Posts by BenWilson
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Speaker: House prices and the "Magic Money", in reply to James Butler,
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.
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Speaker: House prices and the "Magic Money", in reply to James Butler,
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.
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Speaker: House prices and the "Magic Money", in reply to James Butler,
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.
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Speaker: House prices and the "Magic Money", in reply to Michael Homer,
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.
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Speaker: House prices and the "Magic Money", in reply to Swan,
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.
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Speaker: House prices and the "Magic Money", in reply to Swan,
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?
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Speaker: House prices and the "Magic Money", in reply to Glenn Pearce,
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.
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Speaker: House prices and the "Magic Money", in reply to David Hood,
in reality it is somewhere between 0 and 4 billion extra houses needed to stablise demand. And because of the unknowns that is a pretty wide error range.
Yes, and hardly filling me with cozy feelings of security about the future stability of prices. If as few as 1 million people with a lot of money decided to make a beeline for NZ, locals would be drowned in capital and the class divide would turn into a bottomless chasm. Those already in property would make a killing. Those not in it would never get in, ever, unless they became independently very wealthy. Probably through inheriting property.
As someone in property (and likely to inherit more), I’m “safe”. As someone who wants this country not to degenerate into third world levels of inequality, I’m really concerned. At a global level, it’s this wonderful self balancing system. At a local level, entire countries could be completely ruined. Do we want to be that country?
I pick the number 1 million from thin air. It’s one four thousandth of the 4 billion upper limit you give. It’s one fifteen hundredth of the number of people in China. It’s one three hundredth of the number of people in the USA. Without any way of knowing the actual numbers, it’s picked as “very small compared to what it could be”. Maybe it’s conservative. Maybe it’s overestimating. Point is: Who knows? Shouldn’t we know?
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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.
Totally agree. We also have no idea how this demand could change over time. It could treble over a year due to some policy change in any one of the very large countries in the world.
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Thanks so much for this, David. Will check it out much more thoroughly later today.
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