web analytics

House Price Inflation

Written By: - Date published: 10:58 am, May 6th, 2012 - 59 comments
Categories: business, capital gains, debt / deficit, Economy - Tags: , ,

It is a conventional economics axiom that increasing the money supply without a concomitant increase in production causes inflation.

In the last thirty five years we have had low inflation in all, except two, commodities. Firstly, Land , and thence housing and farm prices. (The other commodity is food).

This is driven by private Banking’s incentive to print money. The more money they supply the more interest they can make. Unfortunately, there is also a strong natural incentive to lend only on solid security, such as land and buildings. Banks know better than anyone the inherent insecurity and instability of financial instruments, including shares.

Mortgage law in most Western countries favours lending on land. Unlike other investments, or lending, if the value of the security, land, goes down, the borrower is still liable for the full amount of the loan and interest. The bank is indemnified against loss. For example, in New Zealand, the bank has priority over all other creditors, including contractors.

Lending on business and other assets does not offer the same security. The bank has to wait in line with other creditors and, normally, cannot continue claims in excess of their proportion of the sale.

Banks, while reluctant to risk their own money, are happy to risk small savers investments. Our pension funds, bank deposits and savings.

These schemes, whether shares, derivatives, hedge funds or other financial instruments are designed so that banks can gamble with our money. Win or lose they always get a cut. Losses come out of our pensions and other savings. Or, if they really stuff it up, taxpayers are expected to borrow more from them to pay for it. “The bailout”.

De-regulation of banking has removed almost all constraints on lending and the amount of wealth banks can take. The total monetary value of financial instruments and debt is now so great that a crash, or super inflation, is inevitable if it is ever fully spent on real production. Does anyone really think that infinitely compounding interest is possible in a world with finite resources?

While we lose our savings, houses and farms, bankers still get richer.

Given the difficulty in obtaining bank finance without land as security, favourable tax treatments in (Western countries for homeowners, landowners and farmers ), incentives for banks to avoid risk and the risks inherent in other investment (The inevitable crash of Banker’s ponzi schemes and the likely devaluation of currency denominated investments) it is not surprising that investors prefer land. The Chinese Government buying up land worldwide with US dollars, before they become worthless, is only a minor example.

Hence land prices rising much faster than wages.

Our economy, along with most other Western economies has been skewed by banks following their own self interest. The “invisible hand” has failed..



59 comments on “House Price Inflation”

  1. peter 1

    And in Godzone our interest payments and bank profits go off-shore for the benefit of others. We are already tenants in our own country, might just as well sell everything off.

  2. Richard 2

    Well, this post is pretty incoherent, and generally factually incorrect.

    Land isn’t, as claimed, treated differently than other investments, it is merely a highly common form of security interest. Other such interests, like Personal Property Security Interests also carry similar priority rules. Further, the presence of the security is the very thing that allows you to borrow 500k on a 50k salary and only pay 6% interest. Take that away, and take away any dreams of home ownership for the middle class.

    Blaming issues of housing affordability on easy access to credit is just bizarre.

    • KJT 2.1

      Bollocks. Try getting business finance without land as security.

      • muzza 2.1.1

        I’m sorry , Sir/Madam, do you have any collateral which the bank could use as security to underwrite any loan for your business.

        Oh, well unfortunately the bank will not be able to provide an undsecured loan, as the risk profile is not in line with bank policy!

        Good day!

  3. Johnm 3

    The early 80s I could easily buy a 3 bedroom house for $32,000.00 I was on a salary of $10,000.00 a year! That house was on a large section and stood alone. Since then the banks have lent a lot of fiat interest bearing money to get rich capital gains housing speculators on a self propelled upward market and real estate sales have cashed in as well. Using a vital social asset at once affordable prices has been turned into a get rich scheme for kiwis with existing income and assets to act as collateral.

    Nats and Labour have refused to stop this rort at the expense of younger kiwi couples ’cause they’re in it as well! By levying a Capital gains Tax of say 60%. Now young kiwis can’t buy their own homes ’cause of the greedies who have troughed in for wealth gains. Easy credit from foreign banks enabled this gross scandal and they have cashed in with the additional interest charged on the principal.

    Just another Ponzi scheme exploiting the fact people must live in shelter.

  4. Nick K 4

    So the problem with housing affordability is mortgages? As Richard said, bizarre.

    • KJT 4.1

      Are you actually trying to tell me that the availability of money has no effect on prices?

      • Nick K 4.1.1

        No. The availablity of money (cheap money) has *an* impact. It’s not the sole reason. Supply is another big factor, which we are seeing now as a result of developers being bankrupt and finance companies going under.

  5. Draco T Bastard 5

    Unlike other investments, or lending, if the value of the security, land, goes down, the borrower is still liable for the full amount of the loan and interest. The bank is indemnified against loss.

    Such laws are systemic to modern capitalism and puts the lie to the great risk, great reward BS that is peddled as the reason some people are rich. The wealthiest people take almost no risk as they’re protected against loss by the government. This needs to change.

    I’ve been thinking about this specifically in regards to mortgages, that I think that nobody should ever be at risk of losing their homes and that whenever you loan someone money you’re taking the risk that you’re not going to get it back. Thus I have come to the conclusion that we need a law that says something like:
    1.) The mortgage is for a fixed term
    2.) Each payment is for the agreed upon amount or 20% of income, which ever is the lesser

    This puts the risk back on the bank where it’s supposed to be.

    Would also need to ban foreign ownership so that vast amounts of cheaper foreign money don’t push the prices here up.

    • KJT 5.1

      I would rather leave out banks entirely. The lender is the democratic polity.
      Private entities should not have unregulated control over money supply.

      At this stage that is the Government as the “peoples representative”. A sarcastic thing to say at present, which is why we need democracy.

      I agree on foreign ownership. Foreign buyers with unlimited cheap US dollars can easily outbid any New Zealander.

      Some countries and States do have public banks.

      In the 30’s in NZ, public banking and issue of finance was a big factor in our early exit from the depression.

      • Draco T Bastard 5.1.1

        I would rather leave out banks entirely.

        So would I but I think that such a policy would have the private banks running for the hills as they’d pretty much be guaranteed to take a loss.

        Private entities should not have unregulated control over money supply.

        Agreed. In fact, the only money available should be what the government spends into the economy. Banks and finance companies would only be able to loan out that which has been loaned to them for that purpose. The right won’t like that though as it would prove that the community is the source of wealth and not the rich as they like to believe.

        • Leverett

          Right – so the risk of default is shouldered squarely by the banks. Two alternative paths spring to mind:

          The first is that bank’s go out of business, or at least cease lending to those of us without huge incomes or enormous estates. Banks might continue to lend to landlords, of course, because if they default the mortgage isn’t securing a home but a business asset. As a coeval, land prices fall because there are less buyers but given they can’t access lending, aspirant folk become less able to purchase property and all the land ultimately ends up being owned big business and big government.

          The second is that the state gets in the business of lending on property on the terms suggested. With no risk of foreclosure for default more people buy property, knowing that there is no risk of bankruptcy or eviction as a result of default – the costs of default being socialised. This makes credit ‘cheaper’ and consequently increases demand – in the same way that student lending increased following interest write-off legislation. Land prices greatly inflate in line with established economic principles. The government takes massive losses as homebuyers default with the crown unable to realise its security. Housing losses consume a huge proportion of the state budget.

          I am not saying the current world of banking and finance is in great shape but am genuinely interested in what is wrong with the foregoing analysis. Are there any examples of such schemes working well in the real world or is such a scheme based only on a priori reasoning?

          • Draco T Bastard

            It’s a question of artificial restrictions. The method used ATM is interest rates and that doesn’t actually work as the collapsing bubble proves. The other method involves regulation about where houses can be built (which we already have) and I’d suggest another couple of restrictions – you can only have one mortgage, it can only be applied to one house and you can only update it once every ten years. Also I’d probably get rid of the OCR and the idea of the government being the Lender of Last Resort.

            Yes it will be the government making mortgages available (at 0% interest) and more people will buy but there’s still a limit to the number of people and thus the number of houses wanted. Owning multiple homes so as to live off the rental income (be a professional bludger) would not be viable. On the positive side, all our people will be decently housed.

            As for the loss being socialised – What loss? The government creates the money to enable the necessary distribution of resources and then destroys it through mortgage repayments and taxes.

            The market doesn’t work without serious regulation and the present system of limited regulation only works to make a few people rich and everyone else dependent upon them. I call such a set up dictatorship.

            • Leverett

              I agree that, for whatever reasons, the world of finance isn’t going gangbusters at the moment and desperately needs correction. To summarise your proposal, however:

              – Ban all obligations mortgages on houses;
              – Ban repayments over 20% of the borrowers’ income for any lending to purchase houses;
              – Ban mortgagee sales over houses where the owner is in occupation;
              – Ban second mortgages on houses;
              – Ban the charging of interest on finance to buy a house;
              – Ban refinancing of home loans more than once a decade;
              – Ban the ownership of multiple houses; and
              – More restrictions on where houses can be built.

              The suggested result of these law changes isn’t that the housing stock will deteriorate and decline – or completely monopolised, but somehow that “all our people will be decently housed”.

              Under the present, imperfect system, my partner and I were able to scrimp and save for a few years to scratch together a deposit. We convinced the bank that we would be able to pay back its shareholders money with interest – showing that we would be a good investment. We are thinking of fixing my rates at some point in the next 6 months but haven’t decided yet.

              We had to move to the provinces to be able to afford a house and I worry about hard times a bit. We pay a little bit each month for life-insurance and mortgage interruption insurance. It means that we rent movies rather than go to the cinema, pack lunches and entertain friends at home rather than frequent cafes – which is sometimes frustrating. We think the arrangement is mutually beneficial because we are starting to build up a bit of equity in the land instead of paying most of our income to a landlord.

              It just seems a little weird that you would call that a dictatorship. In actual fact, you want to intervene in that mutually agreed exchange and dictate terms that no commerical party would agree to. Is there a point where you believe that there are intolerable restrictions on the right to enter into free contracts? I assume you’re not a full blown state-socialist, right?

              Under your vision, the only lender would be the state – but under such circumstances that somehow everybody is ‘taking’ from the system and, in the final analysis, nobody is paying in. There is no risk of penury if I default and no risk of losing my family’s shelter if I don’t work hard to create value for others. So once your ensconsed, why work?

              Again – has that alternative ever been tried succesfully anywhere?

              • Draco T Bastard

                Ban all obligations mortgages on houses;

                Didn’t do that as people would still be required to pay up to 20% of their income.

                Ban the charging of interest on finance to buy a house;

                I didn’t ban it at all. You could still go out and pay interest if you so desire as I’m sure there will be plenty of people willing to take money from you. It’s more that I set up conditions that prevent it from happening due to rational self-interest.

                Ban second mortgages on houses;

                Why would you want, or need, a second mortgage?

                Ban refinancing of home loans more than once a decade;

                Yep, good reason for that – it prevents housing bubbles like the one that just helped trip the world into recession.

                More restrictions on where houses can be built.

                Most definitely as urban sprawl is a) destructive of the environment, b) takes away land that could be used for better purposes (leaving it in it’s natural state is a better purpose) and c) damned expensive to maintain.

                The suggested result of these law changes isn’t that the housing stock will deteriorate and decline – or completely monopolised, but somehow that “all our people will be decently housed”.

                Yep, because all the necessary housing would actually be built.

                It just seems a little weird that you would call that a dictatorship.

                Being dependent upon an individuals whim is being in a position that you cannot govern yourself.

                So once your ensconsed, why work?

                Because it provides purpose.

                Again – has that alternative ever been tried succesfully anywhere?

                Looking to the past for solutions for the now and the future can only result in failure. That said, there’s the 1st Labour Government to look to.

  6. Pete 6

    There is sound social policy behind the relatively easy credit for homebuyers. Home ownership means people are more rooted in their communities, they take better care of their property and there’s a general desire to see a community improve. I’m not saying communities made up of rented properties don’t have their own strength – the student quarter here in Dunedin is a particularly vibrant (although it is by nature transient).

    I think we are witnessing one unintended consequence of the growth of women’s employment since the 1970s. Dual income households are now the norm rather than stay-at-home mums. That money sloshing around pushes prices up.

    Secondly, There’s also regional variations. I think what is playing out is the result of so much of the economy being centered on Auckland. There is so much more demand there and the market really is a different beast compared to the rest of the country. I’m lucky enough to be making the average income, but as a single person I would not have been able to buy a house had I stayed in Wellington. Here in Dunedin I’ve just moved into my own (modest) house after moving down south to work at the university.

    Edit: and I had help to do that too – I saved my deposit through Kiwisaver, so I used those employer contributions and the first home deposit subsidy from Housing NZ.

    • kiwi_prometheus 6.1

      “There is sound social policy behind the relatively easy credit for homebuyers.”

      The cheap credit boom leading up to the GFC was about a record breaking speculative bubble not “sound social policy”. And it has burst big time.

      USA house prices are down around 40% in the last 5 years. Australia tanking the last 2 years.

      NZ is sure to follow.

      And to think history’s ( and NZs ) greatest credit bubble occurred under Labour’s command.

      Shows how ideologically bankrupt the Left is with its Neo Classical Economics Lite, and the stench of stale cat pee hanging around it thanks to Rad Fem felix types.

      • Draco T Bastard 6.1.1

        Labour is of the right, neo-liberalism is of the right, and on top of that the political parties just do what they’re told to by the banksters.

    • Carol 6.2

      There is sound social policy behind the relatively easy credit for homebuyers. Home ownership means people are more rooted in their communities, they take better care of their property and there’s a general desire to see a community improve. I’m not saying communities made up of rented properties don’t have their own strength – the student quarter here in Dunedin is a particularly vibrant (although it is by nature transient).

      Actually, I think that one of the reasons the elite pushes home buying for all (apart from the fact that the people at the top get rich off it all while those at the bottom are kept in an insecure state), is that it keeps people busy with their house etc, so they are less likely to become highly critical of the elite…. ie it keeps them from rioting in the streets, because they are locked into paying for, maintaining and protecting their homes.

      This is one of the main reasons I’ve never been interested in owning my own home. Since I was quite young I’ve always thought it was a bit of a con.

      Lifetime renter, me. Still can’t get excited about real estate, and I have a strong sense of historical and social links to my community without it. Affordable housing should be readily available for all, without a need to buy, IMO. And if society society was organised so that accommodation was easily available, there would be other things to bind people to community and to develop a sense of a social consciousness.

  7. Afewknowthetruth 7

    In the last thirty five years we have had low inflation in all, except two, commodities. Firstly, Land , and thence housing and farm prices. (The other commodity is food)

    What a load of crap.

    Oil is currently 4 times the price it was in the early 2000s ,and is over 5 times the price it was in the 1990s. And that is after severe demand destruction has clobbered the market, due to numerous economies implodinging

    And gold is around six-and-a-half times the price it was 15 years ago.

    My decision to participate in TS discussions only on rare occasions is validated.

    • KJT 7.1

      You are right. Should have thought of energy also.

      Same drivers though.

      Don’t agree Gold is a commodity.

      I think you also agree it is all likely to collapse in a heap when it hits against resource constraints.

      • Lanthanide 7.1.1

        Compared to historical prices, food is also still very very cheap.

        • Colonial Viper

          According to Grantham in the last 10 years commodity prices have recovered all the price drops of the last 150 years.

        • KJT

          It may well be, but it has been rising steeply against median incomes.

          The rising gap between prices for necessities, and incomes, and the drivers for the gap, is our concern here.

  8. Reagan Cline 8

    “the inherent insecurity and instability of financial instruments including shares” Not sure that shares are “a financial instrument” but whatever – there are graphs that show shares long term outperform all other investemnt classes. There is short and medium term volatility in all investments.

    “Does anyone really think that an infinitely compounding interest is possible in a world with finite resources ?” No, if the resources bought and sold for profit are finite.

    The service part of the economy has grown hugely in NZ and is not limited by the material resources I think you are referring to.

    • Colonial Viper 8.1

      there are graphs that show shares long term outperform all other investemnt classes.

      Graphs of the past. Specifically of a past where the focus of the economy was on real industries and real profits, during a time of increasing resource and energy availability.

      Anyways, financial instruments such as shares are not the place to put capital now. Real productive assets and physical precious metals are where you need to be.

      • Reagan Cline 8.1.1

        I’m feeling greedy and a little afraid now CV. What “real productive assets” should I put my savings into ? Mighty River Power maybe ?

        • Colonial Viper

          Cheap, easy to fill rental properties, economically priced farm land, solidly revenue generating small businesses, and yes the power generators being hawked off.

    • KJT 8.2

      Those that deal in shares like to repeat that “on average, shares outperform all other asset classes”.

      While true, in that the total share market has risen faster than any other investment assets, this applies only to the sharemarket as a whole.

      As an individual investment the returns are far more mixed.

      For example. If you picked a random basket of shares in different enterprises 25 years ago, there is a better than even chance you would have made a loss.

      Some would say you can do better by picking when to buy or sell. But, Unless you have specialist (insider) knowledge, or enough money to change the market, you are unlikely to better the market. Even expert, share trading fund, managers rarely do better than index funds, long term.

      I know many people who lost their shirts on shares in the 80’s by leveraging to buy shares.

      Ultimately the only organization that has the long term view and clout to offer the new venture finance, particularly on sustainable energy and products, we need, is the State.

  9. DH 9

    I’m not sure this has the right explanation on business lending. The problem there is that banks will only lend up to 60% on asset value while still demanding a 100% security over the whole asset. Their reasoning is that a receivership fire-sale of business assets will usually return at least 60% so that’s the maximum they lend while claiming a first ranked security over the entire asset. Try and buy a commercial property – they demand a 40% deposit & then take the entire building as security over their 60% loan.

    Banks are the only no-risk party in the business arena and that’s what creates all the problems. Everyone else has to carry the entire business risk from the remaining 40% of asset value. When a business goes bust the bank typically gets all their dosh back, often including interest arrears, and every other creditor gets nothing.

    The finance companies went bust because the banks had first ranking securities over all the assets the finance companies lent against. The NZ banks lost bugger-all in those big crashes, they had the first mortgages. Risk & reward isn’t the mantra of banks.

    • Colonial Viper 9.1

      Correct, in the casino of capitalism, the banks run the house.

      • DH 9.1.1

        Aye, they do but it doesn’t need to be that way if we got a Govt with some balls. Another reason they have the ridiculously low 60% is because it gives them plenty of margin in a receivership to recover generous costs, penalty interest etc. ANZ did ok out of Feltex, everyone else lost their shirt.

        IMO the law needs to be changed so no lender can recover interest from a receivership as part of a security, it should be strictly the capital value of the debt. Interest & other costs should be the very last ranking.

        • Herodotus

          Problem is that banks take charges over specific assets. in this case land & buildings.
          In 08 we never experienced a real drop in residential property. In many cases around Auckland property is 10%+ above the 07/08 sales values achieved, so property is maintaining its real inflation adjusted rate over a severe and testing time.
          If property was 66% of what it currently is, many issues affecting NZ would be solved (and maintaining the long run wages to cost ratio refer link below), less offshore debt, increased disposable incomes to name a few. Problem is that (I cannot see) how an adjustment can be achieved with minimal transitional damage. Easiest way apply CGT on all property, but have a reduced rate for the family home (say 50% of that for all other property), and place control limits over what a bank can loan on a property e.g. min debt:equity ratio on any deal.
          And land “inflation” is far more than what has been statistically reported- as housing densities have greatly increased in the last 10 years or so. I.e. the size of sections has reduced from the 1000m (1/4 acre), to 750m to now 450-500m standard Auckland stand alone section, and in increasing frequency sections below 300m2. The smaller the section the greater the house build costs. As houses to comply to site coverage and return a return to the builder/developer has to be multi level. To reduce build costs both in time and $ is to build single level.
          And for interest read the Housing Affordability report recently released

          • DH

            “Problem is that banks take charges over specific assets.”

            Not always, that usually only applies to funding specific property assets of a business or residential property. Many business loans take the equivalent of a debenture over the entire assets of the business. Take a good look at a lot of the companies listed on the NZX and you’ll find that the banks have first dibs on shareholder equity with most, if not all, of them. That’s how shareholders lost every cent they had invested in Feltex; ANZ had a charge over the company.

            That’s one of the prime reasons that wise investors don’t buy shares. Shareholder capital has been subordinated to the banks. Shareholder capital exists on paper but if any company on the NZX went bust shareholders would lose everything while the banks would get every cent back. Who wants to take that kind of risk with shares?

            • Colonial Viper

              Consequently it means that private investors are very reluctant to help invest in growing, medium sized companies, leaving them starved of capital with few places to turn…except again to the banks.

          • prism

            @ Herodotus 6/5 8.12pm

            As houses to comply to site coverage and return a return to the builder/developer has to be multi level. To reduce build costs both in time and $ is to build single level.

            Bad idea. There is an urgent need for Low multi-level housing to stop the spread of suburbs which create transport problems and costly service provision, (extensive sewer water electricity pipes). The idea of hectares of 20th century style single level housing suburbs flowing out over the countryside is redundant.

            But the trend to hectares of soulless two-storey houses in Auckland developers suburbs now are so depressing. They all have costly soaring two-storey front porches which seem to aim at pretention, the size of the house spreads over the section so that there is little room between houses for sun, privacy separation etc. And they are as individual as 19th century British mass housing, or the ‘tract housing of USA which they are likely to be modelled on.

  10. mouse 10

    Great post KJT… It doesn’t sole all the problems of the world, But it does highlight one of the biggies, and one that can be fixed.

    The deregulation of the 80’s-90s really fucked NZ over…

    We (NZ Inc.) need to re assert control over our economy and it Starts with Banking and reckless administion/ oversight of the banking industry, any fool can create wealth by loaning it into being… and we need to get that Genie back in the bottle.

    Demanding more prudent loan to value ratios on lending… and entry barriers/capital controls on those who are more reckless than ourselves would be a good place to start.

    • KJT 10.1

      Thanks to everyone for helping to sharpen up my thinking on this.

      When I have time I will put up some possible solutions for discussion.

      • Colonial Viper 10.1.1

        Steve Keen has got an idea worth considering. Not simply restricting banks to a house value to loan ratio, but making the ratio based on the likely monthly rental for the property.

        This would kill off the ability for banks to lend more and more money into fueling an asset price bubble, which they could do in a normal house value to loan ratio system, as house values would be going up as part of the bubble at the same time.

  11. BM 11

    Had a pretty large amount of immigrants during the 90’s and 2000’s.
    Of those a good proportion of people were from the UK who didn’t blink an eye paying 100k + over the asking price.
    When you were getting 3-4 dollars per pound it didn’t really matter paying an extra 100k for a property you liked unfortunately it did push the price up beyond what a lot of kiwis could afford.

  12. BM 12

    Edit- things seem to have gone a bit pear shaped with the code

  13. james 111 13

    If we look at affordability of housing in Auckland in particular whilst I agree that the banks are scalping at the moment they are getting more than 200 basis points above their buying rate on lending. We also have to look at the impact of not releasing anymore land for sections this has forced house prices up hugely. Along with the compliance costs of the Council these have risen several hundred % in the past 10 years. eg to subdivide a section in Whangamata in 2003 was a cost of $8000 by 2007 that had risen to $40000. Council gouging ,and spending is totally out of control they have really impacted on the lack of houses being built along with the house prices of existing houses

    • KJT 13.1

      $35000 was the council price to subdivide a Coromandel section last year.

      Lack of supply does not help either.

      • james 111 13.1.1

        Totally agree the subdivision cost is absurd has gone up over 400% in most places just to review a set of plans. Which stops supply in its own right or pushes section prices up so they are unaffordable by first home buyers. The Councils are gouging on compliance costs it really needs to be looked at hard.

        • Colonial Viper

          Council costs are still only a tiny proportion of the $200K or so median Auckland house price increase of the last 10 years.

    • Draco T Bastard 13.2

      Increasing the physical size of a city isn’t a solution either as you will always eventually run out of land. The solution is to build upwards or have people move to other cities.

      Along with the compliance costs of the Council these have risen several hundred % in the past 10 years

      The solution that you’re calling for, more land availability, is what’s likely driving those increased costs because of all the extra administration and costs that goes along with it.

  14. prism 14

    What are the Council’s excuses for putting their rates up so high? Are they trying to take some off the top towards the costs from previous lax control leading to leaky buildings and the cost of remediation etc? If so, is this cost being loaded in full or part, on to the planning section of the Council when it actually is so large it’s an all-Council burden?

    • Colonial Viper 14.1

      The Supercity will save rate payers money. John Banks promised.

  15. prism 15

    lprent – My edit function was refused straight after I put a comment. Then I couldn’t even Close the window. Nothing happened. I got back in by opening a second blog so I could make this report. I did scroll up the page to get information and then had to use my F5 key to refresh so I could read my updated comment,
    something I have had to do since comments are under the heading of WP Ajax Edit Co.

  16. Poission 16

    The fundamental problem is the policy price paradox with property.

    The reserve bank sets interest to curb inflation (demand) The increase in equity in property allows borrowers to use their houses property to borrow more fueling higher costs.

    Borrowers for say small commercial set their rents at both funding costs and revaluation of assets forcing business to increase prices and constrain costs such as wages.

    The asymmetry has distorted the market,making rents for small business around 20-25% of turnover rather then around 10-12% historically.

    The constraint to reduce property inflation is a policy problem,where either property tax (which is widely used o/s) or a reduction in offsets against income,interest,depreciation etc.

    The increased use of say housing for leverage against additional property purchases was a mechanism that still drives property pricing.

  17. Jeremy Harris 17

    Lol, on The Standard it’s like reading posts by primary school children:

    By September 2004 Beal Bank’s assets had climbed to $7.7 billion. Then Beal stopped buying, letting his loans run off. By September 2007 assets had shriveled to $2.9 billion, one-fifth of which was cold cash. He was worried that consumers had taken on too much debt and money was being lent to companies for next to nothing. “Every deal done since 2004 is just stupid,” Beal says.

    He began by pulling back from home loans–even those guaranteed by Fannie Mae and Freddie Mac. Beal thought the two quasi-government agencies were over-leveraged. When staffers mentioned their guarantees in deal presentations he would fire back that these guarantees were “worthless.”

    Outsiders thought it was Beal who didn’t get it. Despite its aversion to credit then, the bank occasionally had to buy mortgages to meet federal low-income-lending requirements. Jonathan Goodman, then head of loan purchases, recalls salesmen from Countrywide laughing at him on the phone when he refused to buy iffy condo paper backed by the two agencies. “Countrywide, Bank of America, Washington Mutual … every single [mortgage seller] thought we were insane,” Goodman says. “They didn’t know why we cared. They thought Fannie and Freddie guarantees were as good as Treasuries.”


    Yip government mandating of central reserve banking and government deposit gaurantees have nothing at all to do with the problems in banking and it’s reverberations throughout economies, it’s all the fault of the evil “invisible hand” and “greedy banksters”. Puh-lease.

    • joe90 17.1

      WTF do the US mortgage scandals and the systematic theft by the lending industry have to do with NZ house prices Jeremy?.

      • Jeremy Harris 17.1.1

        Because like the US we have government mandated central banking and deposit guarantees.

    • Colonial Viper 17.2

      Most of the US subprime mortgage problems were caused by control frauds perpetrated by senior managers in private financial institutions, assisted by the “independent” credit ratings agencies.


      Simple Government deposit guarantees have no role to play in the perpetration of these control frauds, and neither does the classical “invisible hand” of the market.

      • Jeremy Harris 17.2.1

        Some of the problem was caused as you describe, most of the problem was caused by Fannie and Freedie, federal mandates for subprime mortgages, federal guarantees of deposits, expansionary monetary policy by the federally created and mandated Fed Reserve and million and one other federal market interventions…

        • Draco T Bastard

          And who controls the US political scene?

        • prism

          Jeremy Harris You sound as if you are repeating the mantra of right wing financiers in the USA – no way will they find fault with their own sector. No it’s all government’s fault – and the fact that it can be captured by the system with regulation as a pretence is ignored. There is a moral hazard in getting too close to free marketeers if a government intends to provide oversight and take steps to ensure probity in financial rules are followed.

        • Colonial Viper

          Jeremy Harris YOU ARE NOT LISTENING

          Over 80% of subprime mortgage fraud was perpertrated by LENDERS acting under the authority of CEOs and other senior executives operating CONTROL FRAUDS.

          FMac and FMae were late players into this scene, PRIVATE financiers were the biggest and fastest in.

          And as others have tried to point out to you…in the US, Congress is simply an extension of American corporate/banking power.

        • KJT

          Really. So problems which occurred AFTER regulations were relaxed were a result of too much regulation??

          Freddie Macs and Fannie Mae’s collapse also occurred AFTER the GFC. You are confusing an effect with the cause. A few hundreds of millions of defaults, which happened mostly after the GFC reduced incomes, caused the 100’s of billions GFC?? Sarc.

          You are parroting all the other Neo-liberal apologists who like to pass the buck, and the costs, to anyone, but them selves.

          Sorry. we tried your way. Newsflash! It failed!

Recent Comments

Recent Posts


  • September benefit figures disappointing
    The Government is out of touch with the reality that fewer people are going off the benefit and into employment or study, says Labour’s Social Development spokesperson Carmel Sepuloni.  “The quarterly benefit numbers for September are concerning. They show that ...
    15 hours ago
  • MFAT officials refuse to back Prime Minister on Saudi sheep claims
    An Ombudsman’s interim decision released about the existence or otherwise of legal advice on the multimillion dollar Saudi sheep deal shows MFAT has failed to back up the Prime Minister’s claims on the matter, says Labour MP David Parker. “The ...
    17 hours ago
  • Nats still planning to take Housing NZ dividend
    Housing New Zealand’s Statement of Performance Expectations shows that the National Government intends to pocket $237m from Housing New Zealand this year including a $54m “surplus distribution”, despite promises that dividends would stop, says Labour’s Housing spokesperson Phil Twyford. “After ...
    2 days ago
  • Parliament must restore democracy for Ecan
    Parliament has a chance to return full democracy to Canterbury with the drawing of a member’s bill that would replace the Government’s appointed commissioners with democratically elected councillors, says Labour’s Canterbury Spokesperson Megan Woods. “In 2010, the Government stripped Cantabrians ...
    2 days ago
  • Police struggle to hold the line in Northland
    Labour’s promise of a thousand extra police will go a long way to calming the fears of people in the North, says the MP for Te Tai Tokerau Kelvin Davis.  “Police are talking about the Northland towns of Kaitaia and ...
    2 days ago
  • Urgent action on agriculture emissions needed
    Immediate action is required to curb agricultural emissions is the loud and clear message from Climate change & agriculture: Understanding the biological greenhouse gases report released today by the Parliamentary Commissioner for the Environment, says Labour’s Climate Change spokesperson Megan ...
    3 days ago
  • Super Fund climate change approach a good start
    Labour Finance Spokesperson Grant Robertson and Climate Change Spokesperson Dr Megan Woods have welcomed the adoption of a climate change investment strategy by the New Zealand Super Fund. “This is a good start. It is a welcome development that the Super ...
    3 days ago
  • Raising the age the right thing to do
    The announcement today that the Government will leave the door open for young people leaving state care still means there is a lot of work to do, says Labour's Spokesperson for Children, Jacinda Ardern "The Government indicated some time ago ...
    3 days ago
  • Coleman plays down the plight of junior doctors
    Junior doctors are crucial to our health services and the industrial action that continues tomorrow shows how desperately the Government has underfunded health, says Labour’s Health spokesperson Annette King.  “Jonathan Coleman’s claim that he has not seen objective evidence of ...
    3 days ago
  • Inflation piles pressure on National and Reserve Bank
    While many households will welcome the low inflation figures announced today, they highlight serious questions for both the National government and the Reserve Bank, Labour’s  Finance Spokesperson Grant Robertson said.  "While low inflation will be welcomed by many, the ...
    4 days ago
  • Officials warned Nat’s $1b infrastructure fund ineffective and rushed
    Treasury papers show the Government rushed out an infrastructure announcement officials told them risked making no significant difference to housing supply, says Labour’s housing spokesperson Phil Twyford.  “Like so much of National’s housing policy, this was another poll-driven PR initiative ...
    4 days ago
  • More cops needed to tackle P
    New Police statistics obtained in Written Questions show John Key is losing his War on P, highlighting the need for more Police, says Opposition Leader Andrew Little.  “New Zealanders expect serious action on P but today’s hodgepodge of half-measures won’t ...
    5 days ago
  • MBIE docs show country needs KiwiBuild, not Key’s pretend “building boom”
    John Key’s spin that New Zealand is in a building boom does not change the massive shortfall in building construction as new MBIE papers reveal, says Labour Party housing spokesperson Phil Twyford.  “We can fix the housing crisis, by the ...
    5 days ago
  • 1 in 7 Akl houses now going to big property speculators
    Speculators are running riot in the Auckland housing market making life tougher for first home buyers, says Labour’s housing spokesperson Phil Twyford.  Newly released data from Core Logic shows a 40 per cent increase in the share of house sales ...
    7 days ago
  • Labour mourns passing of Helen Kelly
    Helen Kelly was a passionate advocate for working New Zealanders and for a safe and decent working life, Leader of the Opposition Andrew Little says.  “Helen Kelly spent her adult life fighting for the right of every working person to ...
    1 week ago
  • Andrew Little: Speech to the Police Association Conference 2016
    Police Association delegates, Association life members and staff, representatives from overseas jurisdictions. Thank you for inviting me here today. The Police Association has become a strong and respected voice for Police officers and for policing in New Zealand. There is ...
    1 week ago
  • 1,000 more police for safer communities
    Labour will fund an extra 1,000 Police in its first term to tackle the rising rate of crime, says Leader of the Opposition Andrew Little. “Labour will put more cops on the beat to keep our communities safe. ...
    1 week ago
  • Call for all-party round table on homelessness
    Labour is calling on the Government to take part in a roundtable meeting to hammer out a cross-party agreement on ending homelessness.  Labour’s housing spokesperson Phil Twyford said the country wanted positive solutions to homelessness, and wanted the political parties ...
    1 week ago
  • Working people carrying the can for the Government
    Today’s announcement of a Government operating surplus is the result of the hard work of many Kiwi businesses and workers, who will be asking themselves if they are receiving their fair share of growth in the economy, Grant Robertson Labour ...
    1 week ago
  • Breast cancer drugs should be available
    Labour supports the Breast Cancer Aotearoa Coalition’s campaign for better access to cancer treatments as more patients are denied what is freely available in Australia, says Labour’s Health spokesperson Annette King.  “In the last three years, PHARMAC’s funding has been ...
    1 week ago
  • Community law centres get much needed support from banks
      New Zealand’s network of community law centres, who operate out of more than 140 locations across the country, have today received a much needed boost, says Labour’s Justice spokesperson Jacinda Ardern.  “After more than 8 years of static funding ...
    1 week ago
  • Just 18 affordable homes in Auckland SHAs – It’s time for KiwiBuild
    New data revealing just 18 affordable homes have been built and sold to first home buyers in Auckland’s Special Housing Areas show National’s flagship housing policy has failed and Labour’s comprehensive housing plan is needed, says Leader of the Opposition ...
    1 week ago
  • Pasifika wins big in Auckland elections
    The Labour Party’s Pacific Candidates who stood for local elections in Auckland came out on top with 14 winners, says Labour’s Pacific Island Affairs spokesperson Su’a William Sio. “Our candidates have won seats on one ward, four local boards, two ...
    1 week ago
  • Seven7 hikoi to stop sexual violence
    1 week ago
  • Road toll passes 2013 total
    The road toll for the year to date has already passed the total for the whole of 2013, raising serious questions about the Government’s underfunding of road safety, says Labour’s Transport spokesperson Sue Moroney.  “According to the Ministry of Transport, ...
    2 weeks ago
  • Bay principals slam charter school decision
    A letter from Hawke’s Bay principals to the Education Minister slams the lack of consultation over the establishment of a charter school in the region and seriously calls into question the decision making going on under Hekia Parata’s watch, says ...
    2 weeks ago
  • Government needs to act on voter turnout crisis
    With fewer than 40 per cent of eligible voters having their say in the 2016 local elections, the Government must get serious and come up with a plan to increase voter turnout, says Labour’s Local Government Spokesperson Meka Whaitiri. ...
    2 weeks ago
  • Inquiry presents solutions to homelessness – Govt must act
    Labour, the Green Party and the Māori Party are calling on the Government to immediately adopt the 20 recommendations set out in today's Ending Homelessness in New Zealand report. ...
    2 weeks ago
  • A good night for Labour’s local government candidates
    It has been a good night for Labour in the local government elections. In Wellington, Justin Lester became the first Labour mayor for 30 years, leading a council where three out of four Labour candidates were elected. Both of Labour’s ...
    2 weeks ago
  • More contenders for fight clubs
    Allegations of fight clubs spreading to other Serco-run prisons must be properly investigated says Labour’s Corrections spokesperson Kelvin Davis. ...
    2 weeks ago
  • Minister runs for cover on job losses
    Māori Development Minister Te Ururoa Flavell’s refusal to show leadership and provide assurances over the future of the Māori Land Court is disappointing, given he is spearheading contentious Maori land reforms which will impact on the functions of the Court, ...
    2 weeks ago
  • Kiwisaver contribution holiday not the break workers were looking for
    The number of working New Zealanders needing to stop Kiwisaver payments is another sign that many people are not seeing benefit from growth in the economy, says Grant Robertson Labour’s Finance spokesperson. "There has been an increase of 14 ...
    2 weeks ago
  • Fight Club failings
    The Corrections Minister must take full responsibility for the widespread management failings within Mt Eden prison, says Labour’s Corrections spokesperson Kelvin Davis. ...
    2 weeks ago
  • Rethink welcomed
    The Labour Party is pleased that Craig Foss is reconsidering the return of New Zealand soldiers buried in Malaysia, says Labour’s Foreign Affairs spokesperson David Shearer. “For the families of those who lie there, this will a welcome move. The ...
    2 weeks ago
  • Disappointment over UN vote
    Helen Clark showed her characteristic drive and determination in her campaign to be UN Secretary General, and most New Zealanders will be disappointed she hasn't been selected, says the Leader of the Opposition Andrew Little. "Helen Clark has been an ...
    2 weeks ago
  • Māori need answers on Land Court job losses
    Māori landowners, Māori employees and Treaty partners need answers after a Ministry of Justice consultation document has revealed dozens of roles will be disestablished at the Māori Land Court, says Ikaroa-Rāwhiti MP Meka Whaitiri. ...
    2 weeks ago
  • Key’s ‘efficiencies’ = DHBs’ pain
          John Key’s talk of ‘efficiencies’ ignores the fact the Government is chronically underfunding health to the tune of $1.7 billion, says Labour’s Acting Health spokesperson Dr David Clark.       ...
    2 weeks ago
  • More than 1,300 schools to face budget cuts
    The latest Ministry of Education figures reveal thousands of schools will face cuts to funding under National’s new operations grant funding model, says Labour's Education spokesperson Chris Hipkins. ...
    2 weeks ago
  • Speculation fever spreads around country
    House prices in Wellington, Hamilton and Tauranga are going off as a result of uncontrolled property speculation spilling over from the Auckland market, says Labour’s housing spokesperson Phil Twyford.  “Speculators who have been priced out of Auckland are now fanning ...
    3 weeks ago
  • New Zealand lags on aid targets
      The National Government needs to live up to its commitments and allocate 0.7 per cent of Gross National Income on development assistance, says Labour’s spokesperson on Pacific Climate Change Su’a William Sio.  “The second State of the Environment Report ...
    3 weeks ago
  • War on drugs needs more troops
    The Minister of Police must urgently address the number of officers investigating illegal drugs if she is serious about making a dent in the meth trade, says Labour’s Police spokesperson Stuart Nash.  “Answers from written questions from the Minister show ...
    3 weeks ago
  • Doctors strike symptom of health cuts
    The notice of strike action issued by the junior doctors today is the result of years of National’s cuts to the health system, says Labour’s Associate Health spokesperson Dr David Clark. ...
    3 weeks ago
  • Government starves RNZ into selling Auckland asset
    Just weeks after TVNZ opened its refurbished Auckland head office costing more than $60 million, RNZ (Radio New Zealand) has been forced to put its Auckland office on the market to keep itself afloat, says Labour’s Broadcasting spokesperson Clare Curran. ...
    3 weeks ago
  • Government must be more than a bystander on the economy
    Despite what he might think John Key is not a political commentator, but actually a leader in a Government who needs to take responsibility for the conditions that mean a rise in interest rates, says Labour’s Finance Spokesperson Grant Robertson.  “John ...
    3 weeks ago
  • Māori Party all hui no-doey on housing
    The Māori Party should stop tinkering and start fixing tragic Māori housing statistics in the face of a national housing crisis, says Labour’s Māori Development spokesman Kelvin Davis. ...
    3 weeks ago
  • Labour committed to eliminating child poverty
    Labour accepts the challenge from Children’s Commissioner Andrew Becroft to cut child poverty and calls on the Prime Minister to do the same, says Leader of the Opposition Andrew Little. ...
    3 weeks ago