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Opinion: Why NZ house prices are poised to plummet 25% 'like Wile E Coyote'
By Philip O’Connor
Will NZ Housing follow US Housing Down? Can Monetary Policy/Inflation Save the Housing Market?
In a December 2008 blog post I discussed the apparent relationship between NZ house prices and US house prices, based on statements made in both the NZ and US press. Public discussion of house prices and press accounts with statements such as “houses can only go up in value” were remarkably consistent, although I guessed that NZ was about 1½ years behind the US.
Statistical testing, in fact, suggested a 16 month lag, and the closeness of the relationship is remarkable. The size and rate of the increase in house prices in both NZ and the US have been amazingly similar: both experienced a doubling of house prices in 6 ½ years. However, in my blog post, I forecast that if the relationship continued, NZ house prices would fall by approximately 35% by the end of 2011.
The initial impetus in the US housing market was fed by a number of sources, including legislation, easy money, securitization, lax regulation, and the banks' ability to sell derivatives and shift risk. The banks’ ability in the US to sell risk to third parties was facilitated by ingenious inventions of investment bankers such as MBS (Mortgage Backed Securities) and CMOs. Banks could also bypass regulatory requirements with their ability to use off-balance sheet vehicles.
A transmission mechanism between the large US real estate market and the minuscule NZ real estate market is not hard to imagine. Rising prices in the United States would cause travellers and shrewd investors to surmise that real estate would also rise in other Pacific Rim locations; if a beachfront property sells for $800,000 in California, a similar property for US$200,000 in New Zealand may be worth a lot more.
After the initial speculation gains momentum (and there were many stories of foreign investors snapping up beachfront property in NZ over the years), then local residents might catch on and tag along, creating the 16 month lag in the data. In other words, we have a worldwide real estate market.
Coincidentally, the NZ housing market also experienced some of the same aberrations in bank behaviour. The traditional 20% deposit was relaxed so that smaller deposits, or even 0% down, allowed one to buy a house. While US bank lending standards were vanishing, NZ banks and the finance sector learned about these new behaviours from the US, and followed by lowering their own standards.
Related Topics
Housing bubbles have appeared in many other places in this time including Australia, the UK, Ireland, Spain, China, etc. Robert Shiller has stated that almost the entire world has experienced a bubble in the prices of housing, and he concludes that “Higher home prices in a given country may tend to create conditions for falling home prices there in the future.” (See for example). Therefore, the dynamics common to a bubble may be influencing both countries housing prices.
Note , too, that in both countries the fundamental factors that underpin housing valuation -- such as household income and GDP -- changed only slightly. The fact that the value of houses rose without a corresponding increase in income increases the chances that both countries have experienced a bubble in house prices.
Using data from the Reserve Bank website, we can calculate the value of NZ’s housing stock as a percentage of GDP. Up until 2002, NZ private residential homes in total were valued around 2x GDP. A few years later NZ homes were worth 3.5x GDP, and are still worth well over 3x GDP, as shown in Figure 1. This relationship is hard to explain, unless NZ residents are expecting a massive immigration wave or a huge inflation in wages and rents.
Figure 1 shows a time series of the value of aggregate private sector residential dwelling values as a percentage of Annual GDP. 1988 to 2009Q3. Source: Quotable Value Limited, RBNZ estimates
The valuation of NZ house prices is also high compared to other countries. Dividing the median house price by the median household income, New Zealand houses sell for 5.7x median income. In the US houses sell for only 2.9 times median income, a level that NZ experienced in the early 1990s. Although Australia has a ratio of 6.8 (the same as Auckland), the UK at 5.1, and Canada and Ireland at 3.7, are all significantly underpriced compared to NZ houses (all data from September 2009).
However, a bubble in NZ house prices would explain why housing has grown in value relative to GDP. It is widely accepted that the US had a bubble in house prices since house prices have fallen so quickly (see Figure 2 below), so the similarities between the two countries may be related to “bubble dynamics”, a new frontier of finance research. In a bubble, expectations of home buyers and financial institutions have changed in similar ways in both countries (NZ with a 16-month lag) and house prices have not been driven by fundamental factors that affect valuation.
Figure 2 updates the previous blog post where an almost perfect relationship was found between US house prices and NZ house prices. The update reveals two striking features. First, US house prices have followed the the stock price index of US homebuilders almost perfectly. The recent increase in the Case-Shiller index for 7 months in a row is a blip that fits within the boundaries traced by the homebuilders’ index (the homebuilders index is shifted forward 12 months). In fact, the futures for the Case-Shiller index mentioned in the previous post have come very close to predicting the actual values of the Case-Shiller index. This indicates that the futures market predicted that house prices would continue to decline and was able to forecast them with a high degree of accuracy. Housing prices may be predictable.
Figure 2. The left hand axis shows the value of an index of NZ median home value (source REINZ) and the USA Case-Shiller 20 city composite index 16 months before. The right hand axis shows the value of an equally weighted index of the stock prices of the 10 largest market capitalization USA home builders 28 months before. All indexes have a value of 100 at January 2000.
'A striking deviation'
The second striking feature is that NZ house prices have deviated from US house prices starting in March 2009. Prices have risen and dipped and are now about equal to the previous 2007 high. A few possibilities explain the deviation since the peak. First, the relationship between US housing prices +16 months and NZ housing prices could have been entirely random. However, this is doubtful. The chances of a worldwide housing bubble driven by entirely random events in each country independently are too small to quote.
Second, the median house price data may be reflecting a change in the composition of houses sold. If buyers of lower quality houses are being kept out of the market (say because of tightening bank lending standards), the median will reflect the prices of larger wealthier homes. The Case-Shiller index estimates house price changes by examining the price change of houses since they last sold (same house sales). It does not suffer from a bias caused by the changing composition of house sales.
The median house price in the US also rose 101% from January 2000 to its peak in March 2007, some 9 months after the Case-Schiller Index peaked. From their respective peaks until December 2009, the Case-Shiller index is down 29% while the median house price has declined only 12%. So although the US median price index rose in step with the Case Shiller price index on the upside, it took longer to turn down and then declined at a much slower rate. This indicates that the REINZ’s median house prices may be underestimating the weakness in the NZ housing market. Stratified median house price data available from www.interest.co.nz also indicates that REINZ median house price is understating the decline in NZ house prices since the peak.
In fact, the current median US house price at $NZ363,571 is almost the same as the median NZ house price (using the current exchange rate of $US0.70/$NZ). As income and GDP in the US is much higher, NZ house prices again appear to be overvalued compared to US house prices.
'The China effect'
The third possible explanation is that the NZ housing bubble is being driven not just by the US housing bubble but also by the bubbles in Australia and/or China/HK as well, which also may have been caused by US government and monetary policy and which have also not yet burst. While writing this post I came across a blog analysing the Australian housing market.
Australia appears to be looking at a similar decline in the value of their houses. For further information on China’s housing market, try a google search on “Chinese housing bubble”.
Fourth, the explanation for the recent slight increases in both house price indexes may be explained by the change in borrowing rates, as both the US and NZ housing markets have experienced lower mortgage rates (see Figure 3 for NZ mortgage rates). In the US, mortgage rates have remained fairly low in recent years and the reduction in rates has lead to a feeble bounce.
In spite of the US Fed buying trillions of dollars of mortgage backed securities and bailing out owners of mortgages, house prices have only risen slightly. However, in NZ, floating mortgage rates decreased sensationally from 11% to 6%. The huge decline in rates has kept house prices basically unchanged.
Another previous blog post challenged the idea that lower mortgage rates would lead to higher house prices. This was based on the observation that mortgage rates had been increasing virtually in accordance with the rise in housing prices. I challenged the causality of lower rates leading to higher prices, if mortgage rates are a casual factor and lower mortgage rates increase house prices, shouldn’t higher mortgage rates decrease house prices?
Using the same rationale, mortgage rates cannot be a causal factor if house prices rise regardless of whether mortgage rates rise or fall. I argued that mortgage rates are a consequence of demand. The subsequent behaviour of house prices and rates appears to be a classic example of “buy the rumour, sell the news” so often seen in financial markets.
Figure 3. The Relationship between NZ house prices (right hand axis) and variable mortgage rates (left hand axis). The House Price Index is the median price of NZ houses as published by REINZ. The mortgage rate is the Variable First Mortgage Housing Rate from the Reserve Bank of NZ website.
So far, the decrease in mortgage rates has had little effect on NZ house prices, as Figure 3 shows. The dramatic decline in mortgage rates is associated with a fairly small increase in prices compared to the period from 2000-2007.
Maybe it helped?
However, the fall in mortgage rates may have had some benefits to the housing market. Comparing NZ house prices to US housing prices, the lower mortgage rates may have prevented NZ house prices from following the same path as US house prices, which fell by 25%. So what lower mortgage rates may have achieved is a delay in deflating this bubble. The US housing market declined only after the volume of sales declined significantly. If we begin to see a serious drop off in the volumes of houses sold in NZ (which we may have already) then economic reality may again start to influence NZ housing prices.
The final and most plausible reason why NZ house prices have not followed the Case-Shiller index, is that NZ housing prices are about to catch up, with a fall in price of 25% or more. In Figure 2, NZ house prices do look reminiscent of Wylie E. Coyote after he runs off the edge of a cliff and pauses in mid-air just before he realizes he is about to plummet into the canyon. Of course, this need not happen. A stagnation of the housing market for many years combined with inflation could also return NZ house prices to traditional valuation levels.
I also decided to look for information in the NZ stock market that may be predictive of future housing prices, as the homebuilders index (ticker: XHB) has been predictive of US house prices.
Although NZ does not have a publicly listed building sector as in the US, it does have Fletcher Building Ltd. If the NZ housing market is poised to rebound, we would expect to see strength in Fletcher’s stock price. In fact, there seems to be a relationship between
Fletcher’s stock price and NZ house prices from 1998 to 2007, as shown in Figure 4.
Figure 4. The Stock Price of Fletcher Building FBU (right hand axis) and the median price of NZ houses (left hand axis), Mar 1996-Feb 2010. Source: Datastream and REINZ.
Since 2007, Fletcher has departed from NZ house prices, falling 65% from peak to the March 2009 low. It has bounced along with housing since then, but remains at levels significantly beneath its high. Although Fletcher has many business segments and the relationship between house prices and a single company’s stock price (rather than an index) is likely to have greater error, Fletcher’s weakness in the stock market does not bode well for increasing NZ house prices, as the stock market does not see boom times ahead for Fletcher Building. This is the same relationship that existed between stock market prices and house prices in the US before US house prices began to decline.
There has also been academic research on NZ house prices using rigorous statistical techniques. Fraser, Hoseli and McAlevey (2006) produced a research paper for the Swiss Finance Institute and concluded that NZ house prices were 25% overvalued at the end of 2005 as warranted by real disposable income. As house prices have risen much faster than disposable income since then, the overvaluation would be more pronounced now. The last time that actual house prices equalled fundamental value was at the end of 2002. A copy of that paper can be downloaded here.
Can Monetary Policy/Inflation Save the Housing Market?
Although it appears that NZ houses are overvalued, the most important issue now is how the overvalued housing sector will play out in NZ. Every homeowner understandably becomes a cheerleader for higher prices. In talking to home buyers over the past few years, I sensed they were motivated not by greed, but by the fear of missing-out on the window of opportunity to purchase an affordable house if they did not act immediately. Fueled by the belief that house prices would never decline, these expectations and behaviours have helped to create a bubble in prices, and to date have been self-fulfilling.
History has trained NZ investors to believe that real estate is an optimal way to protect one’s savings. The dilution of the value of the fiat New Zealand currency has been substantial. Take one very simple example: a 1946 NZ florin, which is the equivalent of $0.20 today, sells for around $4.50 due to its silver content. This means $0.20 now buys 4.44% of what it did in 1946, reflecting an inflation rate (decline in purchasing power) of 5% per year.
Inflation has bailed out real estate investors in the past. The overvaluation of housing is resolved by an increase in prices, wages and rents that restores house price/income ratios. Although the real value (adjusted for purchasing power) of homes and equity invested in houses fall, the real value of mortgages fall as well. As long as inflation does not cause havoc in the economy and interest rates can be kept artificially low, homeowners can continue to make their mortgage payments and ride out the decline in real value. (Banks would be the losers in these circumstances.) Real estate investors who could service their mortgages in the 1970s and 1980s (floating rates peaked at around 20%) found that the real amount that they owned on their mortgage was marked down by inflation.
The Inflation effect
Debates about whether inflation or deflation will occur are a flooding financial blogs at the moment. On one side, writers talk of the unprecedented actions of Federal Reserve Chairman Ben Bernanke, who has doubled the amount of US dollars in existence (the monetary base) since 2008. These writers fear that Bernanke will cause a Zimbabwe-like hyperinflation where the US dollar becomes worthless.
Bernanke, who extensively studied the deflation of the 1930s, has the philosophy of simply giving away free money or loaning it out at negative real interest rates. His extraordinary statements include dropping new money out of helicopters to stave off deflation; hence the nickname “Helicopter Ben”. However, his helicopters stay close to his banking friends on Wall Street.
But to use an example close to home, the concept is exactly the same as a NZ TAB "bailout day", where all losing tickets are refunded for 100% of their cost. Indeed, this is what Bernanke has done for MBS investors (and Cullen did for NZ finance company depositors). Again, just as the NZ housing market followed the US, the government and RBNZ are strongly influenced by the US policy actions. One only need look at the interest rate policy of the RBNZ following the
Fed’s interest rate cuts in 2008
It is quite interesting to note that in the 9 months from September 2005 until May 2006, silver rose 146% and gold rose 84% in NZ dollars. Bernanke was officially appointed to take over from Alan Greenspan in October 2005, so the rush into gold and silver and out of NZ dollars coincides with his appointment. As it was widely expected that Bernanke would attempt untried (and radical) measures to prevent deflation, this does not seem to be a coincidence. Gold in US dollar terms also rose powerfully, surpassing significant past highs.
This is the type of behaviour one would expect if gold buyers were scared of Bernanke creating hyperinflation, as gold is widely thought to be the ultimate inflation hedge. Although, like the relationship between house prices and mortgage rates, the gold price does not react logically or deterministically to inflation (gold declined in value throughout the inflation of the 1980s and 1990s) over the long term gold appears to retain its purchasing power. (For example, Alan Greenspans argues gold is an inflation hedge and more here)
Gold in them thar houses?
It is quite revealing to compare NZ house prices to the price of gold.
Figure 5 shows the number of troy ounces of gold required to buy the median valued house in NZ. In 1992 it took 150 oz. of gold to buy a typical house. House prices then steadily increased so that in 1995 a typical house cost over 450 oz. of gold. The increase in the gold price surrounding Bernanke’s appointment has lowered the price of NZ houses in terms of gold, with around 250 oz. now required to buy a typical house.
In terms of inflation hedging, NZ houses appear to be very reasonably valued. Of course, Figure 5 begs the question of whether gold is fairly valued. Perhaps the gold “bugs” who fear hyperinflation have bid up the price too high. However, if NZ home owners have bid up the price of houses based on inflation fears, then the high price of houses in fiat terms may be a rational response.
Figure 5. The number of troy ounces of gold required to buy the median valued house in New Zealand. January 1992-January 2010. Source: Datastream and REINZ.
On the other hand, other financial writers believe that deflation, or a fall in asset values and a rush into fiat cash will occur, and that the debt in the economy is so large that debt levels are unsustainable. Unless there is some way to renegotiate the debt that does not cause further disruption, once a decline in economic activity or defaults on debt occur (as experienced in 2008), the pressure to pay back debt becomes so great that people will sell assets to raise cash and drive down the price of assets such as gold, stocks, and real estate. This will cause further defaults and further deflation and so on.
The deflationary writers believe that deflation cannot be avoided, and if it is delayed by accommodative monetary and fiscal policy the final resolution will be worse. This belief is summed up in the following quote: "The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." von Mises Human Action (Chapter XX, section eight)
Deflation risk
NZ households appear to be positioned for inflation and are extremely vulnerable to recession and deflation, as a decline in the value of houses would lead to houses worth less than the mortgage, at least for recent buyers. New Zealand household debt levels are among the highest in the world. Unfortunately the first signs of deflation are starting to appear in the monetary aggregates. The 1-year decline in M3 (money plus credit) of 4.5% in January 2010 is probably the largest decline since the Great Depression of the 1930s. There is hardly a yearly decline in the available data that goes back to 1961 (although data for 1987 could not be found on the RBNZ website), so any decline in M3 is quite significant.
Will the RBNZ try the same policies as the US Fed? Given that guarantees on finance company deposits and interest rate cuts followed similar US actions in 2008, it appears likely. Although the RBNZ is being disciplined compared to its peers around the world, it still controls a fiat currency, and it may be that the RBNZ has less power than it thinks. The RBNZ holds substantial US dollar assets and little gold as reserves (gold appears to be only held indirectly through special drawing rights of the IMF, and the IMF is owned by the titans of the global financial system).
The policy issues facing Western governments have never been trickier. Whatever they do, they will create winners and losers. The government cannot create wealth, but only transfer it from some to others. For example, with the level of debt so high, bailouts have the potential to transfer gigantic amounts from groups such as savers and future generations to current home owners and banks. Or will only banks benefit? And even with these extraordinary transfers of wealth, it is unclear that any government policy can be successful. Remember none of the experts in government could foresee the 2008 financial crises. How can we expect them to foresee what their actions now will cause in the next few years?
In Summary
The NZ financial system is strongly influenced by practices of the US (and worldwide) financial system. The overvaluation of the NZ housing sector relative to income appears to be a rational response to (hyper)inflation fears assisted by bubble dynamics. Because their debt levels are so high, New Zealand homeowners are extremely vulnerable to deflation that would be caused by the default/repayment of existing debt. Extraordinary and unprecedented action by governments around the world as they fight deflationary forces of too much debt, by adding more debt, has created uncertainty over who will be the winners and losers over the next few years. At risk is the fiat currency system that is currently being used.
* Philip O’Connor is a Senior Lecturer in finance at the University of Auckland’s Department of Accounting and Finance.
90 Comments
<i>Remember none of the experts
Remember none of the experts in government could foresee the 2008 financial crises.
To be fair - neither did any of the experts in academia - note the Queen's letter to the London School of Economics asking "please explain your inability to forecast...".
Inflation or deflation: that is
Inflation or deflation: that is the question.
Finally interesting article about the
Finally interesting article about the future direction of the world with options:
de-leveraging by defaulting,
de-leveraging by inflation,
both will creates winners and losers.
The only missing factors is employment and immigrations
This is a very detailed
This is a very detailed analysis. There is an enormous degree of rational logic to the relationship between the US and NZ property market.
However one missing issue is foreclosure liability. The US housing market collapse was triggered by the sub prime financial mess - but it became a viscous circle of home price decline because property owners could walk away from homes which were under water and suffer no more ill effect that a damaged credit score - this was the accelerant that lead to US prices falling 30+%.
In NZ property owners always hold personal liability for these debts and are therefore far more motivated to repay mortgages and thereby keep the house rather than foreclose in a mortgagee sale and end up with debt and no house. This is why sales over the past 2 years have fallen to all time lows. US house sales on the other hand have not fallen by the same relative volume.
Another economist/academic throwing their forecasting
Another economist/academic throwing their forecasting punt into the ring! NZ house prices are more like road runner! beep beep!
Add this article to the
Add this article to the Debt Saturation artricle elsewhere, and I can't see a way around deflation. Adding more debt just isn't going to work this time around.
Not true Kate. Somewhere I
Not true Kate. Somewhere I have a paper comparing ten economists who made accurate predictions with the econo-bureaucrats who did not. If I can locate the link I will post it. I do remember itulip.com were among them.
Why do we compare the
Why do we compare the NZ housing market with the U.S. housing market? Wouldn't the Aussie market make more sense? We are consistently bombarded with opinions that suggest that under-supply and migration are the drivers that under-pin prices, yet this opinion doesn't even acknowledge either.
Kate, Nouriel Roubini and Steve
Kate,
Nouriel Roubini and Steve Keen are among the few who predicted it.
Michael Lewis also identifies a few hedge fund managers who did it in 'The Big Short'
cheers
Bernard
If it was inflationary then
If it was inflationary then houses and inflation proof assets would be selling like hot cakes,instead we have people paying down debt and saving. Thats a powerful deflationary force to turn around. With out a collapse in assets then Kiwis will invest off shore were returns are better. Secondly we dont as a country generate enough income to pay the intetest,debt has to be destroyed.
How Far Down The Rabbit Hole Must We Go?
http://market-ticker.denninger.net/
please let it be true,
please let it be true, I for one can't read another article bout imploding bubbles anymore
Alistair - not all states
Alistair - not all states are non-recourse in the US, and the collapse in prices hasn't really discriminated between those that do and don't.
I agree with the summary of this article. It then begs the question as to which path we'll follow:
- inflationary ---> govt keeps monetary policy stimulatory and creates inflation, doesn't respond by increasing interest rates
- middle ground ---> through some magic and luck, stimulus is withdrawn before inflation is created and without causing another recession (and we struggle along with sub-par growth for some time)
- all other options ---> deflation happens by itself or rising interest rates and withdrawn stimulus (responding to inflation) cause a second downturn
"All other options" seems so much more likely...
"...unprecedented action by governments around
"...unprecedented action by governments around the world as they fight deflationary forces of too much debt, by adding more debt, has created uncertainty over who will be the winners and losers over the next few years."
So it's a risk/reward ratio as I see it.
(1) Be short housing and risk having to pay more for a house in the future; or
(2) Be long housing and risk losing eveything you have, except the debt, which will remain.
Very well written article. Always
Very well written article.
Always nice to see an opinion backed up be facts in an impartial manner.
One of the best I've read lately.
Phillip, What a lot of
Phillip, What a lot of repetitive drivel.
The valid points made in the blog are widely known, yet the hysterical attention grabbing headliner is invalid and unsubstantiated.
"The final and most plausible reason why NZ house prices have not followed the Case-Shiller index, is that NZ housing prices are about to catch up, with a fall in price of 25% or more"
The most plausible reason prices in NZ haven't plunged is that they are still yet to do so?
I'm not going to waste my time rebutting someone who clearly has no understanding or grasp of the differences between the two markets. There is no doubt that in time, such statements will make a fool of the author, who will of course assuredly convince his subscribers that he was right all along via his default theory: "of course, this need not happen".
And to conclude an absurdly vague and incoherent ramble aiming to justify an irrational "coyote" collapse, there is a summation that contains all the rigor of a gambler who just bet ten ways on a ten horse race.
Bernard, of course, treasures such blogs, from his sycophantic brethren as pure gold dust (even though he can't tell that it's just pyrites).
I second that point about
I second that point about non-recourse loans in the US. Its a total red-herring given that only about half the US states are non-recourse (they are listed here:
http://wiki.answers.com/Q/Which_states_are_non-recourse_states_for_mortg...
States such as Florida (which have suffered monumental collapses in house price) are not on that list - you walk away in Florida and they can and will persue you for the debt. Florida is a recourse state (http://wiki.answers.com/Q/Is_florida_a_non_recourse_debt_state).
That has not stopped some folk walking away in Florida - but they are liable for the debt.
Last time I looked Florida housing was amongst some of the worst hit with house prices were down 30% plus.
Bang goes that theory then............
The "personal liability" factor allows
The "personal liability" factor allows banks to lower the rates to encourage greater demand for credit to blow a bigger bubble to entice more borrowing to bring bigger profits and fatter bonuses and lead to the RBNZ raising the ocr so high the exporters are screwed by the rising Kiwi and jobs are lost in the productive sector but the bubble in property hides the unemployment and the decline in real GDP. How the stupid mortgage Laws lead to a failed economy.
Bollard's core funny rate is only half of the answer. He needs to have power over proportionate fee structures for mortgage registration. Key's mates have an open goal to boot at. Raise the cost of the bank's mortgage protection as the sum of loot rises and watch as the demand goes away.
Andy Hamilton, that is a
Andy Hamilton, that is a very important point. California is, of course, a non-recourse State, and they are responsible for about 50% of the mortgage-related losses in the whole of the USA. But Florida does provide counter-evidence, as you say.
There are many confusing factors at work here. I have always been of the opinion that NZ and Australia have to have their own house price crashes eventually based on median multiple income-house price gaps and overseas experience. I still am saying that, and like Steve Keen, I say it is merely a matter of timing. We might have a suckers rally or 2 yet, but I think that once a certain level of median multiple is reached, a crash is inevitable. In California, this was about 9.0. Sydney and Vancouver are both now in that area. Once these leading unaffordable markets blow, the others in the same country unwind too.
Re experts who predicted the
Re experts who predicted the global financial crisis:
From "The Foundation for Economic Growth":
There have been numerous articles and videos pointing up one or another economist or analyst as "the man who picked the coming crisis". I have been looking into these claims for some months now, and I am discovering a longer and longer list of such people.
It is common to see some doomsayers labelled as getting it right by default, simply because if you preach doom and gloom for long enough, you stand a chance of being right eventually if a crash does occur. But in the case of the latest crisis, there were particular causes that either you pointed up in advance or you didn't. For example, the existence of a housing bubble as the source of the coming crisis, and the role of the mortgage financing industry from initiating lenders, through GSE's, to Wall Street.
JANE D'ARISTA wrote an essay:
"Is A Mortgage Bubble Filling The Treasury Debt Vacuum?"
- way back in the third quarter of 1999. You might say this was "too early" for someone to have been picking a problem that no-one else saw until after 2001 at least. But she was right - she picked the start of the housing bubble only nine months after it had started, and the role of the GSE's (Fannie Mae and Freddie Mac) and the securities industry.
It appears that Jane D'Arista was working for years, on the subject of financial system and monetary reform. Unfortunately, there does not seem to be any archive of regular essays as there is for many other analysts. Nevertheless, Benjamin Wallace-Wells in an excellent April 2004 essay (included below) credits Jane D'Arista with being the first to have been making consistent and regular early warnings about the developing crisis.
In September 2001, Stephane Fitch and Brandon Copple in Forbes, authored an article, "What If Housing Crashed", in which they discuss the concerns of economist Robert Shiller, whose specialty is the analysis of housing affordability. Shiller clearly identifies areas of the USA in which worrying bubbles are forming.
Robert Shiller features regularly over the years in warnings of a housing bubble, both in articles authored by others, and by himself. A particularly good example is a paper he co-authored with Karl Case in September 2003, "Is There a Bubble in the Housing Market?".
Gary North, whose archives at Lew Rockwell.Com are freely accessible, was writing regularly about the developing housing bubble and the coming crash, in incredibly accurate detail, years back.
Articles of particular note:
"The Residential Real Estate Bubble", in March 2002
(Included in this essay is a credit to the "FMWatch" website for warnings regarding Fannie Mae and Freddie Mac. "FMWatch" deserves credit but is only accessible to subscribers)
"Housing Bubble, Mortg*ge R*tes, and Spam", in August 2003
(Included in this essay are credits to Alex Berenson and Gretchen Morgenson of the New York Times, James A. Bianco of Bianco Research, and Philip Coggan of the Financial Times)
"Pop Goes the Bubble", in August 2003
(Included in this essay is a credit to Richard Benson)
"Rohatyn's Warning on America's Indebtedness", in May 2004
(including credits to Felix Rohatyn, Bill Fleckenstein, and John Templeton).
"Five Myths of the Economic Recovery", in August 2004
(includes a credit to Stephen Roach)
"Greenspan: The Devil Made Me Do It", in February 2005
(includes credits to John Mauldin and Marc Faber)
FURTHER notable authors:
(Note : most of these authors wrote extensively on this subject: the following references are just some especially good early predictions of the problem)
"Bubble Trouble: Your House Has a P/E Ratio, Too", by Edward Learner, in June 2002
"The Run-Up In home Prices: Is It Real, or Is It Another Bubble"? by Dean Baker, in August 2002 (NOTE: There are two different Dean Bakers, the other one of whom is at the other end of the spectrum from this one.)
"The Costs of Bursting Bubbles" by Stephen S. Roach, in September 2002
And "The Mythical Recovery", in August 2004
(Stephen Roach's writings are unfortunately mostly subscriber only, through Morgan Stanley. Apparently he wrote many prescient essays in this forum.)
"Housing Bubble: Myth or Reality"? By Frank Shostak, in March 2003
AND "Running On Empty", in February 2004
"The Coming Crash In The Housing Market" By John R. Talbott, in April 2003
"The Housing Bubble"; by Christopher Mayer, in August 2003 (NOTE: There are two Christopher Mayers, the other one of whom is at the other end of the spectrum from this one).
"Fannie and Freddie's House of Cards", by Richard Benson, in August 2003
AND "Debt Versus Income: At the Point of No Return", in February 2004
"How To Identify A Bubble"; by Kurt Richelbacher, in Jan 2004
AND "It's the Bubbles, Stupid", in June 2004
"Greenspan's Black Magic", by Ron Paul, in Feb 2004
"America: Like New York in the 1970s but worse." by Felix Rohatyn, in April 2004
"Game Over For Stocks and Real Estate", by Bill Fleckenstein, in April 2004
"There Goes the Neighborhood", by Benjamin Wallace-Wells, in April 2004
"Housing: Too Good To Be True"; by Mark Thornton, in June 2004
"Collateral Damage From a US Housing Bust", by Paul Kasriel, in July 2004
"Mr Bailout"; by Antony Mueller; in Sept 2004
"The Creation of a Bubble - The Housing Market", by Jens Kjaer Sorenson, in Sept 2004
"America's Unsustainable Boom"; by Stefan Karlsson, in Nov 2004
"Down In the House", by Bruce Bartlett, in Dec 2004
FROM this point on, the warnings come thick and fast. The following authors have been acknowledged by various article writers to some degree or other:
(In no particular order)
Steve Keen
Peter Schiff
Nassim Taleb
Barry Ritholz
Jim Rogers
Keith Fitz-Gerald
Nouriel Roubini
Fred Harrison
Steven G. Horwitz
Michael Hudson
James A. Bianco
George Reisman
David Kenner
Paul Krugman
George Goodman
R.D. Congleton
Bill Bonner
Judy Shelton
Mark Skousen
Harvey Golub
Ken Rogoff
Roger W. Garrison
Steve Eisman
Lew Rockwell
Jeff Scott
Mark Zandi
Ivy Zelman
Meredith Whitney
Martin Feldstein
Paul Cleveland
Thomas DiLorenzo
Robert Blumen
Thorsten Polleit
Gerald Celente
Hans F. Sennholz
Joseph Salerno
Ambrose Evans-Pritchard
David M. Walker
One point worth noting is that there is wide disparity among these people as to the "solutions" to the crisis. Some are "for" Keynesian solutions and some are against. As a "school" of economics, the "Austrian" school outperformed all others in predicting the crisis, and it is to a man opposed to Keynesianism.
There is also a very good article in "Spiegel Online", July 2009, by Beat Balzli and Michaela Schlessl, entitled "Global Banking Economist Warned of Coming Crisis". This credits William White and other economists at "The Bank of International Settlements" with making warnings on regular occasions as follows:
A presentation at a conference in August 2003
Annual Report, 2004
Quarterly Report, March 2006
The Spiegel article also refers to a letter from the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Federal Reserve Bank on Sept. 23, 2005, which similarly deserves credit for its foresight.
In September 2004, the IMF "World Economic Outlook" expressed concern about housing bubbles developing simultaneously in many countries. Various IMF papers since that time, expressed concern.
For the record; I don't
For the record; I don't think NZ house prices are going to rocket or nose dip either. I think they're going to grow a bit above inflation but thats about it.
Historical house prices has 0 value for the predictability of the stability for future house prices. Comparing two markets without accounting for differences the way the author has done is just ignorant.
The resulting analysis is irrelevant.
Whoa - banks lend on
Whoa - banks lend on the basis of historical house price movements and they look at markets around the world.
Do you still think it's irrelevant? Or is credit not a factor in considering house prices?
Andy h Its not as
Andy h
Its not as simple as that, non-recourse is only an option, its just you don't have to get court judgement to pursue the debt. before dismissing this you should find out the profile of the states and the type of drop, Florida may allow recourse but a lot of the development was speculative, finanaced by liar loans so there may not be a lot to pursue.
I find the concept of prediction by matching graphs from one of the largest economies in the world with one of the smallest idiotic at the best, sort of like the correlation between pirates in the caribean and global warming , but as Bernard is fond of saying, "We like a good graph as interest.co.nz [especially if it agrees with me]"
One major difference in the NZ market is that I suspect a lot of that debt was spent on building that are now rotting, which will mean default is a big player in deleveraging
Neven
Somewhere recently I read a
Somewhere recently I read a theory that Australia and NZ have a banking oligopoly that has managed to contain the potential housing crash so far. One factor was their strangling of new development by withholding finance and foreclosing on developers; keeping the housing market undersupplied. This would certainly explain why so many developers and finance companies have gone bust while property prices remain high.
The urban planning profession, of course, started the whole speculative ball rolling with their urban limits. It is the area of urban economics that is most lacking today; all the correct financial crisis predictions were on the basis of monetary inflation and debt buildup; no-one saw the role that urban planning has played in it. There are a few people like Hugh Pavletich who were providing valuable information regarding housing affordability, but almost everyone in macroeconomics has yet to "click" about the connection between this and the crisis.
The latest OECD Report on National Housing Markets comes tantalisingly close. I am wondering how many lightbulbs might pop on in the minds of smart people who read it and can see what the report's own authors fail to see under their noses.
Neven911, it is not just
Neven911, it is not just a comparo between the USA and NZ. The latest OECD "Overview of Housing Markets" contains a massive amount of analysis, and expresses wonder at so many housing markets around the world bubbling at the same time, and all of them bubbling to a level that was never previously exceeded by any one housing bubble. What is more, no (comparatively small) housing bubble in the past had ever occurred in more than 4 countries simultaneously.
My pick; (way out on a limb here) it is environmentalism, conservation, and global warming mania driving urban planners in all these countries simultaneously to impose tight urban limits, drive land prices up, and set off a classic "cornered supply" speculative bubble. This is not the first time I have said this, and the more evidence emerges, the more convinced I become.
I have only modest sympathy
I have only modest sympathy for the urban planning argument. The bubble in NZ is fairly indiscriminate ----> it applies to cities and towns with and without population growth.
Its still just a bubble. Its not "different" here in NZ. It might not follow the US (I think chances are low it will plummet, personally), but its still a bubble and bubbles don't end well.
The whole deflation inflation debate
The whole deflation inflation debate is terrible interesting. Simplistically it is astounding that the debate is about two apparently opposite outcomes. One sort of simplistic argument that I have not heard made often goes like this... In a world where the majority of new money is conjured up by bankers when they make loans how can central bankers engineer inflation when the value of the assets backing the loans are falling in value? The reason this question is interesting is that when banks loan money into existence they do so at a leverage of 10 times. This means the banks are wiped out when the assets backing their loans fall by 10% plus whatever the borrowers initial equity was. When the loans are written off it creates a huge deflationary force.
To me the force seems assymetric to the downside. I could give reasons why but it would be very boring. Marc Faber who predicts hyper inflation uses the argument that you can have inflation in a weak economy just look at Zimbabwe. There are of course many differences between Zimbabwe and advanced western nations. Among them being the level of indebtedness. I imagine the average Zimbabwian did not have a mortgage on his house or massive credit card debt. These things don't exist in poorer nations. Weimar Germany likewise probably was not a society of highly indebted people. My guess is it is much easier to generate inflationary pressures in a low Debt society than in a high Debt society.
"Very well written article. Always
"Very well written article.
Always nice to see an opinion backed up be facts in an impartial manner.
One of the best I’ve read lately."
I Agree, but always be wary of looking for pieces that agree/support your viewpoint...
regards
@Simon. Interesting... I have a
@Simon. Interesting...
I have a theory (I just came up with it now).
Indebted societies will see deflation, the rest will see inflation. My logic is simple; the masses must suffer for the few. Kind of like a Spock quote gone wrong!
If, and I'm guessing here, that in Zimbabwe people had little debt, but a little savings, then hyper inflation helps to wipe out their savings. The ones to benefit were the few that borrowed some Zimbabwe Dollars when they were worth something, and bought something like gold. Then they paid back the loan after inflation kicked in (I have a $100,000,000,000,000 note here on my wall)
In the west we're largely in debt, and what's the chance of everyone suddenly being given a 'get out of jail card' that renders their debt worthless, as hyper-inflation would do? Joe-average would own his home, car and stuff in the clear. How would the 'few' profit from that. No, the masses must end up being worse off. That means the debt load will get worse. That means deflation. Lower wages (more unemployment will suffice), while the debt hangs around. The 'few' will profit by that fact they now have slaves (and I use that term after considerable thought) who are even more indebted than they are now.
I call it 'Murphy's Economics' - given the chance of things getting better or things becoming worse, they will get worse. :-)
I'm with IanC on this:
I'm with IanC on this: ignoring the credit-supply argument is just as silly as trying to blame everything on planners, regulators and Certifiers Of Scaffolding.
Our own fair Gumnut promised $100K in credit to anyone who could fog a mirror in 2002.
Instant result: hovels that could be had for under $50K, near the beach, in a major NZ city, had a hastily painted-in '1' in front of their price the next day. I do believe this global-price-signal can be discerned from that there graph.
Now, who's gonna argue against credit-supply, again?
And a much wiser bear than I neatly summed up all these arguments in his version of a 'vicious circle' as follows:
And if you follow the median price multiple arguments and track That, it's still way up in 'severely unaffordable' territory - well over 5.
But be of good cheer, chaps and chapesses. The pieces of the pie do eventually get re-arranged.
Although I'm reminded of a cartoon from a school maths text long ago which has unaccountably lodged firmly in my aging brain.
It shows a cute animule holding out a freshly-cut pie to another animule, saying "Have a piece of Pie". A#2 takes the larger piece. A#1 mutters "I didn't mean That piece'...
@Martiniv I agree. In the
@Martiniv
I agree. In the markets it's often said that the next move will always be the one that generates the most pain for the most people. Arguably the whole Keynesian global fiscal stimulation reflation move has been to give the few enough wriggle space to get their affairs sorted out before the inevitable crash. The many mostly can't and won't dump their houses until they have no choice.
IanC, The whole point about
IanC,
The whole point about the urban planning argument is that it explains how regions with falling populations, high unemployment and falling production, can have a housing bubble. Even the North of England has a housing bubble, in spite of the fact that they should be the Detroit of the UK. Detroit has $20,000 houses right now. The North of England has a housing bubble with nothing under 200,000 poonds. This with 30% unemployment.
The difference is urban planning.
Owen McShane summed it up well recently by saying that the urban planners had struck back at people trying to escape overpriced land values by movinmg out to country towns; they have got the country towns to impose absurd, fussy little urban limits all around them to drive up their values too.
The bubbles are not "indiscriminate", they have not hit anywhere with relaxed urban limits. There are not many examples of this, but that is not my fault. There would be NO examples if the urban planning profession's leading lights had their way everywhere. It happens to be the parts of the USA where they "still cling to their guns and religion", that have avoided the housing bubbles. That gives you some idea of the whole political mindset necessary to allow people "freedom to build".
Oh, the Czech Republic hasn't done too bad either. It helps you develop a healthy attitude to "freedom", to have had several decades of negative experience with "planning" in its fullest form.
@Alistair People in NZ can
@Alistair People in NZ can however declare themselves bankrupt, and walk away. Not sure on the rules of being bankrupt, but I beleive you do have to make all efforts to try to pay back the debt as much as you can.
Waymad, I really, really respect
Waymad, I really, really respect you; and full marks for referring to that superb Rees-Mogg article.
But Owen McShane's latest NBR Column provides the exact answer to your question about the credit-supply argument. How much better credit-supply can you have, than the old 3% subsidised first home loan, capitalisation of family benefit as security, and $10,000 handout; that we had in the 1970's? House prices were affected how much?
House prices simply couldn't go up when it was politically regarded, on a broad social consensus, as a "social good" to be building as many of them as possible on the urban fringes with minimal delays and no upfront fees and no 10X to 30X premium pricing (over farmland) on the land just because it was zoned "residential".
Further evidence: see my point to IanC above. Huge swathes of the USA had no recent housing bubble in spite of having the same Fed interest rates, the same federal laws about subprime lending, the same securitisation of mortgages, etc. California and the other "Green" States with urban limits, brought the entire USA down in spite of this. The total absence of "non bubble" areas in NZ and most other countries, mean that we will suffer WORSE damage than the USA as our messes unwind.
I am so serious about this, that I suggest that these urban limit, conservation, "save the planet" manias will destroy the entire first world economically even without ETS's and the like, unless there is a revolutionary reassessment of their effects on land values and speculation.
Meanwhile in the lucky country:
Meanwhile in the lucky country:
http://www.theage.com.au:80/business/redhot-melbourne-market-starts-to-g...
Interesting that the swing of
Interesting that the swing of opinion seems (mostly) now to accept the in-evitability of the bubble bursting. Those who argue against it seem to use the words 'I think' as against the more experienced who use stats and history as a base for their argument. Considering the weight of argument presented so well by Philip O'Connor there seems a touch of un-realiity in maintaining yesterdays argument that 'we're different' or 'its different this time'.
How can you argue the un-arguable?
A bubble as all-encompassing as this will leave many scars and discourage future speculation for many years - regardless of threatened tax changes. But don't despair; the correction will benefit more, for longer, then the temporary speculation gains of the recent past.
Rob, you are right about
Rob, you are right about people in NZ who are underwater on their mortgages being able to get out by going bankrupt. But there are consequences that put most people off. There is a considerable difference under non-recourse laws in the USA, where you can simply walk away, rent yourself a home, and wait for prices to keep coming down before you buy back into the market again. This is another classic example of unintended consequences of "get those fat cat financiers" regulations.
In fact, the OECD Report I have been referring to, says that one lesson that needs to be learnt from this whole crisis, is that certain types of regulation are "pro-cyclical". That is putting it mildly.
Another factor for the USA, is that mortgage interest payments are tax deductible. (Remember when NZ had this?) That is a strong incentive to keep your payments as high as possible, but then there is a nice soft option at any time prices crash, where you can simply walk away from the excess debt that it suited you to have.
OECD Report: http://www.olis.oecd.org/olis/2010doc.nsf/LinkTo/NT
OECD Report:
http://www.olis.oecd.org/olis/2010doc.nsf/LinkTo/NT00000AFA/$FILE/JT03277653.PDF
I recall Philip O'Connor taking
I recall Philip O'Connor taking a lot of flak for the posting he refers to here:
"...Another previous blog post challenged the idea that lower mortgage rates would lead to higher house prices. This was based on the observation that mortgage rates had been increasing virtually in accordance with the rise in housing prices. I challenged the causality of lower rates leading to higher prices, if mortgage rates are a casual factor and lower mortgage rates increase house prices, shouldn’t higher mortgage rates decrease house prices?..."
Harvard Economist Robert Shiller develops the same argument in this assessment:
http://seattlebubble.com/blog/wp-content/uploads/2007/10/2007-08-robert-...
Interest rates and house prices both tend to be "driven" by the same external factors, rather than one "driving" the other.
So that's higher interest rates=higher
So that's higher interest rates=higher property prices; lower interest rates=lower property prices. Makes sense to me as the cost of one input variable ie: the cost of money, changes to reflect the end product price.
"The Bank Manager" Here's the
"The Bank Manager"
Here's the other side of the coin to "Melbourne's White-Hot Property Market":
http://www.theage.com.au/victoria/huge-land-bank-puts-squeeze-on-buyers-...
"Huge Land Bank Puts Squeeze On Buyers"
"PRIVATE developers and the state government's property agency are sitting on a multibillion-dollar land bank, adding to Victoria's housing affordability crisis.
Private developers and land holders have almost 70,000 house blocks - worth an estimated $12.6 billion - that the state government has zoned for residential development and approved structure planning, according to real estate group Oliver Hume.
Yet new home buyers in growth suburbs have increasingly less choice, with just 1400 vacant lots currently available to the market in growth areas, a historical low, according to Oliver Hume's December retail land supply index.
Government developer VicUrban is sitting on a further stockpile of 25,000 housing lots listed for development across Melbourne, but selling just over 700 lots a year, or 3 per cent of its stock.
Plans for a massive expansion to Melbourne's boundary were last month blocked by Parliament and planners are now calling for better use of available urban land - including land under the control of developers but not yet on the Melbourne housing market.
The drip feed of new house blocks comes as Melbourne land prices soar to new heights, out of step with declining prices in other Australian capital cities. The cost of an average Melbourne house lot grew 12 per cent last year to nearly $180,000, according to the National Land Survey Program. In Sydney, it declined by 9 per cent to $245,000.
The Housing Industry Association has used Melbourne's record land price to put pressure on the state government to move ahead with plans to expand the city's urban growth boundary.
However, the figures show that in the City of Whittlesea alone there are 23,000 residential house blocks ready to be built on. There were fewer than 400 lots on the market in February, according to Oliver Hume........"
Follow the link and read the whole thing.
I also agree that there
I also agree that there must be a correction, however I am firmly in the camp that this will be a very prolonged process with little change to real house prices over the next decade. I expect very little price growth in the next 2-3 years followed by a prolonged period of growth at similar levels to inflation.
Just wait till petrol price
Just wait till petrol price hits > $2.00, thats usually when things get interesting.
Inflation or deflation is determined
Inflation or deflation is determined by movement of the CPI which is a weighted average with housing costs, food and transport the biggest influences. house prices only make a very small contribution and will be nullified by increased, rates, electricity, groceries and petrol prices. I believe house prices and rents will keep falling (deflation) and we will have low CPI inflation and GDP growth and unemployment will keep rising to over 8% by 2011 and 10% by 2012.
<blockquote> Inflation or deflation is
bollocks
"I forecast that if the
"I forecast that if the relationship continued, NZ house prices would fall by approximately 35% by the end of 2011"
Hell what a long winded way to say what I did about that time...
The mean price will meet the long term mean (1970 to 2007) around 2011/12 which at the end of 2007 at the peak would mean about a 25 to 30% rectification
We would get a sudden drop, governments and such would do things to stem an over night drop.
We we didnt is because our banking structure and we cant just hand the keys back as in the States
A heap of fancy graphs and data just to show what plain old common sense says.
What does he want a pat on the back?
Damn just broke my arm...patting myself on the back.
PhilBest - you misunderstand me.
PhilBest - you misunderstand me. I agree that urban policy is a major driver, but contend that there's some pretty serious bubble mentality overlaid (to explain the breadth of the bubble in NZ, for instance).
My view of things are
My view of things are that the economic adjustments that have to occur in the US,AUS,NZ will come a lot faster and harder than eveyone seams to think.I beleive that it will happen before this year is finished,no stats to back this up,it's just a gut feeling.
Where is the house price
Where is the house price going?
Does Advance Hair Studio really work?
Tired of all this...
Thanks, IanC. Yes, I agree
Thanks, IanC.
Yes, I agree completely about bubble psychology being an ingredient. But this time, as the OECD has pointed out, something altogether unprecendented has happened with house prices. This is not just the share market again, or gold or some other commodity.
What has always historically stopped the family home becoming caught up in bubble psychology, was simply the ease of supply of new homes and the plentiful farmland available for conversion without legal hindrance. Bubble psychology has always existed and would have applied to housing at any time in history "supply" was interfered with. In fact, England has provided us with an early example of urban limits in action; they have had 3 of the severest housing price bubbles ever to have occurred in history, all connected with political "tightening" phases of their 1947 Town and Country Planning Act. The OECD Report refers to this; they also refer to regulatory difficulties underlying other early house price bubbles in the Netherlands and Denmark.
It now just remains for some well-placed economist to make himself famous by connecting the dots and doing the broad study that proves the point beyond doubt. But so far, we have more and more evidence all pointing the same way.
Philip O'Connor's suggestion about inflating
Philip O'Connor's suggestion about inflating our way out of this bubble is both wrong and right. Our only way out of this mess is deliberate, acknowledged, monetary inflation; AND the abolition of urban limits and restrictions and financial penalties on development, at least temporarily.
Monetary inflation without the latter, will merely blow the housing PRICE bubble up further, at least as fast as the underlying rate of inflation but probably a lot ahead of it. But monetary inflation WITH the latter, will result in a development and construction boom, providing jobs and incomes, and affordable real house prices.
I also suggest that the inflation of the money supply should be introduced where it will have the biggest beneficial effect; the OCR should be applied to all money owed to the IRD, as well as to the banks. It makes no sense for the government to be trying to stimulate the economy in tough times by offering "cheap money" that ends up in all the wrong places, while the businesses that actually provide the jobs, incomes, and economic growth, are being hit with very "expensive money" penalties for anything they owe in that direction.
Result: if you are making a profit and declaring taxable income and tax payable, you can hang on to it all for reinvestment in your business, at a cost of "the OCR". When the gummint decides they want to encourage you to start paying it back, they will need to revisit the link between the IRD interest rate and the OCR. But it might be such an economic shot in the arm, they will want to be careful just how much they raise it.
PhilBest - land developers have
PhilBest - land developers have always restricted the supply of land to keep the prices up and the banks are making it tough to get finance for the builders so that in turn keeps the existing house prices up thereby keeping the banks safe as they have so much invested in existing home mortgages.
It's all a conspiracy and while these mega-players control the market house prices will stay up.
Once Sydney and Melbourne prices
Once Sydney and Melbourne prices get too extreme the Chinese investors will transfer their attention to New Zealand - the asian invasion is just around the corner!
PhilBest If you can employ
PhilBest If you can employ an engineer with a masters degree in China for $1000nz a month, how the hell are we going to get wage inflation without destroying what is left of our manufacturing economy.
In the 70,80's inflationary environment we had currency controls without currency control who would keep their money here.
My farm went up in value 4x between 2000 and 2006. Its earnings were stable over this time but are now below my earnings in 1995. How can I borrow more to fuel inflation when i cannot pay the interest?
We have moved to a consumption based economy with many jobs in the service sector exposing us to the risk of very high unemployment.
Inflation is very unlikely, currency destruction a possibility, deflation almost certain.
"land developers have always restricted
"land developers have always restricted the supply of land to keep the prices up and the banks are making it tough to get finance for the builders so that in turn keeps the existing house prices up thereby keeping the banks safe as they have so much invested in existing home mortgages.
It’s all a conspiracy and while these mega-players control the market house prices will stay up."
The rich, the govertment and the banks, they are all on the same side of the game.
<b>Bank Manager</b> : Can you
Bank Manager : Can you keep that scenario ( the " Asian invasion " ) to yourself , 'cos Bernard Hickey has gone out on a limb with a 15 % fall in house prices this year !!! No reason to upset the lad unnnecessarily . But point well made , it is a global market-place . And we are seen as a politically stable country , with a currency in a fair-value trading range . Imagine that , if residential property rises 15 % by year's end . Ha ha de ha !!!!!!!!!!
PhilBest - I find the
PhilBest - I find the first graph (if not the whole article) of the below interesting. Holland has plenty of limits:
http://www.imf.org/external/pubs/ft/fandd/2010/03/loungani.htm
"I expect very little price
"I expect very little price growth in the next 2-3 years followed by a prolonged period of growth at similar levels to inflation."
I'm with the taxman, but the property bulls will say that property values double every ten years!!
This means that by 2017 the avearge NZ property will be 700k from 350k in 2007 and 920k in Auckalnd from 460k. That's only around 10% or so a year from today.
How can we short the
How can we short the Melbourne property market??? Looks like a huge opportunity coming our way in the not too distant future.....
http://www.tommys.co.nz/upload/tommys_magazine/issue_100_tfw.pdf
http://www.tommys.co.nz/upload/tommys_magazine/issue_100_tfw.pdf
The Tommy’s agency doesn’t
subscribe to the Dramatically Falling
Prices Theory. Why? Firstly we know
the market very, very well; secondly,
we’re conscious of the downturn in
building activity over the past couple
of years; thirdly, net migration figures
are putting pressure on existing
housing stock.
Well isn't March, April and
Well isn't March, April and June Real Estate figures going to be interesting.
I remember holding onto my shares in 1987 thinking they would bounce back. I also remember the papers painting a picture oh so positive until it was too late, well over the hump and in free fall.
The best bit of advice I've read about the present situation is "to be cash rich and asset poor", and thats what I'm subscribing too being cashed up.
Having been cashed up for a year, what we can say is that the number of houses that meet our criteria, within the much depreciated cost we put in place, is sky rocketing and more closer to town.
I'm glade to be on the sidelines for this crash.
Bernard it would be good if you started a score card on mainstream journalists and which way their spin swings. Then we can see who's boom or bust crystal ball gazing is the best.
The Bank Manager, what a
The Bank Manager, what a surprise! Another real-estate agency thinks that prices will hold ~ I wonder who butters their bread?
Back in the real world, how-ever, educated readers will know that the property boom was caused largely from BB spending money by borrowing on property. They have not left the market, they have simply run out of borrowing power and hence as generation x and y cannot afford the housing they have nobody to sell their properties to.
Look at the volume of houses sold over the last 18 months and you will see that while net migration continues to put pressure on houses and to rebound the falling house prices, that this is not likely to be enough to sustain a rebound over the longer term and in-fact prices are about to collapse.
I stand (somewhat) corrected on
I stand (somewhat) corrected on criticism of the academics and thanks for all the references PhilBest!
But did anyone really get around to forecasting the level of underlying global interconnectedness - the extent of the subsequent money printing - the resultant taxpayer laibilities that would be incurred - the unemployment that would/will result ...
I still don't think the possible "end games" (or "new beginnings") have been accurately laid out. I keep wondering what the end of capitalism, or the beyond Bretton Woods world will look like. Or are we to accept that the future will be a small, very small 'uber rich' and a great mass of ultra poor - because presently that looks alot like where it will go if we continue to think the current global financial system can recover.
PhilBest I don't buy into
PhilBest
I don't buy into 'urban planning' being the total reason for high house prices nor do I think what planners are trying to achieve in NZ is a bad thing, consider this NZ is both one of the most urbanised countries in the world and also on of the most sprawled (the 19 people/hectare in Auckland has not changed since 1900)
If you we to open up the urban limits, yes house/section prices would fall but the commuting costs would rise (and don't chuck in the fix-all public transport because that doesn't function at 19/hectare) so you lower one expense at the cost of another.
Having said that what the planners did allow were shoebox urban slums, whereas i think we would be better server by medium density urban renewal. But the problem is we all want a little plot of land, this is the unsustainable bit (unless you live Pavlevichville, some mythical endless sierra with unlimited low cost petrol supplied by a military empire)
The solution was I feel to rezone parts of Auckland for medium density housing (no more than 3 stories high, minimum dwelling size, coverage that allowed some greenspace) in such a manner that a developer could make a modest profit in the process.
Neven
councils found liable for leaky
councils found liable for leaky homes.
http://www.stuff.co.nz/national/3490763/Council-fails-in-fight-over-liab...
@Neven911: "so you lower one
@Neven911: "so you lower one expense at the cost of another." ~ Yes I agree, and risk being like the US that are highly relient in large quantities of cheap gas....and turn farming land into concrete.....
I have read the theory on urban limits and while I can see it might indeed have some impact Ive yet to see any mainstream ppl pointing at this as the root cause, mostly it seems yet another whine about "over" regulation by the fundie Libertanz.
When I looked around a few years back for a home all I saw was huge houses stuck on tiny sections even far out (paraparam and further)....so for me the cost of the land isnt a biggee....the actions, costs and profit margins of the developers/builders/suppliers is more significant....certainly when my in-laws built their house it was hard to get a builder, the cost of labour was significant and the time supposedly spent, dubious to say the least. I suspect all you would do if you dropped the cost of land 50% is that this would be absorbed by the builders.......and just lead to over-supply and a price crash....so IMHO what's really wanted is house prices to be contained....grow at no more than inflation ie take the capital gain out....as a house owner its paper money I will never realise anyway, its where I live.
regards
@kate: "But did anyone really
@kate: "But did anyone really get around to forecasting the level of underlying global interconnectedness"
Its such a complex system that no....it isnt...even possible...
"the extent of the subsequent money printing"
The QE isnt actually resulting in money being freed...its on a spreadsheet and just moves around on different spreadsheets, it isnt lent out....hence inflation isnt likely and in fact the lending is collapsing, hence deflation is the most likely outcome IMHO.
"the resultant taxpayer laibilities that would be incurred"
Its pay it back tomorrow...
"the unemployment that would/will result"
The money is being spend to try and stop massive un-employment....the Govn(s) are trying to inject $ into the system to prop up....
If they had not, and allowed the banks to fail then a huge depression was guaranteed...which would be double the un-employment we see now I reckon....but I think its coming anyway....the interconnections mean the entire system is shot....it has to be fixed ie nationalise the banks and they didnt....
regards
Rates.... oh bugger....we forgot the
Rates.... oh bugger....we forgot the fact the councils have the legal right to steal money from us to pay for the rotting rubbish slapped up over twenty odd years of idiocy....and Mr Judge he just say to de council ...."pay up"
Dat make Mr Key and Mr English very happy pollies...not only do they escape having to steal the money but oh lordy lordy what a gift...they get 15% gst from all the loot that must be spent to buy the stuff to fix the shite.
Are we happy little peasant ratepayers this morning then? How much will your council have to steal from YOU for the next.....TWENTY plus years.????
Sort of thing to make
Sort of thing to make a peasant think twice about buying property...right?
I mean to say...not only do you need to learn to recognise a rotter from way out on the road...but....you also gotta figure how much of your income is soon to be stolen from you by your thieivng council for twenty plus years...to fix the mess made by people who did very little while employed by the same council as building inspectors!
Now... not all councils employed unskilled inexperienced fools as building inspectors. Those that did, are set to have to steal the most for the longest. Places to avoid yes!
Gibber deflation is the opposite
Gibber deflation is the opposite of inflation which is measured by the CPI if it rises then its inflation if it falls then deflation that is the official measure how would you measure deflation? As I explained it is possible to have falling house prices and inflation at the same time because house prices make up less than 5% of the CPI while accomodation costs, rates, electricity, groceries and transport make up over 60% of the the CPI these items are nondiscretionary so agregate demand doesen't fall unlike discretionary goods and services, prices for these items are set by production costs rather than supply/demand so the CPI will keep rising even though we are deleverageing and money supply is declining.
Deflation is actually a contraction
Deflation is actually a contraction of the money supply, Keiran. Its consequence is falling prices. It is really a misconception that 'inflation' is the CPI rising. Inflation is actually more money in the system chasing more goods that produces higher prices.
<blockquote> ...inflation which is measured
Bollocks.
Better written as
inflation which is
measuredfalsely represented by the CPI.I see you make mention of money supply. Maybe you should focus on that rather than the shonky mis-measure of inflation known as the CPI?
I agree with Kieran's point.
I agree with Kieran's point. It is possible (and in my opinion highly likely) that we will see rapidly rising prices for non-discretionary expenditure whilst at the same time rapidly declining prices in property (and other large ticket item; i.e. boats, cars etc) assets.
I think we can safely say that we can already see the early evidence of this. Property taxes going up, GST taxes going up, energy costs going up, food prices going up.... and property going down.
Commodity prices have so little relationship to retail (finished good) prices these days. The money earned at the farm gate bears little resemblance to what you pay at the supermarket... and I think that disconnect has the potential to get much, much worse.
Barter is likely to be a consequence of the breakdown.
Bernard, Keen, Schiff, Taleb, and
Bernard, Keen, Schiff, Taleb, and Faber, see market fundamentals and conclude this cannot be sustained. The problem is trying to determine the WHEN. At 6.5 times earnings, real estate in Australia and NZ (add to that some parts of Canada) is clearly in a bubble, and should correct to the 3.5 - 4.5 historical ratio. If any of that holds true, then housing prices should have fallen at least 30%. Historically, house price trends have followed US patterns, with an 18 month time lag. The Winter Olympics in Vancouver has sustained their housing market. Home Ownership Grants in OZ has sustained their housing market and LAQC is the sustaining factor in our housing bubble. And now National is clearing the way to top up leaky home owners (how many of those are held in LAQC's?) with even more taxpayer subsidies. So don't beat yourself up Bernard, if you are proven to be wrong... it is only in the timing.
You guys can take hours
You guys can take hours to talk about properties, numbers, charts, % etc. - it just goes around - a circle. Talks around how to heal the ongoing cold.
So, lets talk about how to prevent the cold.
Fundamentally we have a "Patch work - economy" with a few, but rather low wage industries, which never lifts us of the ground. That is the real problem.
It seems to me with Browlee's talks of mining the government has no real vision for improvement. The government need real advice of how we can build up industries, which makes us wealthy as a nation, with good investment and job prospects for Kiwi’s.
Walter
@Doug, and of course dont
@Doug, and of course dont forget the Kiwisaver withdrawal and first home subsidy that will sustain entry level house prices artifically from next month. A $5k grant, $5k withdrawal equals $10k per person ina couple leveraged at 80% equals $100k of pressure on the lower rungs....
Houses and Gold will both
Houses and Gold will both continue to rise because of a couple of simple factor. 1. The rules of supply and demand (They are makeing very little new land). 2. The devaluation of money.
It is not so much that houses rise dramaticlly in price, it is more so that money devalues and that is why you will need more of it to buy the housing product.
No wonder kiwis love their property, they understand it more so than the fundementials of Gold.
(1) What about when they
(1) What about when they make ' lots of new land', by altering the zoning laws? Could be a goer, Gavin? A trade off; less tax reform, more land for ewes to play with....
(2) Gold is just a commodity trade, Gavin. Go out and buy heaps of it, and see where it goes if other metals fall. They aren't like oil and lots doesn't really go anywhere; use them down; melt them; start again !
Money is really going to come into it's own when deflation hits. ALL other assets have had their run. It's moneys turn this time around!
Quite right Gavin...just as they
Quite right Gavin...just as they are rising in the States and the UK and Spain and and and.....demand aint there Gavin...the buyers have gone long ago...were it not for Bollard porking the market with cheap credit and sucking in some fools, prices would have kept falling last year...all he has achieved is to delay the event and extend the misery of debts to more peasant families.
As for your comment "They are makeing very little new land"....just silly real estate blather.
Mr market is arriving with
Mr market is arriving with his higher rates on debt and he is booting English in the bum over the fiscal deficit growing like Jack's bloody beanstalk. The 1500 state employees sent down the road last year can expect many more to follow. Only the fatcats at the top of the civil service...the Lord Humphreys of wgtn...they will get fatter salaries and bonuses for doing the booting out. Throw in the departure of the young and skilled across the Tasman and the news about Noddyland sinking under rotting homes and rotting apartments reaching Asians...all sort of points to bugger all demand for property. So we ought to be seeing the truth emerge in the property development finance sector right?....oh yeah...there it is....failures and losses everywhere.
there is also the phenomenon
there is also the phenomenon of negative latent demand. the loose credit of the last few years sucked demand from future years by drawing in to the market people who normally would have waited a few more years before buying a property. it's something that has been well noted here in california and adds weight to the question - where is all the new demand for houses going to come from?
Will the Mexican standoff morph
Will the Mexican standoff morph into a general buyer's strike? Not only the can't buys
but the won't buys.
Gibber and Nicholas I agree
Gibber and Nicholas I agree that the CPI isn't ideal but its the the best measure we've got. A decreasing money supply is actually called deleveraging because debt = money supply so if debt decreases so does the money supply but that doesen't automatically mean CPI deflation just deflation of the assets that are dependant on debt like housing. look at it the other way around when we had massive leveraging and huge increases in debt/money supply from 2002/7 CPI inflation stayed around 2% it was house values that inflated 10-15%pa and it will be the same with deleveraging just the other way around house values will deflate due to deleveraging not the CPI. The reason Houses aren't included in the CPI is because they are classed as assets like shares and bonds etc..
Kieran, I disagree about the
Kieran,
I disagree about the CPI being the best measure we've got.
It is a very poor measure which is used by the Government to decrease payments in real terms.
Want to decrease the amount you are paying beneficiaries in real terms for CPI linked benefits? Simple, make the CPI have no relation to true inflation. The Government twigged to this sometime in the last 20 or 30 years. And now, in my opinion, CPI is relatively meaningless.
Neven911, The urban limits drive
Neven911,
The urban limits drive up land prices. "House prices" tend to mask this because of their stability. If you separate the 2, if you thought "house price" graphs were disturbing enough, you will end up with a horrifically steep curve for land prices. The value of the land has gone from being 10% of the package for a new house, to being more than 50%.
You have your head screwed on about public transport. Every city in NZ is many times short of the population densities to make this pay.
But it gets worse. Alain Bertaud's studies of Portland and Curitiba (the model "planned" cities) actually show that the flow-on effects of the distortion of land prices, is to increase residential density FURTHER from the centre than it naturally would occur, and hence increases, not decreases, average commuting distances.
There are so many incoherencies and hypocrisies in the "received wisdom" on urban planning and urban transport planning, that one doubts the sincerity of most of it. For example, the monopoly, unionised model for public transport; "mobility" ideals resulting in frequent but mostly-empty services running all day; the legal restrictions on informal carriage of fare-paying passengers by people with empty seats on their cars. I think you probably agree with me on these points.
Ted Nordhaus and Michael Shellenberger are rare among environmentalists, in that they honestly identify policies that would "save the planet" and advocate those; rather than supporting those that help to collapse western economies as most environmentalists do either deliberately or through stupidity. I am serious, there is no other common denominator that explains environmentalists support of so much contradictory and hypocritical policy.
Thanks for all the constructive
Thanks for all the constructive comments. Philbest, that Shiller article is excellent: http://seattlebubble.com/blog/wp-content/uploads/2007/10/2007-08-robert-....
He makes the case that availability of land is not an issue; the profit motive and innovation eventually undoes short term restrictions. While warning that house prices are unpredictable as they depend on people's expectations, he also thinks many worldwide housing markets will see declines or long periods of sideways markets.
One thing that was not commented much was the decline in M3. I have since been able to check annual growth rates since the Second World War, and there have been no negative readings in that time apart from now. This is deflation and if money and credit are not expanding it does not bode well for the continuation of the inflationary economic conditions (including house prices) that we have experienced in living memory. M3 is the number that I will monitor most closely in the immediate future.
Thanks for the list of
Thanks for the list of people forecasting the economic crises of 2008. I'd like to add Robert Precther to that list. You can see his current predictions for free at http://www.elliottwave.com/club/most-important-investment-report/default...
The problem is that the people who have unbelievable powers to transfer wealth at the push of a button, appear to be completely ignorant. Cullen could mortgage taxpayers at his whim, simply for bets that may go bad. Today there is a story about Gordon Brown's UK sales of gold, http://www.telegraph.co.uk/finance/personalfinance/investing/gold/751158.... If Brown can unilaterally sell the UK's gold reserves at the very worst prices of the past 30+ years, what else are our dear leaders capable of?
Here is a good article that compares the US government to Lehman Brothers, and seriously considers the risk of a US government bankruptcy, http://www.safehaven.com/showarticle.cfm?id=16125 .
One more for the list
One more for the list of correct forecasts of the '08 crises is NZ writer, Wayne Lochore, who has a blog here: http://www.sharechat.co.nz/blog/think-global-its-a-wrap-janfeb/
A strange reference to coyotes
A strange reference to coyotes in Manhattan!
"Not even the Road Runner attracted as many coyotes as Manhattan does these days. For the fourth time this year, New Yorkers spotted a coyote in the city on Wednesday, this time hanging out around the entrance to the Holland Tunnel. Residents tweeted about the sighting on Twitter and tracked the animal from the tunnel to Warren and Greenwich Streets in TriBeCa, before it headed south on Varick and Thomas streets, ABC 7 reported. The coyote was last seen in TriBeCa, the NYPD said. Police caught a coyote in Washington Heights in January, and another one was found loitering around Columbia University in February. Earlier this month, a coyote escaped from police who attempted to catch the animal in Chelsea."
March 24, 2010, http://www.dnainfo.com/20100324/soho-tribeca-nolita/coyote-spotted-on-ma...
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Remember the market is like
Remember the market is like an elastic band ,the futher you stretch it ,the futher it comes back .
And do not forget the time fator!
Johan