Matt, yep, loose lending criteria will always lead to higher house prices, no matter what the rate of interest charged.

Isn't it just the law of supply and demand?
Perceived price of asset too low=more demand=more sale=more demand for finance=higher interest rates,(ie:House prices rising/interest rates rise)
Perceived price of asset too high=less demand=less sales=less demand for finance=lower interest rates. (ie: House prices falling/lower interest rates),
All things being equal, of course!

The articles lacks logic. House prices went up mainly due to increased money supply (largely debts, and some wage increase). The other marginal factors include population growth, artificial control of land etc. The house price increase is not manipulated (i.e. fixed) unlike the bank interest rates which largely depends on the RBNZ manipulated OCR to control the inflation. Hence the logical argument is that increased house prices led to increased mortgage rates. The relationship between house prices and the mortgage rates is volatile due to many common factors. It is a bad idea to predict house price increase/decrease based on the interest rates.

How about we look at these numbers because I think they tell the story.

Looking at the 15 year boom from 1992:

House Prices: +331%

M3 (money supply): +339%

CPI: +137%

(data from RBNZ website).

Yes interest rates have an influence on the demand for money but that is often at the extremes. I would argue that credit growth is entirely driven by the inclination of banks to lend and not the prevailing interest rate.

Oh dear, Mr O'Connor. Write on your blackboard 100 times: CORRELATION DOES NOT EQUAL CAUSATION.

Robert, Murray - would the idea I've described in the first part of this post be useful:

http://www.interest.co.nz/news/new-zealand-could-go-bankrupt-within-next...

Les Rudd
Invited Member
New Zealand Manufacturers and Exporters Association

Reminds me of the time that an economics lecturer at a more-than-reputable English university was teaching that it is better to be paid monthly rather than weekly 'because monthly-paid workers have a higher average bank balance than weekly-paid workers'.

Oh my. Well, when I finished ROTFLMAO and explained WHY, he seemed most surprised (c'mon - nobody here needs telling why, do they?).

The quality of analysis here looks very similar.

@ Les .. Your idea of the RCR is an interesting one.... but do you think that it should be the RBNZ's job to moderate house prices?? or would it be better if there were a separate set of controls for housing (i.e capital gains tax, scrap LAQC's, compulsory superannuation, more state housing etc etc).??

Yeh, kind of reads like somebody just found Chart>Add Trendline in Excel for the first time.

Hey, guys, I suspect Mr O'Connor is being mischievous. Although the spelling mistakes and other irritating errors in his essay do not impress me.

But putting this up there for discussion is valuable.

Yes, correlation is not causation. But I have been saying for a while, that one of the great mysteries of the NZ housing bubble is that, unlike in the case of the US one, it has not been "driven" by excessively lowering interest rates. It is almost an indictment on the NZ character, that we have gone so deeply into household debt (worse than the USA) and bidded up our house prices (also worse than the USA), when our interest rates were SO MUCH HIGHER THAN THEIRS.

There are some intelligent comments being made on this thread, but what I see as the most important point, is being missed. NZ is a prime exhibit for the role in land use restrictions having interfered with the whole market concept where house prices are set by supply and demand; we have had a CLASSIC bubble situation where interest rates actually did what they SHOULD in response to excessive demand for finance; they went UP. Yet in spite of that, the house buying mania continued and even escalated.

This thread is the perfect place to discuss my recently stated conclusion that the reason that severe housing bubbles here and in other countries have occurred at this particular era, is the result of land supply restrictions, which are in fashion due to environmentalism; AND that these housing bubbles would have occurred even under a gold standard stable money system, even with high capital gains taxes, and even with every other tax treatment "solution" that people have dreamed up. All that is required is for house prices to go UP, and UP, and UP, and UP; and the building industry to be prevented from bringing new houses onto the market at their historically realistic prices to take the pressure off.

In the absence of other avenues for investment in which returns are anywhere near as high as they inevitably will be in property under these conditions, a housing price bubble WILL occur simply by sucking investment money away from virtually everything else. Capital gains taxes will merely be costed into the asking prices that will be extracted from the sucker buyers right up to the point at which the supply of suckers runs out.

Matt S - because of NZ's investment landscape RBNZ's task of inflation control has equated to attempting to moderate house price inflation. However, in using the OCR in the face of 80% of mortgages of fixed rates the action of the OCR is so blunted that it's has left domestic/internal/non-tradeable inflation (call it what you will) largely unchecked while the tradeable sector (wool, wood, whey, widget, washing-machine, wireless and website exporters) get whacked via the collateral effect on NZD, which is evidenced by domestic inflation running at 2.5 times that of tradeables. (We throttle Paul while Peter slinks off to a tax break somewhere, the 'intent rule' perhaps?)

If you look a bit further down on that post I've described some other ideas to help with the situation, as you have stated. If a capital gains tax (CGT) were to be introduced I'd like to see it done in a way that keeps tax take neutral, leading to a reduction in corp. and income tax. While other countries have CGT and still have housing inflation issues, given NZ's less dimensioned investment landscape, investment flows could be rebalanced away from passive use of assets (property investment) toward productive activity - which would be the primary reason to introduce a CGT; but investment flow being reduced towards property would help reduce inflation of same.

Re. RCR; in concept it resembles other schemes already suggested, and used for instance in Singapore, in that internal inflation is dealt with via a fiscal arrangement, The difference with the RCR is that it would not be a general compulsory interest linked svaings scheme, as in Singapore say, but would only effect users of credit, who are more responsible for inflation than non-users of credit - just as RBNZ tries to effect them now (or did), but failed dismally with only the OCR available.

As for housing, affordability etc., I am interested in that from the point of view of reducing an inflation driver, and I see that, and the problems we face now, as multi-causal requiring a multi-soluton approach, if for no other reason that one 'Silver Bullet' is unlikely to be enough. Also, in addressing a range of factors we spread the impact of change and risk of failure to acceptable levels - for voters - which is who our policy makers ultimately have to respond to, see my inputs here:

http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reaso...

(more discussion above that input)

where I am arguing against allowing government (notice the small g) avoid the nettles that need to grasped in preference to kicking the vote catching housing affordability issues around via a sole focus on land, housing supply. I see the latter as one factor, but if you've got soft hands and can't deal with nettles it's perhaps easier to kick a footbal around - or should I say block of ice on the deck while others continue to rearrange the deckchairs....

@Hugh - re your point: "Dr Bollard failed to point out clearly to policymaers and the wider public - that there was an urgent need to release fringe land supply and deal with infrastructure financing - so that these artificial scarcities could not occur."

To be fair to Alan, this is not his job. It is a government decision and it is Treasury that should be advising.

Hugh - regarding your point about the impotence of monetary policy in the face of constrained land supply. In Tony Alexander's 'Weekly Overview' report this week, available from:

http://www.bnz.co.nz/About_Us/1,1184,3-29-319,FF.html?pmarkC=Image&pmark...

on page 6 he outlines that when RBNZ change the OCR it only really impacts floating mortgages and that given most in NZ fix mortgages, BNZ have suggested the use of a mortgage levy to re-sharpen the OCR. I can't say I'm personally in favour of this kind of tax, but how much of an inflation reducing effect might such an intrument have had on housing affordability during our recent housing boom since 2002/3 would you say?

And how would it have compared in effect to de-constraining land supply?

Also how 'change effective' might this kind of idea have been in comparison to purely focusing on deconstraining land supply?

By "˜change effective' I mean as a solution that could actually happen with a high probability of sucsess. (Nothwithstanding Helen Clark joined with Bill English in rejecting BNZ's idea when Michael Cullen proposed it - that is, nil effective change!)

It would be good to hear others/Phil Best's thoughts as well.

Les, one of the problems in trying to control a housing bubble by the OCR (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.

I am not sure if I have pointed you to Alan Moran's "The Tragedy of Planning: Losing the Great Australian Dream" before; I have mentioned it on some threads recently. Alan Moran devotes several pages of analysis of the various tax regimes that applied in a range of countries, and the conclusion is obvious that not one thing can be said to have hindered the development of housing bubbles in any country or region, other than land supply. Capital Gains taxes were just one of many things that had no discernable effect.

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

Refer to page 54 in particular. (54 as page numbered, not 54 in the whole PDF)

Matt Nolan, don't get me wrong, I did not say that I agreed with Phil O'Connor; I said that I believed he is being mischievous. If he is being sincere, I can hardly believe anyone would get to become a Uni professor and get to post something on a blog like this, that is so stupid. I sincerely hope he was being mischievous but if so, I am just about the only guy on here who "gets it".

sj Says:

April 3rd, 2009 at 1:20 pm
@Hugh - re your point: "Dr Bollard failed to point out clearly to policymaers and the wider public - that there was an urgent need to release fringe land supply and deal with infrastructure financing - so that these artificial scarcities could not occur."

"To be fair to Alan, this is not his job. It is a government decision and it is Treasury that should be advising."

Sj, Don Brash actually left his job as governor of the Reserve Bank and went into politics because he was so worried about this problem. He has not got anything like the credit he deserves, along with his colleague Owen McShane, for warning us so presciently about what the RMA and Council land supply strangulation was doing to house prices and investment patterns. It is just a tragedy for NZ that he did not become PM in 2005; NZ would have been the only country in the world with leadership that understood this vital aspect of the looming crisis, and there might be some justification to the oft-heard claim that we are "lucky" to have had government that avoided the sort of problems that the USA has had. We did not, and we will not avoid the problems.

sj - thank you for your comments that in your view it is not the role of Dr Bollard tp be pointing out the reasons for these housing bubbles. Interestingly - Ian MacFarlane while Governor of the RBA and I think Stevens has as well - although sone of the stuff coming out from those further down the food chain with the RBA on housing at the moment is all over the place.

The Aussie political and commercial establishment is currently "petrified" of the housing bubbles popping there. This years Demographia Survey released 26 January - did not exactly make them happy.

Mervyn King of the UK Reserve has had a thing or two to say about the lack of fiscal restraint by the Brown Government.

NZ Treasury advice with respect to these housing bubbles has unfortunately been of an extremely poor standard.

I would be most interested in learning of others views on whether or not the Governor of the Reserve Bank should or should not be articulating these issues far more clearly in the public arena. In my view Dr Alan Bollard is not an effective communicator.

Hugh Pavletich

Phil why do you constantly go on about land suppy restrictions what exactly are these restrictions? I would really like to hear what they are instead of your empty comments. I get the feeling you wouldn't have a clue what you are talking about but keep harping back to American examples and theories. Incase you haven't noticed we are not part of America do you actually have any idea about land development in NZ?
My brother is a registered land surveyor who does new subdivisions for a living and most of my family are involved in the industry in some way. I am telling you there are NO restrictions to supplying new land, anybody can buy a block of land and subdivide it into residential sections for a profit if they want to, there is plenty of available land to do it with, its actually very easy sure there are rules you have to follow just like everything in life. The biggest restriction at the moment is finance because of falling values.

Here's the whole comment for Kieran's benefit:

In practice, mid/high density housing closer to the city centre is much more expensive than new homes on the fringe, for the simple reason of the difference in the price commanded by the LAND. The ratio is roughly consistent; the resulting price of mid/high density housing closer to the city centre is higher if fringe land is also higher. If fringe sections are $40,000, the land closer to the city centre will be a third the price it will be if fringe sections are $120,000, and a sixth the price it will be if fringe sections are $240,000.

Alain Bertaud, in "The Costs of Utopia", shows an interesting graph of urban density profile for Curitiba and for Portland, two cities that are advocated as models of urban limit planning. What is clearly visible in contrast to less-restricted cities, is that infill development is taking place predominantly at the fringes of these cities because frankly that is the only place that the houses that result from infill development are (relatively) affordable.

By contrast, in less regulated cities, the depression of all land values as a result of the extremely low prices at the fringe, result in demand for infill development closer to the city centre being met at an affordable equilibrium price. Paradoxically, if you want infill development to occur closer to the city centre, i.e. a "natural" density profile; you need to ensure that the land is as cheap as possible by ensuring that the land on the fringes is worth next to nothing. There is no other mechanism by which you can achieve these results other than by totalitarian style confiscation of property.

The ironic outcome is that average commute distances are higher in Portland than if they had allowed a natural density profile to occur.

Do you bother to read any of these things that I refer to over and over again?

Alan Moran, in "The Tragedy of Planning: Losing The Australian Dream", discusses the fact that infrastructure closer to the city centre is older, close to capacity, and very expensive to access and temporarily withhold for upgrading. It is in fact much cheaper to do Greenfields infrastructure. Note that the price for a greenfields development for Wellington hospital (at Porirua) was much cheaper than the reconstruction in Newtown that was appallingly chosen on highly political grounds.

One of the perverse results of insisting on "development/infrastructure fees" for fringe development and not for inner city infill development, is that the cost burden falls heavily on the poorer people who buy the cheapest homes they can, at the fringes - they are paying for their own "development/infrastructure costs" AND paying in rates for the cost of infill development infrastructure upgrading, the benefits of which are captured by the rich people who buy the expensive inner city dwellings.

The conceits of the "planner" class are actually responsible for a lot in the form of perverse outcomes. The tragedy is that those who suffer the most are unaware of where the true blame lies.

I am coming more and more to the conclusion that the fashionable mania that insists that we live in higher densities to save resources, is most likely wrong in any case. As Hugh P. and Owen McShane have been pointing out, studies tend to show that high density living is more wasteful of resources, not less wasteful. In a complex world, I have developed a deep skepticism of all fashionable conceits that insist on "all-knowingness"; the USSR got all this completely wrong and I doubt we are likely to do any better. I do not believe for a a moment that the USSR was a dismal failure "in spite of the advantage of being able to plan high density living and public transport". I insist that those things were an integral part of the "because of","¦"¦the "reasons why" the USSR's economy failed so dismally.

Another thing I liken this to, is the fashionable scepticism for man re-ordering nature by genetic modification and the like"¦"¦.yet we seem to despise the fact that cities can and do develop "naturally" and there is an intrinsic beauty and balance about the results that are actually spoiled by our conceited interference. Look at those urban density profiles in the Alain Bertaud study: aren't the profiles in non-regulated cities so beautifully uniform and "natural"? But look at the ugly results in Portland; and the intentions of the regulations are not achieved, in fact the consequences are perverse on every level.

Think about this: if resources really do become so scarce that we have regular power cuts, would you rather be living in an inner city dystopia, or out in the suburbs where everyone firing the barbecue up to cook their dinner, or lighting candles, won't asphyxiate the entire neighbourhood? There are many, many implications like this one to consider. Quite frankly, the opportunities for "sustainable living" are much, much higher out in the suburbs.

The "Pacific Ecologist" magazine had a lavishly illustrated article a few months ago on how Cuba was a wonderful example of how to exist on a minimum of resources. There was not a high rise building to be seen apart from ruins. Everyone was flat out tilling the land around their separate houses, and running livestock and little cottage industries in their yards. Not only were there no trains, but there was almost no commuting, full stop. The sort of jobs that we commute to here in NZ, simply cease to exist in any case, long before resources become so scarce that commuting becomes impossible.

We really, really need to be thinking these things out a lot, lot more intelligently than we are. We are already suffering enough consequences of this sort of lack of imagination, in financial markets and in social policy and many other areas.

The best way to keep the great majority of NZ-ers on side with land reforms that will affect the values of their homes; is to FIRST introduce a dual relief and stimulatory measure involving tax deductibility to apply to interest payments and/or repayments of principal OF THE "OVERHANG" portion of EXISTING mortgages. That is, where the mortgage has ended up greater than the value of the property, the payment of interest on that portion and/or the repayment of principal to the extent of that portion; be made tax deductible.

Note that it should not apply to any newly instigated mortgages - that would be a moral hazard.

After a few years, as house prices come back up again, this tax deductibility would become superfluous.

Phil - thanks for answering my question that I referred to on another discussion, which was:

"Phil - if you are to pursue deconstraining land-supply as the primary issue and seek to address only that, what is your proposal for a "˜change effective' implementation of your preferred solution?

By "˜change effective' I mean a solution that could actually happen with a high probability of sucsess.

No need to reiterate the solution - what I would like to hear is how it gets done, with anticipation of the implementation risks and your practical proposals for dealing with them."

I'm glad you recognise "it's a huge subject" and although you "don't claim to have nutted out all the answers ahead of time," you also recognise, "that we do not want to sink the solution through political fallout from consequences of its implementation." Fair enough and your suggested change strategy for implementation of your preferred solution is interesting.

I'm also glad you, "agree with implementation of the various suggestions like CGT's. [and] agree with shifting the taxation burden off income and onto capital gains and land." Maybe if such had been around before now David Carter would not be facing this wee problem:

http://www.interest.co.nz/ratesblog/index.php/2009/04/02/banks-attacked-...

In regard to:

"Hugh P. says that these things are being discussed at the highest levels of the National government."

No disrespect meant Hugh, but so what?

Ultimately it will come down to a judgement of what is reasonably and practically possible, both from a functional effect and political point of view. However my deep concern remains that you may well be simply playing football in a nettle patch and that because you seemed to have been 'accommodated' in filling a space with your mono-causal arguement, which might be seen as more convenient politically, the nettles never get addressed - not even when it's obvious it's a complex, "huge subject". So much so that the poor old football never gets anywhere near the goal posts - and we all continue to get stung, over and over again. In this regard, notwithstanding all of yours and Hugh's hard efforts, because of an inability to adequately address more of the complexity of the whole problem, you end up providing more of a diservice than a service, in my opinion.

If you can do it, all well and good. If not the root cause will not be with the logic of your particular argument, and at this point I will close.

Hugh I know you believe land restriction is the cause of housing being unafordable so why don't you tell us exactly what the restriction is you want government to abolish? I would really like to know.

Hugh it is a very simple question why don't you answer it? after all you said yourself we need to focus on a single solution. If you want to get rid of zoning why don't you just say so? How much attention would government give that idea? all they are doing now is tinkering with the RMA and saying they are doing something because people like you have duped the public into thinking thats where the problem lies when infact the real problem is tax policy and bank lending that favours housing over business. The public need to pressure government to reform these areas. Not your red herring.

Kieran - you have made yourself clearer second time around by stating - "If you want to remove zoning, why dont you just say so?". Surely "performance planning" that is responsive to market demand is abundantly clear to you - as I spell out within the March 08 paper "Getting performance urban planning in place". There was never any suggestion made to abolish zoning.

The extensive reputable international research is clear with respect to the causes of housing bubbles. You are obviously having difficulty understanding the Law of Supply and Demand. Some never get their heads around it.

Les Rudd - The Government is very clear in that it is committed to dealing with these land supply restrains - and in addition to this - will no doubt deal with other housing , local government and infrastructure issues as well.

It needs to be borne in mind that these issues have been discussed in New Zealand for over four years now - since the first Demographia Survey was released January 2005 - with the 5th edition released this January.

Hugh Pavletich

And Kieran, your examples of the evil results of doing away with zoning, while extreme, do show that you have grasped the point I have made on many threads on the subject of NZ's economic policy. That is, that a nice environment for us all to live in, carries an economic cost. Countries that are lifting themselves out of poverty, do not yet care about this - the people want to eat, and they want a job. I believe that the first world today, including NZ, may have to face the reality that they have been living beyond their means in this respect as well as in the day to day running of their finances.

Owen McShane in a recent NBR, listed off the top of his head tens of billions of dollars worth of projects that had been held up for years in RMA wrangling, and that have now been abandoned due to the financial situation - had those projects been on the go right from the start, our economy would be the better off already to about the extent of all that fiscal stimulus infrastructure spending that the government is talking about; only it would have been at net benefit to the taxpayer rather than at a net cost.

That is what I mean when I say that removal of regulations now would not result in a wholesale destruction of the environment or paving over of paradise, simply because the flame of business and entrepreneurial development is nigh on extinguished right now and we need to coax it back into life; and what is more we now need to be more grateful for the jobs and incomes they provide, and less ungrateful for the smells they create.

What you say about encouraging the financing of business is absolutely right: making it easier to build factories as well as to hire and fire staff is an integral part of getting this process happening.

Hugh
I have read your paper "Getting performance urban planning in place" but your solutions will have no effect whatsoever. Setting up a Local Government Performance Authority is just more beuracracy costing tax payer money. You go on about the UK producing more reports than new houses well thats all your authority would do. We have far too many 'advisers' 'commisions' 'authorites' and 'enquiries' already we need to reduce them not add to their numbers.
Your other idea of replacing development levies with debt finance so future rate payers pay for new infrastructure instead is simply passing on the buck.
Your other idea of freeing up fringe land is way too abstract what does it mean exactly? if you mean councils should make more urban zoned land available take a look at a zoning map you will see that there is massive amounts land already available. Local councils make the land available but they can't force developement. rezoning even more urban land isn't going to make a scrap of difference how is that going to increase development?

The single biggest thing stopping new subdivisions at the moment is falling prices. The longer it takes for property values to drop back to normal the more damaging it will be for supply. This is why the best thing government can do in the short term is to keep the economy going with stimulus but also make sure house prices keep falling at the same time, this can only be done by stopping investor buyers with tax and bank lending reforms.

Kieran - you are falling for this "years of supply" nionsense - a line the property protectionists in Australia have been conning the politicians and wider public with for years.

The ONLY reliable measure of scarcity or abundance - is PRICE. The Law of Supply and Demand.

Do you remember the famous words of the late great Premier Deng of China - who said "I dont care whether the cats black or while - so long as it catches mice". So I dont particularly care what structures and regulartory mechanisms the politicians at Central Government level put in place - so long as it is EFFECTIVE in dealing with these "artificial scarcities" and the current infrastructure financing fiasco.

In other words - there is more than one way of dealing with these issues - and I have enough respect for the politicians at Central Government level to consult wisely (that would make a nice change!) in getting solutions in place.

Surely with respect to infraastructure financing - you understand the concepts of economic efficiency and intergenerational equity. The latter meaning simply that the generations actually using it through its life (which could be many decades indeed hundreds of years - depending on the specific infrastructures expected usable life) - should share the capital costs of it.

I have every confidence New Zealanders are capable of solving these problems - whether they are Hugh Pavletich's suggestions or...... other...... better...... ones.

Phil - here at April 4th, 2009 at 5:40 pm you say in response to Keiran:

"I have refererred you to a paper that analysed a number of countries that have experienced housing bubbles, and which listed the various taxation regimes that applied in each. The conclusion is obvious. CGT's and other tax treatments made not a jot of difference to whether or not a housing bubble formed."

In the context of investment opportunity I wonder if those other countries were as starved of investment choice as NZ is? So here a CGT would help to steer investment flow to other investment avenues, taking the specualtive pressure off of housing?

Also re. tax issues, see:

http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reaso...

where I was referring to, section 13 of:

Final Report of the House Prices Unit: House Price Increases and Housing in New Zealand - March 2008

https://www.dpmc.govt.nz/dpmc/publications/hpr-report/hpr-13.html

also see Bernard's NZ Herald End the giant rental property tax break
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1052...

plus, Brian Gaynor: Time to think outside the housing box

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1056...

And in your post you say, April 3rd, 2009 at 5:01 pm:

"By the way, please understand that as I say on the other threads, I agree with implementation of the various suggestions like CGT's. I agree with shifting the taxation burden off income and onto capital gains and land. I just think that failing to address the land supply issue would mean that these things would actually result in further inequities, especially if future governments saw ways to maximise their revenue through land supply manipulation."

And you also say here at April 4th, 2009 at 5:40 pm

"I think Les Rudd supports me on this; don't underestimate the need to placate the many, many existing home owners who will be incited by the various vested interests, into blaming any new rules on development and low-cost homes, for the erosion of their own property values."

So no matter whether we follow a single solution (land supply) approach or a multi-solution (land supply + stuff I and others have suggested) approach we are up agin it in terms of implementation. Either way, from a practical management point of view, a phased approach seems to be required to necessarily lessen the impact of change. That may be assisted by further decline in property values to a point where implementation will have less impact on reducing asset values, but still have the positive effect of reducing speed of future property inflation. Or, that said, if we follow the multi-solution approach the risk of failure, by the following just the single solution approach, is minimised and has upsides for the economy as whole, not just improving housing affordability with a sole focus on the numerator of the ratio. See:

http://www.interest.co.nz/ratesblog/index.php/2009/03/06/new-zealand-cou...

Question is, would you like to see some effort on the denominator - improved real incomes - and like to see upsides for the economy as a whole, secured by a broader approach to solving the affordability issue?

Keiran - from:

http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reaso...

Les Rudd Says:
March 24th, 2009 at 1:21 pm
Roger Thompson - I agree with your views and am interested in:

"In 1999, Cullen introduced the 39 % tax bracket, an act of sheer stupidity on his part, and exacerbated this lunacy by fixing that rate to kick in at only $ 60 000. Estimates are that this added 17 % to the subsequent increase in house prices."

Do you have, or can you point me towards, any information on that 17% estimate please?

Roger Thompson Says:
March 24th, 2009 at 1:30 pm
Sure, Les : I read that figure in the Chch Press, in separate columns, one written by someone within the "Infometrics" group, and the other was from "NZIER". Sadly I didn't keep the articles, it depresses me too much to think of the wonderful opportunity we had as a country, during the commodity boom, to really build our economy, to encourage thrift/ industry/ and entreprenuership"¦"¦ and Cullen wasted it all in a frenzied 9 year spree that would have left most shoppaholics in speechless awe !

I asked one of the Infometrics team on another blog here if they could verify that stat, but have yet to hear back.

Whatever the numbers, it's pretty clear, to those who want to open both eyes and take a wider view of this issue, that the structure of taxation has been a contributing factor. One simple answer to this information might be ditch the 39% bracket -good. But if we are going there why not take a wider look at tax and why this single change caused the profound systematic response it appears to have?

Kieran - good question!
Maybe because NZ's economy actually has very little depth, and perhaps a bouyant property market has been one of the few things that has kept NZ in the first world (just, although we are nudging second world status)
I mean lets get real, beyond tourism and primary produce what has NZ's economy really got?
Propping up property is one way to prop up the economy, the Government knows it, and lets face it thats politics...short termism
I mean we can't rely on politicians to develop meaningful economic strategies for the country's future now can we?

Les - good stuff

Kieran - With all dur respect - your memory appears to be failing you - as you are exhausting yourself understanding urban economics. Go back to ther thread "5 reasons why house prices dont represent fail value" - where you provide the costings of why sections / lots on the fringes SHOULD be costing in the order of $80,000 - $100,000 - and Im coming back to you Tuesday illustrating why they should be costing a lot less over time to the order of $40,000 - when infrastructure is financed properly and our construction productivity levels ccome up to "affordable international standards,

Where are the $80,000 - $100,000 sections / lots on the fringes of Christchurch, Wellington and Auchland - just for starters? Plase explain why they are not there.

Les Rudd - As I have stated on many ocassions - the most important thing is to focus on the major structural issues first - and deal with the taxaction problems further down the track.

I dont think we should be too "purist" with respect to taxation on the residential investment fromt either - as there are massive social issues here to carefully consider as well. And we most certainly do not want to create the Australian problems - where they have both a "housing affordability crisis" and a "residential rental crisis".

And from the Manufacturers and Exporters perspective - I would have thought you people would be focused on encouraging a far more competitive domestic economy thats not a drag on our export sector.

Its the affordable markets in North America that are in the best position to weather the current crisis - as they are far more competitive. Just compare Texas to California - for starters.

Hugh Pavletich

Matt - "beyond tourism and primary produce what has NZ's economy really got?"
It might be "primary produce" but NZ produces enough food for 80 million people which is quite impressive when our population is just 4 million. Property is a large part of our economy, but it is a large part of most economies - there's a lot of production/employment/importing/exporting involved in property!

Matt & Kieran, as Hugh pointed out - there are massive social issues the Government takes in to account with property and tax - the last thing they want is to collapse the private rental sector and have an extra 1 or 2 hundred thousand people waiting in line for a state house. Mind you, as I've mentioned before, buidling rows upon rows of state houses could be one way of achieving affordable housing AND countering unemployment ;)

Murray - the sad thing about our reliance on our ability to feed those 80mio is that it ain't worth what it used to be, and but for a bubble rally from time to time the trend of soft commodity values related to our first world product/service needs seems to be down, see MEA website 'Public Comment' section and relevant presos by the CEO. The relevant charts all track down from left to right, while our CAD, for some strange reason, goes up from left right - which I guess would be taken as a positive trend indication by people in RE.

I think it is a sad waste of our primary sectors' talents and success not capitalise on the position they have gained for us by retaining a status quo that does not allow us to diversify our export mix and de-risk our future by adding what extra dimensions we can to our economy, no matter what they be. Hence the benefit of a pluralistic approach to economic development via change to our taxaton structure. A taxation structure that is skewed toward passive investment in assets as opposed to productive use of them, which is where our primary sector has been so strong.

If we do not move in the right policy direction soon it might be that ordinary New Zealanders will be no more able to afford the food grown here than were the ordinary Chinese say, are able to afford the flat screen TVs they were making.

In that regard, what are the possible "massive social issues the Government takes in to account with property and tax" - if we retain the existing status quo and ordinary New Zealanders are not part of that 84mio we feed?

Hugh - I and others know what you have, and have not stated, on many occaisons and interestingly the longer this has gone on the more evidence has come to light to support a multi-solution approach that not only deals with both ends of the affordability equation for you, but also helps with development of the wider economy - and more importantly supports an approach that practically increases the probability of achieving better housing affordability. Why you and your supporters will not recognise this and the supporting evidence seems illogical, to me. In contrast I recognise the logic in the theory of your arguement and would be keen to support a judgement call that we should de-constrain land supply, appropriately as implied here:

https://www.dpmc.govt.nz/dpmc/publications/hpr-report/hpr-13.html

Kieran - I asked you above:

"What is lacking though, the logic, the judgement or the will, or what?"

I don't know about you but something about dog, balls and obvious as, springs to mind - and at this point I'm wondering if things might only change when we are feeding more of those 80mio than we are our 4mio. Sad and hopefully never true - but makes you think dun'it.

Re. your point above re. JK and present effective CGT - am just off for a swig of Tui. The weakness is in enforcing the intent rule - we all know that, so does JK. It needs an unambiguous CGT. As for what he says and what will happen, another swig of Tui please - I heard the same kind of thing regarding first year full write of plant - just finished the tin.

On top of that, if Bollard plays the fool and cuts the ocr below 3%, we can count on the Dollar taking a bath and imports costing a bundle more, ie inflation stage one but not the real load, that'll come when there is a race worldwide to escape from cash and bonds into commodities.

Murray - I referred you to some presos on the NZMEA website to underscore my points made above. Go to:

http://www.mea.org.nz/media/presentations.aspx

and look at:

NZMEA Presentation: Do Exports Matter to Us All?

The charts I recall seeing in similar are not in this preso, but what is there supports the same points.

If we keep doing what we always done - we won't even get what we always got!

Also you might care to go to:

http://www.mea.org.nz/media/outlook.aspx

and look at the research supporting change in our taxation system.

Thanks for all the comments on the blog. After browsing through the comments, I'd like to add:

Saying "higher interest rates caused high house prices," is wrong, of course. But why do I read in the press, and hear so much, that "lower interest rates will HELP house prices"? This statement implies causality, and appears to be accepted by *everyone*. I challenge that statement in this blog. Believers in "lower interest rates support house prices" DO NOT EVEN HAVE CORRELATION ON THEIR SIDE! Their mistake is far far more serious than "correlation does not imply causality": they believe in a relationship that is complete fantasy and does not exist in the real world.

I intentionally left out any mention of real interest rates to keep the article short. But there are some excellent comments that recognize the effect of inflation. In fact, with apparent deflation (e.g., recently Auckland average rents have recently decreased), real interest rates may have increased in the past 2 years.

For the record, the actual graph shows the relationship to be much stronger than it appears in the version printed here.

Most importantly, where are all the irritating speeling mistakes? (The title of the graph, "Counter-Intuiative" was not mine, but www.interest.co.nz's title).

As the old wisdom saying always mumbles: 3 factors decide the house price: Location, location and location.

Location is the exclusive factor to decide the house price. Strange enough is that it is not the utmost "root" factor to decide the house price. To make the question clear, it must be rephrased as "What factor(s) decide the location a good one or bad one?"

Then we find that we come back to the original spot where we started in the very beginning: Job market, school district, crime rates, air/water pollution issue and etc.

A town/city/state of no-job is not a good location; house located in bad location will never have good price. That's it.

Globalization has cost us a lot of manufacturing jobs, jobs that will produce tradeable items. By selling those tradeable goods we can then earn money from outside of the system we are living in.

Some idiots in the Ivy League and the Wall Street believe that we don't need the manufacturing jobs to get the injected money from outside world to keep the economic functioning; just by diligently shoveling the money back-and-forth between one's shirt pockets and trunks' pockets will generate wealth for the USA.