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Opinion: Housing bubbles & deceit
April 7th, 2009
By: Hugh Pavletich
How Wall Street Robs the Banks that it Owns – The Market Oracle
(video)
As William Black, a regulator during the Savings & Loans Crisis explains within this Video – the major cause of these financial crises are fraud and deceit.
It needs to be borne in mind, however, that the finance sector didn’t have a “monopoly” on this.
It’s been endemic through our land use regulatory systems for years as well – creating the bubble conditions that provided the foundation (scarcities and perceived scarcities), for the widespread perception that inflating house prices would continue forever.
The deceitful behavior infected pretty much most communities – other than the 77 major urban markets identified within this year’s 5th Annual Edition : Demographia International Housing Affordability Survey.
And the Authorities played it for all its worth – as they of course welcomed the bubble revenues with open arms.
California is a lesson when things go in reverse.
Did many care about the young and poor people who were denied their right to the opportunity of home ownership and affordable rental homes, while these bubbles were inflating?
Did many care when young and poor people were saddled with household debt of 4, 5, 6 through to 11 (Herb Greenberg – Mortgage Mess) times their annual household earnings – when they should have just 2.5 times annual income mortgage on homes that didn’t cost them any more than 3 times their annual household earnings.
Most didn’t.
They do now on the trip back to reality – and of course – its everybody else’s fault – other than their own.
There are failings of commission………and omission, of course.
There was once a quaint theory that if there was an “obvious wrong” – people with integrity were duty bound to do whatever they could to put it right.
Isn’t it interesting how every generation seems to have to relearn history…………….the hard way.
Hugh Pavletich, FDIA
Performance Urban Planning
Christchurch, New Zealand
Tags: California, Finance Sector, Herb Greenberg, land use regulatory systems, William Black
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April 7th, 2009 at 5:48 pm
If:
“It’s been endemic through our land use regulatory systems for years as well..”
How can it be addressed?
If we do have the problems suggested, perhaps a little more speed and urgency in completing the further work recommended in this report is warranted:
https://www.dpmc.govt.nz/dpmc/publications/hpr-report/hpr-13.html
Apart from some effort on the RMA, what is being done on the subjects mentioned there?
Les Rudd
Invited Member
NZMEA
April 7th, 2009 at 6:02 pm
Really, how long is it going to take all those huge intellects out there all over the world to grasp this elementary reality?
Surely someone, somewhere in the world, is doing the research into the bubbles that have happened everywhere in the first world, and working out the reasons why? The UN? The World Bank? The IMF?
Why did Germany not have a housing bubble? Have any other nations not had one? And why?
Surely this is important? Why do we not want to know?
I reckon I know. But I won’t reiterate all the arguments here. Regular readers will know what I think.
The only attempt at an assessment of this issue I have yet seen is contained in Alan Moran’s “The Tragedy of Planning”; and I agree 100% with his conclusion. I am eagerly watching out for further and wider research and analysis of that type.
Hugh and Demographia have done valuable work on the connection between land development regulations and property prices in the Anglo world; Alan Moran’s study takes a brief look at a range of possible factors, tax treatment, etc; over a range of both Anglo and Non Anglo countries.
But most people are not just holding out for more research, they are concentrating on their own particular hobby horses like OCR’s and CGT’s and completely ignoring people like Hugh. They will need to be beaten about the head with a much broader and deeper study than either Demographia or Alan Moran or Oliver Hartwich or Fred Harrison have done yet. What I would most like to see, is the World Bank unleash Alain Bertraud onto it.
April 7th, 2009 at 6:23 pm
Interest rates need to be decided by the interaction between the willingness of people to save and the demand for productive capital.
The interference with this that results from housing bubbles (and any other speculative bubbles) is what is destroying modern economies today, even leaving aside the issue of whether the central banks can get the OCR’s right.
A bubble develops through expectation of returns. Those expectations cannot be dampened by interest rates. Interest rates that would dampen a housing bubble, would kill productive business off in the process. That is why Reserve Banks are “pushing on a string” as long as housing issues are unresolved.
April 7th, 2009 at 6:59 pm
To clarify what I said here:
“But most people are not just holding out for more research, they are concentrating on their own particular hobby horses like OCR’s and CGT’s and completely ignoring people like Hugh. They will need to be beaten about the head with a much broader and deeper study than either Demographia or Alan Moran or Oliver Hartwich or Fred Harrison have done yet. What I would most like to see, is the World Bank unleash Alain Bertraud onto it.”
I mean on the international scene. If NZ can lead the way thanks to Hugh P’s work with our government, that will be an exciting time for NZ akin to the reforms of the post-Muldoon era in their significance, and overseas governments and the UN and the World Bank and the Wall Street Journal and all the rest of them will be studying and referring to NZ’s example. Go Hugh.
April 7th, 2009 at 8:22 pm
Phil have a read of this article about Germany
http://www.spiegel.de/international/business/0,1518,552901,00.html
They are very similiar to Japan in that they have a falling population and have already had a housing bubble (in the 90’s) the article points out that in 1991 the German Government introduced “incredibly generous tax incentives to property investors” and “the tax incentives were so generous that people over-invested” Japan and Germany are good examples of where most of the developed world will be in a few years time. 50% of Germans don’t own the house they live in.
Les I think the MEA might be better to focus on ring fencing of rental losses rather than a CGT because I tend to think it would have more of an immediate impact on house prices and investment decisions than a CGT would also the current National government are more open to it.
April 7th, 2009 at 8:35 pm
Kieran – yes Germany’s population is declining slightly although they have had quite a lot of immigration
However much of the immigration has been of lower wealth characteristics, mainly from Turkey and Eastern Europe
Japan has always had very little immigration, and again what immgration that has occured is mainly lower wealth – factory workers from Brazil and Asia
thats why I think its not particularly useful to compare Nz with these countries
Now I don’t think immigration will boom here in the next year or so, but I think over the next 5 yeasr there will be reasonable gains in immigration, some of it higher wealth characteristic, some of it lower
these are some of the reasons that I think our slump won’t be quite as pronounced as Germany or Japan
Although I still think it will be significant
April 8th, 2009 at 5:02 am
One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government:
http://www.theatlantic.com/doc/200905/imf-advice
The Financial Crisis: A look behind the wizard’s curtain:
http://www.canadafreepress.com/index.php/article/9454
April 8th, 2009 at 8:12 am
Iceland investigators turn to SFO:
Investigators looking into alleged corruption in the Icelandic banking system want to enlist the help of the Serious Fraud Office (SFO) and Europol:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5111136/Iceland-investigators-turn-to-SFO.html
The G20 moves the world a step closer to a global currency:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5096524/The-G20-moves-the-world-a-step-closer-to-a-global-currency.html
IMF poised to print billions of dollars in ‘global quantitative easing’:
The International Monetary Fund is poised to embark on what analysts have described as “global quantitative easing” by printing billions of dollars worth of a global “super-currency” in an unprecedented new effort to address the economic crisis: http://www.telegraph.co.uk/finance/financetopics/recession/4986287/IMF-poised-to-print-billions-of-dollars-in-global-quantitative-easing.html
Britain should not fear asking for IMF cash:
Britain should not be afraid or ashamed of taking money from the International Monetary Fund, a senior Cabinet minister has told the Daily Telegraph: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5101950/Britain-should-not-fear-asking-for-IMF-cash.htmlminister has told the Daily Telegraph.
April 8th, 2009 at 8:53 am
I am feeling the whole business market is starting to stabalise..
Although I would like property to go down further, I think we could be at the bottom.
Unless, statistics is the downfall of the Real Estate investors..
If REINZ put out figures before Easter.. it will be great results… they will be looking for extra sales over easter.
If they delay after Easter, it maybe that the investors buying at bottom end of the market, may have inadvertently, pushed the median significantly lower.
So unless, the figures scare the novice property investors.. the 20-30 year-olds are out of luck in buying ahouse around 3 times annual salary.
So I would suggest we are in a precipce of change..
We will see..
April 8th, 2009 at 9:10 am
This is typical dimension reduction. Lets see some empirical data for all this speculation. We can all look at an accident and shake our heads, group together and excitedly trade stories on what might have happened.
Rather, lets clean our communities up as best as we can with clever ideas and hard work and then look at the 10 year+ absolutes: hyperinflation (effecting coca cola AND housing), population increase (net worldwide, and more relaxed NZ immigration), baby boomers retiring and all the issues relating to that, finite land in areas with high living standard infrastructure, major upheaval in the business world (due to communication technology, – and whatever black swans will emerge in the coming years)and finally UNPRECEDENTED GOVERNMENT DEBT from every government in the world to the CENTRAL BANKS (what our income tax goes to paying the interest on).
Now lets think of some good ideas on how to better ourselves from what we know.
April 8th, 2009 at 11:05 am
Kieran – ‘ring-fencing’ could be useful too. Bernard has suggested this. (I’ve given the link in other discussions we’ve been involved in.)
Again however, like CGT or anything that helps re-flow funds away from passive assets to productive activity, people can point to examples where such have not stopped ‘bubble’ housing inflation, eg UK, where they have this, CGT and stamp duty. However, yy point is based on one of context difference and that our economy is less dimensioned than such examples, and ‘pointing’ money away from passive assets to productive activity would lead to a restraining effect on housing inflation here in NZ. However, more importantly, and the main point of introducing something like CGT, the re-flowing of investment money would be facilitated and help further develop our productive economy, both in terms of depth and breadth. While also bring balance to taxation between income and corporate payers, and asset holders – why should asset holders have such a tax break as no CGT?
As you and others appreciate we have a multi-causal problem to deal with and I wouldn’t rule out changes in other areas to help ease implementation of the general economic change we seem to need, meaning I recognise the usefulness of Hugh and Phil’s points as well. My concern with all our suggestions is appropriate implementation, as we’ve discussed this elsewhere on this site. Things could be done, but it will require good judgement and political will.
However having seen this video Hugh has posted and noted his comments above, I think I’m becoming more concerned about our capability to even debate and steer through these issues and ideas effectively. Maybe there is job for the likes of Alain Bertraud and William Black in NZ? I don’t know, but we do need some changes on this issue and they seem to be slow in coming when various factors seem to have been so obvious for so long.
Slight change on subject, but still related, see this post here and follow on links:
http://www.interest.co.nz/ratesblog/index.php/2009/04/07/opinion-why-nzs-current-account-deficit-could-fall-to-55-of-gdp-in-12-months/#comment-20152
April 8th, 2009 at 11:55 am
Kieran, that is a very interesting “Spiegel” article.
I would like to make the following comments.
Spiegel fails to distinguish, as is quite usual with most writers on this subject, between a “housing bubble” that involves the building of too many new houses, with prices remaining affordable throughout precisely because of the plentiful supply (Texas is the same); and a bubble in the prices of all houses, or rather in the land they are sitting on, as a result of new houses, or the land they are sitting on, being expensive.
It is obvious to me which is the most destructive, and which is the cause of the worldwide crisis today.
I believe that Germany will reap the benefit of their approach to land supply, even if they had a temporary oversupply of houses in the 1990’s which has of course benefitted their young and poorer people; in contrast to the other sort of housing bubble.
I recommend “Bigger Better Faster More” by Oliver Marc Hartwich, as THE authoritative anaysis of the German housing market and the reasons for the successful maintaining of housing affordability there.
April 8th, 2009 at 12:01 pm
Les Rudd, I think there is a job for someone (Alain Bertaud?) to analyse the situation re housing bubbles all over the world and extend the comparisons done by Alan Moran to a wider range of countries and come up with results that every government in the world needs to pay attention to. Alan Moran certainly shows adequately tor my mind, that variations in taxation treatments made no difference between countries that had housing bubbles. The only factor that correlated with the existence of a housing bubble, was you know what.
April 8th, 2009 at 12:04 pm
Les Rudd – note Infometrics great “concern” with respect to the persistently falling new residential construction numbers – and regrettably – as is typical with generalist economists – not bothering to offer realistic solutions.
Our residential building sector has been in persistent decline since mid 2004 when in excess of 3000 censents were issued monthly – slumping to about 800 January and 1000 February.
The international measure for residential builds is the rate per 1000 population. At a 1000 per month or 12,000 per year for our population of near 4.3 million – this represents a build rate per 1000 population of 2.79.
Normal replacement of existing stock should run at 2 to 3 per 1000. During the 1930’s years of the Great Depression in the United States the build rate per 1000 on average was 2.18.
The UK is such a shambles now the industry people there are of the view that new residential construction there could fall to just 40,000 units for a population of 61 million – a build rate of 0.65 per 1000. California with a population of 37 million will likely only get in 70,000 units this year representing a build rate per 1000 of 1.89.
The reason for these – what only be described as catastrophic build rates – is because the regulatory environments simply do not allow new affordable stock to be built. So these construction collapses are simply contrived.
The only real question that needs to be asked is – how much longer are the regulatory athorities going to allow their construction industries to persist in tanking, unnecessarily sending construction firms to the wall and throwing people out of work?
Or – do they intend to release affordable fringe land to allow affordable housing to be built.
We are waiting……………….
Hugh Pavletich
April 8th, 2009 at 12:18 pm
Phil, Hugh – have seen Infometrics article. Noted, carry on, and good luck with your efforts. I’ll keep supporting stuff that addresses both the top and bottom of the affordability equation.
April 8th, 2009 at 12:44 pm
Les I agree we need multi-pronged solution to reduce the magnitude of economic and housing cycles and increase our productive capacity. No single solution will fix all problems but like any journey in order to get to your destination you have to take one step at a time. Thats why I am really encouraged by the treasury recomendations for tax changes in the next 5-10 years it shows a capital gains tax is number 2 on the priority list after reducing the top tax bracket. Its not a matter of if but when.
http://www.treasury.govt.nz/publications/informationreleases/taxconference/tsy-mttpco-feb09.pdf
Considering we are on the downward side of the housing cycle, there won’t be any capital gains for several years so its not a pressing issue yet. But the tax subsidy given to property investors each year still artificially inflates returns and house values. The continuing tax cuts that national are commited to will have an effect on this though.
I beleive we will always have cycles and there will always be housing booms but there are solutions to reducing the magnitude of them. Here are some of the solutions given by the reserve bank.
http://www.rbnz.govt.nz/monpol/about/2452274.pdf
But I think the money supply issues of the reserve bank play the most significant role in the size of each boom and bust. I agree the main importance of a CGT and Ring fencing etc.. is not to reduce economic cycles but to improve our overall economic performance by diverting investment money away from residential property and into business instead.
April 9th, 2009 at 10:45 am
As Hugh has pointed out on another thread, the correct term for building lots and lots of houses, is a “boom” rather than a “bubble”.
The effect of the two different things on the issues at hand, are quite different.
We definitely are in agreement about the need to get investment going in the direction of productive activity. But in the light of the huge “pluses” that result from affordable housing, I would be prepared to simply ignore the occaisional building of “too many” new homes; in fact, the effects of prices being too high are so much more serious, that I think a little bit of oversupply would be the “best” sign to look for at all times; it would show that the market is not being interfered with in the direction of rationing.
A price “bubble” drives itself to the level at which it collapses, only through mechanisms that will ensure economy-wide destruction in its wake. But a construction “boom” rapidly undermines the reason for its own existence, it is self correcting.