The debate and discussion about house prices is alive and well and most commentators argue that the main influence driving house prices is supply - that more houses need to be built - in fact Phil Twyford went so far as to be reported in the Otago Daily Times that Labour would "flood the market" with houses.
Coming home today, I read this letter in the ODT:
A graph that was shared with an NZPI conference workshop by Productivity Commission staff is drawn from a study carried out last year by the Productivity Commission on the supply of land for housing:
Much of the popular discussion in Auckland has suggested that the problem of increasing house prices is only in Auckland. This graphic clearly shows that the problem is right across New Zealand. All of the lines indicate the same upward trend in land price (for the cities reported). The "rest of New Zealand" line shows the same trend. This tracks along at about 0.3 before 2005, then increases to about 1.2 after 2010, an increase of 4x. Auckland, between 2002 and 2004 is about 1.5, this increases to around 5.0, an increase around 3.5x. Thus you could say that the increase in land price (expressed as a multiple) is about the same in Auckland as it is in the "rest of New Zealand".
Yet nobody is suggesting that there is a lack of supply of housing in many parts of New Zealand (Dunedin and Balclutha for example).
So. If land prices are increasing at about the same rate right across New Zealand, apparently unaffected by variations in supply (supply is generally considered to be tight where growth is high such as in Auckland, but supply is not considered an issue where growth is low such as in Dunedin - or the rest of NZ excluding the high growth cities), then you have to look elsewhere for the reason for that increase in land price that is shown in the Productivity Commission data.
In today's NZ Herald, in the editorial which is headlined: "House rises fuelling gap in society", tucked quite a way down we find this line:
Money has seldom been cheaper.
Drilling into this a little deeper, look at this RBNZ graphic:
Following the crash of 2008 Governments around the world reacted in various ways. It's easier to find out what happened in the USA than what happened in New Zealand. The US Dept of the Treasury provides an account of what happened in the USA which I have put here:
In the span of a few weeks, many of our nation's largest financial institutions failed or were forced to merge to avoid insolvency. Capital markets — essential for helping families and businesses meet their everyday financing needs — were freezing up, dramatically reducing the availability of credit, such as student, auto, and small business loans. Market participants, consumers, and investors were rapidly losing trust in the stability of America’s financial system. Faced with this reality, the federal government moved with overwhelming speed and force to stem the panic.
The first series of actions, including broad-based guarantees of bank accounts, money market funds and liquidity by the Federal Reserve, were not enough. Realizing that additional tools were needed to address a rapidly deteriorating situation, the Bush Administration proposed the law creating the Troubled Asset Relief Program (TARP). That measure, which was passed by Congress with bipartisan support, was signed into law by President Bush on October 3, 2008. Some of the programs under TARP were implemented by the Bush Administration. The Obama Administration continued these and added others, utilizing its authority under TARP to keep credit flowing to consumers and businesses, help struggling homeowners avoid foreclosure, and prevent the collapse of the American automotive industry, which alone is estimated to have saved one million jobs.Reading between the lines, as a layperson, you can see that in New Zealand, one of the major Government responses was to reduce the cash rate, in order to make money cheaper. As this graphic shows:
The red line records the Government decision, and the other lines record the consequences for various mortgage rates, and shows how money became cheaper.
In effect an individual (or a couple or a property speculator or investor) could buy twice the house for the same interest payments, after 2008, anywhere in New Zealand. Most commentators state that an important reason for increasing house prices is low interest rates. For example the web advisory "global property guide", describes New Zealand's property market like this:
One reason for strong house price rises from 2012 to 2014 was the rapid expansion of New Zealand’s economy, which grew by an annual average of 2.9%.Nowhere in this text is "supply" given as a reason for "strong house price rises"....
A second reason was low interest rates.
A third reason was high immigration.
Non-residents are generally allowed to buy houses in New Zealand.
Finally, check out what happened across the Tasman, in Australia:
The source for this information is the Reserve Bank of Australia. What is particularly interesting is the policy responses immediately after the crash of 2008. The target cash rate was dropped to just above 2%, like in New Zealand's case, but then it was lifted slowly up to 4% by 2011, and gently reduced again. This mid-course correction appears to have had a significant effect in damping down the real estate gold rush effect that cheap loans can have, and is why Australia is having less of a problem than New Zealand with housing affordability.
Anyway. I'm a physicist and planner. Not an economist. But seems to me that it's about time for New Zealand's government, and the opposition Labour Party, to stop arguing that increased housing supply is the answer to our problem with housing affordability.
6 comments:
Hi Joel. I don't think it is fair to characterise Labour's position as only being all about supply. I did say in the speech "There is no silver bullet. The mess housing is in is a result of multi-layered policy failure. Fixing the crisis is going to take bold and sustained reform on several fronts" and then set out a broad agenda including cracking down on property speculation, reforming the rental market, ending homelessness, changing the way infrastructure is funded - alongside supply side measures like Kiwibuild, urban development authorities, and freeing up overly restrictive planning rules. I do take your point that cheap and easy mortgage credit has to be a big part of the demand picture, and I think it deserves a lot more debate.
The counter evidence is of course dozens of US cities that do not have a housing (or land) affordability problem regardless of how loose monetary policy gets.
Then there are the countries where there is minimal credit available to anyone but the "median multiple" is over 12. South Korea is the only "first world" example, but many developing countries have this situation. Ironically, the fact that millions of people in such countries remain stuck in slums, is sometimes blamed on "lack of credit", without anyone asking, if the median multiple is already 12+ without credit, what difference might credit make?
Then there is the other outlier example, Spain, where they managed to supply far too much housing (in anticipation of immigration that was not sustained) while bubble prices in land remained until the bubble burst.
The actual factor that causes land price inflation regardless of credit or actual "construction" being part of the "boom" or not, is simply that land supply for development is "rationed". Usually by "planning". There is no such thing as a price-stabilising "supply of urban land" under any "plan" that is based on rationing that supply in such a way that non-urban land is "conserved" in toto or "infrastructure" is rolled out in creeping increments that please the planners.
You have to have no understanding at all of how markets work, to not see the difference this makes in land-owner behaviour and price expectations.
It is partly right to say it is not about "housing supply": it is actually about the degree of market freedom in "land supply"; that is, the freedom to convert land between uses. You could create a bubble in the value of land for just about any use if you gave the same kind of power that contemporary urban planners have, to equivalent central planners of uses of land for, say, alpaca farming or flower growing.
How can you sell a house for $600,000 when you can build a new one just down the road for $300,000, of the same size?
You can't!
The game is all about jacking up the new-build cost. That is the dynamic that holds the entire market to account.
And how do you jack up the new-build costs? Nothing but nothing does it better that restricting land supply, leading to crazy urban land inflation as you induce the land banking and the bidding war from hell (on land).
Seriously....do we need to be economists to understand this?
Access to credit is a factor, but it is only relevant when you're dealing with inelastic supply. Phil Hayward from above is totally right on this issue. Thanks Phil.
http://andrewatkin.blogspot.co.nz/2013/03/the-real-deal-housing-in-new-zealand.html
Because we don't have a stable housing market, our house prices can be boom and bust within different parts of the country within the same time frame.
There were/are some 'bust' parts of the country were section prices were below replacement cost, even taking into account if these sections were developed under a non-restritive Texas style land development policy. The price of these sections could go up a 100% and they still would be below value added replacement value.
Looking at the price of Balcutha sections (and doing a bit of developer number crunching), they are round about the price one would expect if you could develop Texas style, which is were the demand and supply curves lie almost on top of each other and therefore development margins can only be made by adding value.
Or, the cause is (as it is in this case) a demand curve that is counter cyclical to a supply curve and price point being where these two ships will briefly pass in the night. And the price received is not linked to the value added costs of production ie non restrictive land supply.
Thus for a very brief point in time a price point can reflect two very different methodologies.
It does not surprise me that when Auckland land/house increase then the regions would increase, after all we as a country are all using the same dysfunctional system. Just as foreign money looks to park in Auckland property, then Aucklanders ( HAHA my spell checker suggested 'Launderers' for 'Aucklanders', how appropriate) look to park in the regions. A rentier version off tickle down theory.
It does beg the question what is left for Balclutha rentiers to invest in?
The Autumn issue of the NZ Property Professional magazine contains new research (to me anyway) into the activities of residential investors in the Auckland housing market. The authors (Dr Michael Rehm and Ozgur Yildrim of the Dept of Property at University of Auckland) analyse sales transaction data obtained from Auckland Council.
This shows, for example, that on average 41% of all freestanding residential home sales in Auckland in the first half of 2015 were investor purchases, and that investor purchases accounted for 80% of all free standing residential home sales in the suburb of Otara, Manukau. The same pattern is evident in apartment and unit sales, where investors accounted for 54% of sales on average across Auckland, and 81% of such sales in the suburb of Newmarket.
The analysis suggests that most of this investor activity was concentrated in parts of Auckland where property prices are low. The report observes that the median price of freestanding homes purchased by investors was $695,000, compared with the median price paid by owner occupiers for the houses they purchased of $810,000. The authors comment, "68% of the lower quartile of Auckland aprtment/unit transactions involved investor buyers.... and 55% for lower quartile freestanding homes."
The authors write, "..these numbers suggest a degree of investor over-crowding and a high amount of investor consumption of starter homes, which results in increased competition between investors and first-time buyers."
In their conclusion the authors state, "...investors are...key players in the Auckland property market and have distinctively different dynamics from traditional owner-occupant homebuyers. Their role is not only limited to generating additional demand...". The authors call for more research into the likely behaviour of investors when the market changes, noting, "...their likely reactions to changes in mrket conditions, which has the potential to destabilise the economy if investors rush to the exits."
That is very interesting data, thanks Joel.
I have been trying to point out for years that because all the inflation is in the land values, the greatest "house price" inflation is in the dilapidated and/or low quality housing where the structure is not worth a lot, and which USED to be the "bottom of the market" into which first home buyers could buy.
The various quintiles of the market have been disrupted into quite different housing types than what they used to be, besides all the prices having moved up. The dilapidated older homes I refer to, were often in quite efficient locations - the land prices have of course inflated the most at those locations. The new "bottom quintile" will tend to be made up of small-section properties at remote locations where the land is "least unaffordable" ("most affordable", or "cheapest" is the wrong word!).
Investors are probably belatedly following the trends, if they are focusing on "lower value" properties now. The wise approach would be do buy lower value properties with a bit of section, with the lowest possible value houses on them. There won't be so much potential gain in small-section, newer-home properties at fringe locations.
Of course the potential land value inflation embodied even in small units like apartments at more central locations, will still be significant as long as the overall market remains rigged by the existence of a growth boundary. The more permitting of density, the higher the land values go. Hong Kong having 66,000 people per square kilometer does not mean "cheap apartments" - far from it - it means land values literally thousands of times higher!
Then there is straight-out mania guiding speculation, such as the belief that apartments are the new Tulips.
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