Mark Hubbard
Its great to see your council is jumping into new investment with such enthusiasm. It going to be such joy to see how it competes with the private sector. ChCh council leading the way again.

http://www.stuff.co.nz/business/industries/telecoms-it-media/2530060/Bro...

"The mean house price to earnings multiple in the United States is now around 4.4 times, while the New Zealand multiple is around 7.8. Our market remains horribly over valued and horribly irrational" Taken with our disfunctional economy and endless govt failures, the best thing the younger skilled and qualified sector can do is to bugger off as fast as they can.

Re #1: Things that can't go on forever ... don't.

#7 is right on.

Compare and contrast:
http://newsfrom1930.blogspot.com/

"Our (housing) market remains horribly over valued and horribly irrational." To this I would add: "and horribly constructed".

Bernard : that Steve Christ is a cool dude. Scare the crap out of you with his factual article and charts; then offer you a 372 y.o. solution to help you benefit enormously from the upcoming commercial property collapse, for $ US 72 p.a. ( between you and me, if I could crystal ball the future so assuredly, and know how to make out like a bandit from the collapse, you'd need to add a few zeros to that $ 72 to get the scoop from me !)

Further to #7,
http://news.goldseek.com/MillenniumWaveAdvisors/1245567360.php

and lets not forget US interest rates are generally a lot lower (around 20-30% less than here) - so US household income going towards a mortgage is well under half of what it takes in NZ. HOW CAN THE GOVT SAY ITS GOOD THAT OUR HOUSING MARKET HAS NOT CRASHED.

Bernard, you are so modest, if it weren't for your national culture perhaps you might have included this in 'Top 10 at 10':

http://www.interest.co.nz/ratesblog/index.php/2009/06/23/poll-result-45-...

Follow it through, ballsy stuff.

Good to see you back Les, I thought you'd been conscripted to the latest task force:

http://www.stuff.co.nz/business/industries/2531109/Govt-will-set-up-prod...

Bernard

Interesting that Stats NZ gives the average hourly wage at $26.80 per hour - around $51,500 for a full time worker - makes your suggestion of a ratio of 7.8 seem a little facetious.

It's hard to read too much into a US median when they can report the median Detroit house price at US$7,500 when a decent house in the city still costs around US$100,000 and plenty of homes in the city sell for US$1,000,000 plus. It seems that the US statistics are swamped by tens of thousands of semi derelict, abandoned or foreclosed houses selling for peppercorn prices.

Bernard, you know perfectly well that on a country-wide basis US property has always been significantly cheaper than NZ because of the large tracts of abandoned housing in city centres throughout the US (except for California, NY and Hawaii). Such a differential is meaningless if it has existed for 50 plus years and nothing ever happened to change that differential - why on earth would you expect that differential to suddenly change now?

I've said this before - that the ratio of household incomes to house prices in NZ is similar to what it was in the 1950s (when interest rates were at a similar level to today's). Just because ratios were lower in the 1980s (which propagated into 1990s prices) when 1980s interest rates were averaging 16.5%+ does not lead to any remote expectation that prices will return to levels which make those ratios possible again.

I think that it's you Bernard who is horribly irrational and horribly overvalued - basing housing price predictions on nonsense and nostalgia rather than any genuine analysis of the fundamentals and facts, and then peddling the garbage like a doomsday soothsayer.

Chris_J,

You can't deny that comparing apples with oranges makes for exciting reading.

Bernard,

Do you have any data on North Korea's property market?

Chris J: "I've said this before - that the ratio of household incomes to house prices in NZ is similar to what it was in the 1950s"

I wasn't around at the time and maybe it's just "nonsense and nostalgia" but I was under the impression that a family could buy a home from one income in those days (there was only 1 income per family for the most part) whereas this is rarely possible today.

Mitch O/ janet : folks in Nth Korea will gladly swap their entire village for your one house, should you wish to change places with them.........."in the N's" indeed !

Commercial property looks like road kill

Look at the Credit card defaults, they are interesting....9.4% write offs....

http://www.wealthdaily.com/articles/credit-card-companies-say-lets-make-...

but there's more....

"Apparently, you can cut your balance in half with a phone call."

but there's more....

A very large % of houseowners in neq equity....

http://www.examiner.com/x-1528-Baltimore-Personal-Finance-Examiner~y2009...

So when are these ppl going to start spending again? No time soon me thinks....

So what's the default / CDS exposure of the big US banks to commercial property? Just how long can the US Govn continue to pay through the nose (via AIG CDS's, say) for this?

regards

"Commercial property looks like road kill"

Bernard any chance of looking at commercial property in NZ context? We looked at buying land to set up a production facility some years back but sellers were expecting $500-1k per sq.m. for industrial wasteland >10km from wgtn CBD. Thought Nah, we're not property speculators - might look again if prices have come back.

Wally you are kidding right? in 30 years the USD will be worth nothing....The Comp Controller ? was saying by 2040 the USA would be paying out all of its GDP in interest, and medi* services and that was before this present fiasco...

You don't have to run them to maturity, though Steven. Just sell the IOU to another counterparty when it suits. I wonder if their like the old Bank Accepted/ Endorsed Bills that had recourse to any acceptor/endorser?
PS: You're on to it @4.59pm

Janet: but who's going to buy off me? I cant see it....Ppl like Peter Schiff and Jim Roger's think the US is a basket case....Im with them, stay away from the USA is my motto...I cant see how they (the USA) get themselves out of this....fundimentally, they dont have anything of value, they dont produce anything, they dont have that much resources/commodities....its like someone on welfare....would you really give then a Credit card with a 10k limit? like noooooooo way.

Roger,

not to mention microsoft, dell, apple, nike, CNN ... the list really does go on.

@ Chris J - comment re: price/income similar to the 60s.

I am also not so sure about that - the graph bottom left of page 7 here says otherwise, and it only got worse from 2005-2008

http://www.oecd.org/dataoecd/41/56/35756053.pdf

Roger,

agreed. The Americans also have an easy way to stop their debt increasing ie stop fighting a war in Iraq. In NZ I think our household debt levels are a lot worse, and there's only way to deal with that going forward - stop paying silly prices for houses. Remember also that US households only have around 60% of wealth tied up in the home - we are 90%. Does not that make them less risky cause they are better diversified??????

So why do we think we are better of than in the US and the UK??? the only reason ever given is that our banks are in better shape. Better shape to carry on a bubble?? Will they be in better shape when the buibble bursts?? And what does it matter that they are in better shape when most of them are not owned by us anyway - surely the more profitable they are the worse as that means more and more of our earnings are exported overseas. Any wonder we have an enormous Current Account deficit? The insanity in this country is unspeakable.

Roger, jimmy - we have three strands to our productive sector, primaries, tourism and PI - what should we do? (You know the answers - how many people will vote for them though?)

Roger - Property Investment.

Bernard,
a couple of candidates for your next top 10

Steve Keens latest at
http://www.debtdeflation.com/blogs/2009/06/24/eichengreen-and-o%E2%80%99...

Economic historians Barry Eichengreen and Kevin H. O'Rourke are using empirical data to compare this downturn to the Great Depression. I'll be referring to and adding to their comparison in the next Debtwatch (which will be published late next week, before the RBA's July meeting), but the research is so good that it deserves to be highlighted now.

Their conclusion is compelling:

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

the article Keen is quoting is from
http://www.voxeu.org/index.php?q=node/3421

The full summary is

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

And maybe our local pensioners who invested in dud finance companies could take a leaf out of these german pensioners book

http://www.telegraph.co.uk/news/worldnews/europe/germany/5612006/Pension...

re: open plan offices? IMHO they CAN work if there is reasonable space per person and the layout is well designed, but if people are too crammed in they are horrible environments

Roger: Something like 74% of the USA's economy is (or was anyway) domestic consumption, services, shopping etc etc and a huge % of that was fueled by debt. The US domestic sector is being decimated right now....whats left has to go to pay back the debt capital and the interest its earning. I dont know what the US financial sector brought into the US as earnings but the UK for instance I think was 20%+ of GDP...if the US is similar....well take 74% and 20% away from 100%....you should get the picture....

Yes NZ only produces "some beef, sheep, kiwifruit, and a blob or two of butter" but funny thing is, food is an essential of life."¦"¦"We're on the cusp of grand riches, we are (ha ha)" No I dont think so, we are on the cusp of the peak oil downside problem....but our farmers do do well for their numbers, they produce a high quality product, efficiently and cheaply (when you take tarrif advantages of others away)....

So we have spare food....something last year Japan was very worried about as they only grew/produced 36% of what they ate....When a Govn says its worried about that low a %, you should be taking note IMHO and ask why are they worried....why is it enough of a worry to mention it....

Jimmy: "So why do we think we are better of than in the US and the UK??? the only reason ever given is that our banks are in better shape." I will give some reasons, Because we produce something, food, coal....commodities, more then we need for ourselves.......Listening to Obama he's pretty clear that the US has to get back to producing......swinging a country into "producing" takes 10+years, while the debt piles up, while asia runs rings around them...The UK rode the last 30 years on its cheap oil which either this year or next year it will be a net importer of....A significant % of the UK's GDP was financial earnings, thats all gone....and whats left will be regulated to buggery....Yes our personal debt is too high, but we can fix that, the Govn debt is low but going to grow....paying down debt and saving fixes both those issues....

"The Americans also have an easy way to stop their debt increasing ie stop fighting a war in Iraq." The american debt is far more serious than the stopping cost of the war in Iraq, its structural....reading up on the State of California's problems is suggested...

"Write the US off at your peril"....there are far better looking markets around us in asia, NZ is small by comparison so small %s in those markets mean big %s here.....The peril in asia is far less than dealing with those two timing Americans who's lobbists will kill off anything that threatens them domestically...while rampaging through our businesses with their intelectual property games...

regards

Yeah the property market may still be overvalued, but we seriously don't want the kind of market correction, chain reaction effect like what the US has had.
It wouldn't be good for anyone.

If it is overvalued a period of no gains is the best remedy.

The last government should have done more to try prevent the boom in the first place, but they were loving it, happy with people living in dream world thinking they were getting rich.
Labour even repeatedly moaned about the Reserve Bank increasing interest rates, threatening to change the law so the RBNZ could keep inflation higher.

phil,

speak for yourself. Plenty of first home buyers would love to see a housing crash and the benefits to the economy would be enormous. Think how much of an impact it would have when FHB households have 10 to 15 thousand less interest per year to pay overseas and instead to consume in NZ, invest in NZ or even invest overseas and reverse the current account deficit via dividends and interest.

Great commentary fro HT Saniac. I think our culture is slowly catching up to our needs. Polls suggest that we are becoming more spending adverse (http://www.newsy.com/videos/tale_of_two_polls) as many feel like the stimulus was ineffective. On the upside consumer confidence is up, but as the post points out we can't be overly dependent on a consumer economy.

Jimmy, exaggerating again!! NZ current account deficit not 10%, "only" 8.9%.

http://www.rbnz.govt.nz/keygraphs/Fig6.html

I agree that the investment deficit is the most intractable & corrosive part of it. & overpriced housing & farms are a big contributor to that. I think that any reignition of the housing bubble (unlikely as it may seem) would (or should) keep Bollard & English awake at nights. We are already structurally locked into our account deficit, lets not make it any worse. I disagree with Phil (no relation!) that we are better off if the bubble stays inflated.

This idea that retention of property bubble prices is somehow good. For whom?
If you support this idea, then you would have to support even higher prices. Why stop at 7.8 times average income, let's blow the bubble to 15 times. Let's go for stock standard 3br 100sqm boxes on 500sqm plots being $1000000. Is that somehow a positive?

Wally - that is some people's belief. I think of it as a sort of giant, organic ponzi scheme.

Anyone who doesn't have a house could potentially benefit from a collapse in house prices, in particular if the economic fallout is only moderate. It wouldn't be pretty though.

I think you'll find there is a building number of younger people who are, in effect, speculating on housing going down (or at least not going up).

Phil is quite right saying that if house prices stay the same in nominal terms, inflation will do the job of deflating the bubble. In the late 1970s, house prices declined in real terms by 38%, but stayed the same in nominal terms, owing to inflation of about 15% pa. So by about 1980 were still the same price, but worth barely over half what they were.

The damage was still real, to those house owners, but owing to inflation also devastated investments such as fixed term deposits. Pretty much everyone lost, except those (probably very few) who had all their assets in gold, & then had the wisdom to sell about 1980 before gold crashed in its turn.

You would have had to have the wisdom of Solomon to pick a path thru the minefields...

Phil,

"Jimmy if you are worried about banks making money, sorry there is no way around that, it's part of a healthy economy."

Its also a symptom of an unhealthy economy when they make too much money (they were making a killing a few years ago, even in the US). I read somewhere a while back that in the western world the finance industry in general (Banks, brokers, insurance etc) has grown 3 fold relative to GDP over the last 30 years. Funnily enough, at the same time household debt rose 3* relative to GDP. I always wondered how they were able to make such a killing making nothing and essentially clipping the ticket on transactions. When sub prime imploded and took the banks down it became obvious - banks are dependant on our indebtedness. So my only conclusion can be that American banks current unhealthy state (relative to us) is caused to a large degree by the fact that people are deleveraging AND defaulting on debt AND in the process assets are deflating and eroding bank balance sheets. The end result after much pain will be a society that is less in hoc to banks and consequently a much smaller finance industry. This is a good thing.

"they could always save the money then buy a house."

Savings get taxed in full. Capital gains on property does not. Likewise losses on a heavily geared asset can be offset aganist tax effectively COSTING THE TAXPAYER AND MOVING SOME RISK FROM THE BANK TO GOVT. Our tax regime clearly encourages us to choose borrowing heavily over saving, and once this becomes self perpetuating and manifests iteself in a bubble the only choice for the FHB is rent or pay through the nose. A disgrace.

I've got no problem with them removing taxes on savings, I've never agreed with it anyway.

I also don't mind if they bring in capital gains tax, although to some extent we do have it anyway, but I don't think it would be a big factor in preventing a bubble anyway.

Although it could have the good effect of some people not thinking their house is such an ATM and not consuming as much.

Bernard

Apologies for the slightly terse comments yesterday, but re 1950s income ratios:

In 1951 the ratio was around 4 (average wage about 700 pounds - one household earner only - and average house price about 2700 pounds) - remember that was for a 90-100m2 house which would be seen as being modern if it had an electric range, electric hot water and an internal access toilet.

Compare that to the current 4.5 or thereabouts for the current household income (approx 1 and a half income earners) and the current level of pricing does not seem that out of line - especially since the average house is nearly half as big again and offers a significantly higher standard of accommodation.

Consider various intervening points:
1975 - the ratio approached 5 for a single average income
1990 - for a single income the ratio was 3.3 and for a household around 2.5
2002 - 4.1 for a single income and 2.9 for the household income

High interest rates from 1976 until 1991 forced the ratio down, the only reason why prices could survive at those levels was that there was correspondingly high inflation which meant that the differential house prices and their replacement value was quickly made irrelevant, but when inflation came under control post 1991, it left the house prices with no where to go but up - to go back to more sensible levels.

If you think logically about the income ratio you will realise that ratios at around 3 or 4 to a single income are unsustainable in a market that requires large quantities of new housing stock built each year (remember about a quarter of houses are less than 20 years old). Even a modest house requires at least a cumulative full years work just to assemble the materials on site, let alone the work that goes into the manufacture of those materials plus any additional costs and taxes (GST, development levies, etc) and the raw cost of the land.

At the moment a very modest 150m2 dwelling fully ready to move into (including land development but excluding raw land cost) will amount to at least 4 years income. Therefore, how anyone could argue that an income ratio of 3 to 4 is appropriate is beyond me.

The only way such a situation can exist in a market like NZ's or Australia's is during periods of high inflation. (In the US where there is a gross over supply of housing and a surplus of peppercorn properties that drag the medians down)

Chris_J, what is the source for your statistics from 1950? In http://www.rbnz.govt.nz/research/fellowship/3324563.pdf for example (page 43), which I have copied here: http://i41.tinypic.com/2q2fhqh.jpg, the graph shows house prices to household income ratios were 2.5 in the early 1960s, dropping as low as 2.25 in 1970. There was a brief peak to 3.25 in 1975 but that was immediately followed by a 45% (in real terms) price crash.

Inflation and interest rates were pretty low in the 60s too: mortgage rates were between 5-6.7%, inflation averaged 3.2% with a brief peak to 7% (http://www.stats.govt.nz/tables/ltds/default.htm).

Chris_J, so what is the source for your numbers, and for your figure of workers per household? The RBNZ have good sources for average household income, they wouldn't need to use something as crude as a static number of workers per household times average income.