agency –  but it is a limitation that all users face.  Between the continued underinvestment in historical official statistics, and the lack of academic economists working on New Zealand economic history, and doing the leg-work to develop longer-run analytical series (as has been done for house prices in Australia, the US and various other countries), we have a relatively poor sense of what is normal or abnormal.  For example, it would be interested to know whether similar divergences occurred in the early 70s, in the post WW2 house (+land) price boom (when wartime controls were lifted), to be able to see what sort of regional divergences occurred during the Great Depression, and to be able to understand 19th century regional house price shocks (for example, the impact of the gold rushes on Dunedin prices, or of the land wars on Auckland prices).

The subtext in the Reserve Bank article is that what goes up comes down again.  In this article, it isn’t a particularly powerful point (and, in fairness the article doesn’t make much of it directly), since there will always be times when one region or another (even the largest) lags behind house price inflation in the rest of the country.  But there is no natural equilibrium  relationship between Auckland prices and those in the rest of the country –  as experience in the US demonstrates, it is mostly a matter of policy choices.  With weaker immigration and more liberal land-use policy around Auckland, real Auckland house+ land prices could be much lower absolutely, and relative to the rest of the country than they have been in recent years.  Many cities much bigger than Auckland in the US have house prices much cheaper, relative to surrounding areas, than Auckland does (I stayed recently with some friends in a small college city in the middle of the US where house prices were higher than those in the nearest, fairly prosperous, city of a million or more).

Finally, on the housing sector, SNZ released building consent data yesterday, completing the data for 2015.  The authors of the press release pointed out that the number of residential consents was the ninth highest ever –  which isn’t very impressive, since most macro series reach their highest or maybe second highest level each and every year.  What wasn’t pointed out was the way New Zealand’s population has increased –  not only is stock of people living here much higher than it was in previous housing booms, but the population increase over the last year or so has been larger –  even in percentage terms –  than at any time for decades.  Unfortunately, we don’t have an official population series that goes back prior to 1991, but using one of those from the international databases, here are residential building permits per capita since the series the mid 1960s.

residential building permits per capita

 

Last year’s building permits per capita were only just back to the average for the last 35 or so years –  even though the fast rate of population growth might normally have suggested, in a less regulatorily-impeded market, that consents per capita might have been considerably higher than the average over that period.

6 thoughts on “Unprecedented…in a sample of four

  1. You probably don’t want to place much emphasis on residential housing data prior to ca.1985 anyway. The government’s role in building houses (via the Ministry of Works and Development) was so significant that any comparison between now and then would either be invalid or would have to be wrapped up in all sorts of caveats.

    Wouldn’t it be great if we had metropolitan statistical areas (or even better commuter statistical areas) like the US. Cities like New York City appear quite different once you take into account all the people who live in New York State, Connecticut, New Jersey and Philadelphia that effectively are attached to the official city. Recently I heard Deputy Mayor Hulse referring to Auckland as stretching from Wellesford to Pokeno. Pokeno is, of course, in the Waikato District not Auckland but Hulse is being realistic. The commuter shed is, of course, even larger.

    And Christchurch’s commuter shed reaches at least as far as Amberley to the north and Dunsandel (even Ashburton) to the south so any discussion of housing performance that does not include at least Selwyn and Waimakariri Districts is pointless.

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    • Fair comment about the different policy regimes, and the need to distinguish behavior between them, but in a sense that is why we would be better off with much longer runs of historical data (imprecise as they are) – they help us better understand the role of different tax, regulatory and govt-provision structures.

      And, yes, MSA data for NZ would be great. We underspend on some core things that govts really should be providing – notably statistics.

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  2. Its irked me for years that the Bay Of Plenty stats are lumped in with the Waikato. What’s that hump in between then. Kiwi’s who never leave their office are a waste of space.

    Which is why Aucklanders opinions always need to be discounted. The Bombay humps preclude them from traveling other than out the Coromandel and that’s a mission for most of them.

    People who get paid to produce the meaningless reports that you have described and who apparently consider themselves to be statisticians should also quit their jobs. Waste of time and office space.

    Nothing worse than meaningless statistics. Politicians and Reserve Bank Governors seem to relish in that rubbish.

    “There was a huge boom in the early 1970s, as some combination of very low real interest rates and very rapid inward migration drove prices up. But that increase was fully reversed over the following few years as credit conditions tightened, real incomes came under pressure, and significant net outward migration relieved pressure on the housing (house+land) stock.”

    The big boom in immigration was late 40’s and fifties with the English and Dutch and others coming from a Europe that had been decimated by war. Lower Hutt was built around them. They lived in Transit camps in Hutts till they were allocated a house. In the first instance they began to replace the many Service people that never returned.

    IThe population increase in the 70’s was PI’s, many again to the Hutt to Wainui and Porirua and Auckland.
    This was also the time of rapidly increasing oil prices. When the cartel that became OPEC muscled the world.

    “despite all the fevered talk of low interest rates driving prices higher, ignoring the fact that interest rates are low for a reason (weak demand at any higher rates).”

    Well no, rather that the world is awash with money now the oil prices have collapsed causing a collapse in other commodities and energy demand that has been subdued after quite a few years development of low energy use products, cars being a good example and the development of computers and associated products. Energy use per capita world wide has gone backwards. Less money needed and more money in the hand of the average person around the world. I guess you could call that weak demand.

    Of the 90+ thousand extra people we now have this year over last year about 60000 are babies so require no additional housing, 30 thousand of those have replaced those that have died leaving room for others, ( Plenty of oldies that sat in their houses because they couldn’t sell them who have in the last 2 years done so and moved to the Retirement Resorts leaving young families in their house) (Retirement Resorts which have an average tenancy of about 7 years so provide a constant turnover of places to live.),
    30k will be students accommodated in hostels and various homes and buildings that already are in existence thereby making better utilization of existing assets leaving about 30k who have to find a home. Can’t remember the stats but at last census there were a lot of empty homes. So many people will have moved to other area’s leaving surplus houses for the rest. ( Rotorua is a good example of that)

    30K at 2 persons per house is 15000 dwellings needed.

    Take a look how many Retirement Resorts are on the development list currently.
    The growth in the last few years is phenomenal. apparently we all need one.

    Sure there are some struggling to find a house but it ain’t as bad yet as it was in the late 70’s or 80’s, at least not in Tauranga when it was hard. Plenty of land/sections here and lots of houses being built. Going to be some burnt fingers again.

    It is a good bet that Auckland will dampen down again, it usually does and looking around the Lower North Island over the holidays people are on the move to smaller places. Wgtn & The Hutt don’t look to flash but Kapiti coast is continuing on its way and wait till the Gully Rd is finished, Levin will boom.

    “There wasn’t much of a upward trend in real New Zealand house prices, as far as we can tell, until the last 15 or 20 years.”

    I refer you to the Keynote speakers address for the Property Investors Association, one Dolf De Roos. ( Might find it here soon. http://www.upmagazine.co.nz/past_issues/index.html)

    The average house price in NZ in 1960 was $2000 and by 2015 was $600k. That represented eight doublings of value in 55 years or so, roughly a 10% increase in value each year.

    Actually it demonstrates that nothing has changed and I recall he used to say that this level of increase has been going on around the world since before biblical times. (He had once upon a time worked it out from historical records).

    Actually it probably demonstrates that houses are better value for money now than ever they were. Back in the sixties the houses were fairly basic compared to the size and style of today’s average new build.

    So frankly can’t see why the RB and the Governor et al are even bothered about something that has been happening forever. (Well I can, they are born control freaks who think that they can stamp their goody two shoes and the world will change. Ha to that)

    Govenors of the RBNZ during that time.

    Mr Gilbert Wilson 21 July 1962 20 July 1967

    Sir Alan Roberts Low 21 July 1967 11 February 1977

    Mr Raymond W. R. White 12 February 1977 11 February 1982

    Mr Dick L. Wilks 12 February 1982 17 May 1984

    Sir Spencer Russell 18 May 1984 31 August 1988

    Dr Donald Thomas Brash 1 September 1988 Resigned 26 April 2002

    Dr Alan Bollard 23 September 2002 25 September 2012

    Mr. Graeme Wheeler 26 September 2012

    Sunday afternoon ramble!

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  3. I went to a Dolf De Roos seminar here is a synopsis:

    “Tonight, a pumped de Roos tells his audience that he wants people to invest in property and write to him 12 months down the track and tell him they’ve “made one million or three million, or you’ve got 16 properties, or we’re taking six months off because our cash flow now exceeds our outflow!” He says, “I don’t know any other activity where the rewards are so huge. If you want to invest a million dollars in the sharemarket, you need a million dollars. If you want to invest a million in real estate, you only need $100,000.”

    You can buy one property, get it revalued, use the equity to buy another property and then buy another and another. “And you do it all with OPM. Other people’s money. OPM. It’s like being high on drugs!” What’s more, the wonder of depreciation claims on the building and contents means “the government subsidises your investment! It’s delightful!”
    Pamela Stirling – Listener

    People walked around with glazed eyes. The greed emanating from the easy money saw the National Party importing wealthy buyers rather than see house prices level off at what it’s citizens could afford.

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    • There is no depreciation on building in NZ. The National government removed depreciation on building in their 2nd term in government. Australia and the rest of the world continue to allow depreciation on building. It is only in NZ that we believe that a building repairs itself and does not depreciate. In reality buildings do depreciate. It is the land that doe snot depreciate.

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  4. It really boils down to the fundamentals of demand versus supply. As population grows we are effectively trying to fit more and more people in a limited space. That space in Auckland is limited due to geography and some uniques feature, ie the Waitakere ranges(plenty of land but filled up kauri trees) and viewshaft height limits surrounding 57 mounts. NZ has been historically a migrant nation and the migrant policy is largely a replacement policy, therefore population growth in NZ is really due to natural birth. Even though the government has a target to bring in 45,000 new migrants this year they have only brought in around 15,000 new migrants.

    In the past NZ migrants have been made up of Brits who prefer being out in provincial towns but recent migrants of asian descent prefer being in a larger city fueling a booming population in Auckland. Migration is not a NZ problem. It is a Auckland problem. Even if we drop migration to negative, rural drift will continue to boost Auckland population. The reality is provincial towns are shrinking.

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