HOT TOPICS:   Election 2014  |    Regional development   |  OCR                                                                 RESOURCES:    Economic calendar   |  Travel currency tool

The comment stream

Reader poll

Below $6.
48% (68 votes)
Between $6 and $6.50.
40% (57 votes)
About the $7 per kgMS Fonterra's currently forecasting.
12% (17 votes)
Total voters: 142

What will Fonterra's 2014-15 dairy season payout (Farmgate Milk Price that excludes dividends) ultimately be?

Older polls

Join the Interest community to be a registered commenter so you can:
- Edit your comments
- Avoid the CAPTCHA
- Vote on comments
Register Here

Already registered? log back in here ..

Forgotten your password? No problem! Click here

Gareth Morgan says demand for property has very little to do with demand for accommodation, which is why those who think the problem is supply 'are well off the reality'. Your view?

Posted in Opinion
"The current Reserve Bank Governor should be congratulated on ending two decades of inertia, but the fundamental policy flaws with respect to the property market remain."

By Gareth Morgan*

We can expect the LVR (loan to value ratio limits) intervention to impact the housing market.

We can also expect first home buyers to be in the firing line of this policy.

How ironic, given that the whole issue with the housing market is that it’s locking out many first home buyers.

The LVR cure is like shooting the patient in the leg and expecting that once they recover, they’ll be better able to keep up in the property race.

Long ago our property market ceased being about providing New Zealanders with adequate accommodation and instead became an investors’ El Dorado where money can be made free of tax, riches multiplied by resorting to debt, and some of us can get rich while others have to pay more and more for a roof over their heads.

With the banks instructed by the Reserve Bank to lend on mortgage in preference to all other forms of lending, the flood of cheap money into the property market has unhinged house prices from the demand for accommodation.

Demand is driven foremost by the ease of access to mortgage monies.

Flood the market with housing finance and house prices soar, irrespective of New Zealanders’ need for accommodation.

This long-seated advantage of property as an investment has led to an endemic distortion in our capital markets, starving the business sector of funds instead the banks focussed on fuelling a multi-decade property speculation. It is the national pastime, far more popular than rugby.

This rot has been supervised by a succession of Reserve Bank governors who have lacked the fortitude to address the core problem, instead wringing their hands periodically in public about the excesses of the housing market and trying to jawbone the market down.

That approach has been an unmitigated disaster, as is indicated for instance by the ratio of house prices to household income in New Zealand, which stubbornly remains one of the highest in the world, as well as way beyond historical norms here.

Finally the Reserve Bank has acted, ending two decades of inertia.

On that, the current Governor should be congratulated.

But that approach is one that will temporarily take the froth off the market but lead to borrowers accessing the non-bank and backstreet sectors for their finance.

The fundamental policy flaws with respect to the property market remain – they are the toxic duo of a tax loophole and the favourable risk weighting the Reserve Bank accords mortgages issued by banks.

Australia suffers from the same disease, as last week’s published finding from the Grattan Institute attests. That report has found sharp falls in home ownership as a result and a massive stoking of the wealth divide between owners and tenants.

The Reserve Bank can’t fix the tax distortion; it and The Treasury have written screeds on that in the past and pleaded with politicians to find some courage to do it. To no avail, the Nats have no truck with closing the tax loopholes that we owners of capital thrive on, and Labour and the Green’s capital gains taxes specifically exempt the family home, therein making their proposals impotent.

Just to remind you about the tax break – if I put $500,000 in the bank I pay tax on the income, if I buy a house instead then the income equivalent I enjoy is free rent. But I don’t pay tax on that benefit, so it’s a tax-efficient way to enjoy a roof over my head. Some mugs leave their money in the bank and pay rent from the after-tax income it earns, they are tax victims. Far better to invest in the house and enjoy the tax dodge totally.

But the Reserve Bank can correct the lending distortion and it’s disappointing that it’s chosen not to.

The problem is that it still sees the problem in the property market as cyclical rather than structural, hence the LVR instrument – one that like a dial, can be turned up or down depending upon where it’s thought we are in this property cycle. Suitable as a cyclical tool apart but the problem in our market isn’t cyclical, it’s structural so tweaking a dial isn’t appropriate.

In fact LVRs hurt most the people we should be helping, these first home buyers who have to borrow more and more the longer we perpetuate the tax and financial distortions which widen the gap between the value of accommodation and the price of a house.

The appropriate response by the Reserve Bank should be to remove the risk-weighting favouritism it requires banks to give to mortgages.

There’s an old adage in economics, that if you determine that something is an immutable truth (like for instance, mortgages are always a low risk form of lending) the market will act on that policy rule in a way that disproves your assumption.

This is precisely what’s happened as a result of decades of Reserve Banks providing favourable risk-weighting to mortgages. We all know it’s the easiest money in town, so we take advantage of that borrowing on mortgage, buying property, sending the price up.

The demand for property has very little to do with the demand for accommodation. In short it can be whatever the Reserve Bank enables through the risk-weighting favouritism mortgages are given. This is why those who think the problem is supply are well off the reality.

Thanks to the collective action of the crowd, whose demand for property is validated by this easy money, the asset price can only go one way.  Sure there are booms and busts along the way, but the long term trend that results from structural policies that favour this asset class, is for prices to rise in real terms.

If the Reserve Bank was to give away its risk-weighting favouritism to mortgages then the commercial banks would be left to determine who they should and who they should not lend to. They will after all have less overall to lend on mortgage.

It may be low deposit borrowers they cut off, it may not be – the collateral behind a loan is not the only consideration when assessing risk.

And in particular if the banks understand that the gravy train of more and more lending available on mortgage is being slowed down, then they will act prudently to trim their mortgage book to the best quality credits they can. And the best quality is not the same as the least leveraged – which is what the LVR forces them to target.

Even if the Reserve Bank gets it right, ditches the LVR and adopts a neutral stance on the risk-weighting of mortgages, the property market will still be distorted by the tax break – and one wouldn’t expect conventional politicians to muster any courage to deal to that until we as society demand it.

But we would have got rid of one of the market distortions – over-generous financing. And we would have done it in a way that doesn’t cripple first home buyers in the process.

---------------------------------------------------------------------------------

Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his blog garethsworld.com and is reprinted here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

43 Comments

Although I agree with the

Although I agree with the first bit about hurting FHB's being ironic the rest of article based on a big assumption -  "Demand [and high prices are] driven foremost by the ease of access to mortgage monies."
 
So how come prices are only going up in 2 places? surely mortgage money is just as easily accessed outside central Auckland and Christchurch? 

Gareth is seldom making any

Gareth is seldom making any sense. I am not sure why is he given so much room in NZ media to express his views on everything from pet ownership to tax. I understand his son did well by being the first to copy eBay in NZ, kudos to him, but why do we have to listen to his dad's opinions?
 

Gareth makes much sense to

Gareth makes much sense to me.  So really what you are saying is you dont like his opinion(s) as it doesnt match yours. You dont understand, well I cant see that as Gareth's fault.
You dont have to listen, more fool you if you do not IMHO.  I'd suggest listening at the logic and rational and then discounting but if you dont understand...
regards
 

dejannk, agreed. Landlords

dejannk, agreed. Landlords are already severely disadvantaged in their business with the tax deductions more favourable for ordinary businesses. Landlords find it difficult to upgrade without crossing the $500 threshold that makes the expenses non deductible. By removing building depreciation, the government is encouraging slum buildings. Even Australia continues to allow depreciation of 2.5%. Australians buying into NZ properties can continue to claim the 2.5% as a cost on their Australian tax return. We are disadvantaged against foreigners again.

ZZ - in NZ we have TAXATION

ZZ - in NZ we have TAXATION APARTHEID. There is really no other word to describe what is occuring. When Local investors/business are severely disadvantaged over foreign based  investors we have apartheid.
 
The risk-weighting used is also apartheid as the starting point of any income is business yet this attracts a premium on interest charged.
 
NZ has Political, Legal and economic discrimination.
 
The RMA process has Political, Legal and economic discrimination.
 
 
 

Don't be too snide. Gareth

Don't be too snide. Gareth built a well respected economic consultancy. He built and sold a kiwisaver and investment firm for a pretty penny. And he was wise to invest into trade me. He is a smart cookie.

Gareth already has his

Gareth already has his money.
He wants to see you get taxed for you income, taxed for spending your income, and then taxed for owning anything.

If you had a car he'll tax you for your wage to buy it, tax you gst for spending your money, tax you more wages to pay for paying the privilege of paying interest, then tax you for that gas it consumes, and tax you for every mile you drive, and tax just for being permitted by your masters for owning (registering) such a thing.   Then he'll tax you because you're not paying bus fare/taxi or other rental...  no doubt he'll tax you for your natural right to walk (because if you travelled by car you'd pay taxes).   After all isn't that what the masters want? For all the serfs to pay every bit of income into _their_ pockets.

If you buy and live in a house Gareth. there are natural rights of ownership - which like air, rain, sunlight, nighttime, friendship, love and speech should not be taxed or owned by your government buddies.

Yes the market needs controls.  There are controls if I have ability to use excessive strength against others. There are safety laws about what speed I can drive my overtaxed car,   Getting the laws about misuse of authority to dismiss employees or to stop landlords persuing legimate costs against tenants exist.
So all we need is anti-bullying laws to protect the capital playground.

And then we might be able to do away with some of those other ridiculous investment taxes that you should be moaning about - you know all those costs which are killing1 our manufacturing, industrial and service (especially the manufacturing and industrial support services which get hit with a double whammy).  Remove those extra taxes and costs, then we can compete back in our local market and overseas rather than getting smashed by globalised players who don't faces those same tax and interest grabs, who don't face the same overpriced energy costs )which going up/down? with private investors in our energy sector - why again did China look to supply contract manufactures with low cost renewable&atomic energy...).
  Remove those taxes and then we could get NZers back into those jobs, build back the lost skillbase, grow those suport services, employ NZers again...and you won't need to tax people for their roof over their head.

Yes there are some supply

Yes there are some supply issues in Christchurch for obvious reasons but higher prices in Auckland create the expectation of further rises and become self fulfilling with the extension of more debt/credit. This is typical financial mania behaviour as per Minsky.
 
You only borrow a huge sum if you expect prices to keep rising. Would you borrow $1m for a Grey Lynn do-up if you thought it would be worth 25% less in a few years? There will be a trigger, and it will be from somewhere unexpected, but once those price expectations go in to reverse, with this level of debt in the economy, it will be a bloodbath as the overleveraged and foreign owners rush for the exits.
 
In many provincial towns prices are still falling and few buyers because there are few jobs and again who wants to borrow for a depreciating asset. Foreign investors especially from Australia, poured money into towns like Whanganui and Kawerau, bidding up prices but they've since come well back because they couldn't be sustained.

Gareth argues that there is

Gareth argues that there is no supply issue in Auckland and prices only rise because there's credit available. His solution is to tax, tax and tax existing houses then wait for the prices to come down. People don't expect price rises in a vacumn. There are reasons behind these expectations with rises reasurring them that the reasons are valid.
 
Using Gareths logic these expectations could have spontaneously erupted anywhere.  Taking his arguement to the extreme you could demolish half the houses in Auckland, add 50% tax to the rest and expect house prices to fall. 
 
 

I'd borrow $1M for a Grey

I'd borrow $1M for a Grey Lynn villa do up if it had a positive return. It was only 10 years ago I was being mocked at a party for buying one. I remember the mocker saying he could never spend the better part of $400K on a Grey Lynn villa - 'cos how could he explain to his kid why he had borrowed so much money just to buy an old house?

Probably because the growth

Probably because the growth of high income jobs which enable people to get mortgages is concentrated mainly in Auckland. That's where the majority of Corporate HQs are and other high earning business will be drawn to the city with the highest growth. The highest paid jobs tend to be those with the highest barriers to entry e.g. Graduate Degree and/or strict professional licensing standards (accountants, lawyers, doctors, architects etc) There are a few outliers like policemen, nurses, and teachers who have a priviled position in the labor market given they're working for the public sector.
 
And those high income individuals who can provide security to the banks also borrow to house the rest of us who have to rent. They're also able to play speculative hotpotatoe with each other, because they're granted easy access to cheap credit, because of the flawed capital ratio pollicies that Gareth is talking about. Growth containment has been a feature of the NZ planing regime since the 1960s, but what changed in the 1970s which fueled the real estate cycle was the liberalization of te financial system and easing of credit controls. It is a factor, but without loose credit buyers demand for credit to meet rising prices couldn't be accomodated.

".......Growth containment

".......Growth containment has been a feature of the NZ planing regime since the 1960s, but what changed in the 1970s which fueled the real estate cycle was the liberalization of te financial system and easing of credit controls......"
What about the 1960's and early 70's subsidised 3% mortgage interest, tax deductible mortgage interest, handouts to first home buyers, capitalisation of the family benefit, etc etc etc?
Heck, what would happen to house prices now if measures like these were introduced?
The problem is the elasticity of housing supply, which has changed massively between then and now. I remember timber framing all over the place around all NZ cities in the late 1960's, growth and affordable housing were regarded as good things and Council staff regarded it as part of their job to expedite it. 

Confirmation can be found in the statistics on quantities of housing built in the past, especially compared to population and population growth.

There were 34,400 homes built in NZ in 1974.
In 2011, it was 15,382. 

We built 262,000 houses in the 1960's, 279,000 in the 1970's, and 155,000 from 2000-2010.

http://nzinitiative.org.nz/site/nzbr/files/PRICED%20OUT%20-%20FULL%20RES.pdf

I say we are heading down the same track as the UK if no courageous reforms are done: take a look at this data pack:

http://www.buzzfeed.com/dlknowles/britains-dysfunctional-property-market-in-gi-fm44

Bob: "......So how come

Bob:
"......So how come prices are only going up in 2 places? surely mortgage money is just as easily accessed outside central Auckland and Christchurch? ...."
The median multiples are too high everywhere in NZ. If Houston can be "3", why do cities like Hamilton and Palmerston North have to be 4.5, why does Wellington have to be 6.1, and why does Tauranga have to be 7.0?
Saying that "prices are only going up in Auckland and Christchurch" is like saying that only LA and San Fran were a problem in the US housing bubble, because Miami and Boston and Portland and Phoenix and Vegas "only" inflated to median multiples of around 6.......

So the answer to the question

So the answer to the question of whether price rises are caused by too much available credit, shortage of stock or a mixture of these is also: "Houston is just amazing, look at Houston, Houston, Houston, Houston is so cool because it's so cheap". Thanks for that PB. 

Well spoken, Gareth.  I do

Well spoken, Gareth.  I do think that the unfortunate juxtaposition we have, is also the insoluble one.
 
To wit:
 
There are more pollies than you may think, who appreciate the situation as you desribe it, and have thought through and, at core, agree with, some or most of your suggestions.
 
But they are equally aware that, having espoused said solutions in public, they will be summarily tossed out of office, never to return until they recant their heresies.
 
So there we sit.....

Lets use a basic example. 

Lets use a basic example.  Say there are two families living in a town and there is only one house left.  The family who doesn't get the house sleeps in the local park.  Both families have a income so to varying degrees have the flexibility to pay more, or less, for the one house.  Because shelter is a basic human need both families compete and eventually pay a high price for the one house.  Limited supply effecting prices upwards. 
 
Same example but there are 10 houses in the town and only two familes looking to rent or buy, the home owners miss out on a sale or rent if they don't secure one of the two families so the negotiate the cost, down.  Excess supply effecting prices downwards. 
 
Accommodation is not optional.

Whilst the Unitary plan

Whilst the Unitary plan remains in Limbo land for the next 3 years. Do not expect any major building project to move ahead. The next 3 years is land accumulation rather than building. There will be more planning ahead of the Unitary plan but zero building. Who in their right minds would give up additional buildings provided for under the Unitary plan. Most of the building will take place where the Unitary plan goes into the reverse, ie volcanic cones and potential green belt sites go single housing.

On the contrary. In spite of

On the contrary. In spite of all the silly reporting in the Herald the APUP reduces density in many places (and in all cases any consent gets hugely harder to get) so there's lots of applications going in under the current plan.
 
If you have a MU site that goes to UP MU and don't get a consent under the existing rules you lose a floor and get setbacks for starters. You'd be crazy not get a consent in ASAP under operative plan.
 
If you have a 750sqm-800sqm site in Res 6a that's becoming Mixed Housing Suburban you are about to lose the ability to subdivide. 

bob, agreed I encountered

bob, agreed I encountered that problem where Mt Roskill cone goes single dwelling. My res 6a with 3 sites goes single dwelling. I have had to move ahead and complete the subdivision.
This affects 52 volcanic cones in Auckland where they have reduced the density.
 

It's crazy. In a few years

It's crazy. In a few years there will be lots of folk who will suddenly realize they've lost a lot of density/value on their sites.

The appropriate response by

The appropriate response by the Reserve Bank should be to remove the risk-weighting favouritism it requires banks to give to mortgages.
 
Gareth, you wonderful chap, that is exactly what is needed. It is simple and easy to do. Just don't distract the populace with other stuff that can't be done.

Was actually thinking about

Was actually thinking about this the other day.
t would be one of the best things to happen to NZ in a long time.
We need to champion this and make it a popular idea.  
Leave the ball-less politicians out of it.

Spot on Gareth. Sadly, I

Spot on Gareth.
Sadly, I think having lots of sheep around has rubbed off on Kiwi's, and there won't be any social unrest about this issue. 
And even if there was, the ratio of baby boomers to first time buyers will see that nothing gets done politically.
The best thing to do, if you are a first time buyer in NZ, is to leave the country to the baby boomers, and go live in another country where this rort does not exist.
Sad really, NZ would be a nice place to live if you didn't have to commit to debt slavery and live on WW2 style rations just to protect yourself from the rain/snow, and have somewhere to lay your head.
 

The funny thing is Notch,

The funny thing is Notch, they're all coming back. I guess where to live is a combination of a number of things to assess, but if houses are just it, plenty of places to suggest, third world, and above. There is a problem but NZ incentives to invest in housing, indeed lack of financial savvy of many I know to understand anything different, is the problem.

So explain this In Sydney,

So explain this

In Sydney, house prices are going ballistic. First Home Buyers are being squeezed out of the market. They dont have LVR restrictions. Yet prices are surging.

The number of finance commitments for first home buyers has plunged nearly 22 per cent in the last year despite the record low interest rates, according to the Bureau of Statistics. First timers now comprise only 13.7 per cent of total loans, which is their lowest market share since early 2004.
smh-real-estate-news/first-home-buyers-disappear-as-prices-heat-up
 
If a big chunk of the demand side has been eliminated from the equation, why are prices still rising?

Specufestors, including from

Specufestors, including from overseas. 
The lesson is, by the time first home buyers have dropped out of the market, you have left it far too late to do the needed reforms. 

Thin capitalisation rules on

Thin capitalisation rules on residential housing ?
 
Why do we not apply these same rules  to investment properties ie remove a degree of tax deductibility from investment properties. Homeowners don't get it - why should investors.
 
That would have an immediate effect on prices.
 
Perhaps others more informed can offer some  comments around this issue.

Sadly, Gareth does not

Sadly, Gareth does not understand basic structural urban economics .
 
He needs to explain to Interest Co NZ readers why California bubbled and Texas did not …
 
“Land, lots of land: How Texas dodged the housing bubble” Texas A&M University Real Estate Center
 
http://recenter.tamu.edu/pdf/2033.pdf
 
THE REAL DEAL
 
2013 Demographia International Housing Affordability Survey
 
Focus on Restoring Housing Affordability | Scoop News
 
Hugh Pavletich

I have been reading Gareths

I have been reading Gareths argument for years and he has learnt nothing from the real world. The key question is as Hugh asks
 
He needs to explain to Interest Co NZ readers why California bubbled and Texas did not …
 

Brendon I have spent

Brendon I have spent considerable time on the economic issues of NZ and we clearly have a high level of discrimination going on.
 
I have coined the phrase (in an early post) TAXATION APARTHEID. I can find no other appropriate word to describe NZ nationals tax treatment to foreign based nationals tax treatment. We have a devious systemic failure which is one part of the housing price increase component. 
 
While Hugh rightly mentions the other components of systemic failure I believe this could also be considered a type of apartheid administered by Councils so again this is Political, legal and economic discrimination.
 
The RMA process is highly discriminating against business. The business making applicaiton for Resource Consents must not only pay the cost and other fees of an application but must also pay for the time that opposers to applications cause. E.g. Council staff reading opposers information, the generation of any specific reports the opposers may demand of Council, even down to cost like stationary, postage and filing documents is charged out by Council staff to the applicant.
 
Zoning is discriminating and while it makes sense to have some types of zoning to cluster same type land use such as industrial or commercial etc it should not be an RMA issue to go outside of the framework of a particular zone. Business needs to be close to the resources it needs.
 
Councils are highly discriminating when it comes to land use simply because they are generating income from all the charges from hearings and consents etc.
Link to a Speech Helen Clark gave 18th July 2012
http://www.undp.org/content/undp/en/home/presscenter/speeches/2012/07/18...
 
If this woman understood apartheid at all she would have addressed internal issues in NZ very differently. The very thing she says she was opposed to.... she has created in NZ. Mind you she is not the only Politician or Political party who has contributed but she has been very outspoken on other people's countries and the suppression of those people.
Helen Clark during her days as Prime Minister actively encouraged foreign based investment into NZ knowing the tax structures were administed by apartheid. NZ nationals have been paying the increases in prices in housing ever since. When a group of NZ nationals brought to her attention the affordability issue she implemented WFF this did nothing more than disguise the real problems that she had created.
 
 

If we could remove the

If we could remove the expectation of capital gains at its source by implementing Hughs or Hartwiches models then reforming the taxation system to be fairer to NZ nationals would be less contentious and as you say WFF would be unneccessary.
 
I think the descrimination at a local level comes from two sources. Councils and planning departments are developing a feudal lord mentality where it is them who controls everything in their domain and the kiwi-peasants have no rights to build a home or start a business. These modern lords are more interested in their internal politics than looking after the peasants, expanding their departments/empire, the social hierachy -promotions etc.
 
The few councils that try to be responsive to new residents and businesses are penalised. New residents and businesses bring costs -extra services are needed. Of course new workers and businesses bring benefits, they pay company, income and GST taxes. But councils do not see this, that revenue goes to Wellington and only a very small percentage of the tax take in the form of rates stays locally.  
 
If this was reformed along the lines of Northern Europe, you would get competition amongst councils who get rewarded by recieving some of your taxes for responding to your needs. Alternatively you could break down the Councils and introduce competition in the form of MUDs like Hugh suggests.
 
Something needs to be done about the arrogant unresponsive nature of our local perfunctionaries.
 

We've had urban containment

We've had urban containment policies since the 1960s Hugh, thoug back then it was coupled with tight financial control. Its a no brainer that when one is relaxed without the other it will ead to runaway house price inflation. You're assumimg its a result of bunling bureaucrats rather than  deliberate policy. Ask yorself Cui Bono?

Urban growth containment

Urban growth containment "coupled with tight financial control".......?
Like subsidised 3% mortgage interest, tax deductible mortgage interest, handouts to first home buyers, capitalisation of the family benefit, etc etc etc?
Heck, what would happen to house prices now if measures like these were introduced?
The problem is the elasticity of housing supply, which has changed massively between then and now. I remember timber framing all over the place around all NZ cities in the late 1960's, growth and affordable housing were regarded as good things and Council staff regarded it as part of their job to expedite it. 
Confirmation can be found in the statistics on quantities of housing built in the past, especially compared to population and population growth.
There were 34,400 homes built in NZ in 1974.
In 2011, it was 15,382. 
We built 262,000 houses in the 1960's, 279,000 in the 1970's, and 155,000 from 2000-2010.
http://nzinitiative.org.nz/site/nzbr/files/PRICED%20OUT%20-%20FULL%20RES.pdf
I say we are heading down the same track as the UK if no courageous reforms are done: take a look at this data pack:
http://www.buzzfeed.com/dlknowles/britains-dysfunctional-property-market-in-gi-fm44
 

Well I was talking about

Well I was talking about direct intervention in the banks' balancesheet portfolio management and credit policies which prevailed in the  1960s, 1970s and in the 1980s under Muldoon. Government policy dictated bank lending and also intervened in credit supply on behalf of those those whose demand wasn't being met by the private sector.
 
I also think you guys on the land supply side understate the role the Reserve Bank plays in the chronic undersupply of housing. Everytime the Reserve Bank hikes interest rate, its inevitably followed by an economic downturn. as the RBNZ wrings spare capacity out of the economy. Its usually construction that suffers first as credit becomes more expensive, or dries up entirely, projects are canceled, workers laid off, and the more marginal businesse fold up.Construction is a sector which is highly dependant on credit and economic growth to keep it afloat. Its not lieke manufacturing and farming which requires credit for investment in capital equiment only in the initial stage of production and are able to generate cashflow thereafter, they need stable price credit throughout the business cycle, because their customers need credit to purchase the buildings and land which they've built and developed.

  Way back early 2009, I

 
Way back early 2009, I wrote Housing Bubbles And Market Sense  , about the problems of economists, such as Gareth Morgan, who clearly do not understand housing markets.
 
It is a “must read” for those who have not read it/
 
 Read in particular the very important comments by Michael Lewis at the time in Portfolio com.
 

 What part of 3.0 Median Multiple ( www.demographia.com ) doesn’t Gareth understand ?
 

On a lighter note, I incorporated comments by economist Efrain Rojas …
 

An excellent brief article Perhaps Economists Should Be Picking Vegetables by Efrain Rojas, outlines the story of his poor parents, who were smart enough to avoid the bubble prices of California - only recently purchasing two houses there with no mortgages. Mr Rojas states –
 

“It was abundantly clear to them that the housing market was insane and due for a catastrophic collapse, based upon the anecdotal evidence they saw around them i.e. half million dollar homes in places where people were lucky to make $10/hr. If you were an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables”.
 
 
Lending Multiples simply must mirror the Median Multiples of specific housing markets, as I made clear in a Sydney Morning Herald article a couple of years ago … Report: housing affordability out of sync with incomes .
 
 
Hugh Pavletich
 

The difference is this market

The difference is this market is being driven by foreign funds and the structural repricing of land caused by the Unitary Plan. I work with a team of young asian professionals. All of them have bought their own homes with at least $200k deposits from overseas. They are now looking at their second and third investment properties anticipation of the higher density from the Unitary Plan. Again with sizable overseas funds. Their salaries, around the $40k mark. Small salaries but big deposits.

If people moving here all

If people moving here all bought F&P whiteware, wouldn't we be pleased with the boost to the NZ whiteware industry?
In Houston, people moving there merely boost the housing construction industry. The price of houses doesn't go up, any more than immigrants buying F&P whiteware would force up the price of whiteware. F&P just gets on with making more freakin' whiteware. In Houston, they just get on with building more freakin' houses.
Houston grew from 3.9 million people in 2000 to 5 million in 2010. Prices did not go up, employment creation stayed ahead of in-migration, and the economy is booming.

  The question below is

 
The question below is related to the above article by Gareth who I tend to agree with as to the reasons for continued demand in property.
I'm curious to know what you  would do if you suddenly had $100,000 at your disposal? (not that I have)  
a)Deposit the lot in the bank at 4.2% p.a minus RWT would return approximately $3400.
b)Investing in Meridian shares would yield an annual  return in in the vicinity of 10.5% returning approximately $10,500??? (taken from the Otago Times)
c) invest in a 2-3 bed home for $500,000 in AKL renting at $500pw and "assuming" continual growth in property values returning between 13-14% p.a
  Interest repayment @ 5% p.a = $20,000 Income from rentals $25,000 capital return $65-70,000.. minus rates and agents fees 
Or go on holiday... perhaps Vegas...
 

dobrydan, the answer is

dobrydan, the answer is clearly, buy an investment poperty.

Obviously it is property. And

Obviously it is property. And the problem is the reasonable expectation given Auckland/ NZ's history of capital gains from house price rises. Given this expectation I doubt tinkering around the edges of the problem with lending ratios will change things. People will find the money somehow, especially in this global world, as ZZ discusses above.
 
You have to cut out the expectation of house price rises at the source. You need a competitive housing market where the supply of housing is elastic. If existing house prices rise then buyers need to be able to undercut the sellers by building. As soon as that link is broken then existing property owners exploit the situation to extract greater profits from new entrants to the market. LVRs, changing the lending ratio between business and property, capital gains taxes, limitations on foreignors buying etc, may put some hurdles in the way, but if the housing market is uncompetitive then exploitation will occur. 
 
Hugh Pavelitich and Leith Van Onselen have explained and statistically proven this point and favour the Texan model. Wheras Oliver Hartwich from the NZ Initiative favours a Northern Europe/German model to achieve the same purpose.

Brendon, it is always a

Brendon, it is always a pleasure to see others carrying on this thankless fight. Others have come and gone (given up in disgust) while the anti-growth, pro-racket trolls remain.

Just to remind you about the

Just to remind you about the tax break – if I put $500,000 in the bank I pay tax on the income, if I buy a house instead then the income equivalent I enjoy is free rent. But I don’t pay tax on that benefit, so it’s a tax-efficient way to enjoy a roof over my head. Some mugs leave their money in the bank and pay rent from the after-tax income it earns, they are tax victims. Far better to invest in the house and enjoy the tax dodge totally.
This is logical thinking ....taken too far ..and it becomes inane.
The idea that someone who buys a house (to live in ) is replacing the taxable benefit of savings with the benefit of occupany- an alternative return that is tax free.
To show the madness of this logic ....Just swap the word "House" for say....  "food" or "travel"...or "leisure time"..
Gosh...We could say that sleeping is swapping  a taxable benifit of earning money by working, with the nontaxable benefit of the enjoyment of "sleep"..
Without common sense ..economists could figure out a way to explain the earth as being flat.
Also... the choice is not between having a roof over ones head vs savings.
The choice is between Owning vs renting.

Paying taxes is inevitable,

Paying taxes is inevitable, either way.
In one door out the other, in one hand, out the other.
It is the parasites in between that are the problem.
It is the overheads on each transaction, that are the problem.
It is the fractional reserves, that worry me.
Deficits, are not called deficits for nothing.