Cash pies are NOT a tax DODGE. They are a tax break, for those earning over a certain amount, and willing to save their money in NZ. Kiwibank advertises them on their website, showing how much you can save. I guess people instead will invest their savings in houses, which helps the NZ economy?

@ Rob
I agree that they are not a dodge. The previous Gvt brought them in (possibly unintenionally) when it adjusted tax rates for managed funds. However without the guarantee, will the funds invested then divert to housing? Houses arent guaranteed by the Gvt either!

Obama's Big Sellout is the latest piece from Matt "Goldman Sachs - the great vampire squid wrapped round the face of humanity" Taibbi of Rolling Stone magazine, and is well worth a read, albeit a long one.

He sets out in detail just how the Obama administration has been captured by the usual Wall Street suspects, and also has a very insightful analysis of the proposed financial reforms - which he considers to be so laced with loopholes that they will have near zero chance of mitigating the risk of a future financial meltdown.

@Nikki

The Obama Administration has become the Carnival of Corruption 3.0...
Instead of the Whiskey Ring we have the CDO ring.

FYI
Carnival of Corruption 1.0 "“ Grant Administration
Carnival of Corruption 2.0 "“ Bush II Administration

Trading shares is not unproductive. No one would buy shares if it was impossible to ever sell them, they would be worse than housing.

Chris_J: You can also leverage on the stockmarket.

Chris J
I actually agree with you on this. Property has far outperformed the stock market since 1994, however you tweak the figures.
But I think it's an unsustainable outperformance because it was driven by pumping debt into asset prices.
Affordability is way out of a whack and households are now choking on too much debt. Future price rises will have to depend on real income growth, net migration and new housing supply. It is possible migration trends of the last 20 years (ie NZers leaving for Australia) could turn around, but I doubt it. Our income growth will be muted because our economic growth is muted. Housing supply could surge back to limit price growth. Or not. Either way I doubt housing can repeat the doubling of prices seen from 2003 to 2008, which is what produced the outperformance.

Your view?

cheers
Bernard

>>>I agree that PIE are not a dodge. The previous Gvt brought them in (possibly

(I think) I recall that one of reasons given at the time was to increase saving. Or am I misled.

The bubble is being protected by Bollard even though he suggests peasants refrain from splurging with his cheap credit on property...what else would happen!. It is a game of musical chairs and when Mr Market turns off the music..oh man there is going to be one hell of a scramble for the chairs by too many overleveraged punters. In the future students will study how the peasants were brainwashed by the players into believing taxes would not rise and nor would interest rates..that the music could go on and on forever and ever.

Ian,
I am shopping for a house now (in Welly) and prices really are going up at pretty much all levels. Much as we dont want it to be true, property is taking off again.

I had such hopes for a drop but no such luck. Its broken me now and I am getting back in.

fairfax O Rouke Says: That is my understanding. Would you remove your funds from a bank just because it wasnt Govt guaranteed? I wouldnt have thought so.

They are treated as managed funds, rather than cash deposits, so they are more of an investment. Look at what happened to ANZ owned INGs managed funds, the investors ended up losing a lot of money, after trading on their good name. So I think people will not be attracted to non guaranteed funds.

"The stock markets are rising because so much money has to go somewhere"”because shares per se are valued attractively,"
The price-earnings ratio"”comparing the market value per share to the annual earnings per share of the respective enterprise"”has reached a historic maximum of 133. A price-earnings ratio of 14 or more is considered to mean shares are valued excessively...

lemsip - my advice would be unless you work in central government (or in a specialist business servicing central government) - get out of Wellington. It's the only place not yet experiencing the downturn. Best buys at the moment are the provincial centres - particularly those predominantly servicing agricultural business - that business is steady; it's just not growing at the alarming rate that central government is!

Is that the REAL Bernard Hickey replying? (I wasn't sure when you included the word "agree").

The chances of supply limiting house prices this time round are slim. In part that's the former Labour Government's fault with skyrocketing council contributions and fees, which means new smaller houses are not cheap. But the main problem is that (at least in the areas I look at) most land developments have been put on hold or delayed over the past two years so although there are still good numbers of sections available right now at fairly low prices, as they clear (at price levels that are inline with current house prices and building costs), there will be very limited numbers of new vacant sections coming to market, that will cause section prices to head back to the 2007 highs (section prices dropped much more than house prices - probably more like 30% from the peak although they are well up from this now) so the cost of new homes will only have to go up even further, which will drag the rest of the market along with it.

The only scenarios in which this doesn't happen are:
1. If developers start new subdivision construction tomorrow. This isn't going to happen because at current section prices many developments would be loss making, and development finance is virtually unavailable.
2. If net migration went strongly negative. But with the impact of recession in the UK looking well set in, sky high real estate prices throughout Australia's main cities, and thoughts about bush fires in the Aussie countryside I can't see an exodus any time soon.

The reason we had price doubling 2002 to 2007 was more to do with price constraint 1990-2001. House prices didn't reflect replacement cost pre-2001.

This was mainly because high inflation through the 1970s and 80s devalued the cost of building a house (in real terms) very quickly. During this period near new houses could sell for less than their original cost in real terms (still more in nominal terms though), so because there had been a building oversupply in the 70s and also a large exodus to Australia all these relatively new homes selling below comparative replacement cost kept the older homes even cheaper still.

This all came unstuck in the early 1990s as inflation evaporated.

New homes cost vastly more than existing homes, initially this wasn't too much of problem because of the early 90s recession, but throw in some Asian immigration in the mid 90s and with all the surplus supply gone, we then got some of the biggest building booms since the 70s. This meant a lot more brand new homes, which because of the huge differential between the cost of an average new home and an average slightly older home dragged the average price up sharply.

The Asian crisis eased construction with net migration turning negative. Hence prices were not under pressure from higher replacement costs. Once construction boomed again with post 9/11 migration, we got the long awaited upward correction which should have happened during the 90s had interest rates not gone up to 11% every time their was a tiny hint of inflation.

As an example in 1990 in ChCh an average new home cost around 2.25 times the average house price. Today that is more like 1.5 times.

The question is: where is the appropriate level? Given expanding demand for housing and low inflation 1.5 times might be the equilibrium, we'll see. I can assure you though that above 2 times is not an appropriate level.

For this reason alone a repeat of 2002-2007 is not likely. Next time we see a real boom it is probably more likely to be in the +40% nominal terms area (perhaps +25% in real terms over 5 years) after a period of sub-normal growth. But who knows?

There definitely were reasons for the +100% boom. (Another reason was the fact the regions missed the 90s +50% boom but that's a whole other story to go into).

That's interesting.......economic research in the US coming out with results that the 'minimum wage' may be limiting the creation of jobs...stands to reason...seems Obama is getting an earful of this new info from conservative economists. (cnn)

Logical Dave,

Are you sure you can short shares on the NZX?

The other examples you use are applicable for foreign markets, but your quote is referring to NZ stocks only.

Chris_J - I'll recycle this old story yet again re house prices:

In Chch, 2002, it was possible to buy a hovel for under $50K.

Then the Gummint introduced the 'We'll shout you the first $100K if you can fog a mirror' loans policy to 'assist the disadvantaged'.

Instant result: a '1' in front of every house price in the city!

As the Mogambo Guru is fond of saying - Wheeee! This property investing stuff is easy!

And of course BH's little picture there (No deposit if you can fog a mirror) is another brick in That wall - just read what Doctor Housing Bubble has to say about the California experience of that same Nothing Down offer:

I believe a big part of the housing bubble fuel was the ability for people to purchase homes with little to no money. In California, this was the accelerant that created the biggest housing bubble we have ever witnessed.

If you don't know what a mark is, you're the mark....

Ray.
BTW any account in NZ dollars can trade in a multitude of currencies as the conversion is automatic within the account.

Waymad

There really weren't a lot of houses selling under $50,000 in ChCh in 2002. I don't think there were more than 50 freehold houses sold in that price range between 1999 and 2003 and most of those were either distressed sales or in an unlivable state that they barely qualified as houses.

Houses were nearly never advertised at that price range and they generally only sold at that level via auction or tender. (I think I viewed nearly everything on the market in that end of the market at that time and attended nearly all of those types of auction sales).

The cheapest one I bought was $36,000 at mortgagee in Addington for a just livable property, but I consider that this was a real steal as the next cheapest similar sort of property I recall being sold was just under $50,000.

There were plenty of deceased estates where rubbish and vermin were piled to the ceilings such as a couple of houses in Essex St that sold at $36,250 each. A burnt out house on a cross lease sold in Rosewarne St for $29,500 (which was the lowest sale for a house still standing that I know about). But in general most barely livable houses were at least $50,000 if not $60 or 70,000.

I bought what I understand was the cheapest freehold property in ChCh sold since the early 90s, in 2002 for $6,850 which was a very small section which formerly had a cottage on it in Sydenham, which was priced at that level because of building restrictions on it.

Admittedly there were a number of 60s and 70s units selling under $50,000 as well, but most of these were high $40,000s. I know of a small number that sold in the $30,000s but I think the cheapest in livable condition was a 1 bdrm in Madras St at $31,000. You'll note that there are studios selling in the CBD this year (2009) in the $40,000s at mortgagee - properties without land to back them up aren't necessary good investments.

There certainly was never a huge number of properties in this price range. I remember one that Harcourts auctioned in about 2000 with "bidding from $25,000" in Worcester St Linwood. It was very rough and small and was probably worth $50-55,000 max, but it sold with a huge amount of bidders at $67,000. Getting a livable house under $50,000 in 2002 would be a bit of luck. Waymad, I'd be interested to know which sales support your theory.

There were a few sales out North Beach, and in Woolston down in the $30s and $40s too but in general these were bach type properties, some of which just sold as sections and were demolished straight away.

Prices did escalate, quickly and rough houses did rise more than others in value, but for example last week an old bach type house in New Brighton sold for $123,000 last week (December 2009) at auction on a 607m2 freehold front section. This would have been worth $40,000s possibly $50,000s in 2002 (compared to other sales). So it sort of blows the theory that a "1" suddenly appeared in front of asking prices in a matter of months during 2003.

I don't think the welcome home loan scheme had anything to do with the boom. Most of these cheaper houses sold to investors or renovators and not first time buyers - they were simply too rough for the first time buyers.

It's interesting that if you studied the market during the boom, that you would have noticed that it wasn't the bottom end of the market leading the way. Indeed there was very little interest in the cheap end houses unless they happened to be sitting in a great location (or they had been promoted as being about to be given away at auction etc).

Surprisingly the 2003 boom started in earnest when the 60s and 70s houses in suburbs like Hoon Hay, Burnside and Bishopdale started getting snapped up. Houses that had been selling for $140,000 suddenly started commanding $180,000, which forced more expensive suburbs like Ilam and Avonhead up as buyers could afford to upgrade, the boom then also spread through the desirable older areas and eventually hitting the most expensive suburbs. Inner city fringe land prices went up next which pulled up house prices in those areas.

The cheaper areas only really got dragged up once everything else was already too expensive. We were still buying villa in Sydenham and Addington in 2004 for $120-140,000 for properties that had been worth $90-120,000 ten years before that.

So it was the middle of the market that went first not the bottom.

The way the boom flowed around the south island was also interesting (a rough summary):
Starting in Nelson (Mar 2002), moving to Queenstown/Wanaka (Apr 2002), then Invercargill (Dec 2002), then Central Otago (Dec 2002), then Blenheim/Kaikoura (Mar 2003), then Dunedin (May 2003), then Oamaru (Jul 2003), then Christchurch (Sep 2003), then Timaru (Jan 2004), then the West Coast (Jul 2004).

So it took 2 and a half years for the boom to flow around just the South Island - it wasn't a single event triggered by policy changes alone, obviously supply and demand had more to do with the timing of the boom than any changes in credit conditions.

The Center for Media Research has released a study by Vertical Response that shows just where many of these "˜Main Street' players are going with their online dollars. The big winners: e-mail and social media. With only 3.8% of small business folks NOT planning on using e-mail marketing and with social media carrying the perception of being free (which they so rudely discover it is far from free) this should make some in the banner and search crowd a little wary.

www.onlineuniversalwork.com

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

www.onlineuniversalwork.com