One of the more idiotic headlines I’ve ever seen

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.

Indeed.

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.

 

20 thoughts on “One of the more idiotic headlines I’ve ever seen

  1. A minor objection to one well written article. Your statement “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”. needs a rider to it saying… “Providing the banks do not want us to pay lots of principle off to bring the loan down below their level of comfort” I am a shareholder in a Wellington CBD building. Five years ago the value halved due to 7 floors coming empty. The bank demanded we pay off one million dollars of principle and stop monthly payments to the shareholders. We have now let the whole building and the building value has recovered but the bank has not offered to give us back our money.

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    • Yes, fair comment. I delilberately phrased it a bit loosely, but I had in mind anyone who currently has no mortgage (lots of older people) or those with say a 60% or smaller LVR mortgage. Even a 40% fall in house prices straight off would leave those people with zero or positive equity.

      For most residential borrowers, even tho banks can call for immediate repayment if there is a negative equity position, experience suggests they would be unlikely to do so unless the borrower was unable to keep servicing the debt. Those any rise in unemployment is often the key threat, to individuals and to the banking system. In very nasty housing bust recessions – like the US or Ireland – that can be a big issue. But simply freeing up land supply would not be likely to create those sorts of problems, and (unlike Ireland) we can also have a big exchange rate adjustment to mitigate any adverse short-term output losses that did arise.

      I should also add that a range of other people would be caught if land prices did fall sharply – notably those in the process of undertaking developments at present. That would be painful, but it is almost inevitable, in any economic reform, that some people are caught in the transition. It happened to plenty of importers, and inefficient manufacturers, in the 80s as import controls and quotas were stripped away.

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      • The only equitable and politically feasible way to drop housing prices relatively quickly would be to allow highly mortgaged people to write off the loss against their taxes, perhaps for a decade or more. “Ironic”
        I guess.

        I would like to see it limited to the family home, as even “mum and dad” investors should know they are taking a risk, and be prepared to take a loss. Realistically they would probably have mortgaged their first homes to get the second though.

        I wonder if there’s an equitable way to recoup some of the enormous untaxed capital gains some have received (apart from the obvious CGT). I do recall some talk of a “windfall” tax from the Obama administration after the oil companies had made out like bandits.

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      • As part of an overall package, I could probably live with some sort of partial write-off like that. Eric Crampton has at times argued for similar approaches to overcoming resistance to deregulation in other areas (eg overseas places with fixed numbers of taxis, where the medallion had cost a huge amount, and would be worthless after deregulation).

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  2. Nice bunch of stats on the mortgage market today.
    Low interest rates and modest drawdown growth are revealed in a detailed look at the components of our home loan market.

    In the year to March 2017, banks charged mortgage borrowers $10.8 billion in interest. But that was the lowest dollar amount, at the lowest interest rate, since this [short] data series has been available.

    http://www.interest.co.nz/news/87741/low-interest-rates-and-modest-drawdown-growth-are-revealed-detailed-look-components-our

    And I see today that our birth rate has gone down and is now about 2 x our death rate.
    Not sure who is going to live in all these houses. There is a bust coming for builders and developers again.
    e.g there is currently a plan in Tauranga to build 130 residences on a bit of industrial land. That anything up to 400 people. about a half of our incoming per year and that’s on top of the hundreds of houses in the works. Bu Xmas houses here will in surplus. Coming close to it now. Plenty to rent for those suitable to the landlords. Of course plenty who don’t deserve a house at all and won’t get one.

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  3. ”The property market has been so strong over the last couple of years because we have had the highest job growth in the country, which means that more people want to come here to live and work, which is very good for the city.”

    ”In saying that, we have plenty of land zoned now and in the future on which to build houses and we are adding to our housing stock at a rate of around 140 new residential builds per month across the sub-region.”

    Tauranga’s house values have barely moved in three months according to new QV data, and real estate bosses say the market is normalising.

    The latest statistics from QV show Tauranga’s values have increased just 0.9 per cent in the past three months to an average value of $678,643 – although prices are still up considerably from April last year with a 17.5 per cent rise.

    comments about housing in todays news about Tauranga.

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  4. Good article, hit the nail right on the head, supply of land, the other half of the equation.

    If Labour win then it wont be addressed, if National hold then the PM would need to grow a set, cant see that happening.

    Local Government reform = Productivity improvement + Land Supply improvement = real Growth

    (I think I just invented a new Economic Paradigm)

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  5. Various political parties say ‘We are going to build xx thousand houses’.
    No they are not.
    Labour doesn’t own a hammer. Neither does National or any of the others.
    The Ministry of Works is long dead.

    So who is actually going to put on a hard hat and build all these promised new houses?
    Private building contractors, that’s who.
    But all the private builders are flat out right now, and there is a serious shortage of tradies.
    (But we do have an abundance of Lawyers).

    So any house that ‘the Government’ builds will be one less house built in the private sector, as pulling workers off one to build another means the first one does not get built.

    So I see no prospect of any catch-up in the shortage over the next number of years – at least until we can get the Tiger Mums to divert their ambitious offspring from Law School to Unitech.

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    • Over 10 years, there could be a material increase in the supply capacity in the building industry. But, I agree, it does seem likely that at least some of this building will displace private sector activity.

      The key longer-term tests for any of these reforms is starting to see land prices, at the margins of cities in particular, coming down. I’ve not yet seen any evidence of that.

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  6. Michael to be fair to Phil Twyford -here is the full quote.

    “Labour housing spokesman Phil Twyford said a housing bust could be just as bad as skyrocketing prices.

    He said the warning highlighted the consequences of nine years of housing neglect by the Government.”

    This could be interpreted as Phil meaning -if needed housing reforms are neglected for nine years this will result in more volatile house prices -both up and down. A boom/bust cycle which is bad on both the up and downsides of the cycle.

    This would be a truthful statement which I would think empirical evidence would support -housing markets with supply restrictions (inelastic supply) are prone to prolonged booms and periodic nasty busts.

    Phil’s statement does not necessary mean a lack of commitment to demand and supply side housing reforms -although it is a bit politician speak for my liking.

    What I found interesting in the National party’s 10 year ‘KiwiBuild-lite’ announcement -25,000 new homes in Auckland versus Labour’s KiwiBuild policy of 50,000 new homes in Auckland and another 50,000 for the rest of NZ, is Amy Adams accusing Labour of not having the available land supply to fulfil their KiwiBuild promise.

    Yet Labour has a plan for land supply -which could provide affordable land for both KiwiBuilds and privately built houses. As you say Michael, Labour have been quiet about land supply recently. But it is there in their housing policy platform. You can read it here http://www.labour.org.nz/housing

    “Labour will remove the Auckland urban growth boundary and free up density controls. This will give Auckland more options to grow, as well as stopping landbankers profiteering and holding up development. New developments, both in Auckland and the rest of New Zealand, will be funded through innovative infrastructure bonds.”

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    • I certainly agree that it is quite likely that the next recession will come before the housing situation is really fixed. In a recession, building and development activity will slow. Quite possibly house prices will even fall. But the fundamental problems won’t have been adequately addressed and we’ll just be set for further upward pressure the next time there is an unexpected surge in demand (whatever the source of the latter).

      On land supply itself, I will be unabashedly delighted if, given the chance to govern, Labour were to make far-reaching changes, that really put us on a fairly quick path to, say, price to income ratios near 3.

      (As I’d be delighted if any other party in govt were to surprise, and make those changes).

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  7. I look at new builds for inspiration.
    Let us say a new build in the 200+sqm range is saleable at $1.0m currently
    Cost of land is $500k and could fall. How much? -50% would send it to $250 but what about the horrendous service infrastructure costs that are built in.
    The house labour cost could fall by 20% in a stricken market
    The materials cost may fall 10% unless there is wholesale imports of basic products
    The only major reduction could be the size going down from that 200+ to maybe 150 sqm.
    That may be achievable once the land component is reduced.

    Are these silly figures?
    Even if all came to pass the $1m price may get down to $800k i.e 20%
    So a collapse by 20% in the whole market would see all building stop unless new buiold buyers accept the benefits of “new”

    Where is my logic awry?

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    • I don’t know the answer to your question (it is an issue that plays in the back of my mind and makes me a little sceptical that we could get price to income ratios back to 3, at least with our construction industry as it is).

      But is $250000 really the likely bottom limit for a modest section on the edge of town? I don’t know the component numbers – infrastructure and finance costs – but the base unimproved agricultural land is only around $50000 a hectare isn’t it? If new sections could be brought to market for $150000, really large falls in overall prices look a lot more plausible/sustainable. Looking around websites for provincial city section prices, it doesn’t seem impossible.

      But there are people who read this site who are a lot more knowledgeable on such matters.

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      • The base planning and infrastructure cost to draw one line in Auckland is around $150,000 ie roading, private drainage, public drainage, power, water for a simple 1 extra site.

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      • Any complication like hills, valleys, streams and you could easily add another $50,000 and the base cost will go to $200,000 per site. This does not include the land value.

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      • Michael,
        The State house that I was brought up in from 1943 until 1965 was all of 75 sq metres 2 bed and with no insulation and even the footpaths on the street arrived later. We cannot expect to go back to those early value when on a gross wage of 5 pounds my parents saved for a mantle radio that cost six weeks wages.
        So maybe any idea that price to income ratio of 3 is possible is now in fairyland.
        However our first house (1972) which I had built on our own section finished up at $24000 but only $13000 mortgage @ 6% interest, was against my salary of <$4000 with my wife finishing her nurses job on $2100 p.a. Then again the larger than normal deposit was against my then late age to marry of 30.
        Conclusion is that maybe a ratio of 5 is now more realistic

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      • Fairyland or just the sort of experience they routinely have in places like Dallas, Houston, Nashville and plenty of other flourishing places in the US.

        As you note, houses today are typically much better than they were decades ago, but we are richer too.

        But there are quite separable issues. One is the land cost (and within that the distincton between raw land costs ,and all the infrastructure that has to do into an urban section) and the other is the construction costs. Our construction costs seem surprisingly high by overseas standards, and I’ve not seen fully convincing explanations as to why.

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  8. Labours Housing Policy and its Immigration policy are a contradiction.

    Clearly our construction and building industry are at over capacity, lets assume the 15,000 of the 30,000 skilled immigrants are being used in this industry.

    So Labour is going to build an extra 10,000 homes a year, or so it claims. If each new house needs 3 builders, say an LBP, a lead hand and an apprentice, and that they can build a house every 3 months, that’s 4 houses a year. So 10,000 per year divided by 4 equals 2500 homes requiring 3 builders, that’s 7500 builders or equivalents.

    If we assume each house needs 1 plumber and it takes them a week to do a house and that effective working week is 45 weeks that’s 45 houses a year, 10,000 divided by 45 is 222 extra plumbers

    If we assume each house needs 1 electrician for a week, 1 roofer for a week, 2 painters for a week, 2 gib stoppers for a week, 2 window installers for a week, well you can see where I am going.

    So we need an extra 10,000 people, sorry guys that’s an extra 10,000 immigrants based on my paragraph 2 assumption or factoid.

    So Peter above is partially right, we cant wait for Aryran race solution, blond blue eyed builders bred from Tiger Mums, we need immigrants.

    He’s also right about the Public Service “crowding out” the private sector assuming the socialist answer is not too control wages, material costs, profit margins and final sell price.

    Guess what happens then……..give up, all the builders leave for greener pastures in Australia, law of unintended consequences 🙂

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    • I agree that there is a potential contradiction: if Labour is serious about the sort of changes in immigration numbers they are talking about, the new houses probably won’t be needed. If they aren’t needed, neither are the workers needed to do the building etc.

      Liked by 1 person

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