Will Auckland’s housing price bubble be different this time round?

Maybe. Yesterday, the Reserve Bank signalled enough concern about rising house prices in Auckland that they spooked commentators with the possibility of early rises in the Official Cash Rate (OCR) and a more certain resolve to use complementary tools, like loan-to-value ratios.

I have more hope following this statement that the Reserve Bank has learned a lesson or two from the damaging housing bubble of 2002-2007. The Bank has been forced to show leadership given the dearth of it from central government.

The most significant shift in Reserve Bank thinking is that they now see low mortgage rates primarily driving the Auckland house prices rather than real supply-side factors like migration and land supply. Easy credit is driving this housing price cycle more than anything else.

Another metric the Reserve Bank has calculated (with provisos) is the astonishing and enduring faith New Zealanders have in rising house prices. Seventy-three percent of household wealth in New Zealand is invested in housing. This compares to 56 percent in Australia.

The absence of a capital gains tax is likely to be one of the primary drivers of this misallocation of wealth and is likely to be one of the key reasons why the fortunes of our economy rise and fall in step with house prices (see figure 1).

Given the fragile nature of our current economic recovery – a high exchange rate hurting manufacturers and exporters, cuts in government spending, and now drought – the Reserve Bank can foresee a scenario where a speculative bust in Auckland house prices would be hugely damaging to our banking sector and economy.

I’ll be watching what, if anything, they do differently this time around given the Bank’s fondness to rely on one tool – the OCR – to achieve everything. Don’t forget that over 2002-2007, the Bank increased the OCR by 350 basis points, mentioning concern over increasing house prices 17 times in their accompanying statements, yet New Zealand still experienced, in the Governor’s own words (p23), “the most rapid house price appreciation in the OECD during that period”.

13 thoughts on “Will Auckland’s housing price bubble be different this time round?

  1. The most significant shift in Reserve Bank thinking is that they now see low mortgage rates primarily driving the Auckland house prices rather than real supply-side factors like migration and land supply. Easy credit is driving this housing price cycle more than anything else.

    That was what drove the last one as well. High interest rates didn’t seem to make any difference then. In fact, as our interest rates went up the easy money became easier as foreign investors bought bonds from the banks denominated in NZ$ and the house prices bubbled even more. This brings up the old saw:

    Insanity: Doing the same thing over and over again and expecting a different result.

    The absence of a capital gains tax is likely to be one of the primary drivers of this misallocation of wealth and is likely to be one of the key reasons why the fortunes of our economy rise and fall in step with house prices (see figure 1).

    It’ll have some effect but I think the biggest driver of that is the fear that NZers have in investing in new products. This fear is driven by the continuous collapsing that capitalism brings about and ignorance – a lot of people actually don’t know any better. No CGT will fix the business cycle – capitalism is inherently unstable and from that instability we get a few winners and lots and lots of losers.

    …the Reserve Bank can foresee a scenario where a speculative bust in Auckland house prices would be hugely damaging to our banking sector and economy.

    The biggest threat to the banking sector happens to be the banking sector itself and the fact that it creates the majority of the nations money supply and then charges interest on it. We need to change that and then we might be able to bring about a stable economy.

    http://www.positivemoney.org.nz/

    Like or Dislike: Thumb up 12 Thumb down 2 (+10)

  2. I don’t understand technical financial terms or much economy, but this was what i was told by a Chinese vege store owner in Porirua last Sunday.
    His wife lives in AKL while he runs his business here. He told me just last year there were 50.000 influx of Chinese immigrants to AKL (don’t knwo how relaiable this number is) and of course the house prices in AKL keeps rising, and in his view will continue to do so (so he will consider to invest more in property there). Last month His wife just succesfully bid a medium range house in AKL for the price of 480k (almost 150k over GV)…he said all bidders there were either Chinese or Indian (new or old) immigrants.
    with our current immigration policy,the price will not drop in a foresaable future, and property developers/investors love this very much

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  3. I’m opposed to a capital gains tax. There should be no such thing as capital gains, all profits should be treated the same and called income.
    All income should be taxed the same.
    (The rate of that tax and how progressive the tax scale is is a matter for another debate.)

    Then again why not just ditch the lot and have a comprehensive transaction tax instead?

    Like or Dislike: Thumb up 4 Thumb down 3 (+1)

  4. “astonishing and enduring faith NZers have in rising house prices”

    I reckon the situation is more likely due to an entirely reasonable and enduring suspicion of being ripped off by dodgy finance companies and corporate share market raiders. A few dodgy well-connected sos and sos get the money, and everyone else gets shafted – repeatedly – a pattern that has been very clear since Roger Douglas and his dodgy mates let loose the “financial markets” with little supervision in 1984.
    Property is at least something physical and tangible – whether trusting the property market and the Aussie banks is any better than trusting the NZ share market or NZ finance companies is certainly highly debatable though…

    Like or Dislike: Thumb up 11 Thumb down 0 (+11)

  5. I think a capital gains tax on invest properties is a good idea but mostly because it is an income so should be taxed like any other income. It may slow the market down a bit, but most of the value of a market is based on the expectation of its future value, rather than the eventual return it gives to the investor. The real return is either close to expectations or far from expectations, but no one knows this at the time they make their investment choices. In other words, what the majority of people percieve an investment is worth, is its value at any given time. And as the old Chinese saying goes – One dog barks at a shadow, a thousand others make it a reality.”

    Like or Dislike: Thumb up 3 Thumb down 0 (+3)

  6. Russel:

    Yes, access to credit is a major part of blowing-up housing bubbles (or just their prices…don’t confuse bubble value with scarcity value. Scarcity is still linked to real yields – bubbles are not. Bubbles are linked to a gamble on projected “capital” gains).

    But houses cannot be inflated from access to credit alone. No-one borrows $500k for a house when they can still build or buy one for half that money. The under-supply always comes first. Both factors work together.

    Also throw away that graph. “Wealth” is only linked to inflated house prices insofar as they induce a debt-fueled spending binge, and credit-card growth is not real growth (of the type that we want at least!).

    If you allow house prices to deflate you get REAL growth – you get investment, not just a spending binge (take a look at Houston, Texas – one of the highest real growth rates in the USA, with among the lowest house prices).

    Investors are not interested in starting up new business in a context where they must first cover a huge costs of living for their staff, and pay out huge monies to the (commercial/industrial) landlord before they even have a revenue stream established. Go figure.

    Please read my link:

    http://andrewatkin.blogspot.co.nz/2009/10/explaining-new-zealands-property.html

    Like or Dislike: Thumb up 3 Thumb down 1 (+2)

  7. Russel says “The absence of a capital gains tax is likely to be one of the primary drivers of this misallocation of wealth and is likely to be one of the key reasons why the fortunes of our economy rise and fall in step with house prices”

    When Australia introduced capital gains tax, that started “mansion syndrome” where people shifted MORE investment money into private housing (as private homes were excempt from CGT). House prices went up – not down.

    That’s why on the list of unaffordable housing, Australian cities make up 5 of the 16 least affordable cities in the world.

    The reason Australia has more invested in the productive sector is they have 9% superannuation, and a culture (from both the govt and citizens) that looks at share-market investment and profits as a positive thing.

    Like or Dislike: Thumb up 6 Thumb down 2 (+4)

  8. Yes photo, that’s why any such tax must have absolutely no exceptions.

    Like or Dislike: Thumb up 3 Thumb down 2 (+1)

  9. samiam – agreed. If we must have a CGT, it must be on everything.

    People who think CGT reduce house prices miss several factors –
    1/ the large majority of houses will be exempt, thereby giving them an investment advantage over other investments, and attracting MORE money.
    2/ rental houses are not ring-fenced from all other houses, and are a much smaller part of the market by numbers and especially by value, so their prices get dragged UP – not down.
    3/ it encourages money OUT of the productive sector, into housing – making that problem worse, not better.

    Like or Dislike: Thumb up 1 Thumb down 2 (-1)

  10. The vast majority of investor/landlords have no intention of selling their houses. They aren’t in it for Capital Gain but for the income they produce. With Super at $12,500 pa you need something to increase your income.
    However if someone is buying and selling houses for gain to create income then our present Tax laws do tax them. The IRD could do better at getting them though.
    Photonz is right about why CGT doesn’t work. In fact there is no country in the world where a CGT has reduced prices at all.
    Andrew A is onto it too. Mainly its a demand/supply problem. In some ways we need to move away from the idea that a City core is important so people want to live close. Moving business and employers into the suburbs and outlying areas is a good idea. It will solve transport issues too

    Like or Dislike: Thumb up 2 Thumb down 2 (0)

  11. Photonz most houses are ALREADY effectively exempt, “thereby giving them an investment advantage over other investments, and attracting MORE money.”

    I think you are assuming that the starting condition is all even… and it isn’t.

    A CGT WILL reduce this part of the problem, but not resolve all of the many other contributors to high priced housing. LESS money will go into housing in the

    … which means that your further consequences of prices going up are not applicable.

    Reducing the banker’s incentives is not to be ignored. Whacking the council to get it to do something about the land availability is not to be ignored. Laying on a land tax of some sort that takes away the profiteering of the land bankers, cannot be ignored. Removing negative gearing incentives cannot be ignored. Putting the council back in the land infrastructure development business cannot be ignored. Getting councils either all in or all out of the inspection and insurance business cannot be ignored.

    The housing MESS here is a product of one group’s having control over it over several administrations and a badly broken model (choose either English where council does serious inspection and warrants the house fit, or US where inspections are private and the banks and customers and insurance companies enforce that same condition). There is more blame to go around than one can cram into the blender. Nobody escapes. A CGT is one aspect of it and it is a necessary aspect of it.

    BJ

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  12. 1) Introduce Stamp Duty on all houses (in Aust thats $18K to $500K and decreasing ratio after that
    2) Introduce CGT on all secondary homes and investment properties
    3) Introduce additional tax on migrants purchasing properties of say 25-35%

    The market will fall into balance then.

    Like or Dislike: Thumb up 4 Thumb down 1 (+3)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>