Nats’ economic genius at work in the property market

Written By: - Date published: 7:35 am, November 14th, 2014 - 44 comments
Categories: housing, national - Tags: , , ,

National governments are terrible managers of the economy. Historically they have brought us lower growth and higher debt than Labour governments. The current lot are amongst the worst.

Consider, for example, the mess the Nats are making of the housing market. Instead of addressing the real problems of supply and speculation, Bill English tried to mask the symptom of escalating prices with an easy but ineffectual LVR (Loan to Value Ratio) restriction (while simultaneously undermining it with Welcome Home Loans). This despite being warned by Treasury that LVR restriction would likely hurt first home buyers – which it duly did.

Last Monday English called for the LVR restriction to be removed:

Mr English said today pressures were easing, and while decisions on LVRs are for the Reserve Bank to make, he thinks its managers will move. “They find themselves in a world where the current interest rate pressure is less than they expected and probably house price inflation is a bit lower than they expected. … “There’s less pressure to have them now than there was and I would expect that the bank is looking at the path to the end of LVRs.”

Pressures are easing? Really? Yesterday:

Spring house price surge in October

Auckland house prices have hit a new high and national sales volumes rose 11.8 per cent last month in a big spring resurgence. Real Estate Institute data just released showed Auckland’s median price reached a new record of $640,500 which is $3500 above the previous high set in March.

Auckland’s median price rose 10.1 per cent or $58,500 from October last year to last month. Prices were up in Manukau, Auckland and Waitakere cities. The region’s median price rose $25,500 (+4.1 per cent) from September to October, with Waitakere and Manukau cities recording the largest median price increases.

Oh and just for good measure:

Flush owners cashing in on rising house values

Homeowners feeling flush after learning their newly-released property values are borrowing more from banks to splurge on new cars, boats and home renovations. … Anyone feeling rich after seeing their home’s paper value shoot up – many by over 40 per cent – should think carefully before piling thousands more on to their mortgage …

Yup, it sounds like pressures in the property market are “easing” all right. Bring on those fifty year mortgages.

Message to the economic geniuses of Planet Key. The housing bubble is out of control and you are just tinkering at the edges of the problem. You need to address the real issues – supply and speculation. Labour has readymade policy you could steal – Kiwibuild and a capital gains tax.

44 comments on “Nats’ economic genius at work in the property market”

  1. Paul 1

    Excellent post.
    Maybe our dear leader could get some tips when he meets Angels Merkl about their amazing policies regarding rental properties.
    http://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/

  2. Ad 2

    That shrinking 45% who got their early Christmas present by opening their fresh evaluation notice will feel content with National.

    And the growing 55%, not so much.

  3. shorts 3

    Labour may not be able to claim the high ground on homes, at least however they are thinking of solutions not propping up their support base at the countries cost: http://norightturn.blogspot.co.nz/2014/11/should-labour-really-chase-rich.html

    • karol 3.1

      The Greens have an explicit policy on increasing the amount of state houses.

      This is necessary to stop housing price inflation.

      I don’t see anything similar in Labour’s housing policy overview.

      But they do have something on it in the more detailed outline of their housing policy.
      Under the heading:

      “Supporting social housing to support families”

      • ghostwhowalksnz 3.1.1

        Increasing state houses wont stop house price inflation. Full stop. End of story.

        House price inflation is mostly due to easy money from banks. Its in their interest to have lenders taking bigger loans year after year while the security is protected.
        Double whammy really which only suits bank.

        At the moment Banks only have 6-7% of capital compared to amount they borrow ( short term to lend long term where the Interest rate dividend is their margin)

        A large business would normally only have 50% capital compared to borrowed money.
        The only difference between capital and borrowed money is only one has to be paid back.

        This is why banks take high risks because its other peoples money mostly. Wall St is even worse, its only 2-3% of their capital.

        Solution move Banks ( and other lenders such as finance companies) up to the 15-20% use of own capital. Some finance companies should be at 25-30%.

        • Draco T Bastard 3.1.1.1

          We need to do both. Increase state housing so that there’s a 1 to 2% over supply of housing and remove the private banks capability to create money. Th first decreases demand and so will decrease prices that can be charged and the second will decrease the amount of money available for borrowing which will also decrease prices.

          On top of that we also need to ban foreign ownership so that NZs resources are only available to support NZers. This will also decreases prices.

          Problem, no one will vote to decrease the price of their house unless they end up in a better position. To do this we need to have the government offer to buy the house at the present valuation and offer the people who presently live in it a lifetime lease at 25% of household income.

          • ghostwhowalksnz 3.1.1.1.1

            NO problem with creating money, because they dont.
            For every dollar lent on housing, credit cards, business loans etc, the banks have to borrow from someone else.
            And if the overnight numbers dont match up they have to borrow from reserve bank for that night.

            AS for ‘creating credit’, every business does it. The corner lunch shop will have some regular customers who dont pay till payday.
            Creating credit ? Absolutely.

            Banks are regulated so they have to be a bit more precise than that, but they borrow money short term to lend long, thats where they make their money.

            30 day money or 90 day money is at 3% say, 25 year loan is at 6.5% . There you have profit.

            This idea that Banks created money to lend for normal purposes just doesnt happen. Its an old Social Credit idea that refuses to die , yet its absurd.

            Federal Reserve and Bank of England DID create money over last 5 years but that was unusual and everyone knew about it, That a local bank would create money is just absurd ( plus would lead to 100% per week inflation)

            • Nic the NZer 3.1.1.1.1.1

              Banks do create money when they make loans, its called bank credit and is counted by the RBNZ as part of M3 measures of the money supply. Even the money-multiplier model of banking (which implies incorrectly that there is a limited amount of bank credit able to be created) banks still create money every time they make loans. But I am not on the same page as Draco that full reserve banking is necessarily a good idea or even possible (as banks are simply doing a trade-credit for their lending anyway).

              Its not an old Social Credit idea that refuses to die, its an economic reality which is constantly denied by main-stream economists. The reality of this was recently acknowledged as fact by the Bank of England in fact.

              • Draco T Bastard

                But I am not on the same page as Draco that full reserve banking is necessarily a good idea or even possible (as banks are simply doing a trade-credit for their lending anyway).

                It’s not only possible but essential. Infinite exponential growth on a finite planet is impossible.

                • Nic the NZer

                  Physical growth and income growth are not inexorably connected. To think so is to buy into the worst aspects of main-stream economics.

                  The economic theory of monetarism (now widely discredited) directly linked growth of the money supply with growth of the economy, but of course there is no causal mechanism there as you know. The point being its possible to grow peoples income while resolving the planets resource problems and moving onto a sustainable path. We can do that by adopting policies of paying people income to implement sustainable solutions for the economy. There is no hard connection between the real economy and the financial economy, and in a related misconception the financial economy doesn’t have to grow to support interest payments on debt.

            • Colonial Rawshark 3.1.1.1.1.2

              GWWN – there is a hierarchy of money in our economy. Bank credit, eg via a credit card, is almost as good as cash.

              A lunch bar extending someone a tab (IOU) for the week is far far down the hierarchy of money.

              This becomes obvious when the lunch bar tries to settle rent with their landlord using the weekly IOUs from their customers.

              For every dollar lent on housing, credit cards, business loans etc, the banks have to borrow from someone else.
              And if the overnight numbers dont match up they have to borrow from reserve bank for that night.

              No, I don’t think so. It lacks the understanding that banks make loans first and then at some later time go hunting for any reserves which might be required. (And the reserves which are required are not 100% of the loan they made, and as you implied, the Reserve Bank can print any funds it needs to lend each night, instantly without limit).

            • Draco T Bastard 3.1.1.1.1.3

              Nope, wrong. Very badly wrong.

              Banks create money every time they make a loan. That’s documented and I’ve linked to it time and time again.

              Why do you refuse to accept reality?

              • ghostwhowalksnz

                Every time they make a loan, they are required to borrow from someone else, ie deposits, term deposits , offshore etc.
                Ive even shown you how they make money even though its covered by borrowing, why do you live in the 60s with discredited Social Credit theories?

                If the NZ government has to cover its deficit by borrowing, what fool would let the banks create it for nothing.
                As we see, the GFC meant the US, UK ( and probably China) created money, that money virtually went straight to the big banks to on lend.

                You have no real proof of what you say, and any way banks balance sheets show they have assets ( loans) covered by liabilities (borrowed money).
                This is shown during the GFC where the Government had to guarantee the banks deposits, if they could create money they would have no need of this. Why would banks be borrowing in wholesale market or using new instruments such as covered bonds if they could just ‘create it’.
                And please dont refer to Wikipedia for answers !

  4. Tracey 4

    oh and the reserve bank govenor doesnt agree with english by keeping lvr in place…

    in hobsonville 20% of new homes under hnz development will be affordable. 485 (?) as long as you stay 2 years and dont earn more than 120k… so in 2 years what do we think they will be selling them for?

  5. Kevin Churchill 5

    It’s clearly not believable that the English & co care very much about the house price inflation that (mostly) Auckland and Christchurch suffer from because their policies fuel price rises. The tax deduction allowed for loans on second and consequent houses, the level of foreign immigration (believed in access of 40,000 this year), the fact that foreign non residents are allowed to speculate in residential housing all add to the inflationary effect.

    I think too that the effects of their state housing policies of paying private landlords, coupled with the reduction of the number state houses and a inadequate new house building program all excarbate house price inflation. Their state house policies must also inflate rent prices too and offer a further incentive for people to buy extra houses and, of course, the absence of any enforceable standards that ensure rentals are warm and dry all impact negatively on the same people over and over again.

    The banks are a further force pushing house and land prices too, by providing easy credit, they are having a field day (I think ANZ’s profit has been 6% a quarter). It’s illustrative that radio NZ and other media use the bank economists as comentaters on housing and economic comentators – it must be because they’re “independant”.

    So the nats need to address the demand side of the market – fat chance.

    • Tracey 5.1

      why would they… developers… investors… financiers… real estate agents….

      peter thompson of barfoot and thompson is a BIG nats supporter… do you imagine at dinner with john or bill he urges a slow down?

  6. greywarshark 6

    Went to a talk on eco solutions and architecture last night. After, I talked to a locally employed eco advisor and, further to one of the points about houses getting bigger and expectations having risen exponentially in their design and equipment, he said that many people build large and not long after are looking for something smaller and easier to maintain.

    There was talk about the sort of insecurity that affects people and makes them choose a big house that is impressive to others, and that those involved in housing find this frequently. It seems that people want to display their worth by an imposing or architecturally different edifice. Then there is a conformity where everyone is doing that, a keeping up with the Jones effect. A slide was shown of the extravagant house built by a USA sports player millionaire, he had a lake formed that was 2 acres and a mansion that took 15 years to sell and was then pulled down, so wasted. His marriage went on the rocks. His life should have been good but no. Sad.

    • Tracey 6.1

      yup.. our homes… incl mine… are too big… so we fill it up with suff we dont need…

      • greywarshark 6.1.1

        No doubt about it, smaller homes – less stuff. People shifting to elderly residences find that.

    • aj 6.2

      Status Anxiety, a book by Alain de Botton, discusses the desire of people in many modern societies to “climb the social ladder” and the anxieties that result from a focus on how one is perceived by others. De Botton claims that chronic anxiety about status is an inevitable side effect of any democratic, ostensibly egalitarian society. De Botton lays out the causes of and solutions to status anxiety.

      A two-hour documentary film about this thesis, also called Status Anxiety and written by Alain de Botton, was released in 2004.

      This is a must watch.

      • greywarshark 6.2.1

        @ aj
        That sounds interesting thanks for the tip. And the detail. By the way have you read Paul Fussell’s book on Class in the USA. It is quite old but human nature changes little really. I thought quite good.

  7. Nic the NZer 7

    Labours capital gains tax policy will be less effective than the LVR is. I believe due in part to the LVR many housing markets around the country have seen declining prices, excluding Auckland. The LVR could be applied more widely however.

    I have seen zero examples countries where a CGT policy has had any effect on the housing market, and Labours watered down proposal was certainly not going to have any impact. In fact several countries where a CGT is in place also have some of the biggest property bubbles in the world. Imagining that a CGT will work differently in NZ is just a bunch of wishful thinking.

    • ghostwhowalksnz 7.1

      Thats because of CGT nemisis which is called negative gearing.

      • Nic the NZer 7.1.1

        Really? Do you have any examples where countries have a CGT, and don’t allow negative gearing which show that a CGT does in fact work. I have an example, the UK, which shows that it still doesn’t work (the UK has a huge property bubble centered in London).

    • Murray Rawshark 7.2

      I reckon we need CGT just so all income is taxed on an equal basis. I agree the way Labour approached it was weak. The housing bubble can be cut down to size by building state houses, imposing restrictions on the number of houses one person can own, prohibiting ownership by non-residents, controlling rents, and having a rental WOF. Most of that would go down like a cup of cold sick, but we need it.

      The simple truth is that we need to direct money into more than serendipitiously placed dirt if we wish to be more than a third world country.

  8. tc 8

    It’s working exactly as the nats intended, more gains for speculators without a CGT in place and LVR helps keep actual home buyers out of the market.

    Banks charge bigger interest bills and agents rake in larger commisssions as the cheap asian finance is causing a bidding war in some areas so it’s a win across the nat fan base.

    English must piss himself at how easy this all is with the MSM in their pocket.

    • Nic the NZer 8.2

      The property market depends on new entrants (the first home buyers) flowing into the market to keep going. Its highly unlikely that any policy to level the housing market will not discriminate against first home buyers in some way. The government might have structured the LVR restrictions on a per-property basis to be more fair, and removed exemptions so they had to apply to all loans however. This would have been more reasonable without setting up a structural advantage for existing borrowers (with the extra equity in their property).

      The housing bubble is a classic ponzi game, once prices stop going up its the most recent entrants who lose out (e.g the latest round of first home buyers). They lose because they paid over the odds for an asset which is no-longer appreciating in value rapidly.

      • Tracey 8.2.1

        I have lived in auckland almost all my life. I have been a house owner in central auckland since 1991. House prices have NEVER levelled in that time. My current homecost 540k in late 2001. Leaving aside the leaky home repairs, it has just been valued by council at 1,380,000.

        In 13 years. Auckland is disproportionately attractive as a job centre. Unless migrants are diverted to regions, and why would they be, auckland just keeps growing, and demand for homes continues

        If this government were genuine and consistent they would be piling money into aucklands public transport system, buses, train loops and connections to enable people to drift much farther from the centre where opening up land doesnt remove green spaces from the inner areas.

        Utilising places like pukekohe, waiuku, drury, orewa, as genuine satelites from where people can commute efficiently, time and money.

        • Nic the NZer 8.2.1.1

          Well I do think a lot of your suggestions would be positive developments. Not sure that the government can do that much to actually bring house prices into line however. Its kind of a main-stream economics idea that they should be in line with the economy some how, and it also seems un-realistic to imagine that there are any reasons this should happen automatically. I don’t think that the government can do much to bring prices into level looking at the housing market in isolation.

          One of the underlying reasons for the housing market to stick out is that wages have not been growing in line with productivity. This means that workers need to take on more debt to make the significant purchase of a house, which seems to have contributed to starting a bubble at least, if not pushing it along. There has also been quite low inflation, which means that real returns on capital gains have been higher. Its going to take quite a long time for wages to shift up again however, even if the government is consistently positively contributing to that.

          • Draco T Bastard 8.2.1.1.1

            This means that workers need to take on more debt to make the significant purchase of a house, which seems to have contributed to starting a bubble at least, if not pushing it along.

            More and more workers aren’t, because they can’t, taking on that debt. IMO, I think you’ll find that what’s been pushing up house prices over the last twenty years is the few rich people who are taking the proceeds of greater productivity and putting it into housing.

            Basically, house price inflation is what you get when the accumulation of wealth to the few gets out of control and we got that from cutting taxes on the rich and the destruction of the arbitrage system. We supposedly got inflation under control but in reality it’s just shifted from everything to housing and is now used as a way to get rich quick by those who are already well off.

        • tc 8.2.1.2

          akl is a basket case that needs billions spent.

          We need to develop the potential of rural NZ towns that have basic infrastructure, some are getting fibre (Tokoroa etc) and have existing communities that can be built on and redistribute the population and businesses there.

          This is where the nats deliberate neglect/sabotage of rail can be seen for what it is….naked ideological economic ruin.

    • Colonial Rawshark 8.3

      Good analysis. If you had a six million dollar property portfolio in Auckland 3 years ago, chances are it’s worth about ten million today. $4M in tax free gains over 3 years. Which is more than someone on the median wage earns in 100 years. So everything is working fine.

      • tc 8.3.1

        yup the rich just keep getting richer and the poor according to this govt make bad choices that’s why they are poor.

      • Tracey 8.3.2

        Basically owning rental homes is the biggest tax dodge in the country.

        My son opened a savings account now he is nearly working fulltime. Got $9 in interest of which over $2 went in tax. Labour suggested 15% on capital gain…

        • Craig H 8.3.2.1

          Literally a tax dodge – capital gains are taxable income if that was part of the intent behind making an asset purchase. The number of people who evade tax by failing to declare capital gains is undoubtedly huge, mainly because of the misconception that capital gains aren’t taxable unless you’re a trader.

          Here’s my suggestion – don’t bother with an actual CGT, just tell IRD to make it a compliance focus.

  9. DH 9

    IMO what’s needed in the housing market is a dismantling of the rachet effect and that would, I think, require state intervention.

    Rents and mortgage payments need to be decoupled, presently they’re tied tightly to each other. When rents go up it creates more demand to buy property which naturally pushes up house prices. When house prices go up that increases the demand for rentals which in turn pushes rents up.

    That’s the housing ratchet; rents up a notch, house prices up a notch, rents up the next notch, houses up… and so on ad finitum. Fluctuating interest rates add another ratchet. Interest rates fall; rents don’t fall so the mortgage payments fall against rents and up goes the demand to buy property. Interest rates rise; up go rents. Click, click…click goes the ratchet.

    A practical method of separating the rental from the owner-occupied home is to use investors greed against them. Hit them with a capital gains tax every time they increase their rents. It’s investing 101 that, all other factors being unchanged, a rent increase signals a capital gain so it would very reasonable and fair to tax them on that basis.

    A prime reason you’d use that method is because it would slow down rent increases and seriously restrict the amount investors can borrow against their housing equity. Instead of using inflated values to borrow more money to buy more property they’d have to borrow some to pay the CGT and many would prefer to instead not put rents up.

    I see it as using capitalism to your advantage instead of fighting it. If they want the rent increases, and the inflated property values that go with it, they have to pay tax on their gains. If they don’t want to pay tax they don’t get the rent increase and their property (likely) won’t go up in value. Their own personal level of greed will rule their actions. They can’t complain because no-one would be forcing them to pay tax, the choice is theirs.

    If you have a whole bunch of rental properties with rents held low due to tightarsed investors not wanting to pay tax you’d see a significant decoupling of the rent/house price ratchet. That would give renters the breathing space to save for a deposit if home ownership was their goal.

    CGT doesn’t prevent housing inflation when you apply it to the sale of a property. It has to be imposed while the gains are being made, not when the gains are realised. Labour’s CGT was useless, would only have been a revenue earner and a poor one at that.

    Anyway, that’s my 2c. A pipe dream I know… but it would work.

  10. NZJester 10

    But, But. Hey look over there John said that President Obama might grace us with a visit.
    Move along now nothing to see here.

  11. A Voter 11

    Well aint it Grand Crafarrar farms sold to foreign billionaire
    What were they worth forgot ,20mil or 60 or whatever
    They could have sold them individually to Kiwis but I suspect our ballooning debt to China has got us screwed, so much for Whizz Kid John and his brilliant economic merchant banking genius
    Sellout fraud of the highest order I reckon
    Goodbye SOVEREIGNTY

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