Apply the brakes, before it’s too late

27 comments on “Apply the brakes, before it’s too late ”

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1. Salamander 1

   27 August 2009 at 8:54 am

   The problem is Marty that there is no silver bullet on this one. Each action that reduces housing asset prices pushes someone into default or bankruptcy and it’s not just your reviled ‘upper middle class’ punter (where does that type of class strata jingoism come form in NZ?) it’s your struggling working class punters who are going to be screwed as well. Pricking a bubble, like lancing a boil, has a definitive and violent outcome.

   What do you reckon Key should do?
   • Chris 1.1

     27 August 2009 at 10:01 am

     Lance the boil.

     Better that it be lanced than wind up with some freakish weird ‘economy’ which renders housing out of reach of first-time homeowners, and reduces our thin soil of capital (much like the thin soil that covers our country) to bone dry at the expense of genuine productive industries.
2. Marty G 2

   27 August 2009 at 9:00 am

   Salamander – what should Key do? second to last paragraph, and my earlier posts on this topic.

   There’s pain either way, that’s why you do it in a controlled, less painful way.
   • Daveski 2.1

     27 August 2009 at 11:32 am

     Wouldn’t it be better to ride the bubble and pay back debt, cut taxes and take credit for the economic miracle, and then leave the mess for another party when you get booted out?
3. Salamander 3

   27 August 2009 at 9:13 am

   A CGT wont do any good because it will only hit the people who havent been actively speculating over the past 4-5years. It’ll kick your true home owner.

   Mortgage levy, sounds like a nightmare in adminstration costs.

   Government green housing! Jesus on a stick! Sounds like a recipe for driving UP house prices given the State Services inablity to run any decent sized captial project without getting reamed up the botty!

   It really is a tough one of how to kick the bubble in but I think bernard Hickey is on the right path with his comment that the trading banks need to have higher capital reserve requirements applied as this will reduce their leverage in lending and help reduce demand while also making the banking sector a less risky sector.
   • Chris 3.1

     27 August 2009 at 10:05 am

     Someone has mis-understood the intent of a CGT.

     Those speculating over the past 4-5 years should have been taxed via IRD provisions for traders. That they aren’t points to a need for a CGT.

     Additionally a CGT will even out that beloved neo-liberal ‘playing field’ of Key/English/Hide. That if anything will tip English into putting it into place. Would be the brightest thing he’ll have ever done, and would do more to produce a healthier economy.

     For starters, it’ll kill Granny. *That* has to be a good thing.
4. jarbury 4

   27 August 2009 at 9:36 am

   While I agree a CGT is necessary, it’s dubious as to what difference it might make. Australia, the UK and the USA all have capital gains taxes – yet they also have experienced housing bubbles. Perhaps ours has been more extreme because we don’t have a CGT, but I think it’s optimistic to expect that the introduction of a CGT will solve our problems.

   Which leaves one main option – build a crap load of extra houses. This is what I think is necessary. The government needs to broaden the job of Housing New Zealand to land developer as well as subsidised housing provider (as they have a lot of expertise in land development already). They need to give HNZC “requiring authority” status so they can acquire strategic sites, near town centres and transport nodes – so that large sites can be created for redevelopment. Then “the provision of affordable housing” needs to be made a matter of National Importance in the RMA.

   And then we get on with it.
   • Tim Ellis 4.1

     27 August 2009 at 10:59 am

     jarbury if there is a shortage of housing, then why should the public sector build it? And how would they build it?

     If the housing supply is to increase by a large degree it can’t be in the urban centres, because there isn’t room to build large numbers. That means opening up more land for development. What do you think the consequences of further urban sprawl would be on places like Auckland?

     I am concerned with the prospect of large low-cost housing developments on the outskirts of main centres becoming ghettos in twenty years time. Can you suggest another way that this might not happen?
     • Draco T Bastard 4.1.1

       27 August 2009 at 11:22 am

       Because they need to be built using the builders that presently don’t have a job.

       If the housing supply is to increase by a large degree it can’t be in the urban centres, because there isn’t room to build large numbers.

       High density housing and apartment blocks. Makes the demand for land less and improves the efficiency of public transport.

       Can you suggest another way that this might not happen?

       By ensuring that everybody has a job etc etc.
     • jarbury 4.1.2

       27 August 2009 at 2:17 pm

       Tim, there is plenty of room within existing urban areas to develop at higher densities. Absolutely we need to avoid sprawl, absolutely we don’t want to create sprawl.

       I have posted the following before, but hopefully it makes for useful reading in terms of my opinions on the matter:

       There are obviously a variety of reasons why house prices have increased so much in the last decade, but as I am a planner I tend to focus on the issues relating to land-use planning that I think have contributed significantly to this reduction in housing affordability. In 1999 the Regional Council released the Auckland Regional Growth Strategy, which changed the nature of how Auckland would grow in the future away from urban sprawl and towards a more compact, intensified, city. I am a big fan of what this growth strategy intended to achieve, and I do wholeheartedly agree with the purpose of it which is to reduce urban sprawl. Urban sprawl creates automobile dependency, which has a myriad of problems associated with it most particularly that it’s wildly unsustainable environmentally, economically and socially. One aspect of the Regional Growth Strategy perhaps the most important aspect, and the biggest tool in fighting against further sprawl, was the imposition of the metropolitan urban limits (MUL).

       One rather unintended (I suspect) consequence of the MUL is that it created a significant choke on the supply of land for additional housing. Land outside the MUL could no longer be subdivided into urban sized lots, so the supply of land was decreased leading to that land becoming more valuable. This has contributed significantly to house prices increasing over the past decade.

       While it is inevitable that limiting land supply through an urban limit will lead to higher land prices, that doesn’t mean that those higher land prices have to filter through to being higher housing prices. Quite simply, to improve housing affordability we need to build more houses, and if we’re not going to build more houses outside the current city limits then we need to build a lot more houses within the current city limits. So the only way that I think house prices are ever going to reduce by any significant amount is if we provide for significant intensification basically if we actually carry out the other half of what the Regional Growth Strategy said was necessary and rezone parts of the city to allow for higher density development.

       In my opinion, the primary reason why house prices have increased so much in the last decade is that the councils of Auckland have done a damn pathetic job in rezoning sufficient land to provide for intensification. We’ve seen some of Glen Innes rezoned, a tiny bit of Panmure, some of the Mt Wellington Quarry area and that’s basically it. In a whole six years Auckland City has rolled out only a tiny little fraction of the rezoning that was necessary to compensate for the development that hasn’t been allowed to occur due to the MUL. Furthermore, most of our planning regulations are still stuck in the 1970s with their assumption that single-detached housing with lots of carparking is great and everything else should be viewed with the greatest amount of suspicion ever. So even where land has been rezoned for intensification it often ends up being extremely expensive and time-consuming for a developer to actually opt for that kind of redevelopment.

       Another problem is that developers are unlikely to really look too kindly on developing houses to the extent that prices start to decrease. They want to make a profit of course, and finding any way possible to maximise the amount they can sell the houses they build for is part of their business and quite rightly so. Furthermore, the booms and busts of the property development economic cycle seem more related to how easy it is for those companies to obtain credit than it is related to the actual demand and supply of housing. Otherwise we would be seeing a pretty big housing boom at the moment, as net migration is up quite significantly and the population of Auckland is increasing at a pretty rapid rate. Of course we’re not seeing that, because developers are struggling to find money to build anything while they are also waiting for in their opinion the inevitable return of house prices going up and up forever. Finally, it is difficult for developers to get involved in significant intensification projects because property ownership in the inner-suburbs or around the town centres where most of this intensification is supposed to happen, it just too fragmented.

       So, assuming that we don’t want Auckland to keep on sprawling forever, and that we are concerned about improving housing affordability so people in their 20s and 30s aren’t forever locked out of home-ownership, what can we do about this predicament? Having looked at this problem I can’t see any solution other than getting government either at a local level or a central level back into housing. Local government in Auckland has done everything they can to get out of housing provision in recent years, while central government’s involvement in housing is limited to providing subsidised housing, through Housing New Zealand, to those in the most dire need. Essential: yes, having much effect on improving affordability to those on median income levels: not really. What we need is for our government organisations to start buying up significant tracts of land within the highlighted growth nodes of Auckland the town centres and the non-heritage areas in the inner suburbs and actually go about redeveloping these areas to higher densities. Perhaps the government organisation would need to have “requiring authority status’ so that it could compulsorily acquire any strategic sites (giving a slight premium to landowners over market value for the inconvenience). Then the land could be redeveloped hopefully to excellent urban design and architectural standards, and subsequently sold to the general public. As the housing would be quite intensified, a mix of apartments, townhouses and terraced housing I hope, hopefully enough additional housing provided through this method would result in house prices starting to come down.

       There is even the potential for government to make some money out of this, as land development is clearly a profitable business in the long-term. As the government development organisation would presumably be able to borrow money at a fairly low interest rate, and the need for profit wouldn’t be quite so great as for a private developer (for example the opportunity cost for spending the money on this project) one would hope that affordability would be further improved. Of course, there are enormous other benefits from this kind of approach to urban redevelopment: most specifically in that you are getting development where you want it and how you want it. By focusing growth in the actual growth nodes identified by various planning documents you are supporting the public transport system, you are contributing to creating more lively town centres and reducing automobile dependency by providing a wider range of land-uses within walking distance.

       Of course, the biggest problem with this kind of approach is its political acceptability. Most voters do own their houses, and the last thing they want to see is house prices crashing back to earth even if they have a nagging feeling at the back of their minds that the current value of their house is quite unreasonably high. One of the largest voting blocks the baby-boomers would be particularly reluctant to adopt such policies as much of their wealth has been created by the growth in the value of their houses, and their used that growth in equity to buy the SUV, the boat and the beach house. They even manage to reduce their tax bill when the rent they get from their investment property doesn’t quite cover the mortgage. This is just too good a deal for them to ever let it go.

       Which creates a huge inter-generational equity issue. Those baby-boomers were the ones who got their tertiary education for next to nothing, whereas people of my generation often have student loans in the tens of thousands of dollars. The baby-boomers also started out in the workplace during a time of near full employment, and as a result managed to work their way up the career ladder into fairly safe positions by the time any recession came along and bumped up unemployment. And finally, they managed to buy their houses back when they were by today’s standards almost unbelievably cheap. So, while I am sure many people around the country recognise how big a problem the reduction in housing affordability has become over the past decade, I just can’t see there being the political will to ever do something significant about it. Which means I’m probably going to be renting for the next couple of decades.
5. vto 5

   27 August 2009 at 9:37 am

   Marty, you are on the right track. Except when it comes to solutions.

   Firstly though, there has not been “a bit of a retrenchment.” there has been a meltdown. It has varied across market sectors – some have hardly moved and others have collapsed into the abyss, and not just so-called bubbled-up spec’d properties. The market has to rise some because at the moment it is below cost, so it will rise to meet the costs. In the longer picture value equals cost, otherwise nothing ever gets done.

   Also, “upper middle class”? Get real – it has actually been more the lower class (tho I realise people love to loathe that ‘middle class’ esp. in left wing circles).

   Anyway, you are broadly right, tho I don’t think those suggestions for prevention will achieve squat. My opinion is the govt has little control and it is best for those who realise what is going on to simply hunker down. Salamander is in the right direction though re controls on banks rather than home owners. That would have a greater effect.

   This current ‘lift’ is the rise in the middle of the double-bottomed bottoming. And the second bottom has the potential to be far worse than the first. High risk of another great depression imo. Just look at the US and its fiscal position, similarly UK and its underlying deflation. It is freakin’ volatile out there at the moment – put your hard hats on…
   • Pascal's bookie 5.1

     27 August 2009 at 9:42 am

     v, I take yur point re bubbles and costs and prices etc. But won’t both costs and prices in a bubble inflate?

     ie, the costs are just another set of prices that are are inflated in the bubble. If the price of real estate isn’t sufficient to pay the costs of new construction, then movement can happen at both ends of those equations. no?

     I realise that there are fixed costs, but things like materials are surely affected by bubble pricing eh?
     • vto 5.1.1

       27 August 2009 at 10:43 am

       Yes I see costs rise in bubbles as trades and suppliers wack on heftier margins as they perceive that people can pay more. The same thing happenned to an even greater extent with dairy farmers when milk payouts soared.

       When bubbles burst those inflated margins come off quick smart but they tend to then sit at a base cost, and that base cost is far more difficult to lower. The way I see it, the only way that base cost can lower is when all assets, producers, suppliers, economies, etc, right through the chain are suffering from major meltdown. That sort of meltdown is the type that nobody wants – its disaster. I see very little of that base cost reduction happenning at the moment.

       So what I’m saying is that costs rise easily but depress only with extreme difficulty, apart from the initial ‘gouge-margins’.

       Tell you another thing that has imposed on costs (and the bubble) – Council charges. They added 5% to house costs over the last couple of years in many regions of NZ. Thanks Councils, well done …
       • Draco T Bastard 5.1.1.1

         27 August 2009 at 11:31 am

         Councils have costs as well or would you prefer it if you didn’t have the road to your door, the sewers working and the rubbish not being picked up?
         • vto 5.1.1.1.1

           27 August 2009 at 11:47 am

           Draco, those services are paid for by rates. The costs I’m referring to which they recently imposed could have been more equitably dealt with in other ways that would not have put up the cost of housing by 5%.
       • Chris 5.1.1.2

         27 August 2009 at 12:50 pm

         And someone has forgotten their history.

         National deregulated the building industry. The free-market would operate in the building industry and only those builders who were ‘ethical’ would survive.

         Cue forward some 15 years. $11bn dollars is the cost of leaky buildings, which is the cost of National’s policy.

         And given this, it’s natural to demand tougher regulation, cue the Labour government slapping on regulations like no tomorrow (at no outcry from the population, note. Why would they?)

         Regulations cost, but I know what I would rather have. A sound house.
6. Stevo 6

   27 August 2009 at 9:53 am

   Why does “housing” get used as a generic term like this. The problem with speculation / bubbles is not the house, it’s the land value. The house depreciates (but might keep up with inflation) until it is worn out, The land value appreciates: land value = demand / supply.

   Income generated by speculation needs to be taxed openly, just like any other income. A capital Gains Tax could do it, at the time of sale. You know it’s coming and you factor it in. It would need to take into account of inflation, so the taxed increase in value should not include base inflation.

   Under this model you could get a tax credit if the value fell. The time to implement a CGT is when the market bottoms out. A govt signal on the tax would ensure it happens sooner than later.

   Your single declared residence should be made exempt to make it palatable to the voters.

   When making an investment decision, folks might opt for something other than easy money residential housing.
   • Bright Red 6.1

     27 August 2009 at 10:03 am

     No, houses appreciate in a bubble, even though their physical quality might degrade. Bubbles aren’t rational.

     But you’re right about capital gains tax. You just described Green party policy, in fact.
     • stevo 6.1.1

       27 August 2009 at 10:18 am

       So it ain’t gonna happen is it. Will we get something like this instead:

       http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10593399

       “Housing” became a pyramid scheme. last ones in lose. That nonsense needs to stop.

       “No, houses appreciate in a bubble, even though their physical quality might degrade”. People are not rational.
       • Draco T Bastard 6.1.1.1

         27 August 2009 at 11:40 am

         So, Brian Fallow wants the lower income groups to support the higher income groups even more. That’s what GST on mortgages and rent and decreasing the top tax rates would do. Take more money off the poor and give it to the rich.

         Using his logic it would be just as reasonable to put GST on financial services in general and more equitable. Don’t see him suggesting that though.
       • Clarke 6.1.1.2

         27 August 2009 at 1:14 pm

         Brian Fallow is either advocating a huge wealth transfer to landlords – and a speculative property bubble to go with it – or he’s completely financially illiterate.

         A GST on rents will be a massive windfall for a typical landlord. The reason is that making the income from an investment property GST inclusive will require that the various investment entities – trusts, LAQCs, companies, individuals – will need to be registered for GST. This will then allow them to claim GST on their inputs, such as rates, maintenance, and … oh yeah … the purchase of the property.

         For a $400,000 house, this means the investment entity will be able to immediately claim a $50,000 GST refund from IRD. Against this, they’ll have to pay $50 a week in GST back to IRD from the rent they’re receiving, less the GST content of expenses such as rates and maintenance, of course.

         The effect is that IRD will advance the investors a $50,000 bonus when they settle the property, which will take them somewhere around 1,000 weeks – or 20 years – to repay to the taxpayer. It’s an interest-free loan for 12.5% of the value of the property!

         Fallow either knows this and it’s a deliberate attempt to load the costs of tax reform onto tenants, or he’s a complete moron.
         • RedLogix 6.1.1.2.1

           27 August 2009 at 2:33 pm

           Absolutely correct.

           In all the fuss around LAQC’s and CGT’s, most people forget that residential rental businesses currently pay the full whack of GST on all their inputs.

           As you rightly say Clark, registering for GST would a huge windfall for me, and an extra cost directly on my tenants.
           • Clarke 6.1.1.2.1.1

             27 August 2009 at 6:24 pm

             Fallow isn’t thick and must clearly understand the implications of what he’s suggesting – which makes me think it’s a deliberate kite-flying exercise. It looks good in the media – “let’s make those people with big mortgages pay GST!” – but the obvious implication is that it would re-flate the property bubble and result in massive wealth transfer in one neat, tidy package. It’s beyond comprehension that this hasn’t occurred to him.
7. Tom Semmens 7

   27 August 2009 at 11:19 am

   We have lost sight of the fact that a house should primarily be a home and the dream of your own home is primarily about security and place to call your own. Instead, people now see a house primarily as an investment vehicle. The mindset has to be changed. Unfortunately, you can’t take the candy from this particular baby without providing it with something healthier. If you strip away property, where should people invest their money to secure their old age or allow them to retire early? People got into property as much because it allowed them to retain control of their own hard earned capital as the lack of taxation. And who in their right mind would trust their life’s savings to the bumbling, incompetent and downright corrupt wild west that is our financial and business sectors? Blue Chip anyone? Hannover Finance Anyone? Gold Corp? Judge Corp?

   Before we demand the government punish people for simply doing the manifestly right thing with their own money, we need to have serious reform and regulation of the laws governing our sharemarkets, and finance/investment sector.
8. RedLogix 8

   27 August 2009 at 1:06 pm

   Long term property values average around 14-15 time annual rental values, and LVR ratios over 80% are very undesirable. Therefore the simplest method of controlling property price bubbles is for the Reserve Bank to limit mortgage lending to 12 times the annual imputed rental value of a property.

   Right now the median rent is around $300pw, or $15,000 pa, which would limit lending on the median property to $180,000, giving a median property price of about $225,000.

   If you assume building costs of around $1300/m2 (a typical group house build) and the median house being about 120m2 this gives a build cost of about $156k and a land value in the region of $70k. These are pretty much the sort of figures that were the norm around 2001 before the last, late and not much lamented, bubble took off.
9. Phil 9

   29 August 2009 at 4:36 pm

   Marty,

   I’m staggered at the appaling way you can stick a graph together and then completely misunderstand what you’re looking at – that said, the general level of competence in the journalistic community is not better, so it’s a little unfair for me to call you out on this personally.

   You can see how the housing bubble emerged in 2002-2003, when house price increases broke with the pace of GDP increase and started heading for the stratosphere.

   This is complete and utter nonsense. House prices in the 10 years from 1987 to 1997 broadly kept track with GDP. Then in 1998, the economy picked up and began it’s sterling run.

   What did house prices do?
   They flatlined.

   The ‘bubble’ you talk about emerging in 02/03 is nothing of the sort – it was actually a return to price gorwth which was probably four or five years overdue.

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1. Gabriella Turek: posted on 29 August 2009 at 6:28 am

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