The $5 Billion Failure
Today’s weekend Herald discusses the extent of the finance companies’ failures over the last few years and the effect it has had on families and investor confidence in general. It only gives passing consideration of the cause - laissez faire, free market ideology. Before I get bashed to death for my socialist ways, let me say that I am simply agreeing with all the current calls for some regulation of financial advisors and some regulation forcing full disclosure of how and by whom finance companies are run.
Whenever people have called for more oversight of the industry in the past, they have been shouted down. The ideologues insist that the market will shake out the dodgy operators, reward the better run operators and that such ‘heavy handed’ intervention is not needed. Once again, such ideologues have been proved wrong and we are closing the barn door only after the horse has bolted.
The real problem here, which the ideologues will rush to point out in support of their arguments, is that most of the finance companies that have failed were, in fact, quite sound financially. This is absolutely correct. And had we lived in the perfectly rational world that the Traditional Economists fantasise that we live in, then in fact these better finance companies would indeed still be standing and the rotten ones would be purged. Unfortunately, the real world gets in the way of the free market fantasy, and the invisible hand is one of irrational panic.
I think that finance companies are great. They provide much needed higher risk capital to business and developers. It’s just a pity that they didn’t have to disclose the risk to their investors, and in fact paid lower returns to disguise the risk. (We all know that lower returns equate to lower risk.) How far would you go in regulating those who manage such companies and those who sell their financial instruments?
August 16th, 2008 at 10:08 am
Frog, you are fully aware that I am not one to support you that often, however, I have to agree with this post. The collapse of Bridgecorp was the event that changed the situation; people panicked and there was a run on the finance companies which essentially caused the crisis you mentioned.
Personally, and this I know goes against my beliefs in general, I believe that the government should have done something to “bail-out” Bridgecorp. That would have probably stopped the collapses and enabled the economy to carry on running.
August 16th, 2008 at 10:11 am
I read that Gareth Morhgan’s Fund is flush (going in or staying in?) as people trust him.
Which person would you trust most: Owns private jet or drives same VW for 35 years?
August 16th, 2008 at 10:14 am
(sorry spelt Gareth Morgan’s name wrong).
August 16th, 2008 at 10:17 am
Doesn’t the speed of information flow (internet) play a part??
August 16th, 2008 at 10:29 am
The real problem is demand. Why are people so stupid as to borrow money they don’t have to get stuff they don’t need? Who conned us into believing in rampant consumerism?
Why is there no money education in schools?
August 16th, 2008 at 10:33 am
>>the cause - laissez faire, free market ideology.
The cause is a combination of greed, timing, bad luck, and idiocy.
How many “investors” asked how these companies made money? How many wondered how they could pay higher returns? How many assessed the risk level?
Look, the same thing happens in the sharemarket each day, and listed companies much meet high levels of reporting. No matter how much red tape you throw at investments, there are no guarantees, my friend.
Perhaps if they taught financial management/economics is school as core subjects, as opposed to near useless topics, like Maori, more people may be better prepared to evaluate risk/reward.
August 16th, 2008 at 10:36 am
Wow samiam. I find myself agreeing with you wholeheartedly. Our culture of rampant consumerism is definitely at the heart of this. As for education, well, a stupid consumer is more likely to buy crap she/he doesn’t need! Cynical, I know, but I had to say it.
August 16th, 2008 at 10:39 am
>>stupid consumer is more likely to buy crap she/he doesn’t need
Agreed.
August 16th, 2008 at 10:42 am
BP wrote:
The cause is a combination of greed, timing, bad luck, and idiocy.
So you agree with me tha the economists are living in a fantasy world when they assert that all economic actors are rational? This is precisely why I would not teach traditional economic in schools. It is based on fallacious assumptions. I would consider teaching from the school of complexity economics, which acknowledges that people and systems are dynamic, inefficient and far from rational, but can be modelled to a certain degree.
August 16th, 2008 at 10:49 am
john-ston,
totally disagree tha the people (government ) should bail out anyone. All should stand and fall of their own accord.
Some companies (like Air New Zealand) where the asset value (unlike Kiwirail) is greater then the share value, then yes go ahead. At last resort a fire sale my return a few dividentd on top of the investment. At best it can inject capital and get the company back on a level keel. Either ready for resale or as a cash cow.
The problem with Bridgecorp was the lack of disclosure where the money was going. Patently the prospectus was false and hence court action is in progress.
Hanover was equally as bad by not disclosing that the investors money was being lent at favourable rates to the company’s two principal owners.
I think the government has a duty to prosecute any finace company that does not follow their published prospetus.
Plus a duty to diversify the investment opportunites for New Zealand investors (after all they want us to save money) by issuing more government guarenteed bonds.
(your kiwsaver investment is not government guarenteed by the way)
And the people should take responsibility to see that their investment savings are spread over a wide range of investment options.
August 16th, 2008 at 10:49 am
They are rational, although not in the sense you appear to understand the term.
Rational means a person tries to maximise their benefits. The problem is that their analysis is basic (”investment a pays a higher rate of return than investment b, therefore I choose investment a). That is a rational decision by a rational actor, but the level of analysis is poor.
There will always be information asymmetry.
>>I would not teach traditional economic in schools
I would. Particularly the notion of compounding interest, opportunity cost, and comparative advantage.
August 16th, 2008 at 10:56 am
It certainly would be good to teach the fundamentals of the exponential function is schools. Not only would kids learn about compound interest, they would also learn about the fallacy of unlimited economic growth and the fact that it is a physical impossibility until we leave this planet and score a few more. It would also teach tem that our seemingly small forcings on the planet and on nature have huge, compounding consequences that it is difficult to explain in the short term. Like climate change/global warming. So I am with you on that one.
As for traditional economics, they also assume perfect information for their rational actors, and instant response to supply/demand factors. (Meaning that time is removed from their models too.) This is why I rubbish traditional economists. The economy is not a closed equilibrium system!
August 16th, 2008 at 10:58 am
“totally disagree tha the people (government ) should bail out anyone. All should stand and fall of their own accord.”
Gerrit, I would normally agree with you. However, I made my comment in this context, and bear this in mind - history has a strong tendency to repeat itself.
In the mid 1980s, thousands of New Zealanders got involved in the Stock Exchange, you had investment clubs and so on springing up and people were pouring millions into the likes of Chase, Judge and so on. When the 1987 Crash occurred, a lot of those people got burnt and they vowed never to get into the Stock Exchange again.
So, what did these people do? They decided that a far safer way of investing their money was purchasing real estate - after all, few properties had collapsed with as much gusto as the companies of the 1980s. We are living with the consequences of the 1987 crash today; our Stock Exchange is puny and pathetic and most people’s investment option is real estate and of course, you all know the side effects of that.
A similar thing will happen with Finance Companies; people will lose confidence. The main thing that we need for our economy to function properly is for people to have confidence. It took twenty years before people started regaining confidence in the Stock Exchange, and even then, the memories of the old lady gasping, the Chinese man looking like he had been kicked, and the young professional with a phone in each ear are still there among a large portion of the population. The lack of confidence in our Stock Exchange has had a lasting negative effect on our economy; could the Finance Companies be the same? I don’t know.
Further to that, the collapse of Bridgecorp caused a lot of mum and dad investors to panic; they withdrew their money faster than the Finance Companies could get it back and good firms collapsed as well because of the loss of capital. As the Herald article mentioned, even the most secure bank will go bankrupt if everyone withdraws their funds. Bailing out one firm (even if it were dodgy) would have probably resulted in far fewer firms going under as people would not have withdrawn their funds in a hurry.
I would like to see firms stand and fall on their own merits, however, in some circumstances, we need to consider the longer term consequences.
August 16th, 2008 at 11:09 am
Frog,
Perhaps we might agree on something, but for different reasons
Students could well come to the Green conclusions. It would at least demonstrate they understand scarcity, supply and demand.
Unlimited anything is technically impossible, although, again, that’s not what economists mean. The error Greens make is to assume doubling GDP means doubling resources used. That concept is false. The software and internet revolutions are good examples of how it can work in the opposite direction.
Infinite economic growth, in an economic sense, is possible, if the amount of raw materials extracted and energy produced is at or below some base sustainable level; any additional negative externalities (ie. pollution) are kept below the sink capacity of nature; and we have a fiat money system.
>>they also assume perfect information for their rational actors
I’m not sure any economist believes this in practice. There is clearly no such thing as perfect information.
August 16th, 2008 at 11:24 am
# john-ston Says:
August 16th, 2008 at 10:08 am
> I believe that the government should have done something to “bail-out? Bridgecorp. That would have probably stopped the collapses and enabled the economy to carry on running.
Wouldn’t that just encourage more people to act like Petricevic?
August 16th, 2008 at 11:30 am
samiam Says:
August 16th, 2008 at 10:29 am
> The real problem is demand. Why are people so stupid as to borrow money they don’t have to get stuff they don’t need? Who conned us into believing in rampant consumerism?
Huge amounts of money get spent on advertising to convince people to think that way. Much of the advertising we are exposed to is insidious social engineering designed to make people think in precisely that way.
August 16th, 2008 at 12:02 pm
Advertising should also be a school subject. Take a look at current ads and deconstruct them to analyze what is really being said. I do it with my kids all the time, even my 7 year old is getting really good at deconstruction/analysis now. It makes watching ads quite fun really.
August 16th, 2008 at 12:22 pm
Good idea Samian
August 16th, 2008 at 12:36 pm
BP is right on this one, the moves made by investers were perfictly rational in this instance and perfictly predicted by traditional economics.
Even though they all would have benifited more if they all kept investing their money they dont know that others will keep doing so and as such the rational thing to do under risk managment is to remove one money, its an oft studied phenominon in psychology known as ‘the prisoners dilema’.
Though, in typical me fashion, I choose to take a moral sthand on this one and not withdraw my money and contribute to the speculation, probally one of the most irrational things ive ever done but I did it because for some reason I saw it as worth it. Interestingly I knew I would loose this bet and its the first time ive ever lost on a financial investment, lost two thirds of my savings infact. Though since Hanover has made the wise choice it looks as if I will get most of it back. lol.
August 16th, 2008 at 12:40 pm
There is more to these double bubbles than you are recognising.
I suggest you go to my webpage and read the two latest posts - my NBR column “Dealing with depression” and the essay “Double Bubble, the Oil and Trouble.”
This later is written for my international colleagues so the term green is used in a generic sense.
http://www.rmastudies.org.nz/
August 16th, 2008 at 1:18 pm
Blue Peter said
>Infinite economic growth, in an economic sense, is possible, if the amount of >raw materials extracted and energy produced is at or below some base >sustainable level; any additional negative externalities (ie. pollution) are kept >below the sink capacity of nature; and we have a fiat money system.
This is an interesting idea, intriuging, even. Have you got a reference that isn’t just from a rightwing thinktank?
August 16th, 2008 at 4:35 pm
I don’t want to disagree with any of the points or arguments made here but suggest there are a few more dimensions to the problem.
And we need many reforms is this kind of cycle is not to repeat itself.
I suggest to go the Centre for Resource Management Studies web page and read two of my three most recent postings - my last NBR column on “Dealing with Depression” and a longer essay “Double Bubble, and Oil and Trouble” which takes a long look at the history of speculative bubbles and shows that any such bubble generates financial excess and loss. So the trick it to stop such bubbles ever forming or given that they have a certain inevitability make sure they are short lived and don’t allow the financial feeding frenzy to explode too much.
Any increase in demand for a product or service causes the price to rise initially.
But NORMALLY markets increase supply to meet the demand and the price falls back to normal. (Take the iPod or the CD). A bubble forms when the increase in demand continues to generate ever increasing prices because of constraints in supply and people persuade themselves that prices will rise for ever.
Of course eventually all bubbles burst and prices to return to normal and the financiers lose their shirts and so unfortunately to most other participants.
August 16th, 2008 at 9:47 pm
The US housing buble and the sub-prime crisis were a direct consequence of HUD funding GES’s such as Fanny Mae and Freddy Mac and turning a blind eye to financial irregularities in those company’s accounts as long as HUD’s overarching performance statistic did what Congress and the President wanted - gave the appearance of increasing proportion of Americans achieving the American Dream of owning their own home. The affordability issue was swept under the carpet. A classic illustration of “who watches the watchers?” Clinton and Bush are equally to blame for the housing finance meltdown. If there was ever a perfect illustration of why government’s should stick to governing instead of directly interfering in the free market this is it. Government self-regulation is about as likely to work as industry self-regulation.
August 16th, 2008 at 11:52 pm
Perhaps one day NZ’rs might come to understand that getting rich by selling houses to each other is a stupid pyramid scheme.
In NZ people give their money to these finance companies with no question to the risks involved in doing so, just because the investment is returning a high return doesn’t mean its a good investment.
Also in NZ we lock to much money away in real estate, capital locked away in real estate isn’t doing anything to produce goods and services which we can then sell to the rest of world.
August 17th, 2008 at 12:44 am
“Even though they all would have benifited more if they all kept investing their money they dont know that others will keep doing so and as such the rational thing to do under risk managment is to remove one money, its an oft studied phenominon in psychology known as ‘the prisoners dilema’.”
Sapient, which is why I believe that the government should have bailed Bridgecorp out. Yes, Petricevic was a crook in everyone’s opinion, but by letting Bridgecorp fall, you saw at least a dozen good finance firms that collapsed because everyone panicked and withdrew their funds due to the “prisoners dilemma”
“Also in NZ we lock to much money away in real estate, capital locked away in real estate isn’t doing anything to produce goods and services which we can then sell to the rest of world.”
Well, turnip, we did try the Stock Exchange, but far too many people got burnt and scared off when the market crashed in 1987.
August 17th, 2008 at 7:27 am
On the issue of real estate being a good investment or not I read that (in relation to a pool of earners supporting retirees) a small country can use migration as a tool. So it follows that migration is a tool governments will be looking at and house prices are (in NZ) susceptible to migration flows. This is one issue where business will be leaning on the main political parties. Of course we need skills but retraining of older workers is healthy and there is the trade off between affordability and economic stimulation via the property industry.
August 17th, 2008 at 10:47 am
Greater regulation is not necessary. In fact less regulation would encourage investors to put their money directly with people they know and trust.
eg: lending money to their neices and nephews to buy their first home.
Not necessarily: I purchased most of my solar panels and batteries using my credit card. The bills will eventually be paid off. Without consumerism I would still be totally reliant on the national grid. It doesn’t mean I have any responsibility for finance companies falling over.
Yes. the artificial ‘values’ of the housing market have more to do with our financial woes than consumerism does. When people/companies/pension funds invest in a market that is artificially inflated we all lose.
August 17th, 2008 at 12:15 pm
Immigration simply increases demand.
So why should that drive up the price of housing? The market should respond by supplying more houses. That is what happens in most sectors such as cars, CDs and iPods.
More to the point, Houston absorbed about 130,000 households from Hurricane Katrina and house prices rose 0.5% and the housing stock was greater at the end of the year than at the beginning.
How could that be?
It certainly could not happen in Auckland, or Christchurch or Sydney or in California, or in Florida, or in Honolulu.
Why do you think that might be?
August 17th, 2008 at 12:46 pm
“Why do you think that might be?”
Let me guess Owen; the Auckland/Christchurch/Sydney/&c Greenbelt?
August 17th, 2008 at 1:06 pm
As an economist, a Green and a socialist I am intrigued, appalled and terrified by the current liquidity crises.
This crises was not caused by the collapse of Bridgecorp. The collapse of Bridgecorp was a *consequence* not a cause.
The collapse of finance companies in New Zealand dates from before the international liquidity crises (which was caused by mis-priced risk) and started with the collapse of the automotive financing sector. Probably caused by criminal car dealers, but they seem to have mostly gotten away with it.
Frog is right and wrong about traditional economics. It depends which part of traditional economics is being considered. Informational asymmetry is something that has been identified only recently and is still poorly understood. It relates to behavior which is very poorly understood by economists, who mostly do not have much life experience (there are exceptions but most economists grew up and continue to live in the educational systems so are sheltered from the pressures and contradictions of modern life).
And it is not economists who insist that the economy (as measured by the GDP or resource through put) must monotonically increase: that would be the politicians!
Informational asymmetry is the key to the latest round of finance company collapses. How many people can read a balance sheet? How many people could read a finance company prospectus and understand the difference between lending to developers (Hanover) and lending on established buildings (AMP/ING)? How many people know what a credit rating means? How much of your savings should you put in a B+ rated company compared to A-? How many people know that A- and B+ are *not* almost the same? (http://www.investopedia.com/articles/03/102203.asp and http://en.wikipedia.org/wiki/Bond_credit_rating help).
All the above is very very specialised stuff. I specialise in it and it makes my head spin, I have to concentrate and spend a lot of time before I can evaluate a finance companies prospectus.
There is an urgent need for regulation of the financial sector if it is going to survive. Finance companies that advertise retail debentures must be rated by accredited rating agencies (regulate the accreditation). The rating must be prominently displayed. It must be in a language that is common to all agencies (Moody’s Caa = S&P’s CCC and Mody’s C = S&P’s D = in default. How can the average punter cope with that?). Financial advisers need to be accredited and barred from taking commissions or gifts. The phrase “secured debenture” should be outlawed.
It is the role of the state to iron out the inequalities in knowledge and information in the retail finance market. The situation that allowed Nathan Finance to get money trading on a well respected NZ business name, to which they had no connection, and sink all that money into a vending machine business in the USA. How many investors in Nathan Finance would have invested directly in a vending machine business?
peace
W
August 17th, 2008 at 1:13 pm
I think we should limit ownership of new zealand property deeds to those who are citiens or perminent residents of new zealand and busnesses registered in new zealand. also, we should gradually shift out tax on to land and away from effort.
August 17th, 2008 at 2:17 pm
Good ideas Sapient we should also be going after landlords anyone who is owning property and renting it out needs to be heavily taxed and we need to remove loop holes where landlords can use their rental properties to limit the tax they pay.
I have a brother who owns 3 retal properties and pays hardly any taxes he also qualifies for WFF because its a stupid scheme and is based on how much you earn not your assets.
Anyone in NZ who owns and rents out a property needs to be declared enemy number one and taken down.
August 17th, 2008 at 2:30 pm
The “greenbelt” (or Metropolitan Urban Limit or Urban Growth Boundary is a key part of the overall package which constrains land supply, but essentially the international analysis shows that the cause is heavy handed regulation of land use, couple with very high compliance costs, and long delays in processing.
In lightly regulated markets housing is affordable. In heavily regulated markets it is not.
I just wish Councils would focus on the environmental requirements of the RMA and not import Smart Growth and similar fads from the US which after all were intended to price Blacks and Hispanics out of white enclaves after the Civil Rights Legislation said it was no longer legal to simply zone them out.
Smart Growth is actually “Whites only growth.”
August 17th, 2008 at 2:33 pm
turnip,
I dont know so much about chasing down landlords; the rental of houses and flats is extremly useful for those with little money. without landlords I wouldint have a flat to live in. that said, i certainly agree with a capital gains tax but its level should be kept inline with the other taxes.
August 17th, 2008 at 3:01 pm
turnip,
“Anyone in NZ who owns and rents out a property needs to be declared enemy number one and taken down.”
Careful now, Helen Clark owns six rental properties so what you are saying is “take down Clark”.
Price of second hand housing stock will never come down until new houses cost come down (after all, if you paid $400K for a house you wont be selling it at anything less unless under financial pressure in a morgagee sale situation).
As even modest new Fletcher built group housing built down the road from us here in darkest Manurewa sell for $400K, I dont think second hand housing will drop significantly over the short, medium or long term untilo new house prices drop.
You may be able to force private landlords out of their rental property ownership trough punitive taxation regimes. However as most are family trust owned or as in my case in a business unit you woyuld need sophisticated tax laws to close every loop hole.
The punitive taxation regime will have wide ranging effect on other assets owned by trusts or businesses.
You would need to be able to seperate out a domestic rental unit from a commercial rental unit if both are owned by the same business.
Maybe more IRD staff on $100K per year to collect taxes of what value?
And good on your brother for investing in New Zealand infastructure. Those three houses are three less that the state has to fund from taxation.
Your brother has done the New Zealalnd economy a service by not just providing needed infastructure, but also providing for his own retirement fund and family needs. He should be celebrated not demonised.
August 17th, 2008 at 3:16 pm
I would like to see housing being built up not out as it is substantially more efficent, plentiful and it does not impose on productive lands. Prehaps the implimentation of a land tax will see people try to maximise profits through building up; it seems to be the logical move to me. Its a pity new zealanders have such a distaste for such housing. I have no problems with flatting or dorm situations which are substantially worse than living in a tower. I wouldint mind making state housing into dorms; it would serve the same purpose and be much more cost effective than providing them with their own house.
August 17th, 2008 at 3:37 pm
Sapient, are you dreaming.
High rise housing is very expensive, especially in NZ where we have high earthquake and wind loading and is less energy efficient than low rise.
Modern low costs electronic boom boxes demand high quality acoustic insulation which is also expensive.
Also unless you are prepared to waive environmental standards it saves no more land than is “saved” by two storey housing.
People prefer low rise or single family homes with their own gardens. I thought the greens were keen on home gardens.
Your favourit kind of housing was best modeled in Halle Neustadt the worlds most sustainable city. Problem was it was only sustainable while the East Germans lived under poverty and tyranny. Once free – they fled.
Only 1.0+% of NZ land is urbanised and rural is being taken out of production. We have a surplus. Where do these ideas come from?
August 17th, 2008 at 3:47 pm
Owen,
Indeed, I am.
I am thinking more of 4 to 6 story than highrise, I know it is still expensive but it is substantially less so and avoids the urban heat island whilst decreasing urban sprawl. Could always add a greenhouse to the top of it or a rooftop garden, just to make it more green, I understand that is becoming popular in new york.
And I would rather keep it at or below that percentage, we have enough people and enough cityscape as it is, i would rather see a move back to small holdings to be completly honest.
August 17th, 2008 at 4:35 pm
Isn’t population control better? Stable population = stable housing doesn’t it?
August 17th, 2008 at 4:45 pm
Samiam,
To a certain extent yes, though there will still be demand as individuals will want to have larger and larger houses and properties and have fewer people per house, though, at risk of sounding terribly repeditive, land tax could help with that.
An interesting disscussion to have, and one I would like to see on this blog, would be population control and how to acheive it aswel as how to distribute the reproductive allowences. Though with higher levels of wealth birth rates do tend to drop so, for new zealand atleast, the answer may lie in generating a high wage economy and allowing only as much immigration as is required to keep the population stable. as it is, i beleive the average (is it mean or median?) fertility rate of women in new zealand is sitting around about replacement rate (was it 2.1 children per woman?). The problem with that is that the uneducated and unskilled denominations with presumibly lower I.Q. are breeding substantially more than the elete, when realy it is the elete that should be breeding, the ultimate effect being a decrease in the average mental capacity as I.Q. is esstimated to be only 30% influenced by post-natal factors.
August 17th, 2008 at 4:55 pm
So only Green voters should be allowed to have sex!
August 17th, 2008 at 5:27 pm
ergh, there is alot of Green voters I would not want to breed.
August 17th, 2008 at 7:41 pm
“I am thinking more of 4 to 6 story than highrise”
Sapient, people don’t want to live in that sort of housing. Why on earth would you want to raise a family in an apartment? There is no room for children to play, and of course, apartment housing cannot be easily expanded to suit increasing family needs.
Like Owen McShane mentioned, only 1% of New Zealand is urbanised, and even if we doubled it, it would still be a small portion of the country. If there are concerns about making public transport viable, remember that suburbanisation was started by the railway and the tramway; the motorway was only a new form of transportation. Of course, if the concern is about making public transport viable, then you need to encourage more firms to base themselves on the CBD.
August 17th, 2008 at 8:11 pm
lol, John and Owen, for the mean time I shall concede defeat on this one as my arguements are little more than emotive if I dont have the facts and figures availible to back them up.
August 17th, 2008 at 9:55 pm
john-ston, The simple counter argument is “people do want to live in that sort of housing. Why on earth would you want to raise a family?” Your argument seems to be predicated on the assumption that all home buyers are the same and that buyers dictate what developers build. Your argument is true two-thirds of the time but the other third is likely to grow to more than half of home buyers over the next couple of decades.
New Zealand’s history of low density housing is the main barrier to implementing housing choice, in two ways
. Property developers have a proven formula and they’ll stick with it until a major property developer proves that medium density subdivisions are just as predictably profitable. Existing zoning laws are the single biggest barrier to building medium density at a profitable scale in a viable location. Traditional subdivisions work best as greenfield developments. Medium density subdivisions work best as brownfield developments.
Local authorities have zoning laws which confine medium density to less desirable areas, and a small number of existing home owners can effectively delay rezoning long enough to erode a developers profit margin to zero. Even if a developer buys half the properties within a five minute walk of an existinf train staion the existing home owners and “preservationists” will prevent the developer from being able to replace typical NZ low density bungalows with environmentally friendly terraced housing. Combining modern externally insulated tiltslab construction with replica Georgian crescents and Edwardian terraces would provide energy efficient medium density with no loss of greenery. Have a look at Bath’s Royal Crescent or London’s Regents Crescent. Locate those on either side of a village green and you will end up with as much greenery as there is in a traditional bungalow suburb but with the housing density and walkability of a typical European village. But as long as city plans are fixated on preserving the “character” of the inner suburbs homebuyers are goin to be stuck with choosing between low-density suburbs and high-density apartments.
The older “character” homes don’t have to be demolished. They can be put on trucks and used to create a character oldtown-extension subdivision adjacent to a country town where lifestyle blocks are currently the only acceptable form of subdivision.
August 17th, 2008 at 10:59 pm
“Your argument seems to be predicated on the assumption that all home buyers are the same and that buyers dictate what developers build. Your argument is true two-thirds of the time but the other third is likely to grow to more than half of home buyers over the next couple of decades.”
No, I am not assuming that all home buyers are the same. I do accept that there would be some people for whom higher density housing would be desirable, however, as far as I see it, that group is largely a small one. After all, if apartments were so hugely desirable, then why do apartments struggle to sell? The supply of apartments in Auckland at the moment far exceeds the demand.
August 18th, 2008 at 12:46 am
The simple answer is that they are undersized and overpriced and aimed at investors with no real thought to the potential rental market. Apartments aren’t “higher” density they are high density.
I’m not sure what sapient had in mind with his 4 or 6 storeys, but to me that conjures up traditional European streetscapes rather than miniManhattan. The demand I referred to isn’t for isolated boxes in a highrise but for for terraces, as found in any Australian, American or European city. Australia and America seem to have a reasonable availability of housing choice. New Zealand is at the opposite extreme from Britian and the rest of Europe.
The housing market is even slower to respond to market forces than the car market is. Which is to be expected considering the size of the investment involved. It does seem that every nought added onto the price moves the product evolution out to the next unit of time: year, decade, generation.
Which means it takes a generation for those to move from one dominant housing model to a better one. We had the quarter acre baby boom generation after WWII, followed by a generation of section sizes shrinking along with family sizes and the emergence of the town house enterpretaion of modern flats. What we will see in this generation is those first two generations retiring and downsizing without resorting to retirement villages or pensioner flats ghettos.
Maybe this time they will actually get close to the 1950s housing utopia that the Ministry of Works never quite managed to deliver.
http://www.nzhistory.net.nz/media/video/film-clip-call-it-home
August 18th, 2008 at 1:24 am
What I had in mind was townhouses/terreces in the moderate distance from town range and larger appartment buildings clustered around the main business areas, my 4 to 6 story thing is mostly just to do with trading off the advantages of compact housing close to major employment areas and avoiding the urban heat island whilst avoiding the slum like conditions produced in ‘the projects’.
August 18th, 2008 at 10:09 am
I invented the term townhouse while working in the Auckland City Council in the sixties. The current plan was to demolish the whole of Freemans Bay and Ponsonby because it was “slum housing”. The only reason the housing was degrading was excessive regulation. We removed the regs and the whole transformed itself.
At that time too you could only build a house or a flat. I did the demographic studies which showed that we needed a greater variety of housing types. And hence the town house (terrace house) was born. The Herald pilloried us with pics of Coronation Street on the front page. Of course town houses took off and were helped by the demonstrations we build in the land which had been cleared in Freeman’s Bay.
Auckland is actually quite a high density city ( a low density region of course) running at about twice the density of equivalent cities in the US. So we have thousands of terrace housing blocks and in the most expensive as well as the cheapest parts of town. We specifically zoned for these densities around shopping centres and transport nodes and that is where most of them are.
Sapient, I do suggest you drive around with your eyes open.
August 18th, 2008 at 10:16 am
Kevyn
You are wrong.
The financial bubble always follows the product bubble.
The lending excesses would not have happened with the housing bubble which preceded it.
Bubbles need to be financed and the financies respond, whether it is Tulipomania, or Dot Com bubbles, or Housing bubbles or Oil Bubbles.
IF you don’t want financial excess you need to cut off the product bubbles before they start. Just watch history repeat itself with the Carbon Bubble. Although you don’t need to wait. Enron’s claim to faim is that they invented Carbon Trading.
August 18th, 2008 at 10:29 am
Hi Owen, can you clarify this a bit? Are you saying the finance industry would be fine if there was not an overly hot demand for housing?
Thats what I believe anyway; our housing market is somewhat artificial because we lack capital gains limitations, and in fact encourage multiple property ownership through negative gearing incentives.
The market forces are skewed.
August 18th, 2008 at 1:28 pm
“There is an urgent need for regulation of the financial sector if it is going to survive. Finance companies that advertise retail debentures must be rated by accredited rating agencies (regulate the accreditation).”
Yup, this is step 1.
Lots of these pirates were advertising themselves as “AA+ Rated” with a little bit of fine-print saying “self-rated”. Those of us who know how the system works knew what a hilarious absurdity this was, but most people had no hope.
Add in “financial advisors” with severe conflicts of interest (because the pirates are slipping them large commissions) and it was a recipe for disaster.
Hence step 2: require financial advisors to make explicit what they will make in commission by selling you something.
August 18th, 2008 at 1:36 pm
“In lightly regulated markets housing is affordable. In heavily regulated markets it is not.”
Obviously there are extremes of regulation at which that’s true. But we aren’t NYC here.
You got any references that would show that this is the main effect? Because I thought physical and economic constraints on land availability was the main effect.
Somewhere like Houston or Indianapolis - in the middle of flat land stretching in all directions with nothing hugely valuable on it - finds growth cheap. But in general NZ’s terrain is not likely that.
August 18th, 2008 at 1:46 pm
“You got any references that would show that this is the main effect? Because I thought physical and economic constraints on land availability was the main effect.”
http://www.demographia.com/dhi.pdf - if you look at p23 on this, you will see a graph of fifty different cities in different parts of the world. You will notice that all the land rationing cities are higher in terms of unaffordability than the non land rationing cities.
August 18th, 2008 at 2:02 pm
Owen, In this instance you are overlooking what the originating product bubble was. It wasn’t the housing bubble but rather the home ownership bubble created by the federal government.
http://ti.org/antiplanner/?p=488#more-488
August 18th, 2008 at 2:31 pm
Kevyn, how did the Federal government create the home ownership bubble in NZ - whatever that means? Home ownership is not a bubble any more than boat ownership is a bubble.
Anyhow, we have an interesting piece of non-reporting on this matter. Has anyone seen this covered in the mainstream print media? Greens were on this Select Committee so I presume they agree with the findings. LGNZ is in denial but they always are.
From Radio New Zealand:
A Select Committee is recommending the Government acts to ensure more land is made available for subdivisions so that housing is more affordable.
The Commerce Committee has reported back on its inquiry into Housing Affordability, which was held following public concern over inflated property prices.
It recommends more land be made available for subdivision and local authority processes be streamlined to reduce compliance costs.
It also calls for a further review of the Building Act and Building Code so it’s easier to get new building consents for new homes.
The committee used Auckland as a case study and recommended that its regional council looks at what is constraining the supply of land for new housing.
But Local Government New Zealand says it doesn’t accept that local authority processes need to be streamlined to improve housing affordability.
The President of Local Government New Zealand, Lawrence Yule, says slow resource consent processing is not a widespread issue.
He says in the last financial year 96% of resource consents didn’t go out for notification and 73% of those were processed within the statutory timeframe.
The National Party says the recommendation means prospective house buyers will be able to set their sights on owning a home.
National says while prices have stabilised, it does not want to see them get out of reach for first home buyers again.
August 18th, 2008 at 2:34 pm
If you want an explanation of how and why financial bubbles read my paper on
“Double-bubble and Oil and Trouble at http://www.rmastudies.org.nz/
August 18th, 2008 at 7:18 pm
“Like Owen McShane mentioned, only 1% of New Zealand is urbanised, and even if we doubled it, it would still be a small portion of the country.’
Does this (99%) include Mt Cook?
Isn’t Houston surrounded by prairie?
August 18th, 2008 at 8:45 pm
“This week I was also talking to another businessman of a very different ilk. Allan Hubbard, who aged 80 is easily the South Island’s richest man, makes a refreshing change to the Holts of this world.
Hubbard, a self-declared miser, has seen several recessions come and go and managed to keep his finance company South Canterbury Finance not only afloat but thriving.
Instead of buying a Maserati or a floating gin palace, Hubbard has avoided the luxuries that most businessmen, particularly the unsuccessful ones, seem unable to deny themselves. Hubbard still works every day and drives himself to the office in a 50-year-old Volkswagen. He won’t retire, he says. “I’ll just die here.”
Although Hubbard is almost immodest in his modesty, it is no secret he bought out South Canterbury Finance’s shares in the ailing Dominion Finance because he did not want investors in South Canterbury to miss out because of a bad investment.
I wonder how deep the fabulously rich Hanover Finance co-owner Mark Hotchin, who is currently building a $30m house on Auckland’s exclusive Paritai Drive, will be dipping into his pocket to help out his stricken company.
I also can’t help mentioning chief executive of Lombard Finance and Investments (4400 debenture and note holders owed $125m), Michael Reeves, who, according to the Independent, took possession of a new Aston Martin on the very day he proposed a moratorium for Lombard Finance.
It makes you wonder about the motivation of these masters of the universe. Do they ever think of the people whose money they are spending?
I asked Hubbard what buzz he got out of his business. “I just like to help people,” the old financier told me.”
http://www.stuff.co.nz/stuff/thepress/4631146a13797.html
August 19th, 2008 at 3:01 am
Owen, I specificly said “The US housing buble and the sub-prime crisis”. The global response to the US situation is what has pushed many of our investment companies over the edge.
Bubble = something that has been inflated and can be burst.
Home ownership = owning a home instead of renting
Clinton and Bush wanted the home ownership rate to increase despite the fact that housing affordability was reducing the home ownership rate. The federal HUD was empowered to do this by subsidising high risk mortgages to poorer people. This had the desired effect of increasing the home ownership rate but in the process propped up or inflated house prices at the lower end of the market and consequently inflated average rents thereby having a similar impact to the LAQC provisions in this country. Home ownership bubble refers to the artificial increase in the home ownership rate in the face of falling housing affordability. As the statistical manipulation was essentially a pyramid scheme dependent on HUD subsidising new sub-prime mortgages the bubble was bound to burst. The lending excesses which fueled the housing market were a direct consequence of HUDs actions, particularly it’s decision not to regulate how these sub-prime mortgages were being purchased by Freddie Mac and Fanny Mae. That’s where these dodgy risk bundling financial packages could have been nipped in the bud, except that would have revealed the methods being used to increase the home ownership rate.
As with all pyramid schemes, it inevitably had to fall over. It’s the shockwaves from this bubble bursting that has taken the heat out of the housing boom. As you have made clear in your articles a boom can go on forever if the fundamentals are solid. The longer a boom continues the greater the risk of overconfidence replacing financial caution and the creating the conditions for a boom to turn into a bubble. But when a housing boom has a hidden credit bubble underpinning it then the boom is really a bubble but nobody realises this until the credit bubble bursts. In this case even the credit bubble was hidden by HUD’s failure to regulate the GSE’s and require proper accounts that would have provided an early alert to the size of the credit bubble. All because the Executive and Congress wanted to inflate the home ownership rate without addressing the housing affordability problems.
The creative investment vehicles that have been used to move the sub-prime risk onto mainstream investors might still have happened without HUD’s subsidies but not without HUD looking the other way. The US housing buble and the sub-prime crisis were a direct consequence of HUD’s Presidential authorisations to raise the home ownership rate without addressing housing affordability in the same way that the last domino falling is the direct consequence of the first domino falling. Once the chain of events was set in motion the outcome was inevitable unless deliberate action was taken to stop it. With such high level political and financial greed at play intervention was not realistic.
August 19th, 2008 at 6:43 am
Kevyn, nice summation. I think you’ve expressed it quite well.
I found Mark Hotchins comment quite revealing when he said that “the industry model has collapsed”
That convinced me the problems had more to do with artificial structures rather than people defaulting on their loans.
It has been a paper-money-go-round.
August 19th, 2008 at 7:42 am
owen mcshane:..in yr dreams..!..eh..?
“..I invented the term townhouse while working in the Auckland City Council in the sixties..”
whereas wikipedia says..
“..In architecture and city planning, a terrace(d) or row house or townhouse (though the latter term can also refer to patio houses) is a style of housing in use since the late 17th century, where a row of identical or mirror-image houses share side walls..”
and even here..
..early versions of which were built in parnell etc..
..way before the 60’s..
wazzup with that..!..
eh owen..?
phil(whoar.co.nz)
August 19th, 2008 at 7:49 am
Owen,
sorry to take so long getting back to you.
I dont drive and have only been to auckland once, so forgive me if I did not know such things about the city, from where I went all I saw was the CBD and large areas of individual lot housing. My suggestion was mearly that I thought that configuration would work well, much better than a more sprawled configuration, and that I do not beleive we need to, or for that matter should, surpass 1 to 2 percent of the habitable land mass. By the way you claim, atleast partial, responcibility for the density of auckland, I gather that you agree with my first point?
September 11th, 2008 at 8:53 pm
I wonder how deep the fabulously rich Hanover Finance co-owner Mark Hotchin, who is currently building a $30m house on Auckland’s exclusive Paritai Drive, will be dipping into his pocket to help out his stricken company. There is alot of Green voters I would not want to breed.I would. Particularly the notion of compounding interest, opportunity cost, and comparative advantage.
Zero Interest Credit card
October 27th, 2008 at 10:39 am
I found this comment at the Invisible Hand:
“Property mezz loans were 16 to 25% 18 months ago by the time you accounted for all the charges, PIK etc. Even with a 300 bp insurance cost there is still a significant margin if finance coys go crazy and pay 10 or 11% on deposits. Which they won’t do because they’ll argue the guarantee makes them as a good as bank, they’ll advertise at 8.5% and the grey rinsers will go mad for it.
I just dont see why treasury/rbnz had to allow finance companies potentially in. All of them except the 3 that would survive anyway have already gone and artificially raising them from the dead is poor use of resources and a bad signalling mechanism. Their “assets” are generally worth zero by the time the the banks get back their first mortgage so essentially the insurance scheme is just allowing them to start a new business using exactly the same failed business model.
We are seeing developers walk away from their failed projects and buying it back from the bank at 30 cents. Now we are gonna see finance companies reflate their businesses courtesy of the taxpayer - its a rort. There is just no way the rules will stop finance company shareholders stripping subsidised money out of the companies no matter how tight the rules are. Good time to be a finance partner at rmv.”
http://tvhe.wordpress.com/2008/10/24/a-run-on-finance-companies-but-no t-in-the-direction-youd-expect/#comment-4075