A depressing debate

Watching last night’s party leaders’ debate had its entertaining moments, but mostly if it  was clarifying it was so in a pretty depressing way.    And one of these two will be Prime Minister for the next three years.

There was the sight of both party leaders falling over themselves to disavow any notion that house prices should fall.  Apparently, a $1 million average house price (or the less headline-grabbing but still obscene median price of $800000+) in Auckland is just fine.  I suppose we should be grateful that on the one hand the National Party has moved on from the nauseating talk of how these house prices were a “sign of success” or a “quality problem”, and on the other hand that Labour’s housing spokesman will openly talk of an aspiration to having house prices averaging perhaps 3 to 4 times income.    Perhaps both party leaders really would prefer that Auckland house prices hadn’t increased very substantially in the last five years, but now they both seem content to simply treat it as a bygone –  as if we should simply live with $1 million house prices indefinitely until, some decades hence, a combination of inflation (mostly) and real income growth, might render home-owning in our largest city once again affordable to new entrants.

A couple of weeks ago I showed this chart.  Starting from a price to income ratio of 10 –  roughly that in Auckland now –  it traces out how house price to income ratios would evolve if nominal house prices were unchanged from here on (something both party leaders now appear regard as a good outcome).

house price to income ratio with flat nominal house prices

Just focus on the green line.  If we have inflation averaging two per cent, and productivity growth matching the performance of the last 30 years (quite a step up from where we are now) it would take almost 25 years to get price to income ratios down to even around five times income.     The Prime Minister talked of this being an issue for his kids.  The solution, to the extent there is one, seems to be aimed at his grandchildren.

Ardern seemed to try to have it both ways with the talk of “we just need to build more affordable houses”.   Lay members of my household responded “well, wouldn’t building more houses lower prices, which she just said she didn’t want?”.     Actually, it is unlikely to make very much difference, unless she is serious about freeing up land supply.  Without that, the overall affordability of the housing stock won’t change much, and any new houses built by or for the state will largely displace others that would have been built by the private sector.  And yet, although on paper Labour’s policy on improving land supply looks promising, the current Leader of the Opposition continues in path trod by her predecessor and simply never mentions the land issue –  even though everyone recognises that in Auckland in particular, the price of land is the largest component of a house+land.   Relative to that, further extending capital gains taxes is just a third order distraction.   At any plausible rate  –  in today’s low interest rate environment –  so is a land tax.

Sadly, I suspect there is an element of dishonesty about both party leaders’ responses.  If their housing policies really worked, I can’t imagine that either one would have a problem if house prices fell by, say, 20 per cent all else equal.  That alone would lower price to income ratios in Auckland to eight times.    It seems unlikely that that sort of fall would put anyone much in severe financial difficulty –   not that many people recently have been able to borrow at LVRs over 80 per cent anyway, and servicing capacity mostly depends on continued employment.     Continuing to talk of stable nominal house prices perhaps avoids (a) scaring the many people whose equity would be wiped out if house prices fell by 50 per cent, and (b) leaving themselves open to scare stories about how falling houses inevitably mean terrible economic times.   But it also makes a hard to develop a constituency for the sort of changes that might, in time, make a real difference, and enable this generation of young people  –  ordinary working families – to afford a decent home.

If that was bad enough, Jacinda Ardern’s superannuation pledge was worse.    John Key’s  pledge to resign rather than increase the NZS eligibility age was cynical –  he was quite open to Treasury that the age would rise, just not under his watch – but perhaps almost understandable in the context of the 2008 campaign.   Helen Clark would have run the “secret agenda to raise the age” line, at a time when Labour itself had no intention of raising the age, and had established the NZSF to buttress the political messaging.   But in this election, the incumbent Prime Minister leads a party which intends to legislate to increase the NZS age –  by a little, and some decades down the track.  It could hardly attack Labour for leaving open the possibility.   Even if Labour didn’t want to increase the NZS age itself now, what would have been wrong with a simple pledge that “no, we don’t see a need to raise the NZS age at present.  I don’t envisage it happening, but if at some point that judgement changes, I pledge that we won’t change the age without taking it to the public first as an election campaign promise”?

When the Prime Minister announced his NZS policy back in March, I ran this chart

Here is a chart showing life expectancy at 20, and the NZS eligibility age.  The final two dots are what might have happened by 2040 if the life expectancy gains continue at the same rate as since 1950, and the NZS eligibility age if yesterday’s National Party policy proposal comes to pass.

life and NZS age

Over that full period, 90 years, the NZS eligibility age would have risen by two years, and adult life expectancy (those getting to 20) would have increased by about 13.5 years.  By 2040 it will be amost 40 years since the NZS age got back to 65.  In that time, adult life expectancy is likely to have risen by 5 to 6 years, and yet the NZS age will have risen only by two years, if the new National Party policy is implemented.

How has a New Zealand politics got so febrile that parties that claim they want to use scarce fiscal resources to solve child poverty are reduced to this?   We can be pretty sure Bill English won’t be Prime Minister in 2037, so the NZS age won’t actually increase on his watch –  he’ll just foreshadow change decades down the track –  so in effect both candidates to be Prime Minister are refusing to increase the age while they are PM.   Old people vote of course, but this isn’t an issue about today’s old people –  it is about today’s middle-aged and younger people.   Even among today’s older people, almost half of those aged 65 to 69 are still in the labour force.

partic rate 65 to 69

Personally, I support a modest universal age-pension, but not one that cuts in at an age when a huge proportion of the recipients are still working, and are physically capable of doing so.    And how come we can scarcely even have that political debate even though all manner of other advanced countries have been willing to take steps to increase the eligibility age?  In Australia, for example, the age pension eligibility age will be 67 by 2024 –  and technically, all those Australians, and (a more plausible possibility) the New Zealanders living in Australia, would be eligible to relocate to New Zealand and claim our NZS, with no prior residence requirement, at age 65.

I found the “debate” around child poverty almost as depressing.    Neither party is actually willing to campaign for lower house prices –  even though housing costs have been a big factor in the material and financial challenges some face.  And all the talk was of how much money (other people’s money) the government could throw at the problem, with no mention at all of the possibility that improved economic performance might be the best way to lift living standards for everyone.  But then neither party seems to have  a serious idea as to how to lift our economic performance –  or even to care much about doing so (the Prime Minister just makes up stuff about the current performance of the economy).   And the Prime Minister was very keen to talk up how he, lots of data, and some public servants, are going to solve all manner of social problems.  Which, on the one hand, displays a touching faith in the capability of politicians and bureaucrats –  usually shared only by politicians and bureaucrats, and with little in past experience to support it –  and on the other simply refuses to address the likelihood that cultural factors are part of the story in dysfunction and deprivation.    I don’t really expect it from today’s Labour Party, but the Prime Minister is a self-described social conservative.

And then there was the wages debate.  On that one, I reckon the Prime Minister is right on the facts –  real wages have been rising, and faster than productivity has –  and I was disappointed to see the Leader of the Opposition still running here “its how people feel that matters”.   It might be uncomfortable to face it but wage inflation running ahead of productivity (and even than terms of trade gains) is one of the symptoms of an overvalued real exchange rate.  Plenty of observers –  including the outgoing Governor –  have highlighted that as a serious challenge for New Zealand.  It is part of the reason why Treasury forecast that exports will be shrinking as a share of GDP on current policies.   (If this whole point is obscure, it is partly a teaser for a forthcoming post.)

UPDATE:  On further reflection I’ve deleted the final paragraph.  I wrote it based on reading various commentaries, but before digging into the numbers myself (a salutary lesson that I shouldn’t need).   Understanding better both the Labour numbers and the National claims, I’d now take a more nuanced stance.

And, of course, there was the $11 billion fiscal hole that wasn’t.   Perhaps the National Party really believed their story when they put it out yesterday morning. By debate time, it was pretty clear to anyone without an axe to grind that there was little or nothing there.     Wouldn’t an honourable Prime Minister have simply quietly let the issue slide, and addressed the real challenges New Zealand faces, including real and legitimate questions about his own government’s performance over nine years, and about the aspirations and specific proposals the Labour Party is now outlining.

31 thoughts on “A depressing debate

  1. with no mention at all of the possibility that improved economic performance might be the best way to lift living standards for everyone.

    As I recall, Ardern did try to raise it once but English quickly interjected and shut her down. I suspect, after the first debate where productivity got an airing and English said J B Were were wrong, it was obvious that he was ready to deflect that one at all costs this time around. The moderator tried to restore order and give the floor back to Ardern, but English kept talking over him.

    No excuse for not raising it again though. It seemed to me the moderator wanted theatre – and he got it – at the cost of both participants being forced into corners and losing all sense of measured consideration. It was a ‘policy on the hoof’ spectacular.

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    • I like that final description: “policy on the hoof” spectacular

      I must have missed the Ardern mention. Of course the problem with the “better performing economy” narrative, is that it offers big gains but slowly (the long grind of year after year 1% pa faster productivity growth “

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  2. Michael how long would it take to drop median house prices in Auckland (where the main housing problem is) if the current stock of new houses -more than 500,000 houses remained stable in prices -with a current median of $800,000 odd, if reforms to increase land supply, infrastructure supply, building material competition and the creation of economies of scale house construction businesses etc were such that 10,000-15,000 new houses were built a year and priced at around 4x projected median incomes -$450,000?

    It is not inconceivable that cheaper newly built houses will not lower the value of all existing houses. Many new houses will be in different locations -30km from the CBD in the far ends of North Shore, West or South Auckland. Will they really lower the prices of houses in -say St Heliers or Remuera?

    Alternatively newly built houses could come from intensification. So an average priced suburban house in say Mt Roskill -a $1million house could be replaced by 6 modest sized units -say 100sqm 2-3 bedroom -walk up apartments, townhouses, duplexes etc, priced at say $500,000 each. The existing homeowner hasn’t lost any money. In fact if their profit margin was $50,000 per unit (10%) they have made a tidy profit. But again it is not clear that $500,000 units on tiny plots of land will lower the price of neighbouring existing suburban houses on large plots of land.

    Housing is not an interchangeable commodity and specifically targeting market reforms to give more diversity and choice in supply (so not just 200sqm McMansions are being built) like Jacinda advocated for in the leaders debate will make housing less not more interchangeable.

    I think we need to be careful about scaremongering. When homeowners read that median house prices are going to 3-4 median incomes in the future and some dollar value is attached to that, let’s say $300,000 to 400,000, then they do not have some nuanced understanding of how median’s are measured, the housing stock, build rates of different types of houses in different locations, inflation effects, wage growth……. All they think is that such and such government action will cause their particular house, that they own, to reduce in value……

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    • Brendon

      It is certainly true that if you buy less house and/or less land, it will be cheaper than a “more house, more land” option. In principle, that might lower a crude median measure (of all dwellings) without altering any existing house+land price. It won’t alter (in particular) the QNVZ house price index – the main semi-official measure, which is well-constructed to take account of compositional changes in the stock.

      But I’m sceptical that you get the sort of bifurcated market you appear to be hinting at. Having lived for decades in an older part of Wellington I know of numerous families who left older but close-in suburbs like Berhampore for the new – but distant – hutt Valley or Tawa suburbs in the post-war decades. Faced with a choice of paying $1 million in Onehunga or Te Papapa or, say $250000 for a similar size house on the periphery, I’d predict there would be plenty enough people who would make the move (or rather choose the cheaper rather than the more expensive) to bring prices closer to town down as well. And the impact filters up the line – if Onehunga falls and One Tree Hill doesn’t, some will substitute to Onehunga, lowering One Tree Hill prices. And so on for comparisons One Tree Hill to Remuera. Land in premium locations will still be much more expensive than that at the periphery but – with proper liberalisation – would almost certainly be materially cheaper than it is no.

      Same goes for the little boxes – you might not want to live in a 100sq m box on no land, but given the choice between that at $500000 and the (impossible to afford) $850000 150sq m on a decent section, some will make the trade, and in the process that would tend to lower prices of the existing properties. Yes, houses are different – and in NZ often almost every house is different, (eg the Motu work on sun effects on price) – but they are also substitutable to an extent. For new vs old in the same area, I’d suggest that extent is considerable.

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      • The only problem is that those 100sqm brand new boxes without land in central Auckland sell for $1 million plus and I am just as surprised that people do buy them. They are pretty much sold out as soon as they are launched.

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      • Michael I will admit to having my tongue in cheek for some of my arguments I tend to agree with your analysis that easing land-use reforms will have an effect on existing house prices. But I think there is huge uncertainty on how much for specific houses and this is a difficulty for politicians because their announcements are interpreted individually. Journalists when questioning politicians will say the ‘viewer’ deserves to know how much such and such policy will affect the value of ‘their’ home.

        Politicians trying to express a nuanced, uncertainty wrt specific houses but that the overall effect will be a downward price correction will get chewed up.

        Remember too Michael one of the benefits of the marketplace is it allocates resources when there are so many variables it can’t be computed or predicted. If markets could be predicted then the Soviet Union would have been more successful.

        It is for this reason I am glad that KiwiBuild is only a 1/3 to 1/4 of the new build house market -with the government acting as a new entrant entrepreneur to reform the market over a fixed/temporary length of time -10 years. And that alongside of Labour’s government sector proposal’s they have reforms which will benefit private sector house builders.

        In some ways KiwiBuild is a ‘burn your ships’ move that guarantees Labour will make land-use reforms to keep its promises.

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      • Markets are hard to predict (thanks for the Market Economics 101!) altho rigged markets – and the undoing thereof – are perhaps somewhat easier.

        Take the point about individual property prices, but you could think about the market price of any property as having a systematic (overall market) component and an idiosyncratic one (specific features). Widespread land use reform is mostly likely to affect the former, so an honest answer would probably be along the lines of “every house is different, but yes if we are committed to making decent houses affordable again we expect that will involve land prices (and thus prices of existing houses sitting on land) falling on a pretty general and widespread basis.”. that might be tough for some, which is why i – entirely seriously – proposed a compensation scheme for some badly affected owner occupiers.

        I’d like to believe Kiwibuild was a “burn your ships” move. my worry is that it will turn out to be a substitute for extensive land use reforms, and may (tho less confident about this) be a substitute for private builds. As I’ve noted before the Greens haven’t noted for their enthusiasm for more extensive cities, and the obstacles to more intensive ones remain very real. Perhaps a Labour govt won’t need the Greens, but I’d still be surprised if that proves to be the case.

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  3. To be more concise Michael, in your chart above are you assuming a static stock of housing or do you account for the housing stock increasing? If you do account for an increasing amount of housing stock, how do you account for the possibility that the new housing stock is priced considerably under the median value of existing stock?

    Further are we implying housing is a homogenous product when in fact it is heterogenous one?

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    • Brendon

      On this narrow point, I’m implicitly assuming that new houses of the same general characteristics come onto the market at the same price as existing ones (adjusting for depreciation, location etc). That is consistent with the proposition that land prices are the biggest component in house+land, and that developable land prices will move to leave people indifferent between old and new houses. In other words, it is highly stylised.

      But bear in mind that the REINZ house price index is a stratified one (developed with the help of the RB).

      Will reply next to your fuller comment/question above

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      • Michael those assumptions will not hold if Labour leads the next government and KiwiBuild becomes a reality. Which means ramping up to 10,000 govt built houses a year nationally priced below median prices and 5,000 of those being in Auckland. There is no reason to think the government cannot contract this work out to the private sector and achieve this pricing.

        Steven Joyce’s commissioned own report indicates there is significant savings to be accessed. http://www.interest.co.nz/property/88883/government-says-land-use-regulation-blame-56%C2%A0-cost-average-house-auckland

        Labour in the form of Phil Twyford and David Clark are well aware of these opportunities and are planning on accessing them as soon as they get into government -by using amendments to the RMA not waiting years to replace the RMA as Nick Smith proposes.
        http://www.labour.org.nz/not_another_nick_smith_wild_goose_chase

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      • yes, but my point is really that existing houses prices will adjust into line if there genuinely are reform and liberalisation options adopted, such that the characteristics-adjusted prices are very similar in the two markets. of course, if they are tiny places on next to no land, they will be weaker substitutes for existing places.

        There may well be a gap to be filled – so-called “affordable houses”, but mostly that gap looks as tho it was created by the land use restrictions themselves. In two senses : the market would provide if the land was deregulated, but also that people wouldn’t settle for 100sqm boxes on no land if overall housing were more affordable (my own first house – 110sqm – had been built in 1957, to the limits of what State Advances would then allow, on a 600sq m section). We are materially richer now, and space is a normal good – it is just that regulation has forced people to shift back up the demand curve, and settle for less.

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      • Well let’s see. Markets are complicated and not completely predictable. The various regulatory failures may mean the housing market lacks diversity and choice. There is some evidence that the market is over supplying 3 and 4 bedroom homes and under supplying 1 and 2 and 5+ bedroom properties.

        There are plenty of people who are renting in shared larger homes with essentially strangers. They only have a bedroom as private space. I know a lot of younger nurses in that sort of rental situation. A small 1-2 unit might for them be a significant improvement in their quality of life, as they would not be sharing lounges, kitchens, bathrooms with others.

        P.S I think the evidence is stronger that it is built residential space that is the normal good

        P.P.S I meant David Parker -Labour’s spokesperson for the Environment. David Clark is their Health spokesperson

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      • I think the market is going to deliver the much needed correction – regardless which party in is power. 12-18 months from now, Kiwibuild will not be the build focus – it will be state housing. The big unknown is how the banks will respond to those underwater on their mortgages, particularly if they are interest-only.

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  4. There seem to be so many contributing factors to what makes up the Auckland $1m residence that no one is able to come to a conclusion on what a target should be for a new house price that brings the price to income ratio down.
    We have had various complications like quality needs ( insulation/double glazing, council oversight/inspections ) and safety in construction like scaffolding, council specs on services all within the last twenty years.
    Will buyers be happy with 120 sqM? Are seekers aspirations in line with practicalities?
    Who will even start to build them in a private profit seeking market anyway?
    Stopping here before my head begins to hurt.

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    • It is actually very simple. 70% of sales which create the market price are by people buying and selling in the same market. Therefore for 70% of sales, price is not a factor ie it does not matter if the house costs $100,000 or $10 million. That is why it does not take many foreign buyers to pay a little more for those cheap Auckland property when you are say used to paying $40 million for an apartment in New York to give momentum to the Auckland property market.

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      • With so much transparency in market prices you would expect a property to sell at market price however, the human element is the emotional attachment to the purchase. Auctions work well in a rising market because it allows the auctioneer to push the human emotional attachment to its upper limits which takes the price beyond the market price.

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    • All good questions. If the income to house price ratio was so far out we would have had a calamity in the market. No one would have bought the houses and they would be going bust owning them. Not happened.

      Its would be my gut intuition that various suburbs have different wage levels and will have some relativity to pricing.

      Just a week or so ago I posted an article on the effect of schools on house prices with one North Shore school “exacerbating house prices by over 90% above the norm.’

      Build more good schools and that in itself will cause a major drop in house prices as parents stop competing for zones for schools that they consider their child needs to go.
      Here is the article; https://www.stuff.co.nz/business/95390822/data-shows-school-zones-make-significant-difference-to-house-prices

      In the seventies we built hundreds of 70 to 100sq mtr homes on small sections. Many are still in use. (have a few myself.) They didn’t cost much to build and they were usually without many luxuries. e.g. garages but you could add them later when the money met the need.
      We simply cannot do that today.
      Why.
      Well subdividers protect their section and house values with covenants that set out what sort of house you can build. You can be sure if you tried to move on a 3 beddy factory house you would be required to remove it. True.

      Most are 180 + sq mtrs, enclosed garages etc etc. No wonder people can’t afford houses.

      The other very significant factor id generational money. For some years now there has been a big rump of money from the older generation that has been dying that gets passed down families. Especially out of Auckland. If that older generation has has a couple of houses and industrial building or such the the estate brings forth considerable sum to the beneficiaries. Beneficiaries as we know like to spend. Have seen what happened along the Marine Parade, Ocean beach rd foreshore at the MT. That beneficiary money gets spent in the blink of an eye.Now not all of it goes there and much of it is spread around. And this is a driver of house upgrades and so on. Nothing like free money. (as we know.) The other big source is farm sales.

      Actually I’m rather over the house issue as too many lies are told by all sides much like the poverty issue.

      Try doing maintenance work on HNZ houses and you will see why so called poverty is seen around.
      Its all about attitude.

      The same attitude that locks these dreadful people out of housing. Many should be made to sleep under a hedge.
      No one in NZ is in any need of being poor or in poverty. The state spend billions each year on people Imagine how quickly we would get wealthy if we had that tax back and sent those that didn’t bother back whence they came.

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  5. If you don’t know what cause is, in my experience, you cant fix it

    Example if the radiator on your car blows up and you take it to a mechanic and they change the left rear tyre you haven’t fixed it and the toxicity continues. If you have gangrene of the left big toe and the surgeons amputate your right foot you got problems

    Both parties are terrified of the consequences of the fix.
    The nouveau aristocracy enjoyed the ride up while the lever pullers remained silent while ignoring the side effects of that ride up and now cant fix that either

    Both parties are terrified of the true costs of unfettered immigration

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      • Nah, IMO both parties are not indifferent to the damage that has been done to the fabric of NZ society – they know – they are simply shit-scared of acknowledging what needs to be done to fix it – they saw what happened to cunliffe 3 years ago – so talk about anything but

        Liked by 1 person

  6. “And, of course, there was the $11 billion fiscal hole that wasn’t. ” (Now deleted, but, admirably, not removed)

    I think you may wish to revisit the original reasons Joyce advanced to support his fake news, that Labour had failed to account for inflation and future pay increases.

    https://www.newsroom.co.nz/2017/09/05/46123/election-2017-live-labour-matches-nationals-child-poverty-pledge

    English and Joyce have introduced new objections as they were deluged with ridicule by informed commentators of all stripes, including introducing the “unknown unknowns” argument made famous by Donald Rumsfeld. But, to me, if the inflation and failure to cumulate arguments have been dismissed, this should not detract from the need to hold them to account on their blatant falsehoods.

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  7. I’m so sick of hearing about Auckland house prices. They’re a clear price signal to MOVE OUT OF AUCKLAND. There’s no reason why Christchurch couldn’t have 600,000-700,000 people in the general metro area to aid in re balancing the population across New Zealand. Having 1.2 Million in one huge city, and then only around 300K in the other two cities isn’t sustainable at all.

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      • Not all of those “poor souls” need to live there. I’d love to live in New York City, or Miami, or the center of Chicago. But I don’t, because of the price signal. My parents have a nice apartment in the middle of Chicago because they worked their ass off over many many many years. It’s simply not sustainable for Auckland to absolutely dominate the proportion of population that it does. Even MANILA only has about 10% of the total population of the country living there. Not close to 25%. People AND businesses need to move out of Auckland to somewhere else in the country, and businesses will only start moving when people do.

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