Three totally unrelated items

Rather than clutter in-boxes with three separate shortish emails.

First, a follow-on from yesterday’s post about house prices. I noted that the absence of any real sign of falling land prices in and around our cities suggests that the (admirable) words around possible reform from the Minister of Housing are not being treated as credible. Asset markets typically incorporate expectations about future changes in factors that might affect prices in the relevant market.

I had a brief exchange in the comments to that post with Eric Crampton of the New Zealand Initiative, and I see that Eric has now set out comments along those lines in a post on his own blog.

Eric’s key point is that it is hard to short houses. That is quite true, but not (I reckon) determinative. There is no traded derivatives market (eg a futures contract on the QV index, whether nationally or regionally), and although someone who would naturally own one house can sell that house and rent for a few years, it isn’t easy or cheap to do so (actual transactions costs are non-trivial, it is often hard to get a secure long-term rentals, many people have ties to specific neighbourhoods etc). Of course, many holders in other markets are pretty passive too – you can short US equities (say) but a huge proportion of holders are either in passive index-following funds, or in funds that allow only small deviations from benchmark.

But, to get back to the land (and housing) market in New Zealand. If hardly any suburban owner-occupiers (like Eric or me) are going to sell and rent, even if we believed – as Eric seems to – that substantial reform really is coming, there are plenty of other market participants, and it is the marginal choice that will drive the price. Young people starting out can make a choice to hold off buying for a few more years (they are already renting, so have no new transactions costs). Older people looking at trading down can bring forward that move by a year or two. And probably more importantly still, marginal players often aren’t owner-occupiers (actual or potential at all).

If, as someone owning rental properties, you believe the government is really serious, and change is really coming (in fact, even if you only believe it with a 50 per cent probability), you face a high chance of a large fall in the price of your asset over the next few years. A rational response to that expectation would be to sell now – to get out while the going is still good. If you had a bought a few sections in the outer suburbs thinking you might develop them a few years from now, if you believe the government is serious and change is coming, you would want to offload your land exposure now. And – for the really serious players – if you hold pockets of land, large or small, on the periphery of major cities, and have seen the value of that land sky-rocket as population growth and regulatory scarcity rewarded you, any serious prospect of a change in regime, in which peripheral land might once again go for something like its best alternative (farming) use, would surely see you reassessing now.

None of these effects are as instantaneous as (say) the fx market’s response to a Reserve Bank OCR announcement, or even the stock market’s response to possible corporate tax cuts, but they are real and efficacious mechanisms which we should expect to see already at work if the Minister’s plans are likely to be the real deal. Sure, if his speech to the New Zealand Initiative two weeks ago changed expectations – and it certainly impressed some people, including me – we won’t yet see the results in the data (house price data is at best available monthly, and decent land price data is even harder to come by). But that won’t be a credible story as the months roll by.

Of course, in any such experiments with non-instantaneous effects, it is hard to untangle precisely what part of any price movement is due to the specific factor one is trying to isolate. But if these reforms are really the big event the Minister suggests (recall that the aim was to “flood” the urban land market), the effects should be pretty apparent pretty soon (especially with a slowing economy, easing migration, extended brightline tests, ringfencing, talk of CGTs, tighter credit conditions and so on). I remain pretty sceptical, less (as I noted yesterday) because I doubt Phil Twyford’s intentions, than because I doubt the commitment of the government as a whole (the PM in particular), or its interest in actually seeing land and house prices fall materially.

My second item related to the Reserve Bank.  Yesterday, there were two emails from the Bank.

The first was this press release

pac c banksThis from an organisation that claims it is underfunded.  “Fostering investment in green technology” simply is no part of the Reserve Bank of New Zealand’s mandate.  Nor, to be blunt, does the Reserve Bank have any obvious expertise.

Perhaps I should be encouraged to learn that the Governor is going to focus on lowering the cost of capital in New Zealand (bearing in mind that our real risk-free interest rates have long averaged the highest in the advanced world), but I don’t suppose that is what he meant.

And the second email from the Reserve Bank was this

capital

I guess it is better than not publishing the material at all, but this new 65 page document is finally released more than 3.5 months since the consultation document, setting out the Governor’s plans, was published, and with only a month until submissions close.  I haven’t yet read it, but someone who has tells me that it still doesn’t deliver a proper cost-benefit analysis, and only promises that they will do one one day –  probably after the final decision has been taken, to provide support for whatever the Governor settles on.

This is no way to make policy on serious matters.  Meanwhile the Governor cavorts with his tree gods and dabbles in things –  green technology just the most recent example –  that are no responsibility of his.

Thirdly, and finally, why is the case of Shane Jones (Associate Minister of Transport), the Northland trucking company (owner by a donor and distant relative), the NZTA, and the prosecution, not leading all media outlets?  Why is the Prime Minister not fronting up and facing hard questions about acceptable conduct in her Cabinet?   Appearances of impropriety should not be tolerated, let alone substance.

Matthew Hooton’s tweet seemed apt

Reminding ourselves that Transparency International is itself largely government-funded.

10 thoughts on “Three totally unrelated items

  1. It’s a corruption *perception* index, it doesn’t even claim to measure *actual* corruption to begin with, although it often gets reported that way, hence the accuracy of Hooton’s tweet. Measuring actual corruption on a global level would be very difficult.

    Like

  2. I vaguely understand Mr Crampton and Mr Reddell discussion of land prices. Clearly land prices are way out of line with sanity and they kill the opportunity for my kids to buy a house in Auckland. However almost whatever the govt does will run into our growth problem. The council emailed out its ‘Auckland Conversations’ newletter today and the first line starts: “” With Auckland’s population set to swell to 2 million by as early as 2029, …””.

    I’ve only lived here for 16 years and I’ve seen empty four lane motorways become six lanes, then six lanes plus a dedicated two lane busway and now they are eight lanes with half of them congested in the morning and the other half in the evening. No wonder Aucklanders are leaving in droves.

    Liked by 1 person

      • The budget is $2 billion. That would be enough to buy just 4,000 sections at $500k each without build cost and infrastructure costs and you got to turnover that $2 billion every few months. Everyone who knows anything knows that was a pipedream election big fat lie. Oh sorry only 6 economists and Bernard Hickey can’t do maths that thought it was feasible.

        Like

      • But why not at farm land valuation? Unearned capital gain versus all those people who get cheaper sections?

        It would be better if the state owned all the land and people bought a right to a lease, that way the state could just give notice so that suburbs could undergo timely redevelopment (as in Singapore)?

        Liked by 1 person

  3. Isn’t another possibility that the likely re-zoning of green belt farmland IS already factored into the price – I have read of various landowners around the city sitting on multi-million dollar blocks of land, far more valuable than equivalent good farm land further away from Auckland. No one can build residential property on these, but everyone knows that day must eventually come. While more migrants keep arriving, their situation only improves… Things have just gotten so bad that even a prospective liberalisation of the zoning rules still deliver a windfall profit to the owners.

    The only policy scenario that would see a correction would be if Auckland CC doubled down on densification – i.e maintain a green belt, but liberalise the rules on apartment blocks and towers… That would ease the pressure but leave the green belt land worthless except for farming purposes…

    Liked by 1 person

    • Your first para sounds plausible. After all, in the fast-growing cities there have been lots of houses built in the last 30 years, but land has never been comprehensively freed up in ways that allowed real land prices to fall. But the latter – both re density and physical expansion – is what Twyford seems to aspire to. Given the political constraints (eg his boss and the Greens) I reckon current prices are probably reflecting quite rational expectations.

      Disagree on your second para. It would not lower house/land prices much, if at all, for long.

      Like

  4. Wayne Mapp
    One thing is absolutely clear, Auckland will grow to 2.5 million in 30 years. Around the town centers there will be increased density. But in areas where the norm is townhouse and traditional housing there will be huge resistance to multilevel apartments. Mayor Len of course knows this, and the plan will be adjusted to take that sting out. Typically in these exercises you put your maximum position out for consultation to give some space to pull back. Of course some planners may not understand this political nuance, and probably not some councillors (i.e. Anne Hartley, judging by her reported comments at the meeting).
    http://www.kiwiblog.co.nz/2013/05/roughan_on_auckland_rumblings.html/comment-page-1#comment-1147615

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s