Sunday, April 12, 2009

Time to buy?

The Sunday papers today are talking up the housing market.

But suggesting it is more than just an attempt to butter up one of their major sources of advertising, the Patron St of Taxpayers, Bernard Hickey, has joined in the spruiking.

Bernard has tended to predict savage cuts in house prices, but now he says it is time to buy. His view is based as much on the costs of rent v the costs of a mortgage and other costs associated with owning a home.

Nonetheless, the state of the economy and rising unemployment may still cause further price declines, he admits.

However, over at the Sunday Star-Times, because the New Zealand housing market was less speculative than in other countries, there is less potential for a downside.

The SST also notes lower interest rates v the rental costs, plus impact from immigration affecting future prices. Supply is also being hit by a slump in new housing starts.

However, citing rising unemployment, some economists still say hold off.

But with growing talk and practice of mortgage holidays, this just might give more confidence to a depressed market, with homeowners knowing they still have upto a year to find work if the worst happens. Even if such holidays come with a cost of rolled up interest.

In Kerikeri, though, I still see falling prices. But this is perhaps an area that boomed more than most in recent years. Perhaps there will be significant regional variations to this story.

What do you think? Is now the time to buy? And where?


Anonymous said...

Tauranga. Rotorua, Whakatane.

Anonymous said...

Auckland apartments, as many as you can over 55sqm, with a carpark, not leasehold, and preferably with a deck.

Anonymous said...

Certainly dont buy bare land.All those subdivisions up nth provide enough land for about 20 eleven million years of growth.
Land prices should drop well over 50%......
Anon 9.45 is onto it.
Replacement cost is around $6500 m2 and they are selling for less tha $4000m2

Whaleoil said...

What exactly is a broken arse itinerant like you going to buy with whats left of mummy's legacy spent trolling the red light districts of San Francisco, Hamilton and Auckland?

Nothing is what.

People like you whined about housing affordability when they were affordable and now they are more affordable you are worried about whether it is the right time to buy, when the ones with money are simply buying whenever they damn well feel like it.

If you pulled your head out of your arse for longer than 5 minutes you ould know this.

Anonymous said...

The average house still costs over 10 times the average wage. Should be around 4 times. Interest rates low now, but for how long with inflation on the up and governments printing lots of money. Still time to keep your hands in your pockets.

Anonymous said...

Has anyone any idea what rating system is proposed for the new Auckland Super state? There are large differences in average rates plus a substantial property type difference between land value rating and annual value rating used by ACC. When you add in hte differntials that some others use I would expect some ratepayers could be looking at huge rate changes. Seen any research on this yet???

PhilBest said...

Whaleoil and others, please read the Demographia Annual Reports and Hugh Pavletich's press releases on Scoop.Co.Nz for the last couple of years.

That "anonymous" commenter above is right. New Zealanders are among the world's most ripped-off people for house prices. The cause, as Hugh P. points out, is that our land supply is subjected to a racket because of council zoning.

It is simple economics. If land for agriculture suddenly goes up in value THIRTY TIMES when it is rezoned "residential", there is a bloody racket going. As Hugh points out, there are places, especially in the Southern USA, where there is NO land price premium at all. Sections at the urban limit of Dallas, Houston, San Antonio, etc, cost twenty grand....!

Whale Oil especially should be onto this stuff, yet another way that big government interference and fascist style planning screws us over.

House prices in NZ have a long way to drop yet if they are to reach even 2002 parities with our incomes, let alone 1990 parities, which was the last time they rated as "affordable", and had always historically done so prior to then: i.e. before the bloody greeny twat "planners" got involved to the detriment of all future first home buyers, not to mention investors getting trapped in a housing bubble for the first time ever.

PhilBest said...

I am one of a few but growing number of people who believe that people like Hugh Pavletich, Wendell Cox, Oliver Marc Hartwich, and Alan Moran have the key to this problem and we are ignoring tham at our peril. For the benefit of those who haven’t followed the argument, here is what I insist you should check out.

Wendell Cox and Ronald Utt: “Don’t Regulate the Suburbs: America Needs a Housing Poliicy that Works”.

Alan Moran: “The Tragedy of Planning: Losing the Great Australian Dream”

Those who insist that factors other than land use rationing, such as taxation treatment of housing, are responsible for housing bubbles, should look at page 54 onwards, (page 61 of the PDF) where Moran gives analysis charts of these factors accross a number of countries that have exerienced housing bubbles.

Oliver Marc Hartwich and Alan Evans: “Unaffordable Housing: Fables and Myths”

On page 17 is a graph of previous house price bubbles in the UK. The UK just happens to have had land use rationing decades ahead of everyone else. They have also had house price bubbles decades ahead of everyone else; they just never got the connection.

Oliver Marc Hartwich and Alan Evans: “Bigger Better Faster More: Why Some Countries Plan Better Than Others”

Germany has policies of funding local government which are powerful incentives to development and construction. Consequently, Germany has not had a house price bubble other than in a few locales where local anti-development sentiment was strong enough to survive the cost impact of consequent loss of funding. They have had a nationwide 1990’s construction boom and subsequent depressed property prices which are frequently misinterpreted as a “bubble”. They do not, however, have huge increases in household debt backed by the “faery gold” of house price inflation, and subsequent wipeout of equity bringing the whole banking and finance system down. Germany can honestly say that the impact on their economy is spillover from outside their borders. Just about no other country can say that, including NZ and Australia.

I badly wish for more evidence than this, but this is pretty conclusive to my mind.

Why property price bubbles, nearly everywhere, at this time? There have been numerous periods of monetary looseness in the past which have led to bubbles in the share market. I would argue that every potential property bubble in the past was spiked in time by construction booms, other than in the UK, obviously. But the 1980’s and 1990’s were marked by the advancement of environmentalism and urban limits and planning and land use rationing. Just as environmentalist mismanagement of forestry policy has finally had to be blamed for unprecendentedly destructive forest fires in California and Australia, it is high time that the true blame for the housing bubble crises was directed that way also.

I also insist that a property price bubble will get underway against all other obstacles, because of land rationing policies alone. Alan Moran’s comparisons are conclusive that CGT’s and other taxation treatments made no difference. I would argue that land rationing policies could cause property price bubbles even under a gold standard. Think about this. All that is required is for prices to be unable to be relieved by supply, and mania to do the rest. The (temporary) gains for speculators in such a bubble will naturally be more attractive than virtually any other investment. The starving of productive capital of investment, as a result of the bubble, will indirectly contribute to the bubble’s ultimate collapse. This is because of the effect on incomes, of productivity being affected adversely.

Did the famous tulip bubble not take place under a gold standard?

PhilBest said...

When a housing price bubble gets underway, Reserve Banks increasingly find themselves “holding a tiger by the tail”. Raising the base interest rate will depress PRODUCTIVE activity which is already being depressed by the diversion of investment into real estate. But the demand for finance for the housing bubble will have been having an upward effect on interest rates anyway. Meanwhile, the cashing-out of increased house owner “equity” will have been driving consumption, which will not have been resulting in increased productivity either.

But a lower base interest rate, in the absence of other seriously depressing effects, will immediately have a highly volatile effect. NZ did not get this effect like the USA did, as our Reserve bank did not “do a Greenspan” any time there was a clamour for lower interest rates. In a way, we can thank them for that, but on the other hand, a housing bubble will inflate and blow up regardless, it will just blow up quicker under the low interest rate scenario. That is what we desperately need to avoid now; we desperately need to avoid tracking the US experience any further.

As I intimate above, NZ is thus far avoiding the highly volatile response to lower interest rates that was experienced in the USA, at least partly because we are already up to our eyeballs in debt even under the higher interest rate scenario, and partly because there are other depressive factors at work, like the rest of the world imploding around us………

But what would Bollard and Co hope to achieve by “stimulating the economy”, Greenspan style, with lower interest rates? All we would be doing, is tracking the USA from 2001 onwards, only we would be starting from a very much worse position regarding our debt and the inflated prices of our houses.

The biggest favour the National government could do our economy now would be to just let the builders loose on whatever land anyone anywhere will sell them, and let low interest rates combine with LOW HOUSE PRICES and small mortgages, to leave as many income earners as possible with as much REAL discretionary income to spend, as possible.

PhilBest said...

Please excuse me, what I am doing here is pasting arguments I have made recently on “Interest.Co.NZ”.

One of the problems in trying to control a housing bubble by the base interest rate (Greenspan didn’t even believe there WAS a housing bubble in the USA) is that not only is the housing bubble not based on the other fundamentals of the economy, it is de-linked from them. In some cases, the fundamentals are being driven by the housing bubble; like consumption being driven by people cashing out home “equity”, rather than by incomes. As long as house prices cannot be brought down by the building trade and free availability of land, bubbles will occur and will blow up eventually. The OCR will seem to have played a role in so far as the bubble has been inflating more rapidly when the OCR is low, and possibly bursting at some point when the OCR is raised, but meanwhile everything else in the economy will have been pushed completely out of kilter. Incentives to save, what to invest in, productivity, wages…….

The fundamentals should drive house prices and the fundamentals should also drive what the Reserve Bank does with the OCR.

PhilBest said...

The global crash problem in a nutshell; investment in productive capital was siphoned off into a speculative bubble in real estate.

Previous speculative bubbles have been mainly confined to financial markets. Why? There is a certain limitation on “supply” of business, in the shares of which speculation can take place. Such bubbles ultimately pop, and investors lose, in a matter of hours.

Speculative bubbles do not take place in commodities for which supply responds to demand. What Austrian economists call malinvestment can occur when production is boosted to meet demand that is not “real”, but damaging as this is, it is nowhere near as damaging as speculative bubbles are in their own right. What some people call a “housing bubble”, where a lot of cheap homes are built as in Texas recently, is really “malinvestment”. In these conditions, prices of all real estate is actually kept low because of the over-supply; that is not a “bubble”. Left to itself, these over-supply situations would be limited in their consequences as the suppliers would quickly adjust to the reality of lack of sales, and demographics and migration and economic reality (affordability) would ultimately take care of the empty homes. But price bubbles just carry on and on inflating until they reach the point where the economy cannot sustain them, by which time catastrophe is the unavoidable consequence.

Why did speculative price bubbles not take place in real estate before this particular time? The simple reality is that land supply was not restricted to the same extent or for as long as was required for bubbles to get underway. An interesting exception I can point you to, is the UK. The UK has been experiencing severe housing price bubbles since way back in the 1960’s; the obvious consequence of their much earlier adoption of anti-development land use restriction policies.

Allowing these bubbles to occur in real estate is an economic error of an order of magnitude of difference to bubbles in financial markets which the small proportion of people with money to burn enter voluntarily, and the fortunes that are made on paper and wiped out do not leave huge economy-distorting amounts of debt behind them.

Not so housing. Housing affects everybody. The total sums of money are not only much larger than the sharemarket, the debt that remains when the values on paper collapse is an order of magnitude larger and affects a high proportion of the population. Nor does the bubble burst in a matter of hours, with values quickly resetting at realistic levels; denial and paralysis besets the whole economy for years.

Productive capital gets starved of investment both coming and going: both as the bubbles were inflating and as they deflate. This is grave in its implications.

Did ANYONE have the wisdom to see this coming? I’ll tell you what, precious few have even got the wisdom today to see that this is “what happened” and what “is happening” still.

PhilBest said...

First, we need “domestic savings”. It wasn’t “domestic savings” that were going into buying houses, it was borrowing - debt - created by monetary inflation.

We need to be prepared to utilise resources, and utilise them efficiently. We need to make it less hassle and less risky and just plain less unpopular to be in business and make money. We need to reduce if not abolish corporate tax; we need to abolish the employment grievance shakedown industry and wind back the holiday and maternity leave and so on that we thought in the years 1999-2008, that our economy could afford. And we need to wind back the toxic combination of the RMA (Resource Management Act) and the anti-development powers bestowed on councils that are responsible for the double whammy of restricting productive investment and allowing house prices to bubble by interfering with supply, and also wind back the fee gouging by councils.

Our economy could NOT afford it in reality even then. THIS assessment, which I have just read, is exactly applicable to our situation; I have been looking for a long time for this sort of assessment:

Fred Harrison: “The Mystery of Britain’s Missing Recession”

(You could change “Gordon Brown” to “Michael Cullen” and it would still be true)

“…..If the business cycle had played out in the way that we would have predicted on the basis of historical trends, the price of houses would have deflated in 2001-2. This would have been the outcome of a mid-cycle recession. Instead, under Gordon Brown’s stewardship, the residential sector was allowed to bubble. This set new benchmarks for prices: the next housing bubble would have to inflate to stupendous levels before finally collapsing and driving the economy into the Depression of 2010.

But in the meantime, Britain’s consumers were on a spending spree. They borrowed like there was no tomorrow to finance the purchase of luxury goods, holidays in exotic locations, new cars, and improvements to their homes. Following the election of New Labour in 1997, consumption grew faster than output, with retailers sucking in imported goods to make up the difference. Between 1999 and 2001, consumption grew exactly twice as fast as Gross Domestic Product (GDP). Unsecured consumer debt rose at an annual average rate of nearly 11% over the five years to 2004. While Gordon Brown preened himself with declarations about his virtuous ‘prudence’ in handling the nation’s public finances, he sanctioned private bingeing that undermined the culture of thrift……”

PhilBest adds:
While Michael Cullen preened himself about fiscal prudence, NZ consumers went on a spending spree that artificially inflated our GDP and our business turnover and profits and the government’s taxation revenue. We SHOULD in reality, going by what was happening to NZ’s productive capital and productivity, have been in recession already and tightening our belts and the government should have been cutting wasteful spending, not embarking on new binges; and the government should also have been freeing up the productive sector, not imposing new burdens on it.

PhilBest said...

Interest rates need to be decided by the interaction between the willingness of people to save and the demand for productive capital.

The interference with this that results from housing bubbles (and any other speculative bubbles) is what is destroying modern economies today, even leaving aside the issue of whether the central banks can get the OCR’s right.

A bubble develops through expectation of returns. Those expectations cannot be dampened by interest rates. Interest rates that would dampen a housing bubble, would kill productive business off in the process. That is why Reserve Banks are “pushing on a string” as long as housing issues are unresolved.

As Hugh has pointed out, the correct term for building lots and lots of houses, is a “boom” rather than a “bubble”.

The effect of the two different things on the issues at hand, are quite different.

We definitely are in agreement about the need to get investment going in the direction of productive activity. But in the light of the huge “pluses” that result from affordable housing, I would be prepared to simply ignore the occaisional building of “too many” new homes; in fact, the effects of prices being too high are so much more serious, that I think a little bit of oversupply would be the “best” sign to look for at all times; it would show that the market is not being interfered with in the direction of rationing.

A price “bubble” drives itself to the level at which it collapses, only through mechanisms that will ensure economy-wide destruction in its wake. But a construction “boom” rapidly undermines the reason for its own existence, it is self correcting.

KG said...

"The biggest favour the National government could do our economy now would be to just let the builders loose on whatever land anyone anywhere will sell them, and let low interest rates combine with LOW HOUSE PRICES and small mortgages, to leave as many income earners as possible with as much REAL discretionary income to spend, as possible."


PhilBest said...

Huh, this site doesn't take links?

My same comments, with working links, are on Interest.Co.Nz:

Presumably that won't work either.

Google Bernard Hickey "Housing Special: Why the March housing market surge is an Indian Summer" if it matters to you.

PhilBest said...

Thanks for that positive response, KG.

A relevant point I just made on the Bernard Hickey thread that this thread is all about, is this:

# Andrewj Says:
April 13th, 2009 at 2:27 pm

I dare say Churches are in a quandary. Half the congregation wants cheap houses, the other half risk having all their equity wiped out by falling house values.”

AndrewJ, you SAID it, but that goes for most of NZ, not just the church-goers.

My solution, though Hugh doesn’t like 2); is for the National government to announce:

1) that they are going to bring property prices down by abolishing urban limits and getting land onto the housing development market at the price it is worth for farming (not 30 times as much)
and various other measures that Hugh has recommended to get $140,000 new homes onto the market.

and 2) existing property owners will be shielded from the impact of this by simple, blunt, tax rebates on their repayments of mortgage principal. Complexity might bring fairer results in theory but administrative costs would kill it.

I think that Hugh is underestimating the negativity of opinion that will come from the undermining of existing property owners positions. But if 1) can be sold to the public without 2), fine. I also think Hugh is underestimating the predictability of our mainstream news media’s reaction - I sincerely wish him all the best with getting them on board, they are crucial. NZ political history is littered with the ruin of good ideas that have been shot down in flames by the media, at appalling cost to the whole country and its economy.


It is great to see the debate starting off again.
Coming from the UK, where there are way too many people, I can see an argument for restricting land supply as you do not want what's left of the countryside concreted over.
There again, people have to live somewhere.
The best response for the UK would be to curb immigration.

As for New Zealand, where we have room to spare, it is outrageous that house prices are at very high multiples of earnings.
If New Zealand is to be an economic backwater away from the fast growing economies of elsewhere, at least we can be the world's lifestyle block.
Let Kiwis have that house and decent-sized section.
Get the price of land down and affordable housing will follow.

There again, I do feel how the tax system works also has an impact.
Cullen raising the top rate of tax did fuel landlordism.

And I agree with the consensus here that constantly rising house prices created its own momentum end fuelled excessive consumerism at the expense of the productive sector.

Adolf Fiinkensein said...

Philbest, comments, not encyclapoedia, are welcome here.

Please keep them short and to the point.

Anonymous said...

Look it's really, really fucking simple.

NZ average income: $35,000.

NZ average home price: $350,000.

That's a ten to one price ratio.

When the average house price gets to about $120,000 then it will be time to buy. Not before.

Now we see the conspiracy theories crawling out of the woodwork:

our land supply is subjected to a racket because of council zoning.

Blah blah blah. Evil councils. Helen! Rodney!

But what's even worse are the socialist scum, saying crap like:

Let Kiwis have that house and decent-sized section.

Fuck 'em. Kiwis, sorry on only $35,000 or only $100,000 don't deserve anything of the kind. People only $25K "deserve" a garage with an outdoor toilet, and perhaps, a communal tap. People on $100,000 well yeah, a two-room apartment for $300,000 seem about right.

The really simple fact everyone except Sir Roger seems to miss is that NZ is now an entire Nation of Bludgers. We don't make enough to pay our way - we certainly don't make enough to pay for fucking dream homes for everybody

NZ is an open economy. Even after 10 years of Hellen they didn't destroy that, although they sure as fuck tried.

So you commie losers, here is the simple fact:

Unless you're earning a respectable international salary in an export industry, say $150,000 US DOLLARS or (these days $100,000 POUNDS) or say EURO 100,000 ---

then you do not "deserve" to own a house in NZ

Nobody deserves to own anything. Especially not a house. It is not the job of the government to make house ownership, car ownership, plasma TV ownership, playstation ownership or ANYTHING ELSE affordable for people who do not earn it.

If you are earning less than $250,000 NZD, or lets say $500,000 as a couple, then you have absolutely no reason to whine about NZ's house prices

And if you are earning that much, then yes, houses are affordable.

So you poor whinging socialists can just fuck off.

Anonymous said...

Oh for fucks sake Philbest. Do you know what a fucking link is?
You do this everywhere and its a fucking pain.

Also people. Get it right. Its 3 times income equals the mtge. NOT 3-4 times income equals the house price.
Geez with the average wage 30k, do you really think Akld houses should be 90-120k?
I've never seen so many fucking amateurs come out of the wood work when it comes to property these days.

Anonymous said...

Geez with the average wage 30k, do you really think Akld houses should be 90-120k?

well most of these budgers don't and won't ever "trade up". The idea of a property ladder - like you know, the idea of having to pay for their own healthcare or education or fucking anything - is completely foreign to them all!

And - sadly -with Hellen's houses-for-bludgers plan for the airport, yeah, if you force councils to sell sections for 20K, and put enough 100K lockwoods on them, you could make quite a lot of houses available for 120K

but it's still socialism. Basically if all you've got is 30K income, or 250K in the bank - you don't deserve a "house"

Garage or self-storage-unit conversion, perhaps.

PhilBest said...

Anonymous; "Let them eat cake", eh?

What address do we send the tumbril to?

You sound like a hardworker/ achiever but you do not sound like you have any idea of economics or even the typical political beliefs of the left/right.

I am definitely not a socialist, I am a libertarian. It is bloody government rationing of the land supply that makes housing unaffordable. And by the way, I agree that people should be allowed to live in garages with running water if they want to. Again, it is bloody government minimum standards for housing that stops them.

I recommend the essay "Scratching By: How Government Creates Poverty As We Know It", by Charles Johnson. Government controls are the most to blame for most people simply being unable to get into home ownership or business startup.

Worse, the housing bubble situation only worsens the situation for the younger generations and will cause more poverty and personal failure. This is because income increases only come from productivity increases, and productivity is hindered by investment being sucked into a housing bubble.

We can kiss any real economic recovery goodbye when most of our potential productive investment money remains sucked into the black hole of a housing price bubble. These bubbles actually worsen the likelihood of income increases enabling a catch-up of the fundamentals that underly home affordability. Business investment simply could not match the returns,(temporarily) from property investment. Interest rates that would prevent a property bubble would kill business. Reserve Banks are pushing on a string once the bubble mentality takes over.

We are surrounded by people talking the house buying market UP again, and persuading us that the time is good again for making that purchase. This is balls. It is economic Darwinism. Here we are, with some of the world’s most unaffordable house prices, a situation that developed mostly in 4 years, 2002-2006; graphs that show what can only be described as one of the world’s worst house price bubbles; here we are surrounded by house price bubble collapses all over the rest of the world; here we are with our economy in recession; and we are talking home buyers INTO the market and talking price expectations UP?

I am personally acquainted with various family friends who I have been unable at any time, even with all my background knowledge, to persuade them that buying a house 2 years ago or now, was not and still is not a good idea. We still see on, comments from people who should know better, that “NZ is different”; “Buy”! “Buy”! “Buy”!.

You tell me what is going to fix this?

You tell me what mechanisms are going to result in new homes hitting the market at a price that reflects the value of land for other uses, plus development costs, plus profit. Where are the $40,000 sections now, even after half the property development industry has fallen over? Why are even the bankruptcy sale prices attached to an invisible skyhook?

Some commenters are pointing out that homes are for sale in Atlanta Georgia for US $20,000, and using that as evidence of a housing bubble crash in Georgia. But this is missing the point. Brand new homes on the urban edges of Atlanta were always available for as little as US$120,000. Oversupply and economic downturn has resulted in bankruptcy sales for a little less than this. But tumbledown old dumps in ghetto areas were also always available for $40,000 or less. Why would a first home buyer pay 7 or 8 times average annual income for a tumbledown old dump in a ghetto area, when there are brand new homes available for 3 times average annual income? This is the option that has been denied to the first home buyer in California - or NZ.

Or look at it this way. A subprime mortgage in Atlanta might be an unemployed solo mum with a mortgage of US $40,000 or $50,000. A subprime mortgage in California is a professional yuppie couple with a mortgage of US $600,000. (And that is for a tumbledown dump in what used to be a ghetto area). Where do you think the problem of toxic CDO’s has really originated? Some of the studies I link to in my essays on point out that California is responsible for 45% of all the mortgage related losses of equity in the whole USA so far - and New York is responsible for another 10% and Florida for another 10%.

New Zealand is tracking California, not Georgia or Texas. A high proportion of our mortgages ARE what the USA would call “subprime” - we are just insensible to it. Our younger and poorer people are being screwed by having to pay hundreds of thousands of dollars for ANY home, whether on the outer limits of cities or for tumbledown old dumps in ghetto areas. Californians could emigrate to Texas much more easily than Kiwis can escape the property price trap. Are you aware that California spent years leaking population on net even as their house prices escalated, while Texas attracted large in-migration while houses remained well-supplied and cheap?

What do you think the flow-on effects are throughout NZ society, of unaffordable housing?

That is why I argue that the inhabitants of particularly desirable areas should NOT be “entitled” to prevent further in-migration to their area through policies that make property unaffordable. If greed and selfishness on Wall Street requires legal restriction to prevent damage to whole economies resulting, then so does greed and selfishness in green and pleasant local communities. People have to live somewhere, and these selfish policies at root are saying to people of the next generation and poorer people, “…do us a favour……don’t exist….no, you can’t live THERE…….no, you can’t build THAT….yes, that is the cheapest accomodation you are allowed to live in…”. The bottom 3 rungs have been knocked out of the social mobility ladder. But “combating inequality” is all about “transferring wealth” via taxes and government spending, isn’t it…. not about ensuring that homes are affordable.

But Hugh P. tells us that there is good cross-party progress in getting a grasp of these issues in our current parliament. I wish him all the best, the consequences are of paramount importance economically and socially.