Speaker by Various Artists


House prices and the "Magic Money"

by David Hood

At any one time, some people take out loans to buy houses, some people work paying off mortgages, and some people sell houses, possibly paying off mortgages. And the housing market reflects that behaviour.

At least, that is the traditional model of the housing market. A model that applied in New Zealand, a model that still applies in overseas countries – but not a model that applies any more in New Zealand.

Because I really, really strongly believe that informed debate involves giving people access to the data and explaining your working, I have done two versions of this post. This Public Address version is the easy-to-read one that draws a cloak over the technical steps. The Github version shows the exact computer code used.

Declaring my sources for this right at the outset, the data file used is compiled from the Reserve Bank of New Zealand. The Housing Value (in billions) is available in time units of quarters in the RBNZ housing data. I have converted the billions to millions to make the units consistent with debt. The Household Debt (in millions) comes from the Reserve Bank series C6. As C6 is in time units of months I have converted it to quarters by taking the average debt of the months in the quarter, as this is what the Reserve Bank does in the shorter time series C6a. that is my raw data. I have also added the CPI for normalising the data against from Stats NZ - Infoshare Group: Consumers Price Index - CPI, Table: CPI All Groups for New Zealand (Qrtly-Mar/Jun/Sep/Dec). Arguably the Capital Goods might be better, but it really doesn't change the final results and from a people perspective you need to buy food etc. So that is the data.

People make a graph like this showing the relationship between Debt (red) and Price (blue). Which I have done in Figure 1. People go run linear relationship models on that and conclude it fits wonderfully.

It doesn't.

There are a few things wrong with this graph (the stretchy axes are a bit of a problem), but the main thing is that it has not taken into account the "stuff increasing over time" issue – that both Housing Value and Household Debt are governed by "the amount of money" factors like inflation. There is an entire website of spurious correlations of this type.

Now, because we are not blind monkeys mooshing keyboards, but instead have some understanding of the "stuff increasing over time" issue, we will take the difference between quarters.

This is a very standard approach to things that happen over time, and we have evenly spaced time periods so it all works nicely. From each quarter you subtract the value for the previous one, so that you are left with how much things change by. This lets you compare the amount that things change together, and doesn't have any "over time" issues as they are all the same short block. Making the similar graph similar to the previous one, but this time using the Quarter on Quarter information and locking down the vertical axis we get Figure 2.

We can do a linear regression of these two things, which suggests people getting mortgages are weakly matching money being paid for houses. But even that a bit rubbish because it doesn't take into account the possibility that things have changed over time, and not being a blind monkey it is pretty clear that scale of movements in recent times is much more than earlier times (other sources suggest the pre-2001 pattern held going back through time).

I would also suggest that the upward trajectory since 2008 is not reflected by movements in debt. And further suggest that, as is the case in other countries, if people were buying houses in the traditional model the ratio of increase in value to increase in debt should be relatively constant.

At this point I have satisfied myself "something is up". To get a sense of the overall magnitude in a slightly speculative way, let's look at the cumulative differences.

First, by converting the lot to 2015 dollars based on the CPI. If, hypothetically, the early figures represent an internal economy with the traditional pattern sales are paid for by equity plus borrowing, and that the 90s is representative of that ratio, we can do a linear regression to get that relationship.

Calculating it with a zero intercept, because if there was no money people would not be buying houses, we get an estimate of 2.1915 added house value to added household debt. This gives us around an average 46% equity in the purchase of a house, which in the spectrum of new buyers to older people downsizing seems a credible average. This 2.1915 multiple gives us the expected component of added values which are paid for by people getting mortgages. So what does that mean cumulatively? Well, Figure 3 is what it means.

Keeping in mind that in the early 90s household debt matched house value, and it still does in other countries that are not open to buying from the world, the height of the blue line above the red line is the gain in value (in billions) that cannot be explained by household debt (and does not seem to be coming from any other sector of the economy). I realise I am now back to "stuff increasing over time", which means it is a problem comparing things of different periods, but the CPI was the best correction we have for that.

Because it can be difficult to read heights in a stacked graph, I have separated out the magic money section by itself in Figure 4.

Is all the magic money offshore capital? We just don't know. There is a lack of evidence of it coming from other parts inside the New Zealand economy, and given the hundreds of billions of dollars, a local source would be somewhat obvious. We also know that in other countries, with more internal housing markets, household debt does not just match the pattern of house value, the amounts add up to the same in gains. In New Zealand there is a 300 billion shortfall.

This is why I don't think supply-side solutions are going to do much – the supply-side solutions are couched in terms of supplying the demand from local people, but we have no idea how big the supply would need to grow to deal with the demand from sources invisible to the New Zealand economy.

And only after that demand is satiated will the magic money not be competing with local people wanting to buy houses. And if it is offshore capital, then local buyers are competing with anyone in the world for whom buying a house in New Zealand is a superior choice to buying local property.

Just to pre-empt a few common concerns:

House Sales are not the same thing as Housing Value. True. But based on REINZ data I have seen the value in sales tracks to the same pattern as the total Housing Value which is extracted from Sales, and it is the lack of pattern in Value compared to Debt that is the give-away. Also, in other countries growth in debt does actually match growth in value, so if you are asserting in New Zealand it should not, you should produce some actual evidence for why that would be the case. Even if it isn't actual sales, it is a measure of influence over the market, so for the magic money to be there a house must have been bought. 300 billion of the 800 billion in the past decade is quite an influence.

This doesn't prove it is overseas capital. True. But it isn't coming from mortgages, and given the sheer size of the values, that amount of money being diverted from elsewhere in the economy would show up on something. It has not shown up anywhere I have seen, and I have tested a lot. Once again, if you are asserting that you should bring some actual evidence to the table.

Authority X said it was supply constriction due to RMA restriction. I am sure they did. However, the initial launch point (third quarter 2001) precedes the RMA (and subtaintially precedes the time spent implementing it). But we come back to this: if around $300 billion in the $800 billion in Housing Value gains is not explainable by inside-the-economy debt (it has nothing to do with people, actual immigration is not a very good predictor of house prices) – how many houses do you need to build to satisfy that unknown demand?


Land of the brave little kids

by Rob Salmond

My former colleague Sarah Austen-Smith recently posted some observations from her experience of America. I had an experience last weekend that caused me to think about the same NZ vs US comparison from another perspective: health care.

Of course, a lot has been written about this before. Their system is more than twice as expensive, their system is very bureaucratic, our system delivers better population-level results, and so on.

Our system generally comes out looking pretty good. But those broad comparisons don’t tell the full story.

First, there are things the US health system does better than ours. If you’re really sick, with a rare disorder, you want to be living in the US, not New Zealand. I saw this sharp end of the American medical system first-hand caring for my late daughter Sophie, and it is very impressive.

The US has many of the best specialist doctors and largest, most successful specialised hospital units in the world. The reasons are fairly simple: salaries and scale.

As a general tendency, the larger and more specialised your unit, the better your chances, because the doctors are more likely to have seen lots of cases like yours before. Practice makes perfect and all that.

That’s why those New Zealanders advocating for a South Island Starship hospital are so mistaken. Having two high-complexity children’s hospitals rather than one dilutes our expertise, meaning if your kid gets a rare disease, the doctors you see are less likely to have seen it before. They get less practice, which means the treatment is less perfect.

Yes, South Islanders will travel less time to see their sick kid in the hospital. But it’s more likely their kid will die, too.

I’ve often wondered why New Zealand’s system of escalation for really complex illness goes usually to Australian hospitals first, then to British ones. US hospitals are closer than British ones, and are often better, too, due to scale. Why not send the really complex kids to Australia first, then to the US?

So the US system is better at some big, complex things. How about small things?

This weekend my little Miss 2 presented with an angry rash. Our home medical centre was closed, so I packed Miss 2, Miss 4, and myself off to Wellington urgent care.

I’ve been to urgent care in the US, so I thought I knew what was coming. I packed my computer, DVDs, books, colouring pencils, toys, and food. I expected a four-hour adventure.

I’d made my first visit to American urgent care after picking up a hot charcoal briquette like a drunk dunce. I sat with a burning hand in the waiting room at UCLA. Several people came past with GSW. They got priority. Fair enough. Four hours later I went home, unseen.

I went a few times with Sophie, starting when she was 16 days old. She’d got out of hospital the day before, and promptly developed symptoms the specialists had told us to look out for. She was immune compromised, but it took an hour in the waiting area before we got a room, then four more hours before an overworked junior doctor sent us home, looking out for more of these same symptoms.

Other trips with Sophie got a bit better in terms of treatment – as parental Bolshie-levels rose towards 11 – but no better in terms of efficiency.

On all these occasions, there were complex insurance forms to fill out, and co-pays to pay or co-pays to argue about for months and then not pay.

Last weekend’s Wellington urgent care adventure wasn’t like that. At all. From leaving my house to getting home again was 57 minutes. I filled in one name/address-type form on arrival, then Miss 2 was seen by the nurse within 10 minutes of arriving, then 10 minutes later we saw the doctor. The doctor prescribed some antibiotics straight away, which I got filled in 5 minutes in the pharmacy next door.

No money changed hands.

And, even though some New Zealanders do pay to see the GP, we don’t pay as much as the “free” GP visits included with American health insurance plans, because the plan itself is massively expensive (average cost well over $1,000 a month for a family), and economists generally agree this is mainly money that would have otherwise gone into salary, especially for modest-wage workers.

I think our health system is better than the US’ for most people, but not for all people. But that’s no reason to ignore all lessons from the US, nor a reason to avoid all parts of the US system. Some of our sickest Kiwis need US-level care, and we’ve got the means to give it to them.


Protesting private prisons

by John Palethorpe

On May 2nd the Minister of Corrections, Sam Lotu-Iiga was interviewed on TV3’s The Nation about the opening of the new Wiri prison in South Auckland and its management by Serco.

A few weeks later the UN reported on concerns about the high level of inmate on inmate violence at Mt Eden corrections facility, as well as highlighting the over-representation of Maori within NZ’s prisons.

These percolated, and I wrote a post illustrating just some of the many failings outsourcing to Serco has produced. But last week I realised that maybe writing about it, or tweeting in an increasingly frantic style was not enough. Having attended many protests and demonstrations, I suddenly found myself organising one. The Facebook page for it can be found here.

The protest is, obviously, in response to the shocking details of the mismanagement of Mt Eden, revealed through leaked footage of violent incidents and accounts. There have been further allegations, both from families of injured or deceased inmates and in Parliament from MPs.

This evidence indicates both a troubling culture of violence within the facility and either wilful negligence or deliberate concealment of the facts by Serco. That this information has only come to light through leaks is in line with similar revelations of equally catastrophic mismanagement in other Serco run services in the UK and Australia. And while we’re beginning to talk about Serco, it’s definitely time for some action.

While the Corrections Chief Executive, Ray Smith, has invoked a ‘Step In’ clause to take control of the management of the prison, this further highlights the failures of privatisation. It is public servants who are being transferred from their own place of work in order to solve the problems that Serco have created, only for Serco to retain both the contracts for Mt Eden and the recently opened Wiri facility in South Auckland.

How the disruption of New Zealand’s publicly run prisons and the necessity of an investigation into brutal violence is a ‘cost saving’ is beyond explanation. For example, only 10% of Serco’s fee is performance-related and penalties for failing to effectively manage the prison cannot exceed 10% quarterly or annually. So, for their $30,000,000 a year, are New Zealanders getting the effective service they deserve?

The past week has seen the Minister of Corrections, Peseta Sam Lotu-Iiga, first deny a problem, then admit there might be a problem, then say there is a problem but it’s definitely not his fault and finally the Prime Minister trying to blame Labour for their role in revealing information about Serco’s failings.

The problem for the Government is that if they admit that Serco has failed in New Zealand, like they have in the UK and Australia, it raises serious questions about their competency in managing Wiri as well as excluding them from the mooted outsourcing of mental health and social care services. The issues here should obviously focus upon the appalling conditions within Mt Eden, but also raise serious questions about the alleged benefits of privatising essential public services.

In organising this action I seek to highlight the fallacy of attempting to run an essential, if relatively invisible, public service for profit. The role of corrections is to ensure that those in their care are denied their freedom, not their human rights. It is also to create an environment in which inmates are able to develop the skills and mentality to make a positive contribution to society upon their release.

The privatisation debate is framed by its advocates as the only option, with the cry of “We can’t just do nothing” in response to problems within state run public services. This creates the illusion that privatisation is progressive.

But it’s not progressive to make services more unaccountable and less effective. It’s also not progressive to pay your taxes, expect decent public services but instead fund the profit margin of a British company like Serco. The argument for quality public services where every dollar goes into effective service provision should not be seen as either regressive or radical. It’s just a reasonable expectation.

However, these are my views and mine alone. Others have been fighting for recognition of the problems of public and private prisons for far longer than I have, and it is not right for me to speak for them.

Those attending on Saturday will include family members of those within New Zealand’s prisons, established prison reform and prison abolition campaigners, MPs, activists and many others whose affiliation is simply to ensure that New Zealanders get an effective and humane prison service. There will be many views about the role and existence of prison present, all seeking to have their voices heard but all united in their belief that Serco and its like has no place in profiting from New Zealand’s prisons.

I have spent the last few days talking to different parties across the political spectrum and getting in touch with various interested groups to invite them along. This demonstration comes under no single political banner, because the issue of effective humane prisons as a public service is one which cannot and should not be claimed by one single political party. Public attention is focused both on Serco and the issues of privatisation, which need a serious and open debate. Now is the time to act.

See you Saturday.


I would also like to thank everyone who has given me advice, constructive criticism and support so far. I’ve never organised anything like this before, and the warmth and empathy which has been expressed from so many different people and groups is humbling. And again, see you Saturday.


Too much to swallow on the TPP

by Rob Salmond

As Public Address readers will have seen, Labour has announced it will not support New Zealand joining the Trans-Pacific Partnership Agreement unless it meets five conditions:

  1. Protecting Pharmac
  2. No corporate litigation against NZ law changes
  3. NZ still allowed to restrict land sales to foreigners
  4. Te Tiriti upheld
  5. Meaningful gains for NZ farmers

David Farrar broadly agrees with these conditions, and even wants to add another:

  1. No changes to New Zealand IP laws that would hurt our internet experience.

Here’s my personal take on this: There is no way the TPPA will meet those five or six conditions. No way. That means Labour will be opposing, not supporting, the agreement that makes its way finally out of the smoke-filled room. And I think that is a good thing. Here’s why.

First, New Zealand has no credible bargaining chips on free trade. When we ask another country to make a concession, and they ask “or you’ll do what?,” we have no answer. That’s because New Zealand unilaterally dismantled most of its tariffs and other trade barriers in the 1990s, without asking for anything in return. Who was the author of such a self-defeating, masochistic exercise? Why, none other than MFAT’s trade negotiations surpemo of the time, one Tim Groser.

Now, thanks to Groser and friends, we show up at these negotiations with a long list of things we need, and nothing to trade for them. It’s like showing up naked to a strip poker game, or going to the store with a shopping list but no money. I’ve written academically about this error before.

That means when New Zealand turns up at the TPP and demands the agreement include this thing but exclude this other thing, the rest of the room has no incentive to pay attention. Countries, like people, respond to incentives. No incentive; no response.

Second, the agreement Labour and David Farrar is seeking, with…

  • no extra rights for Big Pharma or other firms harmed by our social legislation;
  • no extra rights for Americans with spare cash to invest globally;
  • no extra rights for American copyright holders;
  • but still with gains for our dairy farmers in the US, harming US farmers;

…is not the slightest bit palatable to the US Senate. If the agreement meets Labour’s bottom lines, it fails the Senate’s. It’s that simple.

Yes, it is possible there will be a TPPA agreement that the Senate can ratify, and that several other countries can ratify, too. But that agreement will not do what Labour needs, meaning Labour will inevitably end up opposing this deal.

I’m ultimately pleased about that, despite being an advocate, in general, of freer trade. That’s because this deal is not ultimately about creating freer trade; it is ultimately about restricting trade. Here’s Paul Krugman on this aspect of the TPPA:

In any case, the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America.

On intellectual property: patents and copyrights are how we reward innovation. But do we need to increase those rewards at consumers’ expense? Big Pharma and Hollywood think so, but you can also see why, for example, Doctors Without Borders is worried that the deal would make medicines unaffordable in developing countries. That’s a serious concern, and it’s one that the pact’s supporters haven’t addressed in any satisfying way.

On dispute settlement: a leaked draft chapter shows that the deal would create a system under which multinational corporations could sue governments over alleged violations of the agreement, and have the cases judged by partially privatized tribunals. Critics like Senator Elizabeth Warren warn that this could compromise the independence of U.S. domestic policy — that these tribunals could, for example, be used to attack and undermine financial reform.

So I’m pretty clear that, given its current position, Labour will oppose the eventual TPPA text. The bigger question is: what will Labour do in government if it passes? Unraveling an agreement like this is massively harder than opposing it in the first place. Sadly, my own guess is that, if National saddles us with an agreement that does undermine our social legislation or our rights to regulate who owns our country, then Labour will be pretty much stuck with it.

Note: While Labour is a client of mine, I have played no part in formulating its position on the TPPA. This post represents my views alone.


The CERA transition that no one wants to talk about

by James Dann

At the end of last month, the government released the draft transition recovery plan, the most important document for the governance of the rebuild since 2011. While CERA was widely expected to wrap up when its powers expire in 2016, this document proposes a new entity, which will take on a number of the roles CERA had, as well as some of the special powers CERA had, until as far out as 2020.

Despite the significance of these proposals - it will require new legislation to go through parliament, something that hasn't happened since the previous bill in 2011 - the public has just 30 days to comment on it. And while they have an extensive communications department - now employing more than 7% of their total staff - CERA is not hosting a single meeting about the proposals. Not. One. Single. Meeting.

Reading the document, there are plenty of admissions that CERA's time is up:

International research shows that, for recovery to be sustainable in the long term, it needs to be ‘owned’ and led by local communities and institutions. Central government leadership and coordination of the recovery, through CERA, was needed in the immediate aftermath of the earthquakes, but the time has come for central government’s role in the recovery of greater Christchurch to evolve.

Yet the suggested new entity is almost a complete rejection of this. There is no ownership from local communities and institutions. The plan puts puts forward a government-controlled entity, with special powers for a further five years. It barely even hints at any alternative structures.

Of the options, a group of us have formed around Option 3+. This option puts control of the new entity back in the hands of the Christchurch City Council, with support from the Crown. We're not saying it's perfect, but of the limited options that we've being presented, it's the best.

If one of the other options is chosen, then the government will continue to loom large over the Council until 2020. That's this council term, the next council term, and the council term after that. If you consider that alongside the decision to extend the reign of the commissioners at ECan until 2019, you can see that there is something of a democratic deficit here in Canterbury.

So what can we do about this? Well, we're been trying. Myself, Barnaby, Ryan and Emma edited a book about the recovery, which came out almost a year ago. This Saturday, we're hosting a "recovery clinic", where people can come down to a pub and talk about city-making. We're going to encourage people to make a submission too. We're running an Option 3+ public meeting next Tuesday at the Physics Room. We'll be explaining what the situation is, what you can do about it and why you should care. 

But this isn't just about people in Christchurch. We know that the rest of the country is totally over hearing about Christchurch. This is the most dangerous time for us now. Apathy from the rest of the country is what will enable the government to assume that they can do whatever they want down here.

Next thing you know, we will have been forced to sell off our productive, strategic assets - the port, airport and the lines company - whilst being hit with the bill for a stadium we can't afford, and roads that the government have squirmed out of paying for. Economists are saying that the rebuild activity has "peaked", and we still have whole city blocks that look like something out of the Balkan conflict.

People here are exhausted. They've been trying to sort their houses, their streets, their jobs and their families for going on five years now. When we get together in the same room, we know that things aren't right, but it's hard to pick one issue as it's difficult to say what is the most wrong.

But this submission process is open to all New Zealanders, and I'm asking for your help. If we can get thousands of submissions flowing in on these proposals, then the government and the Minister will know that this isn't acceptable. It's a long shot, but given how disenfranchised we've become from the powers who control this city, it's our best shot.

Submissions close at 5pm, next Thursday (the 30th of July). You can submit via the form on the CERA website, their Facebook page, via email or snail mail.