Of course, there is plenty of competition. But this isn’t the latest on Kim Kardashian or Prince Harry, or whatever. It is about house prices. And this time one can even, sort of, excuse the media outlet concerned
According to the Herald, New Zealand housing market 40% chance of going bust, says Goldman Sachs.
Sounds bad. Or perhaps promising if you care about the prospects of your kids being able to buy a house.
But quite what does “bust” mean here? Well, not quite what you or I might think of us as a bust.
Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.
A five per cent fall in real house prices is a “bust”??? In what sort of alternative universe? If the Reserve Bank does its job and keep annual CPI inflation around 2 per cent, unchanged nominal house prices for 2.5 years is a real fall of around 5 per cent.
As recently as 2008/09 – no one’s definition of a house price “bust” in New Zealand – nominal house prices fell by 9.1 per cent in year to March 2009. The total nominal fall was a bit larger than that, and the real fall was a bit larger again. In serious ‘busts” abroad, real house prices have fallen by 50 per cent (most of that nominal). In the late 1970s in New Zealand, real house prices fell by 40 per cent.
But, of course, the worst of it isn’t Goldman Sachs fishing for headlines with ill-chosen labels for modest corrections, but politicians who fall over themselves to suggest that, no matter how awful and unaffordable current house prices are, we can’t possible have house prices falling.
Last month it was Andrew Little
But asked if he welcomed signs Auckland house prices were falling, Little said no.
Today, Phil Twyford seems to be running the same line
Labour housing spokesman Phil Twyford said a housing bust could be just as bad as skyrocketing prices.
(In fairness, even though this quote appears in the “bust” article, it is possible Twyford has something more in mind than a 5 per cent real fall when he talks of a “bust”).
Flat nominal house prices might be an improvement on what we’ve had, but as I illustrated in a post last month
Depending on how optimistic you are, [with flat nominal house prices] it could take 40 to 50 years to get house price to income ratios back to around three – the sort of level sustained over long periods in well-functioning US cities (and in many other places before land use regulation became the fashion). Perhaps you are sceptical New Zealand could get back to three. It would take 20 years or more just to get back to five.
Of course, it isn’t as if other political parties are really any better.
If Amy Adams had been asked, at today’s launch of the plan for the government to build lots of houses, if she was hoping to see house prices fall, I wonder what she would have said?
The Green Party co-leader, Metiria Turei, did once call for a slashing in Auckland house prices. But that was a year ago, and nothing more has been heard of that call.
Last year, Arthur Grimes called for a 40 per cent fall in house prices. That was greeted by the then Prime Minister with the label of “crazy”. As I noted at the time
It betrayed a fundamental lack of seriousness on the part of the Prime Minister and the government about making housing affordable, and in fixing the dysfunctional market that they – and their Labour predecessors – have presided over.
Arthur noted that no politician has been willing to give a a straight answer on how much they wish house prices to fall and suggested
I suggest that this simple question should be asked every time a politician (of any stripe) talks on the subject. One can then see if they are really serious about making house prices in Auckland affordable for ordinary people.
Big changes in relative prices can be disruptive. They already have been, on the way up. But as I noted last year
if some people will suffer in house prices fall, that is only the quid pro quo for relieving the pressures (“suffering”) on whole classes of people who find it desperately difficult to afford a house at all, especially in Auckland – the younger, the less well-established, the newer arrivals, those without wealthy parents to fall back on.
It amused me last year when someone passed on a report of a talkback caller who had insisted that I couldn’t be a real economist because I favoured a fall in house prices. I think what caller had had in mind was the sort of fall in house prices that results from massive overbuilding, and reckless lending. Severe recessions are often associated with those sorts of gross mis-allocations of resources.
But we’ve had no sign of overbuilding (if only…) and not much sign of reckless lending either (if banks had been inclined to, successive waves of LVR controls have made it that much harder). Instead, we could fix up the housing market by freeing up land supply (because the biggest underlying issues – for all the talk of building houses – are land, not the house on the land). And we could help by taking off some of the population pressure, even if only temporarily. People who had bought in the last few years, might well find themselves in a difficult position. People who haven’t been able to buy or build would be much much better off. And for most of us, it wouldn’t make a lot of direct difference at all – the mortgage you were planning to pay off over 30 years, would still be being paid off over 30 years. There wouldn’t be an economic recession in consequence, rather than would be a new wave of optimism and opportunity as land – not exactly naturally scarce in New Zealand – was once more affordable.