sign up log in
Want to go ad-free? Find out how, here.

Alex Tarrant says we must cut the cost of supplying houses. And that must feed through to lower house prices. It's simple economics, but not simple politics

Alex Tarrant says we must cut the cost of supplying houses. And that must feed through to lower house prices. It's simple economics, but not simple politics

By Alex Tarrant

“Brian, we don’t actually have a new-build housing market; we have a housing market.”

We all sat there thinking it through for a bit while Steven Joyce carried on.

…helpful when people do decide to build a new house when moving from an existing one…Reserve Bank macro-pru exemptions for those who build leaning in the right direction…

“…we do have a housing market and if you get a lower level of housing activity – buying and selling of houses – less demand will lower the housing supply response.”

“It’s just simple economics.”

Housing demand and supply.

What better place to talk it through with the Finance Minister than the Reserve Bank museum, right after the OECD’s chief economist had called on the government to give the central bank power to limit debt-to-income ratios (DTIs).

As always, Joyce was naturally cautious on that front.

“There’s no free lunch in economics.”

That was regarding the housing market dip following the Reserve Bank’s introduction of speed limits on loan-to-value ratios.

“Demand management tools can also soften supply responses. I think we’re seeing that a little bit at the moment.”

Yes, the Reserve Bank is trying to manage the demand side of the housing market. But we must be careful not to soften the supply side so much that the Bank is effectively chasing its tail in a downward spiral.

Planning regulations are the primary cause for Auckland’s housing supply issues, Joyce said. Improvements are being made, and we’ve seen a supply response.

We just don’t want to choke that off by reducing demand so much that supply stops coming on-stream.

“That’s the constant battle for the Bank and for the government in that space.”

Can we read that to mean he’s not a fan of adding DTIs to the RBNZ’s macro-prudential tool kit?

“No, I just think we’ve got to look closely at it, because you’ve got that balance of demand and supply to think about. I think, in the meantime, the fact that the Unitary Plan in Auckland is now in place, it does allow a lot more residential construction activity around the city.”

It may well be simple economics. But aren’t officials talking about exemptions for new-builds? Aren’t policy settings trying to encourage new-builds? How could tools affecting current housing have a perverse effect on the supply side for new housing?

This is where Joyce’s comments at the start of this column appeared in the piece.

Brian Fallow’s follow up question required a bit of thinking through too – but it was spot on.

Isn’t there a distinction between the demand and supply for housing, and the supply and demand sides of the housing market?

“Well they’re all linked,” was the response.

A personal anecdote: “Take, for example where I live in Albany. Some big apartment plans there. Where it gets to the key sharp point where somebody’s proposing to build 500 or 1,000 apartments, and how many they can sell off the plans…that determines whether it’s bankable and whether the apartment complex goes ahead or not.

“If the demand side measures are too restrictive then you just won’t have that development going ahead, because the banks won’t fund it. We’ve seen a little bit of that in Auckland," Joyce said.

“Overall, you’ve got…this tricky balance, of demand versus supply. And it’s just something that we’ve got to constantly to be aware of. I think it is important though, that the Reserve Bank does its job, and the banks do their job [with credit standards], and they don’t get too far out on a limb, because nobody wants a sudden sharp fall in the housing market.”

There’s a bit of a paradox, then. We want to reduce demand, while boosting supply. We want developers to keep building, even as they’re seeing lower potential for getting current prices further down the track.

A few notes on that:

Demand might be ‘coming off’. But remember, that’s at current prices. Demand curves slope downwards. There will be more demand at lower prices. High price, low quantity; low price, high quantity.

There’s a problem though. Supply curves slope upwards. Supply tends to fall at lower prices. High price, high quantity; Low price, low quantity.

Generally, rising demand puts upward pressure on prices, which leads to a supply response. That supply response then puts downward pressure on prices and we head back towards equilibrium.

Joyce’s point is that the opposite also holds – falling demand means a negative supply response.

What to do then?

We know there’s more demand down there below the current equilibrium price. The problem is how do we get the supply curve to match that?

It’s simple economics.

Reduce your costs of production. Alter where that equilibrium settles.

Find ways to allow prices to fall while keeping supply constant or even boosting the incentive to supply a greater number of units. Allow for economies of scale. Build smaller units of output. Have government intervene in the market.

Sounds like an answer, doesn’t it?

Keen readers will notice a roadblock though. The bit about allowing prices to fall, or finding a lower equilibrium. None of our main political parties want to entertain that (although the Greens were a bit less opposed than others). Existing home owners tend to vote.

It's not simple politics.

We’re stuck.

Unless we go with the other answer, which is to try and boost demand at the current price. Give more people the ability to buy houses as the market sits now. Improve their incomes.

How about tax cuts to improve take-home pay, lifting those consumers shut out of the market now above that threshold of income required to purchase a house?

In other words, reduce the tax base to boost the housing market.

Then supply will respond too, won’t it? That’ll stop all that extra demand from contributing to prices rising too much – a supply response should eventually bring the market back to equilibrium.

Sure. But just remember, this will require much more time to reduce New Zealand’s house price to income ratio from the highest in the world to a level we're not all complaining about all the time.

A better way: How about a bit of both?

Ah, no. Sorry - that still requires prices to fall.

Simple economics. Not simple politics.

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.

69 Comments

Id say tax cuts were a big cause of the problem. How much do you think we'd need to lower tax for houses to be affordable? Quite a lot. Then you'd need to cut spending to pay for tax cuts - that will kill off inflation and pay rises. Tax cuts will not fix the housing market in any way, even a right wing extremist must see that.
Only way govt can make houses affordable without prices dropping is to create inflation. Maybe a big rise to the minimum wage would do it.

Up
0

Just as interest rate cuts won't fix the problem either....or any problem for that matter! And in the spirit of Steven Joyce having a handle on the market, (“It’s just simple economics.”) we have the emboldened quote below....

Low interest rates are a sign that monetary policy has been tight, in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.

http://tinyurl.com/y8zwyndx

Up
0

Supply vs demand and a monopoly on building supplies

Price per square meter to build
Sydney and Melbourne $1000 - $1500m2
Auckland $3000 - $4000m2

Something is wrong with the building cost fundamentals, when it costs so much more to build in Auckland.

Up
0

That's why a govt sponsored / subsidised mass building programme is required.
The market alone will never solve those high building cost issues - we are a very small island economy with limited economies of scale and competition

Up
0

cough - Tauranga / Hamilton - cough - $2000-2500 - cough.

The market has completely solved the problem.

Tauranga and Hamilton are small cities that operate at economies of scale that are much smaller than Melbourne or Sydney. Hence the costs are higher.

However the economies of scale in Tauranga and Hamilton are much larger than the economies of scale in Warkworth and Kumeu and Silverdale and Wellsford and Pukekohe - all the places the idiot planners of Auckland Council insist on placing expansion suburbs. Hence why the costs in Auckland are so stupidly high.

Idiot Auckland Council.

Up
0

Carters, Fletchers, James Hardie. Sort them out, let competition in. Lower material costs. It's a Rort.

Up
0

Bang on

Up
0

Stephen Joyce sees the problem as “just simple economics.” He's wrong. There is no such thing as 'simple economics'. Economics is neither simple nor impartial. It is both complex and a rigged game. The complexity and the rigging are political choices.

Economics is not the controlling factor in social choices. People are not pawns in an economic game. Where they are, capitalism has no ethical or functional advantage over communism. To repeat my statement above, economic choices follow political choices. They are human choices, thus political choices.

And the political choices are straightforward. Do we wish to have a society with embedded, widespread and increasing homelessless? With embedded vulnerability for increasing numbers of renting families? A generation without the security and independence of home-ownership? A society showing increasing existential despair in almost every indicator from suicide to family violence, alcoholism and drug addiction? A society riven with third-world childhood and adult diseases prevalent in substandard housing? A society in which working families, in which the adults may have two or three jobs, need to live in shared and overcrowded homes in order to - just - make ends meet?

These are political choices. Put most simply, do we choose to organise our society for the benefit of discredited economic theory? Or do we choose to organise it for the benefit of a coherent, functioning, inclusive, healthy society? Plainly, Joyce and our political leaders are satisfied with the first choice.

Up
0

Put most simply, do we choose to organise our society for the benefit of discredited economic theory? Or do we choose to organise it for the benefit of a coherent, functioning, inclusive, healthy society? Plainly, Joyce and our political leaders are satisfied with the first choice.

I'm not so sure the choice is as simple as this... ?? My guess is that a social response may also lead to the haves and the have nots.. In regards to Housing new Zealand it results in long waiting lists.
Same with our public hospitals ... long waiting lists with "shifting goal posts'.
( the only way this is not so, would be if NZ had massive wealth, enough to supply our needs.... BUT we don't ,... we are a debtor Nation )

i'd love to buy each of my kids, and their kids, a house , but what constrains me is a lack of wealth..

commonsense economic principles is just that.... reasonably simple and understandable in terms of commonsense.
Like you imply... the twisting of it , is in ithe way it is hijacked and misused by vested interests to justify and get their own way..

its hard to deny that much of the worlds innovation has come out of Capitalist countries, where the basic underlying premise is that people move and shake out of self interest, and also , that people at a community level DO have a social conscience , which might be expressed as a kinda balance between a handout and a handup. ( I think unfettered institutionalized Social welfare has unintended consequences ).

Apart form Waymads list of solutions to our housing problems ( which I think is a complete solution, within the framework of natural market forces ) , I don't have any easy equitable solution..
If Waymad was running for election.... I'd vote for him..
here are some of his ways (and this particular post was written back in 2013) http://waymad.blogspot.co.nz/2013/01/how-to-fix-housing-mess.html
http://waymad.blogspot.co.nz/

Up
0

Roelof, I do think this is an issue of choice. Choice is about settling on priorities. Thereafter the questions are about solutions. Structures follow strategy. And, fortunately, capitalist societies do have room for such choices. And they are or can be good at coming up with solutions. (They are, as you say, innovative.) However, New Zealand's recent political mantras - exemplified by John Key and the Key government - have been that fundamental changes or innovations in housing policy and the housing market are 'too complex' or 'too difficult'. So nothing has been done. Or the only thing that has been done is the attempt to minimise or deflect attention from the problem.

Unless fundamental strategic choices are made, and made quickly - choices that allow new practical solutions - we will intensify and expand social exclusion and, for some, lock in long-term social degradation. At that point, the whole social compact and its political framework comes under pressure.

Up
0

I agree..
At first I thought you were alluding to the solution simply being a massive investment in social housing, within the context of the current quagmire of issues.

Waymad , together with the productivity commision ,have pretty much addressed both the problems and the solutions.
What stand in the way , ironically , are the so called "Social institutions" ... eg.. councils... govts... govt agencies.. etc.

So... it is possible to allow a market response by providing the proper strategies and structures that remove the constraints to the ability of the "market' to respond.
AND... Also by enhancing the natural market response with "touches" in the right placees... eg... govt direction in bringing the cost efficiency of factory quality construction..etc..etc..

Becomes a social- market response to the issue..
https://en.wikipedia.org/wiki/Social_market_economy

Are we on the same page... ? :)

Up
0

You're right, Roelof. I'm not advocating massive Government investment in social housing. Rather, I expect Government to set policies for the good of the nation, and then, according to those policies, deal with the various functional constraints (the cartels, the public and private hindrances to achievement) within which Government and the free market operate.

Until there is any policy (I mean policy not tactic) for housing, we will continue to see the social failures I first mentioned continue to accumulate. All I see from Government are attempts to deal piecemeal with the results or symptoms of its policy vacuum. If there is any policy, any overarching strategy, to do with housing for New Zealand citizens I have yet to hear a single note of it.

I would have thought that demanding (via policy) and then ensuring (via legislative and other rule-setting tools) an efficiently functioning free-market and social investment environment able to provide adequate access to adequate housing for our range of citizens was pretty basic. .

Up
0

The capitalism versus socialism (or whatever the strawman alternative is) is not the question. The concept of socially beneficial capitalism depends on competitive market. The housing market both in terms of existing supply and the provision of new supply is clearly distinctional. There are a host of reasons for this but here are a few to get started:

• uncompetitive markets boost the cost of building supplies raising the cost of supplying houses
• skill shortages, a failure to produce skilled tradespeople to do the work leads to inflated costs of supplying houses
• confidence concerns about the quality of products, finished houses and the financial stability of different actors undermines decision making and increases costs.
• financing issues prevent people taking risks and investing in capital/large scale projects.
• incentives encourage people to hold undeveloped land rather than develop it.
• infrastructure costs are prohibitive because the externalities of not building infrastructure aren't captured.

It is competely consistent with free market economics and capitalism to identify this as market failure and provide solutions.

Take steps to diversify building material suppliers - carrot (tender across a range of suppliers) and stick (legally force competitive behaviour).

Get active in supporting trades. From what I know the trades have been undermined for decades.

Look at insurance options both for development (finance risk) and shoddy building risk. Crack down on rogue operators with sanctions tied to individuals not just LLCs.

Provide financing for big projects on terms that can deliver a commercial gain to the government and strengthen the markets future capability to deliver.

Tax land, the more it costs to hold land, the cheaper it will be and the more productively it will be used.

That should get us started.

Up
0

>"Tax land, the more it costs to hold land, the cheaper it will be and the more productively it will be used."

Agree - it's looking more like the TOP is on the right track. Rebalance tax to what it's been at different points in history, a more equitable mix of land tax and income tax rather than the entire burden being foisted on incomes while land gets tax-free benefit.

Up
0

Increased demand should equate to increased home ownership rates. Why have home ownership rates fallen to 55 percent in Auckland.

Up
0

In 2013 only 12% of 20 to 29 year olds and 41% of 30 to 39 year olds owned their own home!

And it would have gotten worse since then.

Up
0

It tax is cut, more people will have money to become investors.

Up
0

Saw an article on UK election.

BEWARE OF "YOUTHQUAKE".

How true. NZ election soon.

Up
0

The problem with a "Youthquake" is that they tend to vote out of rebellion rather than any actual policy awareness. Very effective at ousting the incumbent, but who-ever gets in next usually fails as well.

Up
0

Ousting is a necessity in our current situation. Can you really imagine another 3 years of denial with heads firmly entrenched in sand. Anything is better than that.

Up
0

I don't disagree - but am wary about the whole out of the frying pan and into the fire.

National were in, then out and we had 3 terms of Clarke, who in hindsight probably made things worse overall, the 3rd term backlash happened and we got National for 3 terms, who again, overall have probably made things worse.

So we get another backlash, end result = a different bunch of people making it worse. Whatever happens in September I expect it will still get worse.

Up
0

Agree as 9 years too long a period for national. Need change and should happen.

Up
0

.

Up
0

Labour has a wonderful chance to paint a picture of the future Auckland is currently staring down under National. Are they smart and articulate enough to take it?
a future where a minority of young people will be able to afford a house, and where - if they have children - they will face schools bursting at the seams without sufficient teacher resources.
A future where inequity and crime rises, but where the police resource also fails to keep up.

and then paint the alternative under Labour

Up
0

Change of government in NZ is what will be best for NZ interest.

9 year of power - arrogance at best and give national another term and will see ultimate display of arrogance which will be disaster for NZ with their approach and policy.

So think and Vote.

Up
0

... the latest opinion poll I saw , had Labour down 4 pips to 27 % support !

Wild Bill is odds on to win the next election ... 3 more Gnatty years , folks ...

... the last credible leader Labour had was David Shearer ... he had them over 30 % in the polls consistently .... but , very sadly , his own party gave him scant support , and some ( DC ) were outright hostile due to their own self serving ambitions for the top spot ...

Bugger !

Up
0

Those numbers are just prior to their immigration announcement, so who knows.
I'm picking Winston will chew deep this time round and the polls won't show it. He will hold the marbles come the day of reckoning.

Up
0

Polls :)

Times have changed.

National wining by itself - have doubts. Will be lucky if get majority with the support of Winston Peter.

Up
0

Apparently these polling companies are still making around 75% of their calls to landlines. In the younger demographic I would not be surprised if we are getting down to single digits in landline use. The outcome does not surprise me, and I can see how it would make prospective opposition voters throw their hands up in despair, concluding that their vote would not make a blind bit of difference.
I really do hope the younger generation get engaged soon, as they stand to just be swept along for the rest of their lives otherwise.

Up
0

.. if the younger generation in the UK had've been engaged in the Brexit referendum ... it would have failed ..

That is a lesson to the younger generation everywhere : Use your vote , or risk a handbrake being placed on your future ...

... 3 more years of Wild Bill & the Gnats ... 3 more years of see no problem , steady as she goes ... smiley wavey .. flipping heck !

Up
0

...GBH ...you're dreaming mate. National will get smashed at the elections. You're going to the wrong dinner parties.

Up
0

... I am a terribly sloppy and messy eater ... the food flings and gets flung alike drunken Vikings having an all nighter after a successful pillage and burn raid ...

No one invites me to dinner parties ... anymore ....

... speaking of which , the Greens are pillaging the youth vote off Labour , and Winston has permanently raided the over 65's ...

Up
0

You won't get any joy from Joyce, National's economic game plan depends upon house prices continuing to rise.

DTI's "As always, Joyce was naturally cautious on that front ......No, I just think we’ve got to look closely at it"
Demand - “Demand management tools can also soften supply responses. I think we’re seeing that a little bit at the moment."

Cmon bro - how much longer are you going to stare at it especially as National has been saying the same bollocks for ever - what have they actually done????

Up
0

I think it's an excellent policy, force all the unemploydable riff-raff out of Auckland by making it unaffordable for them. Let them move up to the slums in Kaitaia where the cost of living is much cheaper, who knows it may even improve the crime rate up there¿ It's about time somebody came up with a sensible way to reduce crime and poverty in places where decent people live.

Up
0

Claiming simple economics when there are too many regulations where they aren't needed and too few where they are is not about economics at all. National could have done something but have failed to act over the past 9 years. The only voting block they care about are retirees, they should change the Party name to Grey Power.

Up
0

What the Minister said is probably true - the economics of the housing market are tricky to balance. However, what I also read above is that housing market has failed and will continue to fail if we do the same thing. This means some form of outside intervention needs to occur to change it. Change in tax policy, regulation, government building programs, productivity gains, and technological innovation are probably all needed to address this crises.

Up
0

In short government has to tackle supply as well as demand side.

Any government that talks of only supply without talking about demand has no intent to solve the crisis for petty vested interest.

Vote for government who cares about average kiwi and not just elite few like themselves.

Up
0

Agreed. Vote for change.

Youth too should come out and vote. Unless they do, government will not take them seriously as government is only interested in votes to get to power.

Youth participation is must as future depends on them and world over 'youthquake' is happening and is good for future as most full time politicians view is my way or high way. Forgetting that they are been voted to listen and serve the people and not to Rule.t

Up
0

Alex Tarrant, you suggest: "Reduce your costs of production"
That sounds great, and obvious and also theoretical, I'm an Architect designing & building houses, if you know how to "reduce the cost of building a house" please tell me and NZ how, in detail please

Up
0

It costs more to buy a section, than it does to buy the land.

Up
0

... but , when you buy a section ... don't they throw in the land too ?

Most sections aroundabouts here do come with the land attached ...

Up
0

Then just make sections cheaper, most of the land is owned by wealthy privileged white males who need to make reparations for their privilege.

Up
0

skudiv...About time someone started blaming someone else instead of the Government and Asians..privileged white guys...

Up
0

I generally can't tell if you two are being sarcastic or serious.

Up
0

Privileged white guys should be treated as national treasures. If it's okay for Prince Harry I don't see why not.

Up
0

You don't need to confiscate anybody's property, just tax land that isn't being used productively, or compulsorily aquire it for a fair price. We can't afford keep playing games where people gain more from holding a piece of dirt than building on it. If the land is designated for building you should have to buid.

Up
0

If you've bought a section and are having difficulty locating the land, first step is to check under the grass. Sometimes it slips down there out of sight.

Up
0

Don't use an architect? Jokes.

Seriously though, building a thousand houses is cheaper than building one. Building one hundred thousand houses is cheaper than building a thousand. You get the idea.

Up
0

Your first comment is valid. But to be fair architects are not involved in every build.

Secondly as I mentioned above, bust open the supply cartel that never ever gets publicly spoken about. Branz and the like. Simplify OSH requirements and associated costs. Simplify the consenting process.

Up
0

Yeah the bit about architects was just a joke becaause he said he was an architect.

Up
0

Hardly, again in theory, you're right, building "en-masse" is cheaper. In reality, we can barely get enough tradespeople to build the amount we're building now ! If you try to build 10'000 more houses, what do you think will happen to tradie's hourly rates and materials ? Yep they will keep going up more and you STILL haven't built cheaper

Up
0

My assumption was that if you build components in a factory you can: increase output per tradesperson (working faster through technology and production line techniques, working in all conditions, reduced shuttling between jobs) and make more use less skilled labour.

Up
0

Use the greatest economy of scale.

If you have a large city in your region, build new homes close to that.

Up
0

Yvil - the way to do it is for the government to build prefab housing en masse, on its own land, and sell to first home buyers on a peppercorn lease basis. We could easily see 3 bed homes for 400k in Auckland

Up
0

Single sentence paragraphs.

Lack of continuity of thought or exposition of an idea.

Anyone else have trouble deciphering the detailed logic behind this opinion article?

Up
0

A single, concise sentence to complex for you?

Up
0

Comprehension is not an issue. A lack of expositive discussion is an issue. At least IMO... you may instead enjoy the complex discussions found on the 140 character limit in twitter. I'd rather delve into the intricate details and nuances. It depends on whether you are focused on sound bites or substantive understanding.

Up
0

No. I abhor txt. And twitter.

Up
0

With that abhorrence, I am a bit surprised that you find disagreement with my dismay about the lack of substantive content in the article. As I inferred previously, single sentence paragraphs are not conducive to rational discussion.

Up
0

What planet is Stephnen Joyce on ?

Managing demand for housing ?

Allowing 1,000 new people into the country every 120 hours while we build only 8,000 houses a year

Is that managing housing demand ?

What an idiot

Up
0

Are they idot or we the people who trusted and voted them.

Think and Vote.

Up
0

Idiots, or those who simply benefit from the rising prices having been born at the right time to get in while they were low? Maybe more outright self-interest and disregard for young and upcoming generations of Kiwis than idiocy.

Up
0

Low supply but what if the government took a role in providing supply using its low cost of borrowing, long term perspective, and purchaser (demand) of social housing. Wow, I can't believe I completely solved that problem in the five minutes since reading the article.

Next you'll say what about labour supply. Unfortunately that takes more time but if they mass produce components or even houses the labour requirements might be minimised.

What about component costs? If the government builds at scale they will be able to drive the cost of components down. They could also look at competition in the supply of building materials (and standards). Strangely enough national set out to do all this back at the time of the Christchurch earthquake including driving diversification of building material suppliers and lowering costs to similar levels as Australia. How did they go in that policy objective? What did they try? From what I can tell they gave up.

Up
0

As an owner of a vacant section waiting to build I can tell you building costs are very high and deterring many away from building. It's still cheaper per Sqm to buy another house. Two thoughts as solutions.

1. Material costs are very high in NZ. We need more competition for materials to lower cost. As others have mentioned costs in Australia are much lower. Some sort of Government inquiry is needed.

2. Government should consider eliminating GST for the next 2-3 years on building materials and labor. This will reduce new build costs by 15%, will ease financing needs and encourage building new supply vs. us all trading the same stock between ourselves.

Up
0

People do not understand what is happening here. The Government could have stopped the housing crisis occurring in its tracks, if it wanted to. It had plenty of tools at its disposal to do so, such stopping negative gearing, reducing immigration along with many other tools.
Instead, it just looked the other way. Vested interests took over. Most politicians and their supporters own many rental properties. It was not in their financial interest to stop the housing mess we are in.

Politicians with rental properties should not be allowed to vote on housing issues as it is a conflict of interest.

Up
0

Again who will decided if they should vote or not - them.

It is just you vote a government and they try to perform and than vote them second term and get attitude and with term arrogant display at best so may be should not have voted term time to national. Even if we did definitely not 4th term

Up
0

One of a governments most crucial responsibilities is to insure that markets free and fair and open to all competition. In respect of just about everything that touches the housing market they have done the opposite; - Land supply, building materials market and demand. If they had done their job properly we would have a free market in land supply and building materials and as a result land would cost a fraction of the present crazy Auckland prices, materials would cost about half and we would not have pumped up demand from crazy immigration and foreign investors. Accordingly we would have a balanced supply and demand market which would fill the demand for houses at the minimum price as we see in just about every other properly working market, e.g. cars, electronics, etc, and we would not have the problem of the bubble prices that we now face. As things stand the price point has moved well beyond what the people who need houses can afford to pay. So we have huge unsatisfied demand, increasing prices and static or falling supply - the market has long ago left any sane equilibrium.

So the question that faces us is "do we want to continue with a totally artificial market that is impossible to control on an interventionist basis or do we want to get back to a free market that will look after these issues automatically?" My suggestion is that we cannot leave things as they are and long term must get these markets functioning properly. Inevitably this must lower prices significantly so we must also carefully consider how we will handle that,- who we will try to look after and who we will throw to the wolves.

Up
0

All building up to some sort of reset.

Either wages have to go up massively, or houses and building costs have to decline. The first option is to start an economic model that leads to Zimbabwe...aka buying a loaf of bread with a wheelbarrow of cash. This would be financial chaos to retirees, and those about to retire, which is a large demographic group that actually vote.

I know what reset I'm voting for, the one that's good to youth and retirees. Who knew that their interests would end up being aligned.

Up
0

You might be completely wrong.

Demand might be ‘coming off’. But remember, that’s at current prices. Demand curves slope downwards. There will be more demand at lower prices. High price, low quantity; low price, high quantity.

We have had consistently high demand for a number of years fuelled by low cost capital. If there is now a trend for increasing capital costs (the FED is raising rates) then demand at lower prices will not increase if the costs of borrowing are increasing faster than the decrease in prices.

We know there’s more demand down there below the current equilibrium price. The problem is how do we get the supply curve to match that?

No we do not know this.

We are very far into a regional construction boom, with the exception of Auckland, all of Australasia has participated. Australia has had a 6 year boom and regional (non-Auckland) NZ has had 2 year boom. Next year there will be a substantial over supply of housing in Australia next year and a minor over supply in regional NZ.

There is falling demand and high supply. The only exception is Auckland, where (due to idiot planning) there is low supply. Auckland has for a number of years "enjoyed" uniquely high land prices, it is about to find out the flip side of that uniqueness.

Up
0