IMHO low interest rates are the single biggest cause of the increase in property values.
Could be. But other factors could be nearly as big as low interest rates. To think we can fix things only with interest rates because they are strongest is akin to saying you can fix my swimming by just working on my right arm because it’s stronger than my left one. Actually, you want to work on the left, and also the legs (despite a far smaller contribution each), and also look at other refinements, like abdominal tension, breath control, shaving your chest, etc.
I say all that without even accepting the dominance of interest rates. If we somehow proved that foreign investment were the biggest lever, that wouldn’t mean that we should stop worrying about interest rates either.
The way I see it, any time there’s any control we could use to tweak the economy, we should consciously aim to have it in the arsenal for use, even if we don’t always use it. That makes our system less fragile. It takes pressure off the other controls. We design vehicles to go backwards and forwards, even though they could get to most of the same places by just going forwards and steering. It’s just way less easy, and can get completely stuck. Let’s not design our economy like a car with only one gear and a wheel that can only be turned in one direction, because it’s conceptually purer. Let’s design it with maximum functionality, much of it completely redundant (until the day we need it – like our ABS on that one wet day some idiot crosses the centerline at us).
I was wondering whether changes in the amount of deposit required might influence things. If all of a sudden people need a 25% deposit rather than a 5% deposit (or whatever you could get away with in 2007), that might show up as lower levels of debt vs housing value? Or is that small potatoes?
That already happened, didn't it? LVRs were changed. David, did you notice it affecting debt/value ratios?
What bemuses me is that people seem weirdly resistant to that idea.
Word. There's two main hypotheses here:
1. Unusual foreign demand is driving up prices in Auckland
2. Collective local lunacy has gripped Auckland
I don't see 2 as any kind of null hypothesis. Both hypotheses say "there's something going on". The null hypothesis is that there's nothing going on. That one is already clearly rejected in the way, way out of normal growth in Auckland prices.
You have to actually have the strange ideological view that some economists seem to have that money does not exist, and everything works as a perfectly balanced bartering system to think that 2 would be a case of business as usual.
Restricting foreign investment is a tool you might consider using, but I suspect that if you can keep price growth down other ways then it simply won’t be needed – why would anyone who doesn’t want to live here want to invest in an asset whose value grows slower than wages?
Well you might have other reasons than price growth to want to live here. Like ... living here. But you're predicating this on foreign investment NOT being a big factor in price growth, saying we got it under control some other how. That other how might be really, really straining to keep prices down if foreign investment IS a driver. It could cost NZ a lot. We'd be paying to build houses just to keep the prices low so that foreign investors (after nothing more than money) would not be attracted to it? Or, maybe simpler - don't let them do it so easily. Even better again - let them build the houses themselves. Then they drive the prices down. Definitely worth thinking about.
We know that housing prices are rising dramatically, and we can argue all day about why that is (and I’m sticking with “Auckland’s run out of all the easy places to add a dwelling” until I see good evidence that it’s not the case);
I don’t think you’ll find such evidence, because, as you say price is a function of both supply and demand. So you can always blame both. I can’t even imagine what evidence there ever could be that would contradict “Auckland’s run out of all the easy places to add a dwelling”, without factoring in the demand side of the question. How many dwellings do we need? Until you can answer that, the statement is somewhat meaningless, and thus impossible to contradict. If we only need 1 new dwelling per century, then we’re far from having run out. If we need another hundred thousand houses per month, then yup, we’re out, and prices will skyrocket, but one could perhaps say that the need itself is the problem, not the number that we’re predictably failing to make.
Perhaps we could look at it another way: Maybe if instead of talking about how much supply we need for our demand, or how much demand we could curtail to fit with our supply, we talk instead about how fast we can accept prices increasing. Then we can aim to work on both of the factors to keep that growth to an acceptable range. I’d suggest that it should not be faster than wage and salary growth or the wealth gap can only widen.
Then we don’t have to have these futile discussions about which cause is most important. Instead we acknowledge that we should be both increasing supply and controlling demand, and then we do both at the same time. With variable levers so that we can get the balance right – some growth, but not too much growth.
Personally I think it should grow slower than wages and salaries to decrease the wealth gap.
The levers we can then tinker with are pretty clear. For supply, natural technological change is always a upwards driver, but it’s not controllable. Increasing the speed of approvals is a tap that can be turned up or down. For demand, interest rates are a lever we already use. Limits on foreign capital flows are another, and they could free up the other lever considerably. Trying to do it all with interest rates is like trying to swim with one arm. Then there’s the obvious possibility of redistribution through various subsidizations. I’m sure there’s others.
It’s so typical of economics as a discipline that we wouldn’t work out how much demand is a factor by deliberately controlling it the way we’d work out how something in the natural sciences works. Experimentation is virtually seen as an evil in economics. Which means that we really struggle to move beyond voodoo.
No. Why would that follow?
I see what you mean, that you can't work out how much the demand curve moved from how much the price changed, without also knowing the shape of the demand curve and the supply curve, and how much the supply curve moved. And no one really knows the shape of these curves, because they are actually conceptually meant to apply to a single mass produced product. The closest we can get is grouping houses that are as similar as possible and keeping the history of the sale prices. Then we know where the curves crossed at various times. But that is all we know. We don't know the rest of the curves, because they are entirely hypothetical. They are not, and can't ever be data. So they are as useless as I thought. There was me hoping to find an actual use for them.
I can swap my tulip bulb for another tulip bulb with a similar valuation without finding any actual money.
Good luck with that. Try it down at the plant shop and see what they say.
Well my hypothesis is in my comment above – constrained land supply has resulted in prices being bid up.
I can see that constraining land supply will mean that rising demand will lead to rising prices. What I don't see is where so much demand came from. If land supply were rising at the same pace as demand, then prices would remain stable.
Are we seriously suggesting that Auckland is meant to grow at roughly the rate that it's property prices have been rising? So 26% in the last year alone? We're meant to build a whole quarter of the city in one year?
Not even the crazy unconstrained growth of an anarchic third world country bursting into the industrial revolution can keep up with that. This is a stable and mature democracy with a high standard of living. It can't supply the labour to build so many houses, it can't get the goods to make them, it can't possibly allow consents that rapidly because there isn't enough manpower to consider all of the planning issues. As it is, the city is turning into a sprawling suburban nightmare - is the answer really to intensify that? Or is it to try to come to terms with the sources of the demand? To ask ourselves as a nation whether it's actually in our interests to allow it? Of course it's in the interests of a rich minority. That much is obvious.
Sure they could all go out and load up on debt to spend on holidays (the wealth effect) but there is no reason why that should be so, and certainly no reason why they would draw down some large proportion of their equity.
Nor is there any particularly strong reason why they shouldn't.
The question of why rising debt is traditionally strongly associated with rising asset prices is interesting. But I'm not asserting that it must be so, and from what I understand of David's point, he's asserting that it isn't so, here in NZ, right now. So I'm not sure that we're having a head-to-head argument here.
one potential hypothesis is that since the “magic money” change point in the graph, the increase in the value of the housing stock has been associated more with revaluation of existing assets and less to do with real investment.
For sure. Nothing re-evaluates existing assets like people coming in with a whole lot of money and bidding them up. That might be what's happening here. If it isn't what's happening, it would be interesting to hear your theory about why there has been a national reevaluation that added 300 billion to our estimation of our net asset worth?
I was trying to use an extreme example of 1 house to demonstrate to you that an increase in the estimated value of all houses in the country does not require a corresponding increase in debt
I don't think David is disputing that. He's arguing that a corresponding increase in debt hasn't happened, after all. The idea that it should seems to be received wisdom in economics. It's also how it works in most countries that don't have such open floodgates. When foreign money either can't or just isn't coming in, then debt is the main source of new money in the economy, thus the main source of this kind of inflation. If it hasn't been issued, then the money had to come from somewhere.
I get that you're saying that it doesn't take 300 billion of actual money to inflate valuations by 300 billion. And I think that's true - we haven't had 300 billion in loose money flowing around the NZ economy. It would be hard to not notice that. But the current valuation is not based on 1 sale. It's based on thousands of sales happening on a monthly basis. Furthermore, the 300 billion is a problem not because having loose money is bad, but because that's 300 billion of asset value standing between NZers and home ownership at the moment. Even if it's not realized money, that doesn't stop it being an impenetrable barrier to entry. It's money that NZers would have to have just to afford to buy the housing stock in their own country.