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Bernard's Top 10: The 2002 inflection point for NZ house prices; The Melbourne and Sydney property bubbles; Clarke and Dawe; Mad, mad CEO pay; John Oliver; Clarke and Dawe

Bernard's Top 10: The 2002 inflection point for NZ house prices; The Melbourne and Sydney property bubbles; Clarke and Dawe; Mad, mad CEO pay; John Oliver; Clarke and Dawe

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must read is #5 on the changes in the power industry.

1. Can anyone explain these charts? - The two charts below (courtesy of Alistair Helm on Twitter) neatly encapsulate all of the drivers in our housing market over the last 30 years or so.

You could argue they say a lot about the economy too, given we have something of a housing market with bits tacked on rather than a broad-based economy.

They show how New Zealand house prices have risen 317% since 1993, which was more than double the growth in rents.

It's even more extreme for Auckland, with house prices up 425% and rents up 145%. Neither chart is adjusted for inflation.

For some people this is wonderful because it represents an explosion in the equity in their home, as long as their debt didn't rise as fast. For renters and the people who subsidise rents through NZ$2 billion of rent subsidies each year (ie. taxpayers), this is a disaster.

I'd love to know how this happened and could be justified. Obviously leverage increased and interest rates fell.

But what was the factor in 2002 that created the inflection point?

2. 'It's a bubble' - We've heard plenty of experts say Sydney and Melbourne house prices are a bubble because of very high demand from foreign investors and rental property investors.

But here's LF Economics saying it's a bubble because of over-supply. Here's their thinking via the SMH:

The largest oversupply is in Melbourne where there has been a frenzy of inner-city apartment building. They forecast the total available homes in Victoria outstrip demand by 123,000. NSW has a surplus of more than 40,000, according to their analysis, which was based on data from the Australian Bureau of Statistics.

"This calamitous outcome is especially likely in Melbourne where rents have not increased in real terms since 2010. Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices [178 per cent]. Perth is also in a serious predicament.

"Housing prices across all capital cities remain grossly inflated relative to rents, income, inflation and GDP. What event or set of events triggers the beginning of the end of the housing bubble is not yet known. A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals."

3. Crazy, crazy CEO pay - This research by America's Economic Policy Institute looks at how exploding CEO pay has contributed to America's income inequality and how it had very little to do with improvements in CEO productivity.

Here's what they say:

Over the last three decades, compensation for CEOs grew far faster than that of other highly paid workers, i.e., those earning more than 99.9 percent of wage earners. CEO compensation in 2013 (the latest year for data on top wage earners) was 5.84 times greater than wages of the top 0.1 percent of wage earners, a ratio 2.66 points higher than the 3.18 ratio that prevailed over the 1947–1979 period. This wage gain alone is equivalent to the wages of 2.66 very-high-wage earners.

That CEO pay grew far faster than pay of the top 0.1 percent of wage earners indicates that CEO compensation growth does not simply reflect the increased value of highly paid professionals in a competitive race for skills (the “market for talent”), but rather reflects the presence of substantial “rents” embedded in executive pay (meaning CEO pay does not reflect greater productivity of executives but rather the power of CEOs to extract concessions). Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment.

4. Brace for it - Bloomberg reports on a UBS report suggesting that China's property market slowdown could hit demand for commodities globally. New Zealand dairy farmers are getting an early taste, albeit compounded by supply shocks from European and US farmers.

"As the multiyear Chinese property downshift continues to unfold beyond this year, we may see a longer-term decline in China's appetite for foreign industrial imports,'' the analysts wrote in a report June 22. "Commodity, reprocessing, and developed country exporters alike should brace themselves for the impact of weakening China demand this year, irrespective of whether U.S. or EU imports pick up.''

5. The power revolution - The New Yorker has a long and detailed piece on the changing economics of solar power for homes in America. It looks in particular at the role some power companies are playing in financing the upfront investment in solar arrays, insulation and heat pumps.

Most of the technology isn’t particularly exotic—these days, you can buy a solar panel or an air-source heat pump at Lowe’s. But few people do, because the up-front costs are high and the options can be intimidating. If the makeover was coördinated by someone you trust, however, and financed through your electric bill, the change would be much more palatable. The energy revolution, instead of happening piecemeal, over decades, could take place fast enough to actually help an overheating planet. But all of this would require the utilities—the interface between people and power—to play a crucial role, or, at least, to get out of the way.

Power utilities now face uncertainty of a kind that traditional phone companies faced when cellular technology emerged. A few utilities welcome the challenge; others are resisting it; and the rest are waiting for someone to tell them what to do.

6. A world without work? - The Atlantic has an indepth piece on the future of work which asks some uncomfortable questions about what happens when the robots do the work.

The end-of-work argument has often been dismissed as the “Luddite fallacy,” an allusion to the 19th-century British brutes who smashed textile-making machines at the dawn of the industrial revolution, fearing the machines would put hand-weavers out of work. But some of the most sober economists are beginning to worry that the Luddites weren’t wrong, just premature. When former Treasury Secretary Lawrence Summers was an MIT undergraduate in the early 1970s, many economists disdained “the stupid people [who] thought that automation was going to make all the jobs go away,” he said at the National Bureau of Economic Research Summer Institute in July 2013. “Until a few years ago, I didn’t think this was a very complicated subject: the Luddites were wrong, and the believers in technology and technological progress were right. I’m not so completely certain now.”

7. Chinese buying galore - In America. Jamil Anderlini looks at how Chinese investors bought US$28.6 billion of US residential property in the year to the end of March. There's more where that came from.

With the Chinese economy and real estate market slowing dramatically and a vociferous anti-corruption campaign in full swing at home, Chinese buyers have been scrambling in the past few years to buy real estate abroad.

As a group they have become the biggest buyers of housing in many major western cities, including New York, London, Sydney, Vancouver, Toronto and Auckland.

Houses in English-speaking democracies with good education systems, excellent quality of life, strong rule of law and strong property rights are regarded by Chinese buyers as excellent stores of wealth.

In the year to the end of March, Chinese buyers spent more than three times the average American buyer, paying an average of $831,800 per property, compared with the national average transaction price of $255,600.

8. And it's technically illegal - As Jamil Anderlini points out...

Since China has strict capital controls that limit individuals to transferring just $50,000 a year out of the country, it appears that most of the money flooding into global property markets is technically illegal.

While there are legal ways to transfer larger sums, several major banks in Beijing told the Financial Times they had never conducted such transactions for offshore real estate buyers.

People involved in the market say the vast majority of money for overseas property purchases is transferred out of China illegally.

9. Totally John Oliver on the problem with the Internet and online harassment. It's very topical in light of the digital harm bill before our Parliament.

10. Totally Clarke and Dawe on Australia's immigration policy...hilarious.

We welcome your comments below. If you are not already registered, please register to comment.

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.

49 Comments

2. It's a bubble: Lindsay David and Philip Soos, who have written books on the overheated housing market... I stopped reading right there.

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Couldn't agree more, self interested commentary is such a bore.

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I wonder if you would be so anti possible self interest if they were saying what you wanted to hear?

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Holy-obvious-batman. Yes, OnwardsUpwards very well may be clinically delusional.

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#2 It's like watching a car crash in slow motion...

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As you should, perma bears have been getting it wrong for years now.

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In regard to 1#
House price growth is a reflection of the inflationary and Rampant , money supply growth.
http://www.tradingeconomics.com/new-zealand/money-supply-m3

The muted Rental price growth is a reflection of the deflationary forces, of Globalization and emerging economies, on wage rates.
Why are we so fixated on the CPI as being the end all of inflation/deflation ..???
That chart ( house prices/rent ) is a reflection of all the disparities and inequities... of excessive debasement of Money in a Globalized world..

I'd love to see a chart of House prices... M3 money... and average wages... ( also executive pay ).
I know M3 and house prices have a similar growth curve...and I'm guessing executive salaries does as well..??
Its ironic that when wage rate growth heats up.... the Reserve Bank cries out and yanks on the brake.....
This is a great example of the myopic idea that inflation= the CPI..
Also the idea that House prices are related to rents ( wage rate growth) which, maybe, they should be but are not.
thats my view on it.....

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The problem with that argument is that many places in the US (Texas in particular Southern/Mid states in general) and Europe (Germany) which were exposed to the exactly same globalised forces and monetary conditions did not have house prices matching M3 money and a divergence between rent and house prices.

I think in NZ, 2002 was the point when banks and property investors (the FIRE industry) realised that housing supply was inelastic but demand could be created by relaxing lending standards and going on borrowing binge was a positive feedback system -the capital gains feeding into higher prices and so on. The Clark/Cullen government turned a blind eye to it as they had other things to do and to challenge the situation was too difficult -there were too many vested interests.

This 'system' worked until the GFC and it has since restarted. This time Key/English are turning a blind eye -doing too little too late -again because to challenge the status quo system is too difficult -too many vested interests.

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Brendon, There is no rule that says m3= house price growth... Maybe in texas it manifested as a greater volume of Homes built...??? maybe it manifested as higher wages..??? Money is fluid... it can go where it wants.... AND .. in that regard each Country has its own circumstances..
If we did not have housing supply constraints then .... we would be different..
I think u will find we are in the midst of a "Global" property boom.... ..even Germany... even texas
Its alot to do with the FIRE economy.... which seems to be disconnected from the real economy nowadays..
i tend to agree with Lowell Mannings views..
http://www.interest.co.nz/opinion/64724/lowell-manning-says-problem-hou…

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Roelof if there is no rule that says M3 = house price growth then your statement

"House price growth is a reflection of the inflationary and Rampant , money supply growth" is not necessarily true.

Roelof like it or not but the evidence shows that many cities are not inflating in property values even though in other parts of the same monetary area property prices are inflating. So the problem must lie with the particular policies of the inflating cities.

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Agree.. CPI based on old inflationary problems not new inflation, like necessities and financial transactions. also would like to see house price chart against M3 and immigration?

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I ain't no expert but is there any similarity in cause and effect between the so-called "shortage of supply" in our lovely city and the ghost towns in Ireland and Spain - have we not learnt?

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I agree how much real need for housing is there or is it just a demand for housing to invest in. Too much money trying to escape Chinese bubbles, creating bubbles elsewhere.http://www.bloomberg.com/news/articles/2015-06-19/china-stocks-poised-f…

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In 1993 M3 was $58 billion In 2015 M3 is $292 Billion This is about a 500% increase.
that is a compound growth of about 7.5% /yr.
April 2015 y/y growth for M3 is running at 7.8%
Just focusing on the CPI keeps one blind....
The key question for me, always.... is... How will that increase in Money (credit) manifest in an economy..??? ..... Asset prices...?? House prices...??... equities..??.... wages..?? consumer prices..?? current acct deficits..?? ..etc

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6. A life without work. It's happening and fast. But is this factored into the so called need for migrants to do all the work? What work will that be (apart for displacing less enthusiastic locals)?

Housing it seems has two forces fighting....foreign money looking for a home, versus locals who are going/are sufering from flat commodity prices. Does one join the stampede into more property, or sit and wait - that's the dilemma and the outcome will be luck. I admit to having no idea, the more I read/listen, the more confused I am.

Very uncertain times...though one would think if Melbourne has an access and becomes affordable, the young will be outa here.

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#3 CEO wage should be a maximum multiple of the company lowest paid employee.
And tied back to performance, performance which should include sustainability and employee turn over.

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Absolutely! that way if a CEO wants to pay himself more he can he just has to pay everyone else more who is actually doing the work. A maximum of 10x multiple would probably be fair. If you think your company is so successful that you should be paid $400,000 you have to make sure the staff are getting $40,000 on average.

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Sounds reasonable. Another suggestion would be that workers could have a democratic vote on wether a CEO can exercise his/her share options for the year or of the shares should be distributed to workers instead

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DFTBA - We all know this, but our voices are landing on goverments deaf ears.

The question is "How do we get people to shout loud enough so the government hears us"?

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Mike B

I'm not sure what you expect the government to do about it? Or what they CAN do about it? I think it's probably more up to shareholders to stamp their feet a bit more.....
Anybody else have any suggestions?

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Simply automate low paying unskilled labour ( Amazon is a good example ) and hire high paid engineers instead. That way you can maintain market rates for all your staff including the CEO and maintain a 10x income multiple.

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Said by someone who is not, and will never be, a CEO.

CEO's work long hours, are generally exceptional people, work under intense pressure and are accountable to the board and shareholders. If they weren't worth what they're paid they wouldn't have a job, to say otherwise is implying that the whole world can't do cost/benefit analysis. There are several, rather basic ways to evaluate a CEO's performance in monetary terms.

If anyone not a CEO wants to earn more they can work smarter and harder and stop whining at their betters.

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No "job" is worth millions.
.
the jobs that should be well paid are the likes that save lives, like doctors, and nurses, firefighters, ambulance EMTs.
Or people who take care of the planet so we have clean air to breathe, clean water to drink, and grow us healthy food to eat.
Or people in caring positions, who look after the young, and teach them, and who look after the very old when every body else has forgotten them.
Jobs like these, and science jobs, are the important ones.
Everything else are just fillers.
.
Even the CEO of The Warehouse admitted last year that CEO salaries are ludicrous...so it doesn't just come from the likes of me...
Also - just because somebody takes home more pay than me does not automatically make them my 'better'....but a comment like that says a lot about you, Mr Happy....

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Of course a job is worth millions, if not billions. Say a CEO comes into a struggling company, turns it around and doubles it's profits from 100m to 200m, you can say that CEO is worth 100m per year. In fact, by this measure the worlds best CEO's are underpaid.

If a companies performance continued to slip I would expect the CEO would pay for it with their job.

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Remembering, of course, that Steve Jobs went back to Apple in '97 (that was bailed out by...Microsoft, of all saviors!) having been sacked 4 years earlier to work for $1 per year to turn the company around. His reward came from share appreciation that came with his success. Arguably, that's where a CEO compensation should better come from, not from the bottom line of the capmany balance sheet?
(Welcome New Zealand, on a trip back home for the Aussie school holidays!)

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That would certainly make CEO's accountable for their performance but whether a CEO (or any staff member) is rewarded via salary or share options should be entirely up to the company owners.

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Chiming in as usual to prove you know nothing about anything. A long established rule is that each layer in an organisation gets paid 20% more than the one below. No CEO should be on more than about double the productive worker.

CEO's are not exceptional, it is an expression of their personality type (usually ENTJ's) and they can't help themselves anyless than a caregiver type (ESFJ) choosing a profession such as a nurse. Or an *ST* personality such as yourself thinking your know everything and thinking you should be CEO because of this.

A good friend of mine is fairly high powered engineer, BSc, BE (Mechanical) and MBA. He says management is easy, engineering is hard.

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Your first sentence is interesting, trying to attack me personally simply because you don't agree with me. You've lost the argument/high ground in your first few words.

"...Thinking I should be a CEO..." I'm the sole director of my company so talk from experience. Your implication is that I should pay my workers more... I'm saying it's my company and I'll pay my workers what I deem they are worth, if they don't like it it's a free country...

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#5 - This could be a gamechanger

The materials in most of today’s residential rooftop solar panels can store energy from the sun for only a few microseconds at a time. A new technology developed by chemists at UCLA is capable of storing solar energy for up to several weeks — an advance that could change the way scientists think about designing solar cells.
http://newsroom.ucla.edu/releases/ucla-chemists-devise-technology-that-…

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Regarding the potential bubble in Australian capital cities there is an interesting letter to the editor in the Dominion that relates to the compulsory acquisition policy advice from the Productivity Commission.

"Whatever the arguments for and against giving Councils powers of compulsory acquisition of sites for development of higher-intensity housing, why are Sydney and Melbourne used as examples of these powers being used already, in the context of “housing affordability”? Two of the least affordable cities in the first world, with median multiples in the Demographia Report at 8 or 9 times annual incomes.

Systemic unaffordability even when powers of compulsory acquisition are being used to ram Plans through, means that the beneficiaries of inflated urban land prices are continuing to benefit regardless, at the expense of the people who are being gouged regardless – that is, all first home buyers and renters from the time of the start of the unaffordability.

If you want to use compulsory acquisition to restore affordability to the housing market, the historically tried and true approach is where new whole suburbs are built on what was farmland, compulsorily acquired at true farmland prices, and the finished housing sold at prices that incorporate no gouge in the land values. Something like this was literally done decades ago when Porirua and parts of Lower Hutt were being developed under Plans of the time. As long as the housing quantities are plentiful, it makes the entire housing market affordable, including even more centrally located properties, for which the prices are derived from “fringe housing plus location premium”. If the quantities are not plentiful, you might get a few lucky people “winning lotto” in the form of an artificially cheap home if the Council puts price controls onto projects, but the market overall is not affected.

Of course vested interests in fat profits in land and in mortgage finance, are perfectly happy with Inquiry after Inquiry that pussyfoots around making one useless “novel” suggestion after another."

Yours faithfully

Philip G. Hayward

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There is no evidence whatsoever that the CEO paid two million dollars does better than somebody paid two hundred thousand.

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very true.

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the best CEO.s normally have skin in the game. IE they either created the company or own a big piece of it and therefore have a long term vision and plan to get there. the ones paid mega bucks and are only there for 5 to 7 normally don't add much.

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Yes there is, you just haven't tried to look.

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Put it another way. If a company thinks their CEO job is worth two million dollars, show me that they can reliably appoint the correct person who can perform to deserve the salary. Appointments seem pretty random to me given the results, and there are plenty of examples of ultra high earners who are a disaster.

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#8
"People involved in the market say the vast majority of money for overseas property purchases is transferred out of China illegally."

The NZ government should work with the Chinese government to seize properties bought with illegal monies. A 50:50 split of the proceeds would increase our coffers.

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#8 so if the banks wont do it how does it get transferred illegally except in suitcases?

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#1 - BH, I've related this leetle story soooo many times but still yez ask....

In CHC, around the start of the century, 'twas possible to buy a do-er upper shack in downtrodden areas for $40-50K. The reason I know is that got a call one fine day that informed me I now owned one. One of Ollie Newlands 3D's - Death Divorce and De Bank - deals. Auctioned. Price IIRC low 40's.

Lo and behold the stoopid Labour Gubmint, full of good intentions and funded by (what else?) OPM, announced what is now HomeStart loans a few months later.

Qualification for aforesaid loan - can you fog a mirror?

Awkland I think the loan was $350K, Christchurch $150K or so. (For exact historical figures, ask Dr Google, ye lazy sods).

Anyhoo.

Overnight, literally, it was quite impossible to buy a Christchurch house under $ - wait fer it, try guessing - $150K plus.

Every price started with a 1 where the week before it did not.

Universal pricing signal. The economically clueless (there's a lotta them aboot in Gubmint) had struck again.

So, there's at least one solid reason for the sudden bend in the curve.

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sellers lowest price sets the whole market.

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I believe the 39% tax rate came into force about this time too. Everyone that could rushed into rental property to take advantage of the tax benefits.

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You are correct Waymad and it is a pity BH wouldn't look into it.

In 2002 NZ was discussing the possibility of new regulation in building codes and the Local Government Rating Bill. The RMA was starting to take on new legs as Planners and others in Council offices manipulated it to fit the old Town and Country legislation.....

In Feb 2002 NZ's national median sales price for residential homes showed the highest ever recorded and the national sales volume was the highest since March 1996. The national median price for Feb was NZD186,000 compared to NZD175,000 for January.....the national median sales volume in Feb 2002 was 8,733 compared with 6,771 in January and 6,185 in Feb 2001.

Auckland median in Feb 2001 was NZD247,000 and in Feb 2002 NZD258,000
Canterbury/Westland median Feb 2001 NZD147,000 and in Feb 2002 NZD145,000

Section sales eased during the last quarter of 2001 however the median section price remained steady at NZD85,000.

I think BH that if you care to look you will find a Treasury report which spelt out the economic benefits that housing price increases would have on the country.....hence the plethora of new rules and regulations that hit NZ housing...

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#3 Not so crazy ceo pay. The #3 chart is a sample of 350.

"And the “CEO-to-worker pay ratio” for the average CEO compared to the average worker was only 3.83 times last year, nowhere close to the pay ratio of 331X reported by the AFL-CIO using the 350 highest-paid CEOs in the country. Call it a “statistical falsehood-to-truth ratio” of 87-to-1 for the AFL-CIO’s exaggerated, bogus ratio. The chart above also shows that the real CEO-to-worker pay ratio has not been increasing as is frequently reported, but instead has been remarkably constant over the last 13 years, averaging 3.8-to-1 in a tight range between a maximum of 3.89-to-1 in 2004 and a minimum of 3.69-to-1 in both 2005 and 2006. The ratio of 3.83-to-1 in the most recent year (2014) was actually the lowest CEO-to-worker ratio in six years, since 2008."

https://www.aei.org/wp-content/uploads/2015/05/ceo.jpg

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Rent prices are driven by supply and demand.
Whereas house prices are driven by "how much can I borrow?".
It's the same with farms, as we noticed about then the banks changed tack. Rather than being "gate keeper" where you had to fight for the money, it gradually became a "lolly scramble", probably from increased money supply from some sub prime instruments that came back to haunt us in 2008 - This matches the house price drop as money supply tightened as a result
.

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Rent prices are actually driven by a tenants' income, not supply and demand. There could be 1 property on the rental market and 1,000 people who want it, But if the rent asked is $1000 per week and none of the tenants earn enough to pay more than $500, the property will remain empty until such time as the rent asked = $500,the highest amount that someone can pay.
That's why all this "But rents will rise if...(whatever)" is faulty logic. Rents are income dependent and always, always charged at the maximum that the market can bear, and in a stagnant or falling wage environment, that will put more and more pressure on any landlord who cannot afford the cash flow loss.

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I think the technical word you're looking for is "limited" or "capped".
Supply an extra 50,000 quality houses in to Auckland, you'll see prices drop. Knock over 20% of the existing stock, as per Cantab earthquake, and you'll see them rise.

Demand _works_ by the renters saying oh god I really HAVE to live near work/business. I _will_ pay $1000 a week.

that's how the Supply / Demand works. As the demand goes up, few customers have the money to pay the higher rate, but those few WILL pay that price.

That's why pushing demand up massively _means_ scarcity and exclusion. the trade off is there "the magic GP" ie gross profit margin, vs sales volume.
there used to be a trend going around about 10 years ago with recent Marketing Graduates "guaranteeing" to double your businesses turnover. What they did was just reduce your price to the buy-point of twice as many customers. Sure, chances are that meant you were actually selling at a loss but it would double your _turnover_. What it also did was create demand...but only for low price point - so to keep your "double turnover" you'd have to create enough _low_cost_ supply to meet that price point. Put the price up and your demand vanishes.

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maybe this is what Roelof is saying but perhaps 2002 inflection point can be explained by Greenspan flooding the world with USD after the dotcom bubble burst.

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". For renters and the people who subsidise rents through NZ$2 billion of rent subsidies each year (ie. taxpayers), this is a disaster."

ermmm I beg your pardon?
If the graphs were reversed it would be a disaster for renters and those who subsidise rents, as it would indicate the subsidies are supporting rent increases.

The news is actually bad for property owners and landlords, as they're not getting returns from their investment, what is coming through is all capital gain through devaluation (as the whole market is lifting according to those graphs, not just pockets.)
What is worse however, is that people are still making graphs like that without taking out Auckland and Christchurch, which are outliers. your mark on this paper is therefore (F) please redo with meaningful data.

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#3 again, the data polled is not similar. Could we please have a line on the graph indicating median or mean size of company that those remuneration values are taken from. There is big difference in CEO of 10 branches, and an International with 100 branches; or software selling services of 20 engineers (pre-1980) vs selling shrinkwrap and OEM in the multi-million volume size.

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#1: Bernard plot immigration alongside house prices. In 2003 50k net people arrived.

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