Some solid reasoning in there, but the "crash" has been a long time coming (if it does actually come). Regarding #7, I am happily domiciled offshore with a steady but challenging professional job. If I were to NZ, I would have to prepare myself mentally for "kicking back" (which I'm personally loath to do at this stage of my life). I agree that many Kiwi expat "cruisers" would love to retun home for the lifestyle. OTOH, there are probably a fair number like me who would balk at blowing their hard-earned cash on NZ real estate. Even among the 03-06 expats, there is a probably a small army of suckers who blindly sold themselves into mortgage bliss.

With a lower % of transactions at the bottom end - it seems doubtful prices moved up at all.

The latest unemployment numbers out of Australia (refer The Australian) should sober us up here as well. Prof Steve Keen has a few things to say on that score on Debtwatch this evening.

Re the surge in cashed-up expats and foreigners buying: if they were really looking for a deal, wouldn't they be looking at the numerous other countries which have already seen their real estate markets dive?

JC,
ask some hudred thousand Kiwis who invested in various finance institutions what they think about retarded investment.
And they don't really speak English in Japan

I agree J.C. I bought a rental 'investment' 18 months ago - one of the latter of the 100% mortgages. I got it at about 25% below market rate at the time, which I thought would be an ok buffer, and fixed on the best rate possible at the time - 30 months. I thought running at a small loss would be worth it in the long term. Now the market has fallen back to what I paid, I still am paying the high interest rate locked in for ANOTHER 12 months - drooling soberingly as I stare at those low rates that would turn a profit from my rental, and to top it off, the market rents have stayed the same! As long as I can service the mortgage, I am one of the lucky ones - but looking back, I would say that highly leveraged NZ rental property investment is looking like one of the most retarded investments I may have made. Still, its been a big learning curve. Wisdom - that which one gets, just after one needed it. At least I got me some metal when the dollar was at its peak. Very soberingly put Bernard. If only they taught that kind of economics at school...

Dear Allen,

Yes, the Englishman is fortunate that he speaks Japanese. Funny that you mention that the Japanese don't speak English because non-Japanese-speaking Aussies have singlehandedly created their own property bubble.... in the dying ski resorts of Japan! My bet is that the Kiwis and the Aussies will flog the property horse to death in their own indomitable style until all hope is gone. It's priceless if you think about it.

Matt in Auck,
Many thanks. Without giving too much about how much my wife and I were earning a few years ago, my bank was willing to lend me that much. You're right. I couldn't afford it. But that wasn't stopping the bank.
cheers
Bernard

Matt and Bernard - Am I reading what you appear to be saying - that Banks were lending as much as 7.6 gross annual household earnings a few years back?

How many times annual household earnings are they prepared to lend out now?

We need to see more discussion of these mortgage load to annual income trends.

JC is correct land prices are falling in very desirable parts of the world. The numbers just don't stack up for investment in NZ's property market. Higher interest rates, much lower wages and very overvalued land prices with poor quality housing on top. I'm going for the size isn't everything argument here. I'd always choose a well-designed, well-located 100sqm house/apartment over a poorly designed 200sqm wheatabix McMansion any day. NZ might be nice for the retirement demographic - but that cannot be good for the nation. Look at Malta, Spain and Greece - the young/ambitious have to leave the country if they have any hope of prospering and the ones that remain become resigned to the politics of resentment as they are increasingly locked out of the local housing market.

Quite happy to be in cash and able to wait for the real bottom to arrive.
The worst has yet to hit and when it does, the screaming demand for English to
subsidise the bloated mortgage debt of those who gambled in the boom, will ring loudly across the country. Fat chance of that thanks to Standard and Poors stranglegold on Bill's fiscal throat. Thank you to Standard and Poors. Don't let go that throat.

But we live in a poorly educated society, so banks continue to reel in their mortgage prey and agents do their best to grab any free money going.

Even the RBNZ is in on the madness, doing its best to destroy savings in the hope of porking some growth or at best holding the GDP slide as the country runs backwards.

Meanwhile Cullen escapes with a perk "do nothing but take the salary" position, is probably wishing he had invested the boom time revenue in a stash of gold locked up under the RBNZ. But no, he blew it.

and boomers are stating to retire and will need to unlock cash from property.

Bernard you're certainly stubborn I'll give you that. You might think you are doing a favour pointing out worst case scenarios - but the problem is that some lemming type people believe you. I enjoy the various opinions on each article each day, and could probably save a lot of time by not turning on my PC to see what rubbish is being splattered through the media on an almost daily basis.

Just as there are people would would love for you to be right, I will continue with the knowledge you are wrong, but get the complete sh1ts that with a lack of financial education in this country people will line up to listen to the man with his own website woo hoo.....

Yes i do have property, so i have a vested interest in my opinion being correct. Perhaps the best thing to do is just buy more as there probably will not be a better time than within the next 6 months to further invest in something tangible, something i can drive past, something i can touch, something i actually own for as long as i decide to keep it

Neven - you however are correct, Mr Bernard Lemming Trainer Hickey could actually look at your comments and investigate deeply into those thoughts if he was neutral - just a shame he is so swirled up in his own ego that he wants to drag the economy down just to be right.... Like a little mini George Bush with a kiwi accent.

andy hamilton,
similar article from WSJ
http://online.wsj.com/article/SB123905105150794313.html?
"Homeward Rebound: Weathering the Storm With Kin "

Andrewj - just someone with my own opinion who doesn't get brainwashed by listening to the same verbal diarrhea spun out by Mr Hickey with his own website woo hoo...

I might have lost up to million since the market tanked, but have clawed back over 550k so far this year without having to do much more than think. Comedian... yeah right...

This from Gibber at;
http://www.interest.co.nz/ratesblog/index.php/2009/04/09/opinion-how-nz-...
Supports my above post, you guys are stuck in a diversion to what is most relevant;

-Faced with an unprecedented explosion of debt obligations "“ many of them apparently fraudulent, and certainly in violation of traditional credit practice "“ Iceland has turned this inflationary solution inside out............ By indexing debt to the rate of inflation, it has guaranteed a unique windfall for banks that vastly increases what they receive in a "down market," at the expense of wage earners and industrial profits. Linking mortgage loans to the consumer price index (CPI) in the face of a depreciating currency and heavy balance-of-payments drain to foreigners can have only one result: destruction of Iceland's society and its traditional way of life.

Rob - just incase you missed my reply to your vitriolic attack, its here;
http://www.interest.co.nz/ratesblog/index.php/2009/04/08/bill-english-tr...

Nice graph Kieran,

I tend to agree with your analysis, and Bernard makes some good points. What has changed in recent years is the determination to pay off the mortgage loan. That used to be the objective - pay off the mortgage. Any fool can borrow money.

The problem with high inflation (what else has the increase in house prices been?) is it destroys the incentive to save. This has to be restored before the current recession is over. Every well meaning attempt to ease the short term effects has to be paid back and so it also extends the period of difficulty.

When every street is a sea of for sale signs then we will have finally hit the bottom, until then it is a slow grind down with short bursts of euphoria.

I keep records of A sth Auck suburb, fairly well rounded for high price home to rentals.
The Oct/ Nov 2007 period 108 sales
highest price $606.000
lowest $262,000
Ave $308,000

Feb/ March 2009 28 sales (which is a slight rise over previous periods
Highest $460,000
Lowest $203,000
Ave 325,000
The mean Ave has been greatly distorted by dramatic changes in distribution of types and price ranges of of the houses.... in the same way, the "ave income" doesnt mean that the majority of are actually within the band of the Ave.
It is very apparent that those houses that where selling well over the $400,000 mark, are now close or below that market around 15% discount and those that havnt sold (and would have in the heyday)are holding out or been withdrawn...
Those that where around the 300,000 are now selling some 15 to 18% below they would have in the heyday
But because a dramatic change in distribution the Ave doesnt reflect this.

So although I have agreed (for different reasons) with Bernard on
"I am sticking to my forecast for a 30% fall in the REINZ median from its November 2007 peak of NZ$352,000 to around NZ$250,000 within the next couple of years. "
I do not see the mean showing the 30% drop BH talks about, but still support the concept a 30% drop in REAL INDIVIDUAL VALUE of houses over the next couple yrs....with already somewhere in the ball park of a 15 to 20% drop...closer to the 20
And "March was just an Indian Summer before a long winter."

There also seems to be a marked drop off in new listings in the last couple months...thu repeat old listings still remain.
The land area (650700 as against 1000/1500) used to relate to price and this also seems now not to be a factor in advertised price...Which would indicate an exit of devalopers from the market.???

Keiran- I have no interest in talking the market up- I currently own no property and soon will be buying into a market in which prices have suddenly jumped and listings are scarce. The zoodle graphs you linked to are old data- they don't give any information about Feb/March.

It just seems that people are looking at graphs and what they think should happen instead of looking at what is really happening out there. The most accurate information over the past few months has come from people currently buying or selling- people here seemed surprised at the jump in March sales but people trying to buy into the market recently have been saying that there is very little good stuff left unsold.

A friend of mine has just listed a property in Tauranga and had immediate interest from several pretty average kiwi families- this property will sell in the mid-$400,000s. There seems to be enough money out there to sustain the current prices in popular areas in NZ. Building consent numbers are improving too here.

One needs to go back to Bernards POINT 2 - CREDIT CRITERIA IS TIGHTENING - where he provides the example of the dramatic change in purchasing power when mortgage lenders hoist the deposits from the 5% to 20% mark - illustrating the purchasing power for a household income of $100,000 - drops dramatically from $800,000 to $200,000.

No doubt this stiffening of credit conditions is a major influence on Bernard predicting that prices will fall 30%.

But the reality is that this credit tightening is not as yet having this dramatic influence on house prices - and illustrates why we need to hear from those in the mortgage industry, exactly how people are financing their way in to inflated property.

So come on you mortgage guys - please participate in this forum as well.

It would appear to me that there are two major things happening -

1) With respect to first home buyers - parental asistance by way of a cash injection and / or the parental home being used as additional security. Tough for kids without parents already owning property.

2) A substantial amount of investment activity where the equity in existing properties is being used as additional security for further property purchases.

If the above is happening - the major reason why the market is remaining "propped up" is because of the artificially inflated equity out there.

Hugh Pavletich

House buyer if you really are who you claim to be and think the market is picking up and the downward trend isn't really happening why don't you hurry up and buy a house then? You keep saying you have no interest in talking the market up, yeah right you haven't fooled me.

Neven,

Can I point out the "silliness" of the following:

"Our (Aussie) banks have not been bailed yet and our mortgage toxicity is not a fraction of that in the US/UK so it is in their best interest to stall wholesale carnage"

Apart from the fragility of the logic, I can guess you're saying we're in relatively better shape because our banks haven't collapsed. Barroom banter. A meaningless observation echoing throughout nation.

Keiran- I stupidly listened to people like you (and Bernard and Gareth Morgan et al) and didn't buy during Feb/March ie I gambled that it was a dead cat bounce and it was safe not to buy. I was also unsure exactly where I wanted to buy so I thought I could put it off.

At the moment- given that the few new listings coming on the market have suddenly jumped tens of thousands in price compared to what has just sold- I would say that was a big mistake. I will buy as soon as something comes up that I want- I am not waiting any longer- I don't believe prices are going to go any further down.

BTW -I am not trying to "fool" you- I just think it is about time people like you took their blinkers off and looked around at what is really happening.

Housebuyer it won't be proven a dead cat bounce untill this time next year, besides its not really a bounce more of a plataue. Activity will probably keep going during April as well because there are people like you who mistakingly think we have hit the bottom of the decline. If that is what you think then you'd better hurry up and buy before its too late then, good luck to you thats your choice but Im not willing to risk losing my hard earned equity.

I sold my dozen rentals well before the 2007 peak. I couldn't believe what people were paying for them!
My properties were bought from 1989 onwards. With 30% deposits and always showing a positive return (even ignoring depreciation claims etc).
I sold a number to people who continued to keep them as rentals. They were making very negative returns on what they paid me for the houses.
I watched as the stupidity continued and couldn't believe what levels property went to.
I too am sitting on the sidelines waiting to see what will happen. I will only buy when the return from a rental is better than the bank (by at least 3%). Property is not a passive investment. Rental houses deteriorate very quickly and over a ten year period require a lot of time and expense. Tenant issues are quite frankly a pain in the backside.
I always bought on the fundamentals and on the understanding that capital gain was icing on the cake. Not the main reason to buy but nice if it happened come sale time.

I am deeply depressed...

The fundamentals just don't suggest prices should inflate..
this is a un-real estate.

Lets see what the March and April immigration stats show...
As you can see from the graph at this link below over the last few years there has always been a strong surge in Feb followed by dips from March through to spring:

http://www.stats.govt.nz/products-and-services/hot-off-the-press/interna...

HUGH - Heatley talked, is he going to walk the talk???

Housebuyer
don't buy until the end of next year- I think real estate will fall by 40% by then.

HUGH:
"CREDIT CRITERIA IS TIGHTENING - where he provides the example of the dramatic change in purchasing power when mortgage lenders hoist the deposits from the 5% to 20% mark - illustrating the purchasing power for a household income of $100,000 - drops dramatically from $800,000 to $200,000.

No doubt this stiffening of credit conditions is a major influence on Bernard predicting that prices will fall 30%."

Get real, a lot of the boom was banks leaning on small no deposit, something that has only existed up to and during the over valued booms....and kieren graph apply reflects this. Old school good business always worked on a 33% equity for security...which could be easy achieved with a 20% deposit and slow increase in values as has happened for generations.
It is illogical to blame the cause of the overvalued market, for the correction that is happening and will be happening. The RB should never have lifted the min deposit and the banks have now done the sensible thing and voluntarily reinstated

And in case people have concerns about our centre right Party performance here in New Zealand - may I suggest they check out the Conservative Party in the UK, Republicans in the US - and the worst of thev worst Liberal Party at Federal and States level in Australia.

Just look at the Liberal Nationals performance in Queensland a few weeks back - and how through sheer incompetence they lost a perfectly winnable election.

In my comsidered view - the Government we have here in New Zealand is way way ahead of the other Governments and centre right partys of the English speaking world. This country could turn around quicker than most realise, with a solid dose of sound political management.

Hugh - thanks for your response
the key question though is - how will National implement your idea to ban MUL limits so as to free up the supply of urban fringe land?
What sort of mechanism do you want?
Do you want the government to introduce a legal provision that bans Councils from setting urban limits?
I understand what you want but I want to know what the necessary mechanism is to implement what you want

Hugh keep putting the pressure on politicians, I will be glad when this housing bubble is behind us so we can move on and learn from it. Hopefully that will only be 2-3 years away and not 10-15 years. I am not going to put my hard earned money into a deflating asset thats for sure, I would rather put it to productive use rather than flush it down the toilet.

Matt yes Its going to be interesting to see what the migration fugures are, they aren't due until the 21st.

Matt - thank you for the question above.

There is of course more than one way of doing anything - and you will be well aware that I have spoken more in conceptual terms - without getting in to the "nitty gritty" of the most appropriate mechanisms to deal with these issues.

My sense though is that we will see before too long a "performance based relationship" put in place between central and local government - with regional government thankfully shut down.

Now - what mechanisims and structures will be put in place to achieve this - I, like everyone else, simply dont know at this stage. I am sure however - that currently there is a massive amount of discussion going on, both within central government and outside of it, with respect to these issues.

The Coalition Government is acutely aware that its focus must be on local government, housing and infrastructure - if it wants to get a recovery underway in this country. The PM as we all know is very committed to raising productivity performance - and thankfully, he (and most other Ministers) has the necessary market understanding of what the "growth blockers" are in the New Zealand economy.

Lets just see whats announced in coming weeks.................

Hugh Pavletich

Kieran - thanks - Im enormously heartened with political progress in New Zealand.

Hugh - "A solid dose of sound political management" do you mean something like this, the WorldBank and IMF have advanced from imposed Structural Adjustment Programs upon indebted nations to new rules of receivership, Private Sector Development Stratagies;
David Ellerman, economic adviser to the chief economist of the World Bank, suggests there might be cause for Alexander's concern. "Making the investment climate better for one group may well be at the cost of making it worse for another group," he writes in a memo. "The Bank tends to ignore these tradeoffs and to implicitly identify with one group (usually external or foreign investors)." ............

The PSDS solution to the equity problems of privatization is to provide subsidies to the lower-income groups. The World Bank's own Development Report 2000/2001, however, points out that subsidies often do not make it to their intended recipients because of "leakage" or capture of the subsidies by richer groups.........

The World Bank spokesperson agrees that "there is no doubt that companies will serve better off customers first," but holds that there are ways to make up the difference. "You can design a privatization that puts the focus on poor customers. ... [I]t is possible to do this equitably." ...........

"The evidence is now unequivocal: both cost recovery and the privatization of essential basic services inevitably lead to deeper inequity, and safety nets fail to prevent this," concludes Save the Children UK in a recent report.

The World Bank spokesperson agrees that "there is no doubt that companies will serve better off customers first," but holds that there are ways to make up the difference. "You can design a privatization that puts the focus on poor customers. ... [I]t is possible to do this equitably."........................

http://www.multinationalmonitor.org/mm2002/092002/tannenbaum.html

No doubt John Key the central bankers favourite son will be trained to deliver.

M - sorry to interrogate you!!!!
Why do the poms and africans have Oz as a preference? Climate? Bigger country? Combination?
Its interesting to get to the heart of these issues
are you guys looking to rush back to NZ because of the economy like some in the media over here, and pro-property punters, would suggest ?

Writing from a hot pool on the Gold Coast. Which, according to the rellies in the building trades here, is DOA in terms of residential and CRE. Public infrastructure like the endless rebuilding of the M1 and the Brizzie tunnels is the safety valve, but the boom is goneburger. Mortgage holidays are the go, but most folk realise that the holiday just capitalises back onto principal, so a mixed blessing.

The intersting meme in the last few days is the notion of keeping lending to the US going, but denominated in SDR. The US has been the only country able to borrow abroad in its own currency. That, too, may now be DOA. Comments, Bernard?

here's the latest crap from tony Alexander in the Waikato Times

http://www.stuff.co.nz/business/analysis/2321195/Time-to-buy

this clown is either a simpleton or is clearly biased

There's no point in comparing the period June 01 - June 02 to now in terms of immigration - that mass flood was initiated by 9/11!!!!!! Thats was people fearing for their lives!!!!

Matt - put rather simply - the economics professionals should hold their heads in shame for their performance through these housing bubbles.

If these people had been trained properly (refer my article "Housing Bubbles & Market Sense" - it is likely we would not have had the housing bubbles today. Thanks to them - the planners dominated.

Senior Bank Executives also need to take a good look at themselves as well.

Matt, M's attitude relects the many expats here in London that still have jobs (or business that is profitable). The idea of running home to NZ just doesn't seem worth the risk, grief and exposure to unscrupulous property merchants salivating at the chance to get their hands on your hard earned cash by pushing last century's dreams. I did that in the 90's recession - so have wisdom born of age (and mistakes). I am curious, have you lived overseas (cashed up) and returned back in search of....? You seem astute, yet you are grating against the edges of NZ's supposed immunity to the wider economic realities (amongst other things). It's a lonely place to be in and everyone that I know who has experienced that frustration usually leaves NZ again ... but for good. I hope you make it, I hope things finally change there so that you can realise a future - the country needs people like you to keep trying. However if it doesn't work out, leaving becomes so much easier the second time around and you will be in very good company.

PostDiaspora - thnaks for the kind words. Yes I lived in Japan for two years in the 90s - much of my long standing skepticism about housing stems fro my time there and witnessing the destruction of their housing bubble
Yes this country drives me crazy at times but there are plenty of great things about the place too that (only just) keep me here
Hugh - I think you are spot on with your comment on economists

Hugh - the economics profession should be truly ashamed of themselves. That so few of them (with a few notable exceptions) saw the massively destructive property bubble inflating is quite astounding.

I enjoyed this article by Micheal Hudson. Its very relevant to the predicament we find ourselves. Thanks whoever posted it.

http://www.scoop.co.nz/stories/HL0904/S00068.htm

In Britain much the same has occurred. Sitting in the lounge of Heathrow airport last month, I watched the hearings on BBC where members of Parliament expressed amazement that the most seriously affected banks were not led by bankers but by marketing men. Their job was not to calculate prudent loans, but to sell as much debt as possible, without regard for the debtor's ability to pay. The result is that the Bank of England "“ like the U.S. Treasury "“ is printing new bonds whose interest charges will have to be paid by taxes on labor and industry.

This problem was bound to arise, given Europe's postindustrial faith that whatever increases "wealth" "“ even by the trick of puffing up real estate and other asset prices "“ is as productive as building new industrial capacity and infrastructure. The result of this ideology was a set of bubble economies built on debt-financed real estate and stock market inflation. Such bubbles always burst at some point. Only belatedly are nations re-discovering the classical axiom that the only way to pay for imports on a sustainable basis is to produce exports.

In recent years financial managers have persuaded many countries to sell off public enterprises like their water or energy supplies, mainly to raise the money to pay debts or to cut taxes on the highest wealth brackets. This sale of the "commons" by naïve, myopic leaders (and the "useful idiots" promoted by financial lobbyists to be their economic advisors) turns debtor countries into "tollbooth economies" in which basic services become a vehicle to extract greater and greater portions of national income and wealth for the benefit of the few. This is the antithesis of "free markets" as classical economists understood the term. They are markets designed and controlled by the financial sector to appropriate for itself the surplus produced by labor and tangible capital investment.

To promote this siphoning off of surplus income, the rich have funded extensive disinformation (propaganda) campaigns around the world. Their tactic is to use familiar and revered ideological terms such as "free markets," "economic democracy" and "fairness" to win the hearts and minds of the population while actually imposing a set of policies in stark contrast to Enlightenment ideology, classical political economy, Progressive Era reform and 20th century social democracy "“ the ideals of freedom-loving peoples everywhere. Financial lobbyists have spent billions of dollars spent on public-relations think tanks to achieve this ideological con job. They have endowed business schools and gained control of government agencies to promote their creditor-oriented point of view, headed by central banks to serve as the ideological wedge for today's anti-democratic forces. This is the ideology that has pushed much of the Third World into poverty since the 1960s, as well as today's tragically debt-ridden post-Soviet economies.

This supremacy of the banks and the financial sector took thousands of years to achieve. It was not easy to overthrow traditional social values and to impoverish so many economies by subordinating customary property relations with legal priority for creditors. Iceland only recently has come under this kind of financial attack by creditors operating globally. Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world's financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.

As an example of their warped thinking, consider an attractively priced home. Would you rather own 100% of a home free of all debt with a market value of 100,000 euros if free of debt "“ or, would you rather own 60% of the same home at an inflated market price valued at 250,000 euros? In the second scenario you would have 50,000 euros of "surplus wealth" (60% x 250,000 = 150,000 euros, compared to 100,000 in the first example). People across the globe have been convinced that the second scenario represents "wealth creation." What is overlooked is that the higher-priced home carries interest charges on its higher market price. This charge would amount to 6,000 euros a year, or 500 euros a month, at 6% interest. The same property is worth more, but includes a much larger debt overhead "“ income for the financial sector.

have a great Easter
andrewj

I did listen Kieiran a year ago when he asked me to sell some of my properties and to fix my mortgage for 5 years( I still keep all the emails Kieiran sent to me). Now I am in a much better position.

Lara, the world is facing a new kind of fear,destruction and there is no where safe to hide. The sand no longer works so don't put your head in there.

Lara

NO

No jobs = No Immigration.

Welfare and health education costs up= high cost on existing taxpayers of new migrants.

Real wages down ,real cost of living up =less income for repaying debt = more people squashed into houses falling rentals.

we are in a slight upturn phase of a long recession.Get used to it. we have woeful production and worse deficits are coming. Tax takes will be down Govt will borrow more, interest rates will climb,house values will fall.banks will have to source expensive funding. It all takes time but its coming.

AndrewJ

I'm similarly pessimistic in the long term, though I dont agree with Ian (ie monetary reform is not the solution). In essence we have lifestyles afforded to us by energy (particulaly oil) consumption, A house is a physical embodiment of the consumption of energy (energy to harvest the wood, mill it transport it, energy to make the cement etc) so as this energy availability per capita drops so correspondingly will our 'lifestyle'.

The corollary to this drop is efficiency, so if we increase efficiency we will keep the system at this level for a period yet.

The Chinese know this which is why they are investing in Brazil, Russia, Venezuela oil projects at the present time.

Debt is simply a call on the future, which is eroded by growth but without increasing energy you cannot grow, ie the burgeoning debt is a symptom (of the inability to endlessly grow) not the problem in itself.

My vision of a solution is a form of Green Economics where sustainability is valued as much as consumption. Though how this will happen I have no idea

Neven

JC looks like you took on the wrong man there and got yourself an intellectual arse whipping!!! Now that was entertainment!

Well someone is going to have to eat humble pie within a year or so?
Will it be Alexander or Hickey?
And will whoever turns out to be wrong have the guts to say it and bear the consequences?
If Hickey is right and Alexander is wrong I would hope (but do not expect) that TA would resign from his position at BNZ
Somehow though I think the truth will fall somewhere between the two of them, so they'll kind of both be half right / half wrong!!!!
time will tell....(my latest favourite saying!)

Exactly, Andrewj:
" It's hard to get an honest view from a man when his income depends on it"
And, re our housing "shortage":
Don't we just have an uneven distribution of house ownership, rather than a shortage? My landlord has 10 "rentals",( must have gone to the "make 100k on each and become a millionaire' seminar!) but only lives in his one house.

Neven - you said;
"My vision of a solution is a form of Green Economics where sustainability is valued as much as consumption. Though how this will happen I have no idea"

How about spending our monetary base into circulation debt free to build sustainable energy projects. Thus, our own monetary base can be borrowed from no-one, owed to no-one and is backed by the free energy it provides throughout the lifetime of the assets created. The maintenance jobs created a further means of entering debt free money into circulation.
Cheaper energy down the food chain and cheaper credit down the food chain, win, win.
You know the first guy that suggested they only need to take a daily dose lemon juice on sailing ships to prevent scurvy was scoffed at because it was thought to be to simple. It was only adopted four years later and 10,000 sailors deaths later when someone of note by the name of James Cook tried it and it worked.
There are more than enough sustainable energy sources to power a reasonable standard of living for all, but what is produced as a prohibitor by those the central bankers who control most of the current technology, the cost! Remove the cost, make it a service to society with which to back our own debt free monetary base.

http://science.howstuffworks.com/maglev-train.htm(magnetic trains)
http://www.environmentalgraffiti.com/business/geothermal-energy-solution-to-the-worlds-energy-crisis/173(thermal energy)
http://en.wikipedia.org/wiki/Geothermal_energy(many sources of energy)

If you have broadband, a bit of time and interest, this doco movie;
http://www.youtube.com/watch?v=NT-2fenmLnc&feature=related (Zeitgeist Addendum)
not only gives a great insight into international monetary and commercial mechanisms, but also an insight into how multinational corporations have brought the patents to new technology in order to suppress its development because it would be less profitable to them than the current technologies they own. What about competition I hear you say? The inhibitive cost of borrowing at start up reduces competition in a world that presently nothing can now be done but for the motive of profit.

Eneko - with all due respect you are falling into the old trap of directly comparing the cost of a house here with houses internationally without factoring in the cost of that house relative to income HERE. Of course if someone comes from say Tokyo a house here would seem very very cheap
Its like if I go to Huntly from Auckland and see a great mansion for $250K - wow! But when most of the households there earn less 40K then that house seems pretty pricey
the key is the price of houses relative to income and as Hugh's studies show NZ is seriously unaffordable
this is another reason why we need to stop foreigners who don't live here permanently buying up our land and houses
they may give a very small boost to the economy when they build the house and for the 3-4 weeks they are here per year, but I think the costs outweigh the benefits

Hugh:
It is very important the economics profession gets away from the Paul Samuelson inspired emphasis on "mathematical modelling" - and takes a more structural "nuts and bolts" approach to specific markets -.......
I think it would be fair to say that we have a lot of badly schooled economists, planners and valuers, causing unnecessary problems, because of their profound lack of understanding of the real market drivers."

Wrong..its not just economists, its town planing, the deskjockeys in education, DoC...everywhere
All stare down at a column of statistics and formula and forget, or rather where never taught plan simple commonsense...They live in effect a dreamworld of 'statistical optical illusions' Then we have our old school academics, Jim Salanger (weather), Neville Economics, Middleton (Education) who are more common sense than statisical... a dieing breed.

Immigration: the general economic theory is we need population growth the grow economy, increase consumption and productivity.....Anyone checked that we have gone thru 2 huge baby boom periods since early 1990, and these will be coming into the economy now and in a few yrs...do we need immigration on the above premise..no.

We are suckers in this country! Few countries are as liberal as us in letting foreigners buy our property.
I am not xenophobic one bit. I am all for balanced immigration from all parts of the world. I'm all for people coming here to live, contributing to our society, becoming permanent residents or citizens and buying property here.
What I object to is absentee foreign property owners who really contribute very little to the country other than minor benefits (maybe eating at a couple of local restaurants when they are down for their one month of the year), who are benefitting hugely as Housebuyer says from the exchange rate.

Readers - for a little light distraction from the weighty issues we are dealing with here.....may I suggest you flick over to "frogblog'" (Russel Norman / Green Party website) for an update on the "love in" going on between the Nats and the Greens.

peterquitote is making an enormous contribution bringing everyone together....with a warm but considerably less witty contribution by me.

All jokes aside - the Memorandum of Understanding entered in to between the National Party and the Greens last Thursday, is a very positive political development - and a great credit to John, Janette and Russel.

Housebuyer - statistics on the level of foreign ownership do not exist because hardly an existing residential property in NZ breaks the threshold for investigation or record of in regard to value or size, it has been a free for all. The National Party central banker muppets are revising legislation surrounding foreign investment to make it even easier.
May the sake of reason come to the rescue.
It is often best to find an outside perspective in these matters to get the true picture;

Can overseas residents invest in New Zealand?
Yes, the New Zealand government actively promotes overseas investment. Non residents can buy property under $50 million and land under 5 hectares without requiring any specific consent firm the New Zealand government.
http://www.escapeartist.com/OREQ13/Real_Estate_In_New_Zealand.html (Australian property investment advisor)

http://theyworkforyou.co.nz/portfolios/finance/2007/aug/14/residential_property(government admission foreign ownership stats not available)

http://canterbury.cyberplace.org.nz/community/CAFCA/OIReview/OIReview.html (all the pertinent information)

Why are we doing it, because of this;
http://www.stuff.co.nz/business/771919(NZ adjust current account deficit or else)

http://www.multinationalmonitor.org/mm2002/092002/tannenbaum.html (Do this now or else)

http://ips.ac.nz/events/downloads/2008/Bertram.pdf (NZ debt charts, take special note pg 16 onward, take of rural lending to GDP of rural sector)

"Most commentators agree that developed countries have accumulated unprecedented amounts of debt. Where opinions appear to differ is on just how difficult it will be to extinguish this debt."

If we go back to basic encomics and imagine one household called china and the other called NZ then China has savings 'in' NZ and is happy to have them there while it is happy to have them there. If it does not want the savings then it spends them and converts them to NZ assets or products. So it buys what NZ can offer. NZ gets less debt and owns/controls less of NZ and China has less savings and gets more of us.

So you then have a political problem. If you create debt then you reduce your ability to have domain over what you believe is yours that is mortgaged. the problem is easy to solve if we allow china to buy NZ farms and properties. But if we dont want that then we have to have a war.

We cant have it all ways and win win win.

Unfortunately some greedy bastard gets a country into these situations gets paid handsomly and then does not care at all. In the 30's faced with the same situation i think everybody just sat down realised they were all mutually screwed and just decided to take the gloves off and beat the crap out of each other until the weakest surrendered.

It is maybe different now because we have the more in your face mutual dependencies of globablisation. But often the people resent globalisation either thru ignorance or because of simple realities like cheap overseas labour devalues their own labour and they dont have the ability to demand higher money for the same work and it is the bosses who benefit from globalisation - while simultaneously the average person is busy feeding their face with exotic overseas products stereos travel and what not on debt. And these people say they were tempted by the evil banksters into debt. Partly true. Partly not true.

What will happen? Well we could just wind down the encomies of the world a decade or two and live more simply and spend less............but it will not solve anything because we still have to eat and find shelter and be amused somehow to avoid loitering street corners getting into trouble. Partly today people dont how to amuse themselves by playing cards, dancing gently and singing and they need a stereo to enjoy themselves or rave parties with drugs and partly corporations have brainwashed people into thinking that happiness comes from not singing and dancing talking and walking.

Even so we are here now. People dont know how to do it the old ways anymore. We can agree there are no magic solutions for today. Even if tomorrow they may come.

Can we spend our way out of this? we could delay problems today in the hope the debt can be managed down i suppose while the chinas support their economies while spending the money they got from us they saved to get us into debt while they did not feed their faces on products and goodies from us they did not want to buy.

I suppose we could go over their convince them they need to be like us and just spend more. And that is already happening

There are no easy solutions here.

A real estate agent posting as "housebuyer" hahaha...

You guys have no interest in buyers other than the commission you get through the sellers.

Hi Iain Parker

Sorry for missing your earlier post.

The suppression of new ideas by big corporates demonstrates a breathtakingly myopic attitude. Where would General Motors be now if, instead of "killing" its own electric car, it had repositioned its business and aggressively marketed the EC as the way of the future? It could have had a 15-20 year lead on any other auto maker. Instead, GM is almost certainly facing bankruptcy, and China is poised to take the lead in EC manufacturing.
http://www.nakedcapitalism.com/search/label/Auto%20industry

I have no doubt that creativity can win out in the end and humankind will find exciting new ways to meet changing life conditions. Eventually. But we can't forget the old maxim "necessity is the mother of invention" which seems to mean that no matter how advanced the society, its people still need the immediacy of a crisis before they will answer a call to arms. However, by the time oil reaches crisis point (say $200 per gallon) there may not be enough time to organise a smooth switch to alternative sources of energy. (According to the US commentators linked to in my earlier post, at least a 20-year lead-in time is required before any combination of alternative sources of energy would be ready to replace oil fully.)

Which probably means that the world is about to go through a very grim transitional period.

Like you, I'd like to see some discussion about how NZ would fare if we could no longer rely on oil as a cheap source of energy. Is NZ uniquely placed to become more self-sufficient in less time than other countries? Or does our isolation mean that we'll be worse-off?

Your links show there are already some ideas that may provide some substitution if we were suddenly faced with oil shortages. Is any one of these ideas advanced enough to step up quickly? And/or to what extent are they themselves dependent on oil?

I don't know the answers to any of these questions, but would certainly like to hear from someone more expert in these areas.

The young people will miss out to the cashed up ex pat Kiwis who are returning in droves and buying everything they can. Local investors also active - hard to compete with these people.

Anz's March property report, which is more based on reality

http://www.anz.co.nz/about/media/library/pf/pf20090320.pdf

I saw a commercial real estate site in Newmarket that sold for $8M in 1987 sold in 1989 by the bank for $2.5M.
An industrial rental struck at market rental in 1986 with a 12 year lease in place to a multinational company expired without ever being reviewed, the rent was prevented from decreasing during that term by a rachet clause.
I personally bought a house in Parnell in 1991 that the owner had paid $6000 more for it 5 years earlier. So not only had it not increased in value over the previous 5 years they also lost $6000 plus the agents commission.

Maybe this is of interest to someone looking at purchasing a property now?

Lara - you really seem to believe the hype about all these cashed up expats returning in droves????

There is no data to support that

January's net migration gain was only 700, February's was 1700. People like Tony Alexander who are heavily biased were talking up the 1700 figure, which is a load of cobwash because the main reasons for that increase was the foreign students returning for the 09 academic year. He says he is an independant bank economist but that is bullshit. If he was independant and un-biased he would acknowlege that March is always a big month for immigration because of students. He does acknowledge that in his bank report but not in his statements to the main newspapers ,which of course get the most coverage

Infometrics in today's sunday star times are talking about a net gain of 10k, compared to Alexander's 15-30K

It will be very interesting to see what the migration figures are for March - they come out on 21 April. I'm guessing they will come back to around the 1000 mark, then they'll lower over winter

I agree with Informetrics, I reckon we'll get a net gain of 10,000 this year

Any increase in property prices or even an increase in activity implies an increase in debt.
You could be right we are in another period of increasing assets,however the increase in debt required to sustain this, means somewhere down the track we end up back where we are now, but with even more debt and bigger deficits as we borrow to pay interest.
The housing problem is a debt problem until this is sorted out the problem cannot go away,it can be put off by low interest rates and a increase debt but the problem has not gone away just been deferred.

Thank you, Bernard for clarifying your position. For a second even I thought that you were recommending people to buy, but your above statement clears up

we are just about to go out for dinner with a real estate agent so these comments are very timely for me to read right now! But, PLEASE stop quoting median house prices - quote average or mean prices, much more meaningful and realistic.

Its well worth reading Mish's (mike Shedlock) Global Economic Trends article today - on the state of the commercial property market in the United States.

On that score - enclosed Malls are dionasaurs - with 400 of the 2000 of the major ones in the United States shutting down these past two years.

The same thing will happen here in New Zealand and Australia at some stage - simply because their total operating costs are not competitive.

The name of the game in retail development - is that only those with the lowest operating costs per square metre - and most importantly - the development configerations that can generate the highest dollar per square metre sales - will survive.

rod Says: Interesting blog, some true the rest crap

right on Rod.

Exponential growth in Debt has to end.

Nothing lasts forever, I suggest now is a good time to get a proper job.

Sam this is NZ though and Kiwis are stubbon they won't sell if they don't want to even if long term they pay more for their house than its worth (ie the true cost), we have a great desire to own our own house at whatever cost. You cannot compare us with other nations, there are other things that make us differrent from the rest of the world, (ie Life style, culture, etc.)
The economy will rebound when housing affordability, driven by increased incomes, increase which is surely but slowly happening as we speak, which will remove the over valuation you talk about.
Therefore we can generalise with the NZ housing bubble, we have to because people will not sell and put that valuable capital into anything else. At the moment Capital Gains tax would create refunds for people as they take the CPI into account in countries that have CGT.

Rod - you need to read The Australian article of April 11 "Easy lending to hurt young housebuyers" - where the Aussie Banks are STLL lending an astronomical 5 to 7 times household earnings - with the FHOG thrown in for good measure.

Rod
%90 of our deficit consists of dividends and interest payments leaving the country. If we continue to borrow this figure will increase. We will need to increase exports. I think we are heading to a decline in the sheep industry of over %30 because of drought and poor returns. Who is going to earn the money to pay these debts???
If the Aussie banks get away with creating more money to lend to house owners, even more of our earnings will end up in Australia. Exponential growth in debt has already reached an apex if thats possible,from here its all down hill.
the argument over housing should concentrate on debt, house prices are irrelevant as long as we can afford them. The arguments over supply and demand ,immigration and new building costs don't matter as much as our ability to pay our debts.
We depend on agriculture for most of our exports unfortunately, it to has experienced a bubble based on debt, the ability of agriculture just to pay its own way looks shaky, where does that leave the rest of you.

Forgive me for copying and pasting some of my previous arguments on housing bubbles.

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

Wendell Cox and Ronald Utt: "Don't Regulate the Suburbs: America Needs a Housing Poliicy that Works".

http://www.heritage.org/Research/SmartGrowth/bg2247.cfm

Alan Moran: "The Tragedy of Planning: Losing the Great Australian Dream"

http://www.ipa.org.au/library/MORANPlanning2006.pdf

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

Oliver Marc Hartwich and Alan Evans: "Unaffordable Housing: Fables and Myths"

http://www.policyexchange.org.uk/images/publications/pdfs/pub_38_-_full_...

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

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

http://www.policyexchange.org.uk/publications/publication.cgi?id=47

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

http://www.dailyreckoning.co.uk/economic-forecasts/the-mystery-of-britai...

Fred Harrison: "The Mystery of Britain's Missing Recession"
EXCERPT:

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

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

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

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

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

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

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

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

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

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

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

PoP
" I'm saying now is not the time to buy, unless, of course, you have other better reasons for homeownership, just as living in a stable home in an area you like close to schools you want.
cheers
Bernard"

looks like a hedging statement to me"¦"

No if we we where discussing some of the other commentators paid by real estate interests or banks, yes I would have to agree...But when it comes to independent commentators like BH, they dont "hedge" but will qualify when stats dont measure up to there opinion.
Or in other words...althu the stats say one thing, they state what the stats dont take into account.
There is an old saying "hear but dont listen, read but dont comprehend, look but dont see"

BH even states very plainly "They're not, so I'm saying now is not the time to buy,"

Or "Next time don't be too fast to scroll past what you think is irrelevant to get to your point as you may sound contradictory"

Iain

As much as I respect your posts on banking and monetary systems, you need to do a lot more research on energy economics, The US only produce a fraction (<10%?) of their energy renewably (cf 70+% in NZ) and some of their 'renewables' are suspect (Corn Ethanol for example). They do have 20% nukes but the rest is Coal and Natural gas

The other thing to consider is that the energy required to replace 100+ years of fossil fuel burning infrastructure is a huge and energy intensive task therefore with declining net energy it is unlikely to happen without disruption (this doesn't even take into account the fact the US grid is not up to the task).

The UK is in a similar pickle, aging Nukes, declining North Sea gas and coal being environmentally destructive, Dont be seduced by "clean coal" BS, coal is a low quality fuel by the time you remove the CO2 (its only waste gas) the net energy output would be pathetic.

The long squeeze has started

Neven

Bernard,
Point 2 is factually wrong!
Kiwi Bank are still lending up to 95% [and more I hear but that may be more academic than real]. They are NOT requiring a twenty percent deposit on their standard 2 year fixed rate, but yes,they do require a 20% deposit if the customer wants the concessionary 2 year fixed rate.

John Buxton
Roost Mortgages - Auckland East
john.buxton@roostmortgages.co.nz
021 644838

PhilBest,
I note your comment

"I also argue that these price bubbles have not formed before simply because "Green" conservation politics had not yet interfered with thye land supply process. (Except that the UK has been having destructive bubbles since the 1960's, and they had introduced the whole green belt, urban limit thing in 1947 - that looks pretty good proof to me)."

Have you looked at the bubble in Florida in the 1920's?

Or Homer Hoyt's book "One Hundred Years of Land Values in Chicago" detailing recurrent bubbles in an 18 year cycle from 1830 - 1833

I refer you to a couple of links
http://www.beardbooks.com/beardbooks/one_hundred_years_of_land_values_in...

and dr housing bubbles article on Florida's boom.

http://www.doctorhousingbubble.com/florida-housing-1920s-redux-history-r...

Both mention easy credit.

As far as I can tell the Florida article does not mention land planning regulations assisting the boom in that time and place.

Haven't read Homer Hoyt's book but struggle to believe Land Planning Regs would have contributed to the bubbles between 1830 and 1933....

Then there is Shanghai's recent bubble. Only regulation I was aware of was you had to get special permission to build less than 10 stories. (Note : I couldn't find a reference for this so it may be a myth. Anyone with knowledge of the issue - please contribute. But the essential issue is whether Land Planning in Shanghai contributed to the boom in Shanghai. Cannot see any evidence of it on the net. Lack of evidence does not mean that I can exclude Land Planning regs from contributing to Shanghai's bubble though).

I put the lack of regulation on the LVR the banks could lend to as the over-arching reason for the bubble. And to prevent this post being waaay too big, instead of just too big, I would suggest you read Steve Keen on Minsky to get the full background to why I believe that.

Plus it might be worth having a look at some empirical evidence on human behavior and bubble formation...
http://www.abc.net.au/catalyst/stories/2525497.htm

Another view on Florida and Chicago's bubble events can be seen at
http://www.dollarsandsense.org/blog/2009/02/great-real-estate-bubble-of-...

Phil Best,

If it is a true shortage of supply that has caused the bubble, why have rents not surged? Rents are the price of occupying/consuming housing, it is therefore rents that should respond the most strongly to shortages. But rental prices in NZ haven't increased much faster than the rate of inflation, let alone household income.

You refer to Germany as avoiding a bubble. It is worth remembering that Germany's population is expected to begin declining within in the near future. I am sure prospective German investors will have taken this into account. Germany has also suffered from sluggish economic growth, and has been through a period of adjustment in recent years.

It is predicted that the UK will overtake Germany as the most populous Western European nation with a couple of decades.

Spain and Ireland have suffered from massive over build, with huge numbers of dwellings standing empty.

I would like to see some figures of the urban land price per square metre in New Zealand compared to other countries. NZ has some of the lowest density urban areas anywhere in the world. Auckland is sprawled over a similar area to London!

15 to 20 years ago a typical Kiwi was happy for his/her first home to be a basic 90m2 square Hardiplank box ie Keith Hay, Beazley or Reidbuilt style. Now first home buyers want all the mod cons, ensuites, heatpump, designer kitchen garage etc.

Imagine say somewhere near Albany or Botany Downs if developers started building streets full of this style of budget home again - would people actually buy them even if they were cheap?

The Bank Manager Says:
"15 to 20 years ago a typical Kiwi was happy for his/her first home to be a basic 90m2 square Hardiplank box ie Keith Hay, Beazley or Reidbuilt style. Now first home buyers want all the mod cons, ensuites, heatpump, designer kitchen garage etc. ......"

Not just 15 /20 yrs ago 30/50 yrs ago..and .no paths, garage etc
Now these same houses have garages, paths, heat pumps, diswashers etc. Even built on extra rooms decks and swiming pools.

"Imagine say somewhere near Albany or Botany Downs if developers started building streets full of this style of budget home again - would people actually buy them even if they were cheap?"
I doubt it...the younger genetation doesnt know how to use a concret mixer or a hammer or a spade..and an attitude of "NEED it NOW"

The Bank Manager - you state "so better to blame the Banks" - and while that has a populist appeal to the ill informed - and I suppose can be seen as funny - it is sheer nonsense.

May I suggest you spend as long as you need to - until you figure it out - why California bubbled out to in excess of 9 times household earnings, while Texas stayed at 2.5 times.

Finance was just as readily available in Texas, as it was in California.

The reality was of course that the finance sector simply had no other alternative other than to design and sell mortgage product to meet the needs of propspective purchasers in strangled markets. In California it got so absurd that they were lending out 11 times annual household earnings - go check out "Herb Greenberg Mortgage Mess" on the web.

The reality is that households should not be paying any more than 3.0 times annual income for housing with 2.5 tiimes annual income of mortgage.

But here in NZ they are mortgage loading them to 4 and 5 times (refer Squirrel website) and in Australia 5 to 7 times according to a recent article in The Australian.

Where the Banks have failed - is in not acting socially responsibly in informing the public and politicians of the dangers of lending out at these higher multiples.

It is debatable, I suppose, whether it is too much to ask that the Banks play a more constructive role in this regard. It would at the very least, make a very pleasant change to the hillbilly marketing dressed up as economic analysis their Ecionomic Divisions dish up to us.

We live in hope!

New Zealand could, and should, have ten times the population it does have.

I am just constantly amazed in how PhilBest has made such a huge effort to absorb the mountains of research material out there. Its a great credit to him.

In my long experience as a development practitioner, industry leader and researcher of these issues - it was extremely important when I embarked on this "housing project" (yes - thats right guys - thats all it is - to get a job done) - that I did this work these past four plus years independently and on a voluntary basis.

I have been around long enough to know that it wasnt the "left" or the "enviros" as such who were the major "progress blockers" - but instead the bureacrats at central, regional and local level - and the protectionist right.

The reason for this - is that these two groups of progrese blockers had the FINANCIAL / CONTROL INCENTIVES to engage in the strangling of urban areas. The enviros and the left were pretty much ill informed pawns to these two major groups of progress blockers.

Most people should well know by now that with respect to the administration of our land use laws - "sham consultation" is rampant. The only ones the bureacracies are interested in fostering and listening to - are those that can further their aims to expand control.

And on the protectionist right - those who turn up to ACT and National Party meetings talking with great fervour about the joys of freedom, competition and personal responsibility (solo mothers are very naughty you know!) - before their next stop - their industry and other groups, where they then get down to the real work of shutting the competition out and scewing their customers?

Why dont a few of you go out and ask Shopping Mall tenants how much they enjoy paying exorbident rent to the planner protected Mall Owners? Go to the Mish website to check out a recent article on where enclosed Shopping Malls are heading in the United States?

If these people werre actually interested in the welfare of this country - and after 5 - I repeat 5 - Annual Demographia Surveys - it would be reasonable to assume that these people wouild have got the hint and said "Hell - I think we need to get ourselves over to North America to LEARN how to build this starter stuff at $140,000 on the fringes".

But no - they are not interested in that - much preferring to stay protected from competition by the land use regulatory system and their local political / planner mates.

Then the same business people wonder why people genertally distrust the business community and particularly the corporates.

Iain Parker:
If housing bubbles form in jurisdictions where officials have discretionary control over market entry (i.e. whether land can be used for housing) and do not form in jurisdictions where officials do not have such discretionary control, clearly the existence of such controls is a necessary condition for a housing bubble to form. Nothing surprising in this. If you restrain the ability for quantity responses to increased demand you get a greater price response to such demand. That then turns houses into apparently inflation-beating assets and people invest in them on that basis. Hence housing bubbles.

You are another who appear to perceive the resources of the world to be infinite, no limit to just how many citizens a nations environment can sustainably report, fill every space with houses for the house traders.
This is beyond stupid. Only a small % of land is used for housing. Allowing land use to respond to the demand makes little difference to that. It makes a big difference as to whether a median house is 2.5-3 times median household income or 6-10 times median household earnings.

One problem with freeing up land for housing is that house-owners then start to complain about the activities which were already taking place in the area, in some cases forcing businesses to shut down.

If you add a rider that no-one buying a house can complain about noise, smells etc. or restrict the normal activities of businesses which were already there when they bought the house, then I'd have a lot more sympathy with the idea.

Thanks for that sensible comment, Lorenzo, I nearly missed it.

One of the things Lomborg points out in "The Skeptical Environmentalist" is that all 6.5 billion humans today could live on Tasmania at Hong Kong population densities.

Forgive me for copying and pasting some of my previous arguments on housing bubbles. (For Iain Parker's benefit).

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

Wendell Cox and Ronald Utt: "Don't Regulate the Suburbs: America Needs a Housing Poliicy that Works".

http://www.heritage.org/Research/SmartGrowth/bg2247.cfm

Alan Moran: "The Tragedy of Planning: Losing the Great Australian Dream"

http://www.ipa.org.au/library/MORANPlanning2006.pdf

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

Oliver Marc Hartwich and Alan Evans: "Unaffordable Housing: Fables and Myths"

http://www.policyexchange.org.uk/images/publications/pdfs/pub_38_-_full_...

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

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

http://www.policyexchange.org.uk/publications/publication.cgi?id=47

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

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

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

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

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

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

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

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

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

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

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

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

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

Oh, here is a goodie that you musn't miss, Iain Parker:

"The tyranny of urban planning:
home truths about home affordability"
or
"Saving the world - a quarter acre at a time"

By Bob Day

".....Let me start by reading an extract from Karl Marx famous Communist Manifesto:
"In this sense, the theory of the Communists may be summed up in the single sentence: "˜Abolition of private property.' We Communists have been reproached with the desire of abolishing the right of personally acquiring property as the fruit of a man's own labour."

To Adam Smith of course the rights of property were sacred. Communism was the antithesis of what Adam Smith preached.
As the great British historian Paul Johnson says (and I will cite Paul Johnson frequently in this paper),
"The connection between political liberty and the individual ownership of property is one of the great certitudes of human society. It is carved in granite where the words "freedom" and "freehold" come from the same root and have interrelated with each other through many centuries."

What I would like to do tonight is:
1. Outline the historical connection between private property ownership and the development of western civilization.
2. Show that modern urban planning laws and their enforcers in the various planning bureaucracies, are destroying this central institution in key jurisdictions in Western society.
3. Trace the evolution of these laws and planning bureaucracies to demonstrate their origins in socialist theory and practice.
4. Establish a link between urban planning laws and the current financial turmoil gripping the world and
5. Show how individual home ownership - private property in its most basic form, still has the power to change the world.

In his famous speech in the House of Commons in 1763, William Pitt declared:
"The poorest man may in his cottage bid defiance to all the force of the Crown. His cottage may be frail; its roof may shake; the wind may blow through it; the storms may enter, the rain may enter"”but the King of England cannot enter. All his forces dare not cross the threshold of the ruined tenement."
Without property rights there can be no freedom.

The 19th Century British Prime Minister Benjamin Disraeli said that private property was to be defended, "with all vigour against the socialists."

The Peruvian economist Hernando de Soto observed:
"Legal property gave the West the tools to produce surplus value over and above its physical assets. Whether anyone intended it or not, the legal property system became the staircase that took these nations from the "˜universe of assets' in their natural state to the "˜universe of capital' where assets can be viewed in their full productive potential."

In other words, property rights, markets and prosperity go hand in hand.
It is impossible to exaggerate the importance of the ownership of freehold land to the progress of liberty throughout the English-speaking world.

Prior to 1832 the British Parliament consisted of a representative assembly of property owners. The suffrage was greatly extended with the 1832 Reform Act but it wasn't until after World War II that universal suffrage was adopted in the UK. In Australia, upper houses in some States had multiple votes for property owners and university graduates until WW II.

For centuries, the legitimacy of the British parliament was based on property rights, not citizenship. Nations in the 20th century that either adopted, or had democratic institutions imposed upon them, proceeded immediately to the one-person-one-vote method of election rather than going through the property ownership stage "“ which in England lasted over 800 years. Perhaps this is one of the reasons why such democracies have proven so fragile. Without property of their own, voters have limited interest in protecting the property of others. And if history teaches us anything, it teaches that when you take away property ownership rights, you take away a substantial chunk of personal freedom.

Perhaps instead of rushing to impose democracy in developing countries in more recent times, the West would have been better off establishing private property, embedded within the rule of law, first. Private property creates civic order. Civic order gives rise to civic representation "“ as it did in pre 18th Century Britain. Make everyone secure in their own quarter acre and many of the benefits of democracy will be achieved.
Historical experience shows that the possession of freehold land leads directly to democratic participation. As America expanded inland in the 18th, 19th and early 20th centuries, it adopted, and pursued on an enormous scale, "a cheap land" policy. Under this policy millions of immigrants arriving without property, were able in just one generation to acquire land. This process was accompanied by the extension of the vote to all citizens.

Australians have been home owners rather than tenants ever since European settlement began. Land was cheap and wages high and the culture of home ownership became strongly entrenched.

Home ownership became a symbol of our self-reliance, a part of our national ethos and culture, and this was particularly true for the hundreds of thousands of migrants who came to Australia from war-torn Europe. The dream of home ownership, so deeply entrenched in the Australian psyche, is founded on the idea that in a free and democratic society the security and stability that comes from having a home of your own should be within the reach of all citizens. And so it was that from the 1950s onwards the rates of home ownership in Australia increased significantly, passing 70% by the early 1980s. Home ownership was a constant ambition of the Menzies governments "“ much derided within left wing circles at the time whose regular refrain was, "We do not want little capitalists". Menzies response to this attitude can be found in his great "˜Forgotten People' address of 1942 in which he recognized the moral, social and emotional importance of the family home.
"The material home," said Menzies, "represents the concrete expression of saving 'for a home of our own.' Your advanced socialists may rage against private property (even whilst they acquire it); but one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours, to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will."

Menzies understood that the human instinct to build and bequeath a home sent lasting ripples through every aspect of social and economic life.
"I do not believe that the real life of this nation is to be found in the great luxury hotels or so called fashionable suburbs". He said, "It is to be found in the homes of people who are nameless and unadvertised, and who, whatever their individual religious conviction, see in their children their greatest contribution to the immortality of the race. The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; its health determines the health of society."

And Menzies matched his words with deeds. He presided over an Australia with enviable levels of home ownership. It is no coincidence that this was an Australia with low levels of unemployment, low interest rates, high immigration, and a high degree of social cohesion. The fact that not just people on average incomes, but many on less than average incomes, could become home owners, was an important factor in Australia's political stability since federation. Australia was a property owning democracy, a nation of home owners.

Since World War II the average Australian was able to buy their first home on the average wage. Traditionally, the median house price was around three times the median household income. For example, when the median income was just 1,000 pounds per annum in the early 1960s, one could buy a basic house on a basic block of land for around 3,000 pounds. When the median income was $10,000 per annum in the 1970s the median house price was $30,000. And when the median income was $40,000 per annum in the early 1990s the median house price in most capital cities was $120,000. Young couples could get a start in the housing market, manage a home loan on one income, start a family, and work their way up from there.
Today, in Adelaide, Melbourne and Brisbane, the median house price is more than six times the median income and in Sydney and Perth it is more than eight times. The long-standing nexus between house prices and incomes has been broken.

So what went wrong? Consider if you will, these words by former Reserve Bank Governor Ian Macfarlane giving evidence to a Parliamentary Economic & Finance Committee in 2006.

"Why has the price of an entry-level new home gone up as much as it has? Why is it not like it was in 1951 when my parents moved to East Bentleigh, which was the fringe of Melbourne at that stage, and were able to buy a block of land very cheaply and put a house on it very cheaply? Why is that not the case now? I think it is pretty apparent now that reluctance to release new land plus the new approach whereby the purchaser has to pay for all the services up front "“ the sewerage, the roads, the footpaths and all that sort of stuff "“ has enormously increased the price of the new, entry-level home."

The regulatory seeds of the current housing affordability crisis were sown back in the 1970s. Up until then land was abundant, affordable and the development of new suburbs was largely left to the private sector. Our pre-1970s leafy suburbs of large allotments and wide streets are an enduring testimony to the private sector's ability and the traditional laissez-faire approach to urban development. It was into this environment of clearly successful urban growth that State and Territory Governments introduced land management agencies to establish and manage "˜land banks'.....

".......Since its inception in 1973, the South Australian State Government's land agency has seen land prices rise from $15,000 per block (in current dollars) to $160,000 per block, more than a ten fold increase. By comparison the cost of building a 135sqm house increased from $97,000 in current dollars to just $102,000 over the same period, virtually no increase at all. Think about that for a moment "“ a ten fold increase for a commodity (land) controlled by Government (with a so-called "˜price containment' policy), compared with virtually no increase at all for a commodity (the house) controlled by the private sector (with no price containment policy). One can only conclude that had the private sector been allowed to manage land supply like it has managed housing supply, we'd be enjoying land prices significantly lower than they are today.

This massive escalation in the price of land carries with it a multitude of detrimental impacts. Establishing affordable rental accommodation for those in greatest need becomes even more difficult for social and public housing authorities as they seek to purchase land and houses in a greatly inflated market. Road widening and major infrastructure projects experience cost blow-outs as land acquisition costs sky rocket, and the cost of establishing schools, community centres, health services and business facilities becomes difficult, and at times impossible. Inevitably the whole community suffers as a result of increased tax, transaction, finance and establishment costs.....

"......It is important to remember that the scarcity that drove land prices is wholly contrived. As anyone who flies into our major cities can observe by looking out the aeroplane window, this so-called "˜land shortage' is not real. It is the product of restrictions inposed through planning regulation and zoning. The so-called "˜land shortage' is a matter of political decision, not of geographical reality. Australia did not, and does not, have to suffer this housing affordability crisis.

But as well as the profit motive, State and Territory Governments have been spurred along by an ideologically driven, urban planning cabal obsessed with curbing the size of our cities and pushing a policy of urban consolidation or "˜urban infill'. Between them they have excluded more low and middle income earners from home ownership than at any other time in Australia's history.

The case for urban consolidation has been advanced on the back of a number of arguments "“ namely, that it is good for the environment; that it stems the loss of agricultural land; that it encourages people on to public transport; that it saves water and energy; that it leads to a reduction in motor vehicle use, and that it saves on infrastructure costs for government. All of these claims, I repeat, all of these claims are false. The facts and evidence from around the world refute each and every one of them.

Urban consolidation is not good for the environment; it doesn't stem the loss of agricultural land; it doesn't encourage people onto public transport; it doesn't save water or energy; it doesn't lead to a reduction in motor vehicle use, and it doesn't save on infrastructure costs. In fact building brand new infrastructure on the fringe is significantly cheaper than renewing or upgrading old infrastructure in the inner suburbs that was not designed for higher density living. Infrastructure developed to accommodate 1,000 to 2,000 people per square kilometre simply cannot withstand housing densities double that number.

It has also been suggested that the housing affordability crisis is all part of a world wide trend. Not true. An international housing affordability study by Hugh Pavletich and Wendell Cox of Demographia has confirmed that land rationing of the very kind we have seen in Australian cities is the principal cause of escalating land prices. The authors found that housing unaffordability was not the worldwide problem it was made out to be but was largely confined to Australian cities and cities on the East and West Coasts of America where constrictive land use polices are in place.

The situation in Australia is so severe that, according to the Demographia index which rates affordability by comparing median housing price as a multiple of median household income, all mainland Australian cities feature in the list of "seriously unaffordable" places in the world to live. If housing remains at its current level of unaffordability we can expect to see a serious decline in the levels of home ownership among future generations.

Urban planners, by promoting urban consolidation and at the same time demonizing urban spread have inflicted enormous damage on the economy and society. Billions of dollars have been wasted and enormous pain inflicted on the community as a result. And all they ever say in defence of their ideology is "it depends what you want our cities to look like." Well, if you ask me, they'd look a whole lot better without the traffic congestion, air pollution, destruction of biodiversity and high density infill projects which have destroyed the character of some of our most beautiful suburbs "“ delightful suburbs which pre-date urban planners and were constructed by people described by Adam Smith as advancing their own interests, rather than pursuing some social engineering agenda".

Ludwig von Mises, one of the most notable economists and social philosophers of the 20th Century observed:
"˜The planner is a potential dictator who wants to deprive all other people of the power to plan and act according to their own plans. He aims at one thing only: the exclusive absolute pre-eminence of his own plan.'

Politicians and public servants should stop listening to urban planners.

I used to run a newspaper advertisement with the headline, "If you do nothing else, make sure you own your home by the time you retire." I used this approach because I wanted to emphasise that the benefits of being a homeowner become most evident when people retire.

In human affairs there has been an imprecise, and at times neglected, moral contract between generations which dictates we should leave things better than we found them. In other words, we shouldn't arrange our lives simply to serve our own needs but we should consider those who are to follow.
When it comes to home ownership however, we are clearly breaking our contractual obligations. We are making home ownership much harder for the next generation. If we do not act to ensure that housing affordability is restored we will most certainly deny vast numbers of young people the opportunity to become home owners.
The social and economic consequence of large numbers of people reaching retirement as renters will not only effect the quality of their lives and the choices they are able to make but it will also create an enormous burden for government in funding housing and social services.

The economic consequences of all that has happened over these past few years have been as profound as they have been damaging. The capital structure of our economy has been distorted to the tune of many hundreds of billions of dollars and getting it back into alignment will take time. But it is a realignment that is necessary. We cannot deny the rising generation a home of their own merely to satisfy the ideological fantasies of town planners and the financial concerns of State and Territory Treasury officials. We cannot deny ourselves the joys of grandchildren because the young women of Australia have to work to pay mortgages instead of raising a family. The joke that high mortgages are the new contraceptive is becoming no laughing matter. Young women used to be afraid of getting pregnant, now, as they approach 40, they are afraid of not getting pregnant. We have to get back to the situation where a couple can pay off a mortgage on one income so they can start a family in their late 20s, not in their late 30s or early 40s.

One of the more pernicious aspects of high land prices ie high mortgages, is the forced misallocation of capital and family income into mortgage payments instead of higher standards of living, assets, goods, travel, children's education, appliances or even foregone income to spend more time at home. The most serious manifestation of this gross distortion in our capital structure, is the postponement of raising a family, and the impact on fertility rates which accompanies this trend.

The history of State and Territory land management and urban planning policies and the extraordinary escalation in house prices which has taken place in our capital cities, particularly Sydney and Perth, has many important lessons for us.

From my perspective, that of a builder who has been in the industry for more than 30 years and who has seen what has happened from the inside, it was obvious that the cause of rising house prices was the squeeze on the supply of land for new housing on the urban fringes of our major cities. It is the most basic law of economics that if supply is constrained for whatever reason, the price will rise. And in this instance supply was not just constrained, it was strangled almost to death.

But more disturbingly, all our important economic institutions, the Reserve Bank, the Productivity Commission , the Commonwealth Treasury and every economic commentator in the land, refused to acknowledge that lack of supply was the cause of rapidly escalating house prices. They seemed interested only in blaming demand factors such as capital gains tax, negative gearing, interest rates, first home buyers' grants, high immigration rates and so on. We need to ask, therefore, how did we get this unanimity of wrong advice? And how can we ensure that it doesn't happen again? While I have been banging on this drum for more than fifteen years, it has been pleasing to at least see the Reserve Bank now highlighting the way in which State and Territory Government restrictions on land supply have contributed to this crisis.

To fix the problem for good and ensure that future generations do not suffer the same fate we need to do five things:
1. Where they have been applied, we need to remove urban growth boundaries or zoning restrictions on the urban fringes of our cities. Residential development on the urban fringe needs to be made a "permitted use." In other words, there should be no zoning restrictions in turning rural fringe land into residential land.
It is only as adequate supply returns to the market that land prices will fall. Urban growth boundaries must be removed and the abandonment of the insane notion of "x" years supply of land available likewise. The home buying public will decide how many years' supply of land there is, not the government. The removal of urban growth boundaries and other restraints on land use is equally important for landowners. These boundaries and planning restraints effectively "˜nationalise' their land preventing those with land outside the boundaries from obtaining a fair value for it. It further inflates the value of land within the boundaries resulting in wasteful lobbying to have land rezoned. As we know, corruption of public officials in dealing with zoning changes is not uncommon. In NSW it has been a fact of political life for decades.
2. We need to encourage small players back into the market by abolishing compulsory "˜Master Planning.' If large developers wish to initiate Master Planned Communities, that's fine, but don't make them compulsory.
3. Allow the development of basic serviced allotments ie water, sewer, electricity, stormwater, bitumen road, street lighting and street signage. Additional services and amenities (ornamental lakes, entrance walls, childcare centres, bike trails, etc etc can be optional extras if the developer wishes to provide them and the buyers are willing to pay for them).
4. Privatise planning approvals. Any qualified Town Planner should be able to certify that a development application complies with a Local Government's Development Plan.
5. No up-front infrastructure charges. All services should be allowed to be paid for through the rates system ie pay "˜as' you use, not "˜before' you use. The inequity of up-front infrastructure charging is obscene. First home buyers on the urban fringe are subsidizing, through their electricity, water, sewer and council rates, the massive repair and upgrading of existing, older infrastructure in the inner suburbs in order to accommodate wealthy "˜in-fill' homebuyers.

Let me touch now on the financial problems which are spreading around the world as a result of the collapse of the sub-prime mortgage market in the United States.
California, the birthplace of the sub-prime mortgage industry, is paying the highest price of any State in America as the housing meltdown persists. California had nearly 500,000 foreclosures on properties last year and by far the biggest decline in house prices. By the end of 2008 property values in that State alone will have fallen by $600 billion.
Not surprisingly, almost half of the 25 biggest US subprime lenders were based in California.
California also happens to have one of the strictest urban planning regimes in the world. It, along with Florida, another highly regulated urban planning regime, account for around 70-80% of all sub-prime losses in the US.

Wall Street believes that investors will lose between $300 billion and $400 billion on sub-prime loans. And it's not over yet. The Chicago futures market for house prices suggests there could be another 8 to 9 per cent price decline during the next 12 months. Fourteen million people who purchased homes during 2006 and 2007 could end up with negative equity in their homes.

Foreclosure losses however are significantly lower in States like Texas and Georgia where planning and regulation were held at bay. Losses there are one tenth the losses in California and Florida.
Like most epidemics, the US sub-prime (and now "˜prime') mortgage housing crisis can be traced back to this one source "“ urban planning laws. The current credit crisis is the direct result of unprecedented house price inflation caused by the kind of urban planning policies I outlined earlier.
In Australia, the housing affordability problem, "˜mortgage stress' and the current rental crisis, are all caused by the same thing.

Again, none of this needed to happen. But it has happened and it now falls to the Government to fix it. Before that can happen, politicians and bureaucrats have to become not only much better informed about the causes of this appalling mess, but also much wiser in their attitude towards the bureaucrats who advise them."

http://erudito.livejournal.com/710656.html

More for Iain Parker to chew on:

The following are causes of increasing inequality and decreasing social mobility.
Breakdown in traditional marriage. The obvious thing is the disadvantage to children brought up without a father, or with a string of perverse male role models in their lives. But also, marriage across socio-economic groups, and subsequent "inheritance", were powerful reducers of inequality.

Provision of services, etc, with public money, that primarily benefit the wealthy, and the neglect of infrastructure that was a greater benefit, proportionally, to lower income earners. The neglect of roads, and time wasted in congestion, has a disparate impact on the poor, who tend to depend more on motor vehicle use than middle class people who can choose where they live and can organise their life around public transport. Public Transport routes converge closer to city centres, so that those who live in the higher-priced homes in those areas, find public transport convenient but those who live in lower-priced homes further out, do not.

The subsidy of cultural centres and art galleries benefits the wealthy at the expense of the poor. New Orleans was a classic illustration of the consequences of concentration on trendy cultural vibrancy and the like, by the local administration, at the expense of vital infrastructure that was fought tooth and nail by chardonnay greenies and NIMBY-ists.

Worth a specific mention, are "free" public goods like Water (in some jurisdictions). In so far as poorer people use a lot less and yet pay for the resource, and wealthier people use a lot more, the cost burden falls disproportionately on the poor in comparison to politically unfashionable "user pays" systems.

Background reading: "Back To Basics", by Joel Kotkin
http://www.joelkotkin.com/Urban_Affairs/NAF_GrowthStrategy.pdf

The "conservation" of land, and restrictive zoning, has a disparate impact on the poor, on the young and those who do not own properties, in favour of the more well-off who maintain their nice views and surroundings, while property values escalate out of reach of all who are not already property owners. An excellent article in this respect, is "Green Disparate Impact", by Thomas Sowell. (The "poor" population of California is actually being driven out of state by escalating property values).
http://www.townhall.com/columnists/ThomasSowell/2008/01/15/green_dispara...

Also, in "The Housing Bubble and the Boomer Generation", Robert Bruegmann argues that this phenomenon has resulted in "the greatest intergenerational wealth transfer in history", in favour of older, existing home owners, at the expense of young, first home buyers. The "boomer generation" benefitted from pro-development policies that enabled them to buy low-price first homes on the urban fringes, while at the same time the price of all houses was kept low. But now the boomer generation has gone along with land conservation policies that result in the prices of all homes being driven up, which benefits them but prices first home buyers out of the market. And when these property price "bubbles" burst, it is the people who bought more recently, mortgaged to the limit, who suffer the most from bankruptcies.
http://www.newgeography.com/content/00452-the-housing-bubble-and-boomer-...

One of the most absurd consequences of these policies, is that while the house prices go up faster than the young can save a deposit, the home owning generation can borrow against the appreciated value of their own home and use the money to buy further "investment properties", which they then rent out to those who are locked out of home ownership by the rising prices. Hopefully now that there has been a major financial crash stemming from these land price inflating policies, they will be reviewed. They were in any case, as this essay points out, probably the foremost cause of widening inequalities in society.

A further related factor, is the trend for developers of new housing, to be required to pay "infrastructure levies" and the like, which add tens of thousands of dollars to the price of every new home. The new homes bought by previous generations, had no such levies imposed and infrastructure was funded out of general public revenue. This gets worse, though, as "infill development" closer to the city centre requires expensive upgrades of old and inadequate infrastructure; while the beneficiaries of this development are invariably wealthier people, the political fashionability of infill development means that special levies are not made or are minimised, throwing a disproportionate burden onto the rates paid by young households closer to the urban fringes.

Increases in regulatory expense, like RMA costs, and the costs of obtaining licenses for commercial activity and the like, tend to inequality. A James Wattie could start up a food canning business in his garage. These "rags to riches" stories, are no longer possible, except perhaps in the entertainment industry.
This phenomenon is well covered in the book "The Mystery of Capital" by Hernando DeSoto. Interestingly, well-established larger businesses like this phenomenon, as it keeps competition to a minimum, hence the little-publicised support of many wealthy people for regulatory, socialist politics. Incidentally, that is not "Capitalism" although the cunning socialists "spin" the issues so it gets blamed on "Capitalism". (The correct term is Socialist Parasitism). More recommended reading: "Intellectual Class Wars", by David Horowitz, "Freedom of Opportunity, Not Equality of Opportunity" by George Reisman, and "Scratching By: How Government Creates Poverty as We Know it", By Charles Johnson:
http://www.fee.org/publications/the-freeman/article.asp?aid=8204

California is probably the outstanding illustration of all these effects of misguided policy of "Liberal Left" government on poorer people, which the same government and politicians claim to care about more deeply than "free market" politicians. A recent article made this comment:

"....As recently as the 1980s, Californians generally got richer faster than other Americans did. Now, median household income growth trails the national average while the already large divide between the social classes"”often bemoaned by the state's political left"”grows faster than in the rest of the country....."

http://www.american.com/archive/2008/november-december-magazine/sundown-...

The subsidy of tertiary education with public money. Tertiary education itself, tends to increase inequality, due to the higher incomes commanded by graduates. To use taxes, which must remain necessarily high on low income earners, to subsidise this, only worsens the situation. An outright free market situation with all students paying fees, and a broader use of direct student-based "scholarships", would actually produce less inequality than the system we have now, and would produce much better results in terms of relevant qualifications. I suggest that many of the poorer folk who do make it to Uni under the current system, could be tending to make poorer choices of qualification, which would be eliminated by better guidance under a scholarship-based system especially scholarships funded by private enterprise which best knows of its needs for people with certain qualifications.

Lastly, the trend for wealthier people to have children later in life, and have less of them, while poorer people still have larger families, tend to start earlier, and the worst of all are, sadly, early-starting solo mothers; this is a guaranteed recipe for cross-generational poverty.

Iain, it is with considerable distaste that I advocate tax rebates for mortgage repayments. (I detest student loan subsidies). I mean it entirely in the context that the government needs to reduce house/land prices and there will be considerable opposition to that on the part of everyone who has a mortgage and who will be left "underwater" when their house drops in value. I would prefer to only advocate it for people who just bought their first home; they are the people most entitled to our sympathy.

By the way, I am 100% against bailouts of banks and financial institutions. The suggestion I have made would achieve the same long term result in deleveraging the banks, but it would bail out the right people in the process, as I said at greater length:

Instead of bailing out the banks and trying to prop house prices up, the US government should have just made repayment of mortgage principal, tax deductable up to a certain level; (along with forcing California at least, to stop the land racket that is responsible for nearly half of the US's financial problems today).

Making repayment of mortgage principal tax deductible has several positive impacts compared to government bailouts of either home owners or banks.

It does not "freeze up" the whole financial system, with everyone waiting for their government handout and scared they will lose out if they act responsibly.

It results in the flow of capital to the banks, that they need for recapitalisation and deleveraging. However, it is earnt money, not money created or borrowed by the government.

The actual cost to the government and the negative impact on the economyof consequent government deficits, is smaller and more gradual.

It is a strong incentive for earners to earn as much as possible, and declare as much taxable income as possible against which to claim the mortgage repayment deduction; rather than to earn and declare as little as possible, which is the perverse consequence of many government handout and rebate policies.

It does not penalise responsible people who have not assumed excessive liabilities; I insist that anyone should be allowed to claim up to a certain limit - I suggest up to 50% of existing mortgages as at a certain date.

In tandem with this, governments should lay it on the line that they are going to ensure that new land and housing is going to be supplied at affordable prices from now on, no ifs, buts, or maybes; house prices will be expected to drop to historic affordability levels and the mortgage repayment rebate is to compensate for the loss of value to existing owners.

Lower house prices will make banks confident again; at the moment, of course they are reluctant to lend when it is obvious that prices have not gone anywhere near as low as they should. We should just get it over with.

Huge amounts of capital is freed up for productive purposes, by being released from being trapped within (and sucked into) housing bubbles.

I agree that these tax rebates will be expensive for government. However, it would fix the problem, unlike the same amount being spent directly by the government in "fiscal stimulus" and bailouts.

Philbest
You have been busy however most of your links and arguments are futile because they are based on historic ideas and ignore the demographic time bomb about to hit us. Sure houses on the fringes have been in high demand by all the babyboomers with families going through the system but are they going to keep wanting the same in the future or are their needs going to be different in the future? We need to look at what their future needs are going to be and make sure we meet the demand.
You use Germany as an example of who we should be following however you fail to mention the majority of houses are owned and supplied by the Government and the ownwership rate is only 45%. If you want NZ to be like that in the future then yes we should take a look at Germany and Russia.

OECD report:
http://www.oecd.org/dataoecd/62/41/42564695.pdf

Postcard from America for Tony Alexander.
http://www.youtube.com/user/george4title?gl=NZ&hl=en-GB

Phil Best- I waded through two thirds of above, skimmed the rest. You very much remind me of Mike Moore, from reading a number of his books and email contact, a very conflicted contradictory person. You claim to support freedom, but come across more slaveminded than not. You claim we need to use resources wisely, yet claim we have no resource issues and the world is free to be covered with housing.
The examples you give of England and Australia are very poor. England is already overcrowded beyond sustainability and Australia during the last drought was going to have to cut water to its agricultural food growing areas to ensure the cities did not die of thirst. I am afraid you will have a hard time convincing me to convert NZ to either of those to create low cost housing due to oversupply created by covering productive fertile land to the point we are further dependent upon imports, whilst further eroding our means of repayment of those imports as is supposed to occur in the surplus-deficit self regulating market model you are trying to convince me/us to retain?
I do not have time tonight for an in depth reply. I ask of you this until I do, Phil, Do you believe that growth can be perpetual and that increased population will not see resources pushed to a point of maximum utilisation?

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

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

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

"In other words, property rights, markets and prosperity go hand in hand.
It is impossible to exaggerate the importance of the ownership of freehold land to the progress of liberty throughout the English-speaking world."

""¦"¦It is important to remember that the scarcity that drove land prices is wholly contrived. As anyone who flies into our major cities can observe by looking out the aeroplane window, this so-called "˜land shortage' is not real. It is the product of restrictions inposed through planning regulation and zoning. The so-called "˜land shortage' is a matter of political decision, not of geographical reality. Australia did not, and does not, have to suffer this housing affordability crisis."

The "new zealand disease" (crazily inflating house prices) is set to return I fear. This country more than any other in the developed world urgently needs to legislate to mitigate increases, capital gains tax being just one of a raft of measures needed. Prices in some parts of nz are still at ratio ave earnings/ave house price of x6.5 plus! Prices in the UK, Ireland and Spain have fallen drastically and they "need to" (for a whole raft of reasons already adequately explained elsewhere) here as well ! no question.
For any market to function properly and to the advantage of all involved, there needs to be an optimal flow of information to both potential buyer and seller. In the UK there are many internet sites that will offer reasonably accurate estimated values for houses, in Nz there none! QV's internet site is cumbersome and expensive to use and they hold a virtual monopoly on the flow of market data). Net result: real estate agents hold too much power, distort the market and act very effectively to stem the flow of market intelligence.

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