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Friday's Top 10 with NZ Mint: Time for RBNZ to exert LVR controls; Bill English getting serious about housing supply shortages; Auckland's '2 stage' strategic housing plan; Clarke and Dawe
Here's my Top 10 links from around the Internet at 12 pm today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email email@example.com.
My must read today is number 5 on the history of the world. Doesn't take long to read.
1. Boom, boom, boom boom - NZHerald's Anne Gibson reports real estate agents are bringing forward auctions and selling houses in Auckland without advertising.
Yet still, the Reserve Bank and many in the government are slow off the mark to realise that an Official Cash Rate stuck at 2.5% for two years combined with housing shortages is creating a boom in the usual way.
From Auckland outwards.
The usual expectations of tax free capital gains will do the rest.
And now that Europe and the rest of the world is struggling again the expectations for low interest rates for even longer will do its dirty work.
The Reserve Bank is investigating loan to value ratio controls so it can tighten controls on the housing market without killing the rest of the economy.
Let's hope the new governor, Graeme Wheeler, has this issue at the top of his 'to-do' list when he arrives at the end of September.
Agents say the buoyant market is driving up sales and they are bringing forward auctions to capitalise on the huge appetite. And while some buyers accuse agents of "cheerleading" price rises, agents say their responsibility is to get the best price for the seller.
Wei Wei Elder, from Bayley's, brought forward the auction of a four-bedroom Mt Eden villa from a month to a fortnight.
"Four weeks was too long. The way we marketed it was quite strong and there was a lot of interest. I thought if I left it too long, the heat will go off a bit," she said.
The house, with a CV of $920,000, went for $1.15 million, with five pre-auction offers even before the bidding opened.
2. House prices "ridiculous" - So it's great to hear Bill English's comments to Brian Fallow in the NZHerald this morning that he's on the warpath about housing supply in Auckland. That's part of the puzzle.
Speaking at the launch of the Herald's Mood of the Boardroom survey yesterday, English said housing affordability was "quite a turn-off for young Kiwis". "The prices you pay for a house are ridiculous and they look that way to 24-year-olds with lots of student debt and the prospect of better pay in Australia," he said.
"The most unfair aspect of it is that there's no housing being built for people in the lowest quartile of income. Like none. That is clearly unsustainable."
It's also a problem for a Minister of Finance trying to return the Government's accounts to surplus. "If we want to get back to surplus and keep it there, we cannot afford to have the Government providing growing subsidies to a housing market that then flow into higher levels of debt," he said. "That cycle does not make sense and we intend to break it."
English indicated the Government was considering changes to planning processes and they would have to go beyond the issue of urban limits. "It's about an attitude," he said. "We need local government committed to providing the housing that is needed, not to producing perfect plans."
3. 'A 2 stage approach' - As if by magic, the Auckland Council's Regional Development and Operations Committee Chair Ann Hartley came out with a statement yesterday on a "two stage approach" to a "housing strategic plan."
The council is still talking the talk on planning compact cities. The pressure is building on this.
Stage one focuses on the tools the council can use to improve housing supply and affordability. These include assessing the impact of regulatory fees and rates on housing costs, using council land and development partnerships to increase housing, further improvements to consent processes, and incentivising upgrades of existing houses.
New zoning options and future urban land requirements will be incorporated into the new Unitary Plan. The committee will receive a report on stage one proposals in December this year and a report on stage two scoping in March 2013.
“The Auckland Plan gives strong direction on how we can build up the housing stock through the principles of a quality compact city which aims for well-planned, well-designed higher density housing offering a range of housing choices. The Unitary Plan, which will set the rules, will play a major part in ensuring a quality approach with a mix of dwellings and neighbourhoods across Auckland,” she adds.
4. LIBOR pressure builds - Bloomberg reports Monster fund managers Blackrock, Fidelity and Vanguard are working together to work out just how the LIBOR scandal hurt them.
This is not going to end well for the banks.
Libor-related litigation “has the potential to be the biggest single set of cases coming out of the financial crisis because Libor is built into so many transactions and Libor is so central to so many contracts,” said John Coates, a professor of law and economics at Harvard Law School in Cambridge, Massachusetts. “It’s like saying reports about the inflation rate were wrong.”
5. The problem with the problem with inflation - Ryan Avent from the Economist does a masterly job here at his Free Exchange blog explaining the economic history of the last hundred years or so and pinpointing what central banks could do next to break their obsession with inflation for the sake of it. He says they should target nominal GDP.
Central banks should focus their efforts on measures of demand -- nominal GDP, nominal income, nominal spending—rather than measures of inflation. If nominal GDP is at a level that’s inconsistent with full employment, demand is too low and the central bank should do more. That might take inflation above some arbitrary level, and that’s totally fine. It won’t stay above that arbitrary level and accelerate unless the central bank keeps raising demand indefinitely. This is not to say that there are no costs to having 4% inflation for a year rather than 2%. There are surely some efficiency costs to changes in relative prices. But if the alternative is a trillion dollar output gap and 6 million unnecessarily unemployed workers, that’s probably a pretty good trade-off to make.
We learned a hugely important lesson from the Depression—that central banks could influence the economy and prevent demand-side macroeconomic disasters. But we took a wrong turn in thinking that the way they did this was by moderating inflation. It was as if we discovered a magical sword in the woods and then went about confronting enemies by whacking them with the sheath.
We can move past this intellectual limitation. Monetary policy can influence demand, plain and simple. This economy could plainly use more of it; millions of unemployed workers are a testament to that. Not to do more to get them to work is to leave the sword at one’s side during a battle, because it looks prettier there. And the Fed should be careful. If it doesn’t use it, someone might try to take it away.
6. Let's leave the euro - Ambrose Evans Pritchard reports from the Telegraph that even some senior Spanish politicians are saying it might be time to leave the euro.
The regional leader of Asturias in Spain has become the country’s first major figure to call for a radical change of strategy and exit from the euro, unless monetary union is fundamentally reformed.
Mr Cascos said the government is “utterly incompetent”, but warned that the deeper crisis is a “perverse” monetary system where capital flight from countries in distress is funding creditor states at zero rates. “This can’t go on for long, or we will have to think about leaving the euro before we are thrown out,” he said.
7. The alchemists of Wall St - Here's a 47 minute long documentary about The Quants who blew up the world's financial markets. HT Tony via email. It's in Dutch and English.
Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st. The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behaviour. Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.
What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster?
A story about greed, fear and randomness from the insides of Wall Street.
Spain may yet be able to fend off a bail-out for some time. It has some cash reserves and can still borrow at short maturities. The euro area also has its temporary rescue fund, which will lend the Spanish government the initial sum of money for the banks. But even if Spain survives a hot summer, the markets are signalling that it will need a full bail-out later this year.
That would be a nightmare, and not just for Spain. The Spanish government must borrow €385 billion until the end of 2014 to cover its budget deficit and other needs such as bond redemptions, according to economists at Credit Suisse. Even if the IMF chips in a third as in previous bail-outs, European lenders would have to find €250 billion or so. They have already committed €100 billion to rescuing Spanish banks, so for other emergencies they would have only €150 billion of the €500 billion now in their rescue kitties.
9. Chinese power output - BusinessInsider reports electricity production in China was flat in June for the first time since May 2009. Many rely on this statistic more than they do on GDP.
10. Totally Clarke and Dawe previewing the Olympics. They are palpably excited about the buzz around London.