Solving the Housing Crisis – Facts or Ideology?

Written By: - Date published: 10:09 am, January 26th, 2015 - 63 comments
Categories: Economy, monetary policy - Tags:

The scale of the housing affordability crisis, particularly in Auckland, is now unmistakable. Not only do individual families suffer as home ownership increasingly moves beyond their reach, but the impact on social cohesion and on the fair distribution of resources is becoming more and more damaging.

The rising cost of buying a house is without doubt the most powerful driver of inequality in our country. Those who already own their own homes can watch the rise and rise in house prices with equanimity – even satisfaction. They can comfort themselves with the knowledge that the increased price they would have to pay for a new house will be offset by the rise in value of their existing house and that, in the meantime, their wealth will – at least on paper – grow week by week without any effort of their own.

Those who are not property-owners, however, can only watch helplessly as the inexorable rise in house prices leaves them further and further behind. They would feel an even greater sense of despair if they realised that, because the rate of increase in house prices far exceeds any percentage growth in national wealth, it does not represent real resources, and can therefore only come from a net transfer of wealth from non-home-owners in favour of those who own their own homes.

Little wonder, then, that our policy-makers have at last been forced to confront the issue. Sadly, though, their response reflects political and ideological preoccupations, rather than the real reasons for the crisis.

The government has seized the chance to offer yet another goodie to their friends in business. The Resource Management Act has long been a serious bugbear for property developers. Life would be so much simpler for them if they did not have to worry about environmental issues and the interests of neighbours. The government has duly obliged. The growth in house prices, they discover, is all the fault of the RMA and, for good measure, of local government bureaucracy, and they have promised action to discipline both of these supposed culprits.

This diagnosis is also consistent with the government’s ideological preferences. The housing market in Auckland is obviously misbehaving. Since the market is, according to neo-classical economics, by definition infallible, its malfunctioning must be the result of “rigidities” that must be removed so as to allow supply to rise to meet demand.

But this is completely to ignore the fact that the housing market is not like any other market. Not only do houses maintain their value as units of accommodation over a long period of time, but in what other market is it possible for those on ordinary incomes to meet the purchase price by borrowing many times their annual income? And where else do the lenders meet any increase in the purchase price by simply offering to lend more?

And since we have now had confirmation from the Bank of England that bank lending on mortgage is created out of nothing (and that the notion that banks lend only what others lend to them is entirely false), we can now begin to see where the pressures for asset inflation in the housing market really come from.

Bank credit-creation for the purposes of lending on mortgage is in fact the single greatest factor in increasing the money supply and is therefore the source of the most significant inflationary pressure in our economy. And since it is not matched in any way by a corresponding growth in real resources, it is not surprising that it manifests itself as asset inflation (or rapidly rising house prices) in the very market into which it is almost entirely directed.

The most reliable statistics for bank lending on mortgage go back only as far 1998. In the period 1998 to 2014, the value of such lending rose fourfold, from $52 billion to $196 billion. Can we be surprised that Auckland house prices have risen over that same period at the same rate – that is, they are now four times higher than in 1998.

The Auckland housing market, in other words, is a function of the cumulative effects of that $196 billion of new bank-created money. Where else could it have gone? And the herd mentality that is typical of markets means that rising asset values attract speculators and investors seeking capital gains, thereby making the problem worse.

The Auckland housing market survives at its present level only for as long as the banks will go on lending. Each rise in prices in the Auckland housing market requires more lending to sustain it. Each new loan helps to create a new price structure which then provides the basis for yet more lending. But if, as some are beginning to realise, the bubble should burst, it is not just the housing market but the banks themselves that would be at risk.

To its credit, our own Reserve Bank is one of the few central banks to begin to perceive the truth about the housing market – hence its initial and timid attempt through tighter loan-to-value ratios to restrain bank lending for housing purposes.

There may well be measures – not just in housing but in areas such as transport – that could usefully be adopted to better align supply and demand in the Auckland housing market. But until the ideologues understand what is really driving the upwards price spiral, there is no real solution in sight.

Bryan Gould

26 January 2015

 

63 comments on “Solving the Housing Crisis – Facts or Ideology? ”

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  1. philj 1
    26 January 2015 at 11:03 am

    The high cost of building materials seems to have been parked by this Government. Apparently, RMA is the problem! If only it was so straight forward. Our building material costs ( timber,concrete etc ) are way higher than Oz or USA. The supliers, Placemakers, Carters, M10 etc. have the market sown up.

    • Draco T Bastard 1.1
      26 January 2015 at 2:00 pm

      I think you’ll find that there’s less suppliers than that. In fact, I’m pretty sure it’s close to a duopoly of Fletchers and Carters.

      • Tracey 1.1.1
        26 January 2015 at 3:55 pm

        placemakers is the retail seperation for fletchers to the market to reduce their liability in negligence but still flog their product with impugnity.

    • aerobubble 1.2
      27 January 2015 at 3:20 pm

      A depleted market requires forced systems to function efficiently.
      A sustainable market, providing its own functions, on tap, ready,
      is a abundant market. Neoliberals want depleted markets, and
      then they want gobernment to butt out, so leaving the monopolistic
      market we have today. Government can force the market back to
      efficiency temporarily to cover over the exploitative avarice gone
      awry, but until governments set up to create abundance true
      fre markets and freedom for citizens will never appear.
      We live at the behest of global elites, a global elite shrinking in
      number fast, u til only a few will rule us like the Maya elite,
      cannibalizing everything to stay in power. You see thats what
      fascism is, it takes the resources of the state and cannibalizes
      society, first they target the outliers, then the opposition, then
      they come for you. Germany was destroyed by the nazis.

      • aerobubble 1.2.1
        27 January 2015 at 3:39 pm

        Take media, a depleted media environment needed government financial support to make up for the lack of a internet, then government created the abundant market we see today, not the private sector. Much of the disruptive innovation today is directly linked to the government creation of the internet. Abundance produces free markets. You see neolibs dont finish the sentence, they say government should get out of the the way of a free market, yes! by creating, imposing govt, not by reducing and shrinking government. Good government naturally becomes small. Bad government shrinks and leaves a hoepless mess of monopolistic and elitist practices. Take jounralism, journalist still want to work with big media, instead of growing local markets and disrupting the big dinosaurs.

        The US is not a free society, liberty for a price is not liberty. The US doesnot believe in freedom, when a citizen cant get cheap health care, where serfdom is the price of housing, where the food is so crap that any free person could not hold a piece of junk food in one hand and say the US is a free country and not look like the moron they are.
        Freedom is abundance, the US was free society.

  2. saveNZ 2
    26 January 2015 at 11:41 am

    Agree with most of the article. The RMA is a not just a smokescreen but actually is being used in a particularly dirty way to claim more affordable housing by reducing ‘standards’ so they are cheaper. This will not work at all! In fact the RMA is already being used the opposite way to make it hard to challenge lazy, incompetent and poor decisions and polluters.

    Poor people can not challenge richer neighbours or corporations for their actions. The public can’t easily challenge lazy decisions like the Pohutakawa 6. In the case of the Pohutakawa 6, I agree with Transportblog,

    The second issue is that the project itself is a dog. Even if there weren’t any trees being removed, what Auckland Transport is proposing to do here it terrible, dangerous and belongs a 1960s traffic engineering handbook, rather than a redesigned intersection of the 21st century.

    As well as ridiculous outdated transport decisions, rich people are oppressing their neighbours by taking away their amenity for their gain. Houses are getting oversized and taking away affordability as yet another house is created into the multimillion dollar bracket. The idea this is for affordability is so laughable – I suggest those lefties fooled by this discourse, look around Auckland. Development is everywhere and houses are getting bigger. More costly and longer to build, more expensive to run and more expensive to rent. As soon as one enormous house breaks the price record for the street, more ordinary people decide to try some amateur speculation and create another McMansion. The whole character of an area is being changed and families locked out.

    Feel you can save some $$ from not doing geo tech reports, due diligence, hiring a registered architect when you build a house? No problem – you can already. Leaky building is well behind the National government and they are ready to relax those standards and guidelines once more. (In fact they never changed but they are encouraging the council to throw away guidelines yet again to look busy, not to mention all the secret deals between council and barristers over the ages). By the way this is now, so I hate to think how much more relaxing their possibly could be?

    So just looking at the above we are facing a throw back to the 1960’s transport with leaky buildings, and Spec houses for an unknown investor. And that’s just in Auckland, think about the pristine environment about to be destroyed under Simple Smith’s reforms.

    The RMA should be STRENGTHENED to increase standards of living and amenity, not weakened. The council needs to be held more to account for the terrible standards they have allowed in Auckland and are now encouraging to be weakened further to created ghettos between rich and poor.

    • Draco T Bastard 2.1
      26 January 2015 at 2:07 pm

      The RMA is a not just a smokescreen but actually is being used in a particularly dirty way to claim more affordable housing by reducing ‘standards’ so they are cheaper. This will not work at all!

      No it won’t. Or, to be more precise, what we’ll get is maybe slightly cheaper housing (Nothing worth mentioning and probably not there at all) and higher ongoing living costs. The higher ongoing living costs do, of course, boost the profits for the rich over any possible savings in house prices.

      The RMA should be STRENGTHENED to increase standards of living and amenity, not weakened.

      The government should be setting standards that are difficult to meet because that forces R&D and innovation. Setting the standards low means that everything can keep going with outdated and inefficient standards while profits can get boosted because no R&D or innovation is needed.

  3. aaron 3
    26 January 2015 at 12:10 pm

    The middle class needs to change it’s attitude to family wealth: It used to be the kids were told not to squabble over the family wealth and to fend for themselves but I’ve told my mother not to waste her money because her grand children are going to need it if they’re ever going to own their own home.

    Of course the retirement-industrial complex has risen up to relieve the baby boomers of their wealth as they live out their last years in style and luxury but if you talk to people from old wealthy families (or read their thoughts on the internet which is how I did it 🙂 they’ll say their wealth belongs to the family and that they’re expected to maintain it for future generations.

    How we got to the point where the middle class fritter away their money with reverse mortgages so that they can continue to keep up with the Jones’s is anybody’s guess. Of course they’ll say they earned it but the reason they did so well is because of the previous generation and it’s social spending programs. It’s not for nothing that that generation is known as the Builders.

    Generation X and Y should known as the Busted Generations – as in: Build, Boom, Bust.

  4. Foreign waka 4
    26 January 2015 at 12:17 pm

    It is a misconception that those who “own” a home, or shall we say mortgage are happy with these ballooning values. Far from it! One reason is the ever increasing costs such as council rates and the other any increase in interest rates to hold the explosive boom. Both affect the average person tremendously and bites big time in their day to day living costs. I don’t even want to mention pensioners who are often asset rich and cash poor. The first expenditure to go is costs relating to health, which in turn creates another issue. That of chronic illness that is avoidable if not in the predicament as above.
    What an envy society we have. “If I have nothing neither will you” kind a thing. What really needs to be looked at are businesses such as these- article in the NZ Herald. Web: business/news/article.cfm?c_id=3&objectid=11391731

    Farms are being sold at the cheapest prices anywhere in the world, we are talking about food producing Agra land. What is wrong with the people of this country, do they not see the forest for the trees?

    • One Anonymous Bloke 4.1
      26 January 2015 at 12:25 pm

      🙄

      “The people are crying out for affordable housing!”

      “Why don’t they just buy farms?”

      • Foreign Waka 4.1.1
        26 January 2015 at 1:28 pm

        This is an ignorant and mischievous reply. And may I point out not worthy of having a conversation about one of the major issues facing this country.

        • One Anonymous Bloke 4.1.1.1
          26 January 2015 at 1:49 pm

          Ok, not my best work.

          I don’t think we’ll tackle the housing crisis without tackling the wages crisis, and we won’t tackle the wages crisis until workers have more bargaining power.

          • Foreign waka 4.1.1.1.1
            26 January 2015 at 2:51 pm

            All good, just feel a bit touchy when people with very little are not getting their fair share. Yes, wages are definitely an issue, to solve this needs some good and honest people on the top. When did NZ have had this experience last? I personally always held Mr Cullen in very high regard.

        • Westiechick 4.1.1.2
          26 January 2015 at 8:20 pm

          I voted to fix this. It was a Labour policy called Kiwibuild. Affordable housing built in bulk by the Government because developers won’t (why should they?). Will be voting for it again in 2017 and hoping more will be with me.

          • ghostwhowalksnz 4.1.1.2.1
            27 January 2015 at 10:00 am

            Its not the housing thats a problem , its the land prices.

            Trouble is the speculators will by hook or by crook get hold of the houses within a few years.

            Whatever happened to covenants, they are still around to make sure expensive houses are built on the land.

            Why cant they put in a covenant to say owner occupiers only.
            Ive heard the Cornwall park Trust only allows owner occupiers, but thats a different class of property

    • Lanthanide 4.2
      26 January 2015 at 12:55 pm

      “Far from it! One reason is the ever increasing costs such as council rates ”

      Council rates are set for the year ahead and then this is divided out across the households in the city. The mechanism to apportion the rates depends on your house value – but if all houses are rising in value at the same rate, there will be no difference in the amount of rates you pay.

      For example, say the council needs to raise $50M in rates and there are 10 houses in the city, and each house is valued at $100k. Each house would have to pay $5M in rates for that year.

      Then next year, the rates stay at $50M but the houses have all increased in value from $100k to $200k. Still the rates required is $50M, and the number of houses haven’t changed (even though they have all doubled in value), so the rates stays the same at $5M each.

      The causes of rates increases are:
      1. The council needs more money to operate, due to inflation, debt payments and new works. This is by far the largest aspect of rates increases.
      2. Your house has gone up proportionally more in value than others have, so you pay a proportionally higher share of the total rates bill than you otherwise would have. The converse is true however – if your house has risen less in value than the average, you’ll pay a smaller share of the rates than you would have.

      • Foreign Waka 4.2.1
        26 January 2015 at 1:34 pm

        As far as I am being made aware through the Council City notices, rates are based on house and land values. If they increase, so do the rates. This may or may not be the best method. But I also understand that there are voices asking for the actual work done and planned, costs calculated and then shared. Mind you under the democratic process there wont be any Convention centers or extraordinary high salaries that the ordinary punter will never, ever see in their life time. Let alone any expansion on the theme by implementing a “super city” concept.

        • One Anonymous Bloke 4.2.1.1
          26 January 2015 at 2:00 pm

          Lanth is right. Council sets a budget and levies rates to meet it.

          Last year, Stuff reported that 118,000 Auckland households got a rates decrease.

          • Foreign waka 4.2.1.1.1
            26 January 2015 at 3:12 pm

            “Rates are based on your property’s capital value, land use and whether it receives targeted rates, a rates remission or is non-rateable”

            “Your rates are based on a valuation of the property you own. If you disagree with your valuation, you may be able to lodge an objection”

            In Millions:
            Arts and cultural activities total $ 86.36
            Building and development control total
            $ 64.41
            City promotions and business
            support total $ 31.46

            Community support total $ 184.63 (Mostly library’s, no housing)
            Conservation attractions total $ 42.03
            Gardens, beaches and green
            open spaces total $ 195.32
            Māori and Mana Whenua
            partnerships total $ 1.64
            Public health and safety total $ 56.09

            Recreation promotion and
            support total
            $ 183.46 (most for swimming pools)
            Transport total $ 203.31 (hahahahahahaha)
            Urban planning, heritage and
            public spaces development total $ 52.75
            Waste reduction and energy
            conservation total $ 3.28
            Wastewater total $ 352.93
            Water total $ 434.69
            Storm water total $ 313.03

            City Council webpage, services/rates-and-property/rates/rates-explained/how-rates-are-calculated

            There are a lot of water charges, how many times are administration double ups?

            So the total cost of this is 2.3 bil. netted out to rate payers but farms, commercial landholdings pumping water out of the ground will have a far lower bill due to waste water not being a factor. Considering that farming is polluting the rivers an affront to anyone. Not to mention the none rateable areas….
            In any case – surprise! it is the working people who have to foot the bill.

            • Foreign waka 4.2.1.1.1.1
              26 January 2015 at 3:13 pm

              This is Wellington Council – Auckland must be a different nightmare.

            • One Anonymous Bloke 4.2.1.1.1.2
              26 January 2015 at 3:17 pm

              Your assertion ( If they increase, so do the rates.) is that rates inflation matches house price inflation. It doesn’t, unless those 118,000 houses decreased in value.

              • Foreign waka …
                26 January 2015 at 4:32 pm

                So how do you explain an increase of an average of 3% each year and the notice inexplicably states that this is linked on property values? And no matter what my income it certainly will never increase at that level. So from my perspective, it does look like it. Considering that the wider Wellington region wants to go “Super City” – this will lead to the same issue Auckland faces, an affordability crisis. How many city council staff can a region afford? And why does the person paying has those peoples hands in their pocket for more?
                This is just another way to create jobs for mates.

                • One Anonymous Bloke …
                  26 January 2015 at 4:39 pm

                  So Council’s budget has increased by ~3% a year. That could easily be explained by a combination of:

                  1. Inflation.
                  2. Population growth.

                  What has the annual property market inflation been?

                  • Foreign Waka …
                    26 January 2015 at 5:05 pm

                    Value Decreased by 0.7%, Rates increased by 5% in my particular case for the year ending June 2014.

                    Council statement:

                    Please note that the information shown below refers to the September 2013 revaluation which is current as at today’s date until the next revaluation which takes place in September 2016. The new property values won’t be used to assess the rates until 2014/2015. Even then, a decrease in the value of your property won’t automatically mean a reduced rates bill. The key factor will be whether your property value has increased more than the average, or less than the average.

                    Yes, we are being taken to the cleaners no doubt about it.

                    • One Anonymous Bloke …
                      26 January 2015 at 5:09 pm

                      So, which one of the factors I mentioned do you think is wrong? Do you accept that population growth and inflation impact on Auckland’s budget at all?

                    • Foreign waka …
                      26 January 2015 at 6:34 pm

                      to OAB, either you purposely overlook the essence of my argument or you actually did not seem to look for a conversation but rather a case argument for the council.
                      1/I have shown you a case for the Wellington area
                      2/Auckland has now the super council and has to be content to pay super rates. Yes, inflation plays a role, and no they don’t need to pursue every pet project there is.
                      Increased population and housing should at a certain expansion degree actually decrease costs as the assets rise and the supply of services are hooked onto existing systems.

                      Are you employed by the council? It would explain your defense to get the general public to pay, pay, pay. Just to make sure that the wages can rise, rise rise.

                      Since you removed the reply button, it could be the case but alas I don’t know. Just surprised that a left leaning forum pleads for more charges to be dished out.

                    • One Anonymous Bloke …
                      26 January 2015 at 8:32 pm

                      I am not now, nor have I ever been, employed in the public sector.

                      All I’m saying is that any Council’s costs increase on an annual basis due to population growth (if any) and inflation. Sure there are economies of scale, and you have to spend more money to get them.

                      You cited an 3% growth in the rates take (if this isn’t the essence of your argument please help), which seems to me could be due to those factors. It certainly might also be driven by extravagance, You’ve failed to show that though.

                      I think it’s… odd that you agree that wages need to go up then rail at wages going up.

                      People on a fixed income are often eligible for rates rebates. Sometimes elders are too proud to claim them. This is fertile ground for vague grumbling.

                  • Naturesong …
                    26 January 2015 at 5:07 pm

                    I live in Auckland, out west.

                    In the last 3 years my house’s CV (upon which my rates are calculated) increased by 37%.

                    In the last 3 years my rates have increased about 7% or 8% (in total).

                    Lanth is correct when he (or she, I’m not sure) asserted: “Council rates are set for the year ahead and then this is divided out across the households in the city. The mechanism to apportion the rates depends on your house value – but if all houses are rising in value at the same rate, there will be no difference in the amount of rates you pay.”

                    Also, I used to work for one of the contractors involved in billing and of ARC rates and the calculations did not change when the super city was created.

                    • Molly …
                      27 January 2015 at 7:53 am

                      “Also, I used to work for one of the contractors involved in billing and of ARC rates and the calculations did not change when the super city was created.”

                      IIRC, all the district rates calculations stayed as they were for the first term of the newly created Auckland Council. About three years ago, all these different rates schemes were brought into alignment. Every Auckland ratepayer, should now be under the same rate calculation now.

    • Murray Rawshark 4.3
      26 January 2015 at 6:48 pm

      Here’s the full link: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11391731

      It gives me the shits when I see the selling off of the country presented as investment. If it’s investment in anything, it’s in banking profits.

  5. Murray Simmonds 5
    26 January 2015 at 12:33 pm

    “Bank credit-creation for the purposes of lending on mortgage is in fact the single greatest factor in increasing the money supply and is therefore the source of the most significant inflationary pressure in our economy. ”

    Congratulations. You have discovered what was published in the Article “Banking vs Democracy” first published in February 2012 by Andrew Jackson and Ben Dyson.

    https://www.positivemoney.org/wp-content/uploads/2012/06/Banking_Vs_Democracy_Web.pdf

    I still maintain its a very significant article that should be on the reading list of anyone who is serious about economic change.

    • Tracey 5.1
      26 January 2015 at 4:00 pm

      funny how if you propose creating money to solve a cou trys economic problems you get called a looney. banks have been creating money that didnt exist to facilitate private wealth accumulation and that is BRILLIANT. apparently.

    • Colonial Rawshark 5.2
      26 January 2015 at 4:13 pm

      Bryan Gould has scored a direct hit here, talking directly at last about the creation of money ‘out of thin air’ via the supply of bank credit to consumers and home buyers.

    • ghostwhowalksnz 5.3
      27 January 2015 at 10:06 am

      If the banks have ‘created the money’, why would they have bank depositors, term deposits and they also borrow on overseas or local money markets ( 90 day etc)

      Can you explain whey would a domestic bank borrow money ( and pay interest) when you say they ‘create it’

      You cant of course explain it. The truth is the bank makes money on the difference between what it pays in interest ( short term) and what it receives in interest ( long term)

  6. Grim 6
    26 January 2015 at 2:24 pm

    Double all wages, half the exchange rate, impose a tariff of 100% on all exports excluding the wage component. Then adjust the measure of inflation (CPI) to include a housing component.

    solved.

    Implemented correctly the only change is the ratio of wages to resources and fixed assets in the local economy, exports remain affordable internationally, raw resources don’t suddenly become cheap international, but do internally.

    Services will become more expensive vs materials, which is how it was back when things were good.

    The drive to a low wage economy is and has always been the issue. slaves and masters.

    • Colonial Rawshark 6.1
      26 January 2015 at 4:15 pm

      It’s customary to slap a tariff on other countries imports into NZ, not a tariff on our own exports out of NZ…?

  7. Colonial Rawshark 7
    26 January 2015 at 4:17 pm

    It seems bleeding obvious, but as usual none of our political parties have got the guts to say it: you can’t fit 1/3 of the country’s population on 0.3% of the land area, and not have fucked up, unsustainable, expensive consequences.

    Just saying.

    • Sacha 7.1
      26 January 2015 at 5:40 pm

      Just ask Singapore. Density pays if the economy is geared for high-value enterprises.

      Of course if we’re not confident enough to back ourselves, let’s double down on suburban sprawl, growing milk powder and casual McJobs serving tourists for foreign owners.

      Which future?

      • Colonial Rawshark 7.1.1
        26 January 2015 at 5:59 pm

        Singapore believes in a strong, gutsy, centrally directed economy willing to invest big money where its mouth is. Their politicians and bureaucrats never swallowed the neoliberal pill like NZ did.

        • Tracey 7.1.1.1
          26 January 2015 at 7:30 pm

          and no one is poor or poorly paid…

          • Mike S 7.1.1.1.1
            26 January 2015 at 11:05 pm

            And it doesn’t have the highest rate of inequality amongst developed nations and it doesn’t have the highest proportion of poor people amongst developed nations or a poverty rate of 26% and climbing fast. Nor does it have the lowest (by a long way) government spending as % of GDP of all developed nations…..

            Yea, Singapore is great…

  8. Karen 8
    26 January 2015 at 4:26 pm

    A few ideas:
    1. Build many thousands of new state houses and allow people to get a state loan to buy them when their circumstances allow. Replace each one that is sold.
    2. Instigate Labour’s Kiwibuild policy.
    3. Improve tenancy rights for rentals so that landlords cannot sell the property unoccupied if there are sitting tenants.
    4. Make landords responsible for ensuring rentals are well insulated and maintained
    5. Do not allow non-residents to buy houses.
    6. Investigate the cost of building materials to find out why these cost so much more than in Australia, UK or USA.

  9. Saarbo 9
    26 January 2015 at 4:39 pm

    Maybe someone can help me,

    If this is the case:

    And since we have now had confirmation from the Bank of England that bank lending on mortgage is created out of nothing

    then I cant understand how this can happen:

    But if, as some are beginning to realise, the bubble should burst, it is not just the housing market but the banks themselves that would be at risk.

    Because if the money is created from nothing, then a bubble burst wont actually hurt the bank, even if it cant recoup its loans, because there is no such thing as depositors doing a run on the money.

    Where is my thinking going wrong?

    Excellent post by the way!

    • mikesh 9.1
      27 January 2015 at 9:15 am

      If a borrower doesn’t repay his loan then he has, in effect, gained at someone else’s expense. That someone can only be the bank.

  10. disturbed 10
    26 January 2015 at 5:11 pm

    CRS said brilliantly,

    “Bryan Gould has scored a direct hit here, talking directly at last about the creation of money ‘out of thin air’ via the supply of bank credit to consumers and home buyers.”

    Yes a paper thin economy that will crumble when the market value gets unbearable and the global commodity market sinks again.

    No Productivity generation so pop goes the economy.
    Happens about every 7-8 yrs.’ or so cycle.

    In Toronto in 1985 the market heated up and house prices rose markedly then in 1991 I saw when it hit there same as Auckland then 1992 and a big bang happened as house slid as prices went down over 30% in a year, and a third of the Toronto housing was put up for mortgagee sales.

    It will happen here. 1992, 2001, 2008, 2015-16.

    • Colonial Rawshark 10.1
      26 January 2015 at 6:32 pm

      Chances are in 2017, the election campaign will be run in a year where NZ is in significant economic distress. Will Labour have a true alternative vision for the nation, or just variations on the neoclassical framework.

      • Descendant Of Sssmith 10.1.1
        27 January 2015 at 6:40 am

        Will Labour have a true alternative vision for the nation,

        No.

        or just variations on the neoclassical framework.

        yes

  11. Jenny Kirk 11
    26 January 2015 at 5:14 pm

    Good article by Bryan Gould, but he’s left out a significant factor in the Auckland housing market – that is, the buy-up of residential homes by non-NZers using cheap overseas finance. See this story about Chinese people getting ready to target the NZ (Auckland) housing market in today’s Herald.
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11391731

    • Colonial Rawshark 11.1
      26 January 2015 at 5:20 pm

      Yes indeed, in the case of foreigners it is cheap foreign bank credit pushing money into the NZ real estate system instead of NZ (Australian) bank credit.

    • Herodotus 11.2
      26 January 2015 at 5:37 pm

      If there are overseas people purchasing properties, then they are trading in property, so tax should be paid on all profits. But unfortunately the ird have not been seen to be proactive in this area. Should the legislation be either ambiguous or the courts interpretation display short comings in it, them IMO the ird should test this out in court, and if they fail report back to their minister ( p.dunn) as to why they failed and what charges are required.
      To change investor behaviour IMO one of 2 these need to be acted on. Be proactive and manage the amount of debt that is a result of property investment or reactive and with the use of taxation make property investment undesirable. For offshore investors the use of taxation as a disincentive eg stamp duty( non deductible expense ) + tax profits.

      • mikesh 11.2.1
        27 January 2015 at 9:28 am

        “If there are overseas people purchasing properties, then they are trading in property,”

        Not necessarily. They may be purchasing to let; or even to live in themselves.

  12. Visubversaviper 12
    26 January 2015 at 8:50 pm

    Anybody who wants to see the actual effect of Asian investment in the Auckland Property market should take a Sunday drive to Albany and visit Golden Morning Drive. The very name is a “dog whistle” to Asian buyers, the houses are all the same sort of design, and most have 5/6 bedrooms and the same number of bathrooms. They all maximise the building envelope, except where a developer buys 2/3 sites and signs off all the inter-boundary infringements. They are crammed onto 500/600m2 of land and do not have a single square centimetre more green space than they are required to have. You get the impression that left alone, they would concrete up the whole site. I hate to think what it will be like in 20 years.

    • One Anonymous Bloke 12.1
      26 January 2015 at 8:55 pm

      I don’t like your racist tripe; it isn’t so much subversive as hateful and demeaning.

      Speaking of dogwhistles, what country is “Asia”?

    • Tracey 12.2
      27 January 2015 at 1:30 pm

      you are describing the raison d’etre of developers (most of whom are white in my experience) not the purchasers

  13. Chooky 13
    27 January 2015 at 8:03 am

    too much immigration…too much foreign buy up….too much depleting of State housing stocks…..this is an artificially created scarcity by John Key Nact and mates…..and it creates higher prices ….. New Zealanders are the losers

    • vto 13.1
      27 January 2015 at 8:11 am

      But how can we be losers? We now have even bigger mortgages – isn’t that a good thing that indicates how rich we are?

  14. ghostwhowalksnz 14
    27 January 2015 at 10:15 am

    We could have a ‘land tax’ on non resident landowners of residential land ( or earmarked for residential)

    The sale of housing could be more clearly bought under the tax system. There should be a period that is clearly defined to cover fast sale for speculation. At least 18 months with a few exemptions, otherwise the increase is taxed at normal market rates

    Often houses are bought and sold quickly by real estate agents who can use their skills to pay under market value to older owners who arent aware how fast the market moves. A quick $50 grand can be made for a sharp operator ( tax free if they are careful)

  15. Grim 15
    27 January 2015 at 12:47 pm

    ****if your wages increase by 2% and house prices increase by 5%******

    Any “solutions” discussed above that don’t address this are worthless.

    The opposition have framed the debate, if you continue to look for solutions within that framework at best you may find a temporary fix, but more than likely just a new layer of regulation that those in positions of power will be able to exploit at the expense of the less fortunate.

  16. les 16
    27 January 2015 at 2:47 pm

    Colin Craigs ‘use it or lose it’ policy toward developers sitting on land had merit.It certainly needs alot more than tweaking the RMA to address this problem of house prices.The govts feeble no reliable data available re foreign purchasers is ludicrous.

  17. MrSmith 17
    27 January 2015 at 4:07 pm

    We can only hope that the next time the banks find themselves going cap in hand to the government for a guarantee, the government of the day have the backbone to nationalise the lot of them.

    And on another subject, it never ceases to amaze me that radionz continue to go to the banks economists for comment on the state of the economy, talk about asking the lunatic’s running the asylum how things are going!

  18. linda 18
    27 January 2015 at 6:26 pm

    new Zealand is heading for a melt down in housing market the current path is so unsustainable as to be a bad joke that is destroying our communities and causing massive indebtedness with all associated social costs bring on the crash because we need one !