We’ve had a couple of widely-reported contributions to discussions on housing policy in the last few days.
The first was the Concluding Statement from the staff mission responsible for conducting the latest International Monetary Fund Article IV consultation with New Zealand (usually a physical mission here from Washington, but presumably done remotely this time). These statements are not formally the official view of the IMF management, let alone the Board, but you don’t get to be a mission leader without demonstrating your soundness and ability to run a line that won’t upset the Board and management. That doesn’t mean the messages are typically consistent either across time or across countries, but it does mean the final report (and the Board review of it) won’t be materially different. Of course, it helps that New Zealand isn’t a very important country (to the IMF – we don’t borrow from them, we pose no threat to global or regional stability etc) – and that the New Zealand authorities don’t these days typically pay much heed to the IMF (in some countries, including a bigger one west of us, authorities have been very very concerned that never is heard a discouraging word from the Fund).
I used to have quite a bit to do with the Article IV processes, both from an RB/Treasury perspective, and in the couple of years I spent representing New Zealand on the Fund’s Board. Specifically, I used to be regularly involved in the final meeting between the Fund mission and Treasury/RB senior macro people on the drafts of the Concluding Statements. I guess it must have been different at times, in countries, when the Fund thought the authorities were going rogue, running reckless or dangerous policies, but if New Zealand has at times offered puzzles for the Fund, it has also been run with pretty cautious macro and financial policy approaches (low public debt, focus on balanced budgets, low inflation, stable banks, high capital requirements and so on). So whatever the Fund has to say tends to be pretty marginal or incidental anyway, and in many topics they touch on the mission team don’t actually have much specific expertise (they are mainly macro people, often very able to that narrow space). So the Fund team tended to be quite accommodating of Treasury/Reserve Bank preferences around what was said in any Concluding Statement, with a focus on “what would be helpful” to the authorities at that time. And this, of course, is only the end of days and days of meetings – often some wining and dining too (although I guess not this year) – in which staff are fully appraised of “sensitivities” and what officials (and the Minister) would prefer the Fund did or didn’t say. No doubt there are limits, but most often the remarks are about issues at the margin – either shades of policy in core areas, or matters on which the mission team doesn’t have much expertise, authority or mandate. Not often then will the Concluding Statement be troublesome for the authorities. (In fact, this is one of the downsides of the move to near-full transparency around the IMF Article IV processes in recent decades.) Favoured mantras will often, quite conveniently, be repeated back to the authorities, as little more than mantras: an example this time is “inclusive green growth”, whatever that means.
In this post I wanted to focus on housing, a rather central issue in current policy and political debate in New Zealand, arguably even a source of potential financial sector instability. What did the Fund have to say on the subject? There were several references, the first from the summary bullet points
- The rapid rise in house prices raises concerns around affordability and financial vulnerabilities. A comprehensive policy response is needed, including measures to unlock supply, dampen speculative demand, and buttress financial stability.
Surging house prices have supported household balance sheets but amplify affordability concerns for first home buyers and financial stability risks.
“Affordability” has certainly been stretched (to say the least), but it isn’t clear there is any greater threat to financial stability at this point. After all, as the report notes, household balance sheets as a whole have improved – not worsened – and if some marginal borrowers have taken on new debt at very high valuations (a) they are the marginal players, and (b) both banks and the Reserve Bank have imposed new and demanding LVR standards. Private lending standards have tightened – over the whole of the last year – not loosened. But it will have suited the authorities to have these references included.
Then we start to get to policy. The first reference reads as follows
Surging house prices should be addressed primarily through fiscal, regulatory, and macroprudential measures, though monetary policy may have a role if house prices pose risks to the inflation objective.
FIscal (tax?) measures as the main way to “address” house prices? On what planet does the Fund think this would be anything more than papering over cracks, and distracting from the core issue? But it will have suited the authorities to have it. And when they say “macroprudential measures” what they really mean is just new waves of controls. After all, the rest of the report suggests no particular reason for concern about the soundness of the financial system. It might have been nice to have seen “deregulatory” instead of “regulatory”, but I guess we can let that pass.
And what about monetary policy? Remarkably, there is no mention at all in this Concluding Statement of the government’s recent change to the Reserve Bank’s monetary policy Remit – the one that seemed designed to create the impression monetary policy was going to do something, even as the Reserve Bank itself said it wasn’t (an impression that at some international audiences have also erroneously taken). And that final half sentence? Well, it just looked like pandering as the Statement had already indicated the team’s macro view that monetary policy is likely to need to “remain accommodative for an extended period”.
They then get a little more substantive
Tackling supply-demand imbalances in the housing sector requires a comprehensive approach.
· Achieving long-term housing affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments. Steps taken to support local councils’ infrastructure funding and financing would facilitate a timely supply of land and infrastructure provision. The reform of the Resource Management Act is expected to reduce current complexities in land use that restrict infrastructure and housing development and contribute to efficiency in strategic planning. Increasing the stock of social housing also remains important, and the Residential Development Response Fund’s plans to deliver 18,000 public houses and transitional housing space, undertake rental housing reforms, and provide assistance to low-income households are welcome.
I guess the government will be quite happy with that. Suggest it is all big and complex and will take years to come to much. Oh, and that final sentence which would appear to be pure politics – you might agree, or not, with building more state houses or handing out more money to low-income people, but it bears no relationship at all to the Fund’s macro mandate, let alone to fixing the housing/land market that regulation has rendered dysfunctional. Smart active (but big) governments are clearly the thing.
But the broad thrust of that paragraph isn’t really that objectionable. Where it gets really problematic is the next paragraph.
· Mitigating near-term housing demand, particularly from investors, would help moderate price pressures. Introduction of stamp duties or an expansion of capital gains taxation could reduce the attractiveness of residential property investment. The authorities should differentiate in these approaches between first home buyers and investors, while continuing to provide selective grant and loan assistance to first-time buyers.
and this one
The deployment of macroprudential tools to address housing-related risks is welcome. The reinstatement of loan-to-value ratio (LVR) restrictions in March and further tightening for investors from May 2021 will help mitigate stability risks. Additional tools, including debt-to-income ratio limits, caps on investor interest-only loans, and higher bank capital risk weights on mortgage lending, are under consideration and could play a useful role in addressing housing-related risks.
Of the first of those paragraphs, really the less said the better. Price freezes dampen reported CPI inflation, wage freezes dampen reported wage inflation. Lockdowns reduce effective demand for, say, restaurant or cafe services. And so on. All sorts of daft, dangerous and inefficient mechanisms can be deployed to try to suppress symptoms, but most of them never should be. And nothing in that first paragraph stands up to any serious (macroeconomic, or really housing market functionality) scrutiny at all. But it must have gone over quite well in the Beehive, where “investors” seem now to be scapegoats for all ills, almost in the way that Jews were often so tarred in eastern Europe etc 100+ years ago. Just an attempt to distract from the real issues, the real policy failures.
The IMF – once concerned with functioning markets and more efficient policy regimes – is now actively touting policy interventions that differentiate by type of buyers, even though this advocacy seems to rest on no analysis whatever. And take as a particularly egregious example the mention of a stamp duty. These sort of transaction taxes are widely disliked in the economics literature – since they impede the functioning of the market directly affected and impair, for example, labour market mobility. In fact, they used to be firmly disapproved of by the IMF – which within the last five years has again recommended to the Australian and UK authorities (with very similar housing markets) that they move away from using stamp duties. So where did this suggestion come from? Either the Fund itself – in which case, serious questions should be asked about consistency of advice – or from The Treasury or the Minister of Finance? Is this an option that they are considering – perhaps (as the Fund phrasing talks of) just for the despised “investors”? The government made those idle pledges about no new taxes, but the “two minutes hate” now routinely directed at “investors” might suggest the government could get away with such a (Fund-supported) fresh distortion, at least among their own base.
And what about that “while continuing to provide selective grant and loan assistance to first-time buyers”? Surely the Fund knows – they’ve told countries often enough – that such interventions tend to flow straight into prices? And what does any of it have to do with the Fund’s macro or financial stability mandate (let alone any focus on economic efficiency?) But no doubt it went down well with the government: was “helpful to the authorities”.
I have heard a suggestion that perhaps what the Fund might have had in mind was a “temporary” stamp duty – whether just for investors or for everyone. If so, they should have said so. But if so, what planet are they on? All manner of taxes have been introduced “temporarily” over the years in many countries. Few get removed very easily – governments become addicted to the revenue, and/or happy to continue to deal with symptoms not causes. And the Fund itself – at least those of its officials with any sense of political economy – knows that.
And then there is the financial controls paragraph. These days the Fund really likes LVR restrictions, and the tighter ones still to come. In none of this is there any hint of the efficiency dimension. In none of it is there any hint of the analysis of risk (let alone of the interaction with the demanding new capital requirements – which don’t mess up the allocation of credit across sectors – the Fund has previously favoured), And having favoured very stringent LVR controls there is then no discussion about what, if any, the residual systemic risks (related to housing) might be. Instead, they allow themselves to become a channel for communicating, and apparently endorsing, the Reserve Bank’s own interventionist aspirations. If the Fund favours, for example, banning interest-only mortgages to “investors”, how does it square that preference with a regulatory restriction that already requires investors to have a 40 per cent deposit? One or other restriction might, in some circumstances, make sense. Both combined just seem like giving up on the market allocation of credit, papering over symptoms, and returning to the control mentality of ministers like Walter Nash. All ungrounded in that statutory goal that the Reserve Bank must exercise its regulatory powers over banks towards: promoting the soundness and efficiency of the financial system.
(Oh, and if the IMF believes that higher risk weights are warranted on housing, it will be interesting to see any argumentation they can advance in their final report – surely there will be none – for how the Reserve Bank has previously got it wrong: the same organisation the Fund repeatedly praised over the years for its cautious (emphasis on risk) approach in setting capital requirements, including for housing.)
If one had any doubts about the direction in which things are heading, there was the Q&A interview with the Reserve Bank Governor yesterday. It was a seriously soft interview by a TV1 political reporter, who displayed (a) no sign of any understanding of the legal framework the Bank operates under, (b) no sign of any real understanding of the housing market, and (c) no interest in doing anything but helping the Governor run his message, even feeding him loaded phrases in the questions. There was not a single serious challenging question. Not one. (Not even – an obvious question for a political reporter – about the recent change to the MPC Remit, talked up the Minister of Finance and then talked down – to the point of being almost dismissed – by the Bank.)
Orr went on and on about investors purchasing housing, but never once noted that if the land market were sorted out – and he did in passing acknowledge supply issues – the entire environment would be different: not only would houses/land not be expected to appreciate in real terms, but owner-occupier affordability would be that much greater (and without LVR restrictions it would also be easier for first home buyers). He made no attempt to tie the fresh interventions he and the government seem to be cooking up to the soundness of the financial system. In fact, he almost disavowed that as a consideration, claiming that the Bank had previously focused on systemic stability (whole financial system) but now had a new mandate that would enable it to focus on a specific asset class. Here he appeared to be referring to the direction issued to be the Bank a couple of weeks ago under section 68B of the Reserve Bank Act. It reads
I direct the Reserve Bank of New Zealand (“Reserve Bank”) to have regard to the following government policy that relates to its functions under Part 5 of the Act.
Government Policy
It is Government policy to support more sustainable house prices, including by dampening investor demand for existing housing stock which would improve affordability for first-home buyers.
As the Governor himself noted in a speech just a few days ago, no one really knows what “have regard to” (the statutory phrase) means. The Act itself provides no further guidance. But what is clear is that this direction provides the Bank with (a) no additional powers it had not already had, and (b) no change (broadening or narrowing) in the statutory goals the Bank is required to use its Part 5 (banking regulation) powers towards. Those powers must be exercised for these purposes (only):
The powers conferred on the Governor-General, the Minister, and the Bank by this Part shall be exercised for the purposes of—
(a) promoting the maintenance of a sound and efficient financial system; or
(b) avoiding significant damage to the financial system that could result from the failure of a registered bank.
It might be all very interesting to know that an incumbent left-wing government really doesn’t like non owner-occupiers buying housing, but what of it? If such activity threatens the soundness of the financial system the Bank should (have) acted anyway, and if it doesn’t well….they can’t. And any such interventions are all-but certain to detract from the efficiency of the financial system, a (statutory) consideration one never hears of from the Governor (except perhaps when he thinks banks don’t lend to people he thinks they should – but that is no definition of efficiency).
There is just nothing in the Act that allows the Bank to focus on the soundness or health or performance of anything other than the financial system (as a whole). And yet they appear to be lining up new restrictions on interest-only mortgages (see above) to help the government out politically, and pursue’s Orr’s own political agendas, not to underpin the soundness and efficiency of the financial system. (As he noted, using debt to income restrictions – which he is legally free now to deploy, if doing so would support the soundness and efficiency of the system, already buttressed by very high capital requirements – would almost certainly cut further against the government’s bias towards first-home buyers.)
Policymaking in this country has been going backwards for years. We see examples of it all the time (another recent one is of course the Climate Commission’s secrecy around its modelling, Treasury’s secrecy around relevant analysis), but the housing market and housing finance markets seem particularly egregious examples, where more interventions keep on substituting for addressing issues at source, adding ever more inefficiency and papering over the cracks (hoping prices will level off for a while and the political heat will recede) rather than cutting to the heart of the problem. It is bad enough when governments and government departments do it, worse when autonomous agencies like the Reserve Bank weigh in beyond their mandate, pursuing personal and political agendas. And whatever limited value an independent international agency like the IMF might have brought to the policy debate, is severely undermined when – supported by no analysis whatever – they just weigh in largely echoing the preferences of the moment of domestic political playersa.
croaking cassandra 
What about the fact that interest on deposits that is not even equal to inflation is taxed while interest on borrowing to buy a rental property (on the hope of an eventual tax-free capital gain) is deductible? Surely that is a market distortion that needs correcting?
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Interest on deposits is taxable similar to rental income is taxable. Lets be honest. If you borrowed to place cash on deposit, the interest on the loan for that deposit is fully deductible.
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Let’s be honest, that simply doesn’t happen with individual investors. All the leverage, and so tax advantages, happens with property!
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Anthony, that is a complete lie. Investors can and do borrow to invest in the share markets around the world. Try Interactive Brokers for international share markets. They will lend up to 80% of the value. Even the ASB bank allows borrowing against the the NZX and ASX share investments up to 60% in many shares. In currency investments you can even borrow 400x the actual currency value to speculate.
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I would be happy to align treatment (I’d tax, and allow deductibility for, only real interest). More generally, I think there are reasonable arguments to be had around CGTs (which I don’t particularly favour, but in principle are much better than stamp duties, and better than (long) “brightline tests”) and even around land taxes or land-value rating. But tax is unlikely to be the core issue re housing (see eg the differences across US states in price/income ratios, while those states all have much the same tax and banking regimes).
On deductibility note that (weirdly) the government is increasing that distortion from 1 April with the increase in the max marginal personal tax rate (although, again, I think there is a marginal issue rather than a key explanatory factor in housing markets).
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I’m always surprised by the fact that the affordability argument seems to focus on house/land prices, as opposed to rent prices. Seems to me if private sector rents, particularly at the lower end of the rental market were affordable (i.e., no more than 30% of lower household incomes), we wouldn’t need to be all that concerned with the former. We wouldn’t need to concern ourselves with capital gains; increases in accommodation supplements and other tax issues and transfers, etc.
I did a little modelling of a universal rent control policy based on the formula: Weekly rent maxima = (RV/1000) +/- x% – where ‘x’ is dependent on what year in the tri-annual re-valuation cycle a particular district is in and targeting ‘x’ to bring the lower quartile of market rents in an area to that 30% of lower quartile household income ratio.
tenancy.govt.nz already categorises rents based on lower quartile. median and higher quartile;
https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/
So it would be very easy to implement and inform the population via tenancy.govt.nz regarding rent controls in all the areas already reported. My modelling found that it is only the lower quartile rents that would be affected – in other words, median and higher valued property rents are more aligned to household incomes in those brackets (i.e., they are largely already affordable). It is the lower quartile of the rental market that is over-priced such that our state houses waiting list and accommodation supplement needs are in crisis.
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But rental yields are so low – consistent with low long-term interest rates- that if house prices were lower (the sort of price/income ratios in much of the middle of the US) rents would be much lower and there would be any need for either huge accommodation supplements or your suggestion of rent controls (altho there would always be a small minority of people who would need specific assistance).
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Yes, I realise that rent yields are low (based on current valuations), but with capital gains being high and these gains being untaxed on top of that, I don’t think it unreasonable for rental investors to anticipate and experience much, much lower (if not negative) yield.
In today’s economic environment, term depositors (savers) are experiencing virtually no ‘yield’ at the moment. And of course, their meager ‘yield’ is taxed :-)!
And, a bonus of universal rent controls (particularly those that affect the lower quartile of rental housing) is that prices achieved on the sale of those properties will most certainly decrease to align with the restrictions on yield. So, we can have our cake and eat it too.
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Right but lower house prices would see rents much lower too. These rents https://www.forrent.com/find/AR/metro-Little+Rock/Little+Rock/extras-House?gclid=CjwKCAiAhbeCBhBcEiwAkv2cY1GWH7j0Mm-u_E3ENd9C2hrXYFPDGP0zmnOqzajWGVcLppjIIN53_hoCkmAQAvD_BwE&gclsrc=aw.ds look to be about half what one might pay in Wgtn (Little Rock is one of my favourites at present, having a population between those of Akld and Wgtn, and still growing)
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Katherine, the 5 year Bright line test tax at now 39% for capital gains for incomes and profits above $180k would be one of the highest CGT on rental property in the world. It is a complete lie to keep claiming no CGT on rental property. Or just plain dumb?
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I don’t disagree that lower house prices would likely reduce rents – but I just don’t see any options for lowering house prices as being desirable (as you have pointed out above) or indeed practical in actually forcing the kind of price drops needed urgently in order to make rents at these lower income levels affordable.
We have a very concerning situation whereby economics theory suggests that, “falling real interest rates result in lower rents, higher house prices and lower owner-occupancy rates” – e.g., as stated here
file:///C:/Users/user/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/E4RVE0MH/Coleman%20Scobie%20twp09-05.pdf
Instead the opposite to that ‘rule’ is happening; i.e., real interest rates are falling and rents are increasing rapidly). To my mind, we can’t wait for land supply release and subsequent building to catch up as you would suggest. And besides, new private sector builds aren’t targeting low income buy-to-let property development (and nor can we expect that they ever will).
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Oops on my link – instead see TSY Working Paper 09/05 (Coleman and Scobie).
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If you want to reduce speculative demand for housing, then policymakers need to allow house prices to fall. Nothing teaches a speculator about the risks they’re undertaking better than a loss.
Policymakers had that chance a year ago and instead we saw the RBNZ relax mortgage lending requirements, leading to a surge in higher LVR and higher DTI borrowing, much of which was skewed to ‘investors’ resulting in a surge in prices.
New Zealanders, quite rationally, believe that house prices only ever rise and are therefore a one way bet.
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Not sure I agree with your second para, but yes the explicit stated aversion of the PM, MoF, and the leader of the opposition to falls in house prices goes directly to your wider point.
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Auckland house prices have been surging since the Auckland Unitary Plan was first proposed and then subsequently notified in September 2013. When the average Auckland landed property allows for 5 terrace houses, whatever is available to be bought, a developer will pay higher prices. It is therefore a structural repricing of the future potential of a development opportunity that has fueled price rises.The significant lag proves this lag between Auckland rising and the rest of the country.
However in recent years, the Tier 1 cities announced by the government and requirement that within the next 15 months, Tier 1 cities, Auckland, Wellington, Hamilton, Tauranga, Christchurch Councils to confirm to the government how Tier 1 cities will be implemented. Tier 1 cities allow for 6 levels of apartment dwellings unrestricted buildings. Buy 1 landed property and get 6 levels of apartments. Carparking is not required. Watch prices escalate even higher as the investment community starts to shift their funds from the NZX and savings deposits into property.
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GGS – agree that the trend towards intensification is a big factor in pushing up prices. I am seeing a lot of ex-state houses (sold into the private sector in the past 3 decades) fetching prices that could only be considered reasonable by developers. This subsequently sees a re-valuation of entire neighbourhoods and sometimes, whole suburbs following suit in terms of higher values.
This is a massive issue when landlords re-set rents (i.e., yield expectations) on these out-of-whack revaluations – and hence why (I believe) rents have skyrocketed at the lower quartile of the market spectrum.
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But this tends to happen mostly where new development on the fringes is severely constrained by regulation. We don’t see these sky high city prices when there is aggressive competition from the fringes.
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But where, for example in Wellington are the fringes? I just don’t see there much much developable undeveloped land around the city fringes.
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In terms of obvious flat land there is the Ohariu Valley, quite a lot around Wainuiomata, and (apparently – I’ve never been there) Whiteman’s Valley. But more generally much of Wgtn is built on hills and the total share of the land in the five local authority areas that is built in is fairly modest.
My argument isn’t that lots more houses need to be built, but that there needs to be aggressive competition among the places where building might take place.
If Wgtn is a harder case, the P North city council last week was complaining (in Stuff) about the shortage of developable land there. That just has to be solely the fault of local authorities, empowered by central govt.
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All very good to criticize the RB but what if anything do YOU think could be done to alleviate the “housing crisis”, or is there none?
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Oh, I’ve been quite clear on that for several years
On the negative side, the RB has nothing to do with the issue, and should weigh out, simply focusing on ensuring capital requirements are set in a suitably demanding way.
On the positive side, establish a legislated presumptive right to build dwellings to two storeys on any land the developer owns. That would create immediate and intense competition among large landowners on the outskirts of our cities, and would be expected to affect expectations, and thus prices almost immediately.
For existing suburbs, establish small (perhaps block-sized) zones where the existing owners can vote to allow higher (perhaps much higher) density or not, subject to a 75% positive vote to change.
Get the PM and (ideally) the Leader of the Opposition) openly championing much lower house prices, regularly and repeatedly telling the stories of the large US regions with median prices at or less than NZ$300K and committing to do what it takes to deliver something similar here.
To buy the political leeway to do this, institute a partial compensation scheme for owner-occupiers who have purchased in say the last decade and who sell in (say) the next decade. Not cheap, but neither is the current disaster.
There would be lots of consequential details to work through, but the political imperative would then be for action to deliver workable models consistent with these political and legislated commitments.
Since reform often works best if done as a package – so there are gains (not always narrowly economic) for almost everyone in some aspect of the reforms – ideally a much wider reform agenda would be launched. Mine from a few years ago was here
https://croakingcassandra.com/2018/05/25/lifting-productivity-what-id-do/
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Personal anecdotal experience supports my theory that when house prices fall, whether due to recessions or direct governmental intervention, is that poorer unsophisticated buyers on the edge are more likely to suffer lifelong deleterious consequences than non-occupier speculators.
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Getting out of this mess won’t be easy or costless, but it has to become simply unacceptable to stay in the mess, digging further into the mire each year.
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If house prices fall then both wealthy and poorer, unsophisticated buyers suffer. But “” a partial compensation scheme for owner-occupiers who have purchased in say the last decade and who sell in the next decade “” would be targetted at the latter. The govt (meaning both Labour and National) should apologise for knowlingly causing this disaster and then commit to a refund of 50% of any price drop for owner occupied properties that were purchased for less than $1million. This compensates the relatively poor but not the wealthy or the investor.
Disaster is the right word. My three oldest children in their thirties, on above average income, in good permanent jobs haven’t got a hope of buying while they live in Auckland. They suffer and so does NZ with its most reliable, thrifty and hard-working choosing to live overseas.
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What’s happened in Auckland is beginning to be repeated across the country.
I personally don’t think for a second that this government, or the last, or the current opposition, have any interest in actually sorting this mess out.
They just want to be seen to be doing something about it, and then hope to pass the mess on to the next government.
Coming back to your point about credit Michael, you should review the data from the bank on credit lending. I didn’t think there had been much of a deterioration in lending standards until I looked at the data, and then it really shocked me. Banks just shoveled money out last year.
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Unfortunately the Bank is now refusing to publish some of the relevant data (under the excuse of the Accellion hack) but I guess it depends what you mean. If controls are eased one would expect some response, and since I thought the case for LVR restrictions was never made convincingly (at any time since 2013) I’m not prima facie bothered by an increase in higher LVR loans. Until quite late last year, it wasn’t uncommon to see media reports of complaints of tightening bank lending standards, even on property-based loans.
More generally, of course I agree. The govt mainly just wants house price inflation to level off – which no doubt it will do before long (has in every other boom in recent decades) because it knows the political heat eases once rates of increase slow, no matter how high the new house price levels are.
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Delete the RUB in Auckland.
The outcomes would be amazing on property prices and the rentals market.
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Mr Orr mentioned that ‘capital’ was flowing into property: capital or credit? I guess the latter could be described as debt capital (and highly elastic) and at end, has to be serviced by real activity/income but is it not the case that access to credit is skewed to those with large existing (paper) equity gains? Seems hard to change that even if new land supply opens up…
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In large swathes of the US there just are no systematic real capital gains on housing, so in that sense the issue no longer arises. The general point is, of course, true: those holding an appreciating asset have more wealth and more access to future credit.
Orr’s specific point – also beloved of Robertson – remains flawed: there have been insufficient real resources flowing into housing in recent decades, given our population growth. Simply bidding up existing house prices is just a transfer – from buyers to sellers. The latter now have additional resources to spend or other invest/allocate.
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Michael, we appear to be in the middle of a speculative bubble with prices around the country going through the roof regardless of availability of land for development. What makes you think supply side remedies such as releasing additional land will have any effect? I think it’s too late for that, the land has already be repriced higher, anyone bringing land to market will hold out for the current inflated valuations unless they are forced to sell.
What we need is a change in sentiment but things may get a lot worse before they get better. IMO much better to try to deflate the bubble by limiting speculation into existing property and forcing new land to come to market while directing investment in new developments.. There are plenty of tools available i.e. cap/remove tax deductions for buy-to-let lending, increase LVRs, add DTIs, increase risk weightings for investor loans, direct councils to rate land rather than improvements etc etc.
You seem to be averse to any sort of targeting of investors/speculators in the interests of market efficiency but the reality is the market for housing has already been distorted by rules and regulations (including monetary policy) when ultimately it should be viewed as a fundamental human right.
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Expectations can, and do, move quite quickly. At present, expectations are underpinned not just by govt inaction on the core land-use fundamentals, but by repeated statements from the PM,MOF, and the leader of the Nat Party opposed to any suggestion of prices falling, just wanting more orderly slower increases. So I am confident that bold action on land use, backed by a quite different set of official rhetoric, would make a fairly quick and substantial difference.
On RB interventions, I am opposed to them for several reasons, but most importantly under current legislation because they would be ultra vires. If the govt wants to pass new legislation to further distort the market in houses, land, and housing finance of course it can do so. But doing so – lack many of the interventions of the last decade or more – are mostly just a distraction from the real issue – not necessarily wilfully so, but practically so. What we know from the US is that with accommodating land use regimes, much lower house prices, and a quite different culture around reasons for purchase etc, are quite readily deliverable.
None of which is to say that I am necessarily opposed to land value rating, or perhaps even a comprehensive land tax. There might even be some “fairness” case for a CGT. But none of these things – any more than brightline tests, removal of depreciation provisions on housing, LVR interventions – get to the heart of the issue. And in meantime the outlook just worsens for the next generation, incl my kids.
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Reblogged this on Utopia, you are standing in it!.
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