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Matt Nolan has seven reasons he disagrees with Lowell Manning on housing affordability

Matt Nolan has seven reasons he disagrees with Lowell Manning on housing affordability

By Matt Nolan*

I’m always glad to see people discussing the New Zealand economy with data and discussion.

So good on Lowell Manning for doing that here.

Of course, this doesn’t mean I have to agree – but I will try to disagree with some substance.

There are a number of the specifics I fundamentally disagree with, I will discuss that more later in the post.

But I wanted to touch a methodological line to start with. The “economy” is the aggregate of individual actions, we cannot reach a conclusion on policy by placing value on outcomes without discussing what individual choices are involved.

Four things come out of this:

1. Without knowing why, we can’t really describe what is going on – this isn’t like a business balance sheet.

2. As a matter of course, without a “why” we can’t figure out causation – there is a risk of getting things the wrong way around! (For the wonkish, we need behavioural relationships as well as identities to get anywhere )

3. When we talk about “debt” someone is borrowing for some purpose. Someone has to borrow – it is not created from the ether.

4. We should not want to treat the economy like a business balance sheet even if we could – as we want a society that “maximises happiness” or some derivative of … not economic output. In honesty, the driver of many structural shifts we see is government policy, which is set GIVEN the fact we’ll take lower output to meet some social needs. Let us keep that in mind please.

This piece ignores this, where are the prices of non-housing goods, where are the determinants of foreigners willingness to loan to us, and our willingness to borrow?

The links related to these things are weak to non-existent, and it makes the other concerns I have even more stark.

Let us move on with those:

Issue one: Relative prices

As a starting point, we are looking at the relative price of one asset, the relative price of the stream of services from one product in the economy.

Applying an analysis based on aggregates and money supply is fundamentally misplaced here – such analysis is based on the general price level, the price of all goods and services.

The housing market issue is a “relative price” issue. Housing is seen as being a lot more expensive than other goods and services. Housing is seen to have provided risk adjusted returns well above asset classes.

This points to something so so different to monetary aggregates!

Issue two: Building costs have risen significantly

Between March 2002 and March 2007 building costs according to the same indicator (Stats CGPI dwelling costs) climbed 37.6% (6.6%pa). Looking at the last few years, when we haven’t built anything, and when house prices in half of NZ’s TA are down 20% in real terms, involves looking past the fact that the period where we saw house prices hit a high level DID involve significant building cost growth.

I agree with Lowell that this is hardly the only driver of what we have seen – and that land prices are very important – but we can’t say building costs have been irrelevant.

If we are talking about “housing affordability”, focusing on the last three years is like catching the final 20 minutes of a play – we haven’t allowed for any of the factors to “build up” which lead to the “affordability concern”. For the later M3 data, Manning does provide a lot more historical context – which makes me think he may have been a bit too loose trying to exclude building costs here!

On that note, I would point out that there are other reasons why land prices may rise … but we’ll put that to the side.

Issue three: M3 is endogenous and subject to shocks

The level of economic activity, the willingness to invest and borrow, the velocity of transactions, and the price (interest rate) of doing so – these are all factors that can adjust M3.

Activist monetary policy will, in a sense, change the endogeniety and measured relationship of things like M3 and NGDP, as well as dealing with “shocks” … all through the way they adjust the opportunity cost of funding in the banking system (or more importantly the rules they set with regards to monetary policy!).

Now I believe the article accepts this for the most part – but ignores the fact that the movements involved are due to real economy shocks! M3 is a useful measure for indicating that something may be amiss – but it doesn’t tell us what is amiss, and “targeting M3″ as a policy measure to deal with things going on in the economy is strange.

When people used to talk about “targeting M3″ it was because of a presumed relationship with inflation – a relationship that then quickly broke down!

Issue three and a half: We can’t talk about borrowing with talking about why people borrow

This is an amazingly important issue, one that seems to keep getting ignored. When we talk about “banks creating debt” and the “money supply climbing” we are communicating in a way that makes it sound like there is some money gushing lever we pull with no consequences.

This is not the case.

In truth, we need to ask why people are borrowing, and what restricting or loosening of the conditions they face for borrowing means for them.

Banks are only “creating debt” because people are willing to borrow at the prevailing rate of interest – tis the nature of demand by households and firms that is important here. In terms of causation, it appears we need to ask why people are so determined to borrow to invest in housing (if that is seen as the driver), making the issues in the housing market one of the causes of what is going on in debt markets and potentially a driver of the current account deficits – rather than a product of it!

Given this, I strongly view this article as having the causality backwards – it is talking about indicators that are symptomatic of what is going on, and as a result indicators that are correlated with the outcome.

But the growth in M3 given current policy rules is not the cause of a lift in relative house prices – it is a product of the real underlying causes! Something the Productivity Commission did make a fair go at, even if I don’t think they really hit the idea of “affordability on the head” (to be fair, no-one has, and they used the same definition most people have).

Issue four: Try to avoid regressing a level on level (unless you have cointegration)

Generally we try to avoid regressing levels on levels (unless we have a cointegrating relationship). There is a graph regressing GDP on M3 which straight OLS.

No mater what your view is – the fact it is levels will at least exaggerate our confidence in the result (by inflating the R2) and at worst will provide an entirely spurious regression.

The endogeniety between the two series is also not a particularly helpful property for drawing such a graph. And actually, it makes this problem fairly fraught unless we start to define the structure around other things (eg monetary policy rules, banking policies).

Issue five: Non-productive is not a nice term

Housing is investment in the non-tradable sector of the economy, it “produces” a stream of “housing services”.

Calling it non-productive and explicitly trying to pull resources away from it is not nice, it is the sort of actions that leads to people living in housing that they don’t like solely so we can support our favoured industry of choice.

There is a problem in society at the moment. We have this 1950sesque bias towards “productive manufacturing” in our mindset. But this does not make investment in non-tradable production, and investment in primary and service areas, a bad thing.

Instead we need to ask ourselves about the relative prices of these things – and try to figure out what they represent (changes in technologies, reactions to tax laws, biases in financial markets or financial market policy).

This comes back to asking “why is the relative price of a house so high” – really why!

Issue six: Foreign ownership isn’t “the primary source of a bubble”

I would like this explained at some point. People keep saying that “foreign ownership of thingys is creating bubble thingys”.

I’ll be honest, from where I’m sitting this makes absolutely no sense to me.

If foreign owners overpay for an asset then we can buy it back later for less … this is called a transfer to New Zealander’s.

If we are selling assets overseas and borrowing, shouldn’t the main question be “why are we doing this” and “are we making worthwhile investment with the capital we are getting in”.

We ARE NOT buying houses off each other – that capital stays in NZ. We ARE NOT buying land off each other – that capital stays in NZ. Supposedly we aren’t buying assets off foriegners … and as a result, we must be building something here.

This is where we should be thinking, not in terms of aggregates themselves, but in terms of incentives for investment!

Bubble is not a catch phrase for when something is wrong.

A “bubble” is when people are willing to overpay relative to fundamentals – interest rates don’t reduce this bubble component, our policy actions don’t influence it at all.

If it exists, it exists as a transfer between people – and again, if it is foreign people overpaying, they are just sending us free goods and services. I am uncertain why we are against this. 

Issue seven: The policy conclusions do not follow from the argument

Here is the conclusion:

Either the proportion of the available M3 investment funding ($253.b*0.945) now actively used to purchase and exchange existing non-productive residential property and other non-productive assets is reduced, or the investment pool M3 itself needs to be reduced through progressive debt retirement, starting with foreign debt. …

The second option makes more sense because it removes a primary source of the structural asset “bubble”, namely the persistent growth of foreign ownership through the current account.

Reversing that growth means managing the exchange rate, but the government and it advisors like the Treasury and the Reserve Bank of New Zealand claim there is no viable policy tool available to do so.

They are wrong.

The government could easily set up a variable and tax neutral Foreign Transactions Surcharge (FTS)[14]. The FTS is an automatically collected levy on all outward domestic currency transactions passing through the foreign exchange interface. Its effect is to increase the aggregate cost of repatriating domestic currency offshore and lower the aggregate cost of using domestic currency locally.

The revenue obtained from the levy would be used only to reduce domestic taxation and to begin repayments of foreign debt, in effect repurchasing those assets already ceded to foreigners. While an FTS will correct the exchange rate and current account it will have little immediate effect on investment prices or the property market. It would instead lead to a gradual easing of the rate of investment price increasesover time.

Manage the dollar, tax foreign transactions, and “lowering debt” (which must mean the government cutting spending or increasing taxes – as we haven’t clearly indicated how we are “changing the incentives of private agents”) in order to deal with the housing market … no no no no.

Stripping it down to clarify the way I’ve read it, here is how I’ve read your argument:

  • House prices have gone up due to land prices
  • Land prices have gone up due to M3 growth
  • M3 growth has been “excessive” due to CA deficits


  • Tax foreign transactions in order to lower the CA deficit

Here is the kicker – without any description of “why” there is no reason why taxing foreign transactions will lead to a lower current account deficit. If we were to dig into why, we might start to see some of the perverse places this tax falls upon (taxing export receipts and exacerbating credit constraints are two of the areas that come to mind). In this way, the tax solution really isn’t related to the premises – so even if I accepted those (note that in reality I rejected them in the prior issues sections, so this is for the sake of argument) the conclusion does not follow.

We can discuss this policy conclusion as a way of “rebalancing” – and in that case I will likely disagree as well, but it will be a debate on points!

But if the relative price of the housing market is the concern, this comes out of nowhere. You’ve just said “NZ borrows, and foreigners cause bubbles, so we’ll tax all tax transactions related to currency conversion” (Note, this is what I’m reading that tax as – if it is a tax on something else feel free to correct me).

These things are not free, there are people that will be hurt. This is why instead of focusing on monetary aggregates and trying to rope the RBNZ in, we should be focusing on these issues as fiscal policy issues, and directly asking “who are we hurting and helping with this”.

In that way this isn’t about the housing market, it isnt’ about M3, it is about the costs and benefits of a Foreign Transactions Surcharge – that is the argument that needs to be made for this conclusion, and it is not the one that is made here.


Matt Nolan first published this article on his blog TVHE. This version is without the emoticons that appear in the original (and it does not represent the views of Infometrics).

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"This version is without the emoticons that appear in the original"

Aha, I knew something was different!  My constant use of emoticons was just supposed to indicate that I was trying to have a friendly discussion about the issues - as long as that is clear they are not necessary ... ;)


If each and every one of us had a 'rush of blood to the head' / a vision on the way to Damascus / woke up and plain got sensible'.  Whatever.

And the result was each and every one of us (and business) started to spend less than we earned.   Without tax, incentives or compulsion of any kind.

What would happen to the Current Account ?


Thanks Matt for setting out some objections for those of us who, economically and statistically, are Bears of Small Brains.


I had this odd feeling with reading through the original article, that a fixation on M3 (an aggregate measure if ever there was one) was shall we say an odd way of approaching an individual market, but just couldn't spot why.  (But then, I did fail Engineering, not least because I couldn't Imagine the usefulness of Imaginary Numbers....)


Apart from a few obvious (to BoSB's, even) facts like:

  • not all of an economy is counted, so M3 and other aggregates miss some data
  • market values are terribly prone to sentiment, as the Raetihi house examples show:  pay $1 for a livable house in Nightcaps, and it's still got a utility value which can be measured in equivalent rent (and, if'n yer Gareth, can be taxed as such...)
  • housing is seen as non-productive (which Matt rightly disagrees with as being perjorative) but in practice a home is also a place of work and storage for a surprising number of occupations:  ask a tradie.....or an electronic plumber.


Well done.


It would attract far more comments, if you chopped this post into several pieces and publish them in a order.


Too many messages were tried to be conveyed at once.


Matt, were is the rest of the stuff on tax. Have i missed them?


Issue three and a half: We can’t talk about borrowing with talking about why people borrow

Maybe I don't get it but seems to be saying people only borrow for a good reason (and therefore money isn't created out of thin air)?

Kurt Richenbauer said :"asset inflation isn't wealth creation, it simply creates a charge elsewhere in the economy". So why would someone borrow: because they expect the price to keep rising? The service is the expectation of higher prices. Why would they think like that: a paradigm of quantity (population/ millionaires) and scarcity (NZ is special)?


Yet another long, boring and pointless diatribe on why absurdly high house prices are apparently a good thing



I think you might have  clouded  Lowells message .. with the detail in your response.

This is ur stripped down summary of Lowells argument;

Stripping it down to clarify the way I’ve read it, here is how I’ve read your argument:

o    House prices have gone up due to land prices

o    Land prices have gone up due to M3 growth

o    M3 growth has been “excessive” due to CA deficits

I  kinda agree with that.

In 1989 M3 was $46 billion… in 2012 it is $253 billion….  Change =  550%

In 1989 aggregate dwelling value was $120 Billion …in 2012 it is $655 billion… change is 546%

Do u think it is coincidence that they grew at the same rate..?????

( Whats the bet that Farm prices also mirror these changes in M3 )

Maybe Lowell is saying that land prices are a better proxy for measuring monetary inflation than is the CPI.

Central Bankers their profound God like wisdom…  decided to allow money supply to be endogenous.

They decide that individuals are inherently rational beings….  who would only borrow money for “rational”and efficient reasons..  ( In their world ..bubbles do not exist).

Our Money supply growth has largely been as a result of offshore borrowing.

Maybe Lowell is saying…   The Monetary aggregates do matter..  Maybe he is saying unfettered endogenous money supply growth is a “flawed Monetary policy paradigm”.


One of the qualities of Money is that it is a ..”unit of Measure”….   If the quantity of Money goes from $46 billion to $253 billion….   Don’t u think it is going to have an impact on prices..??


Lowells argument  also leads into a BIG question

Is the CPI a relevant measure in todays world.. ( in regards to Money Supply and Monetary policy).

One thing I have noticed over the yrs is that most economists define and perceive inflation as being a change in the CPI…   BUT…. Most of the really successful Investors ( practical economists) that I have learnt from believe that inflation is the resulting effects of money supply growth….  Which can manifest in different ways in different economic climates.

2 profoundly different views that raise profoundly different questions.

In conclusion…  I basically agree with what Lowell says…  house prices have gone up due to the inflationary effect of M3 growth…and that the m3 growth has been excessive and due to offshore borrowings.



I'm enjoying the read - thanks folks.

For me, there's the real things like houses, which we can build, using work, energy and resources. They also take up space, which can't be used for anything else, and they take support space (food production, water-catchment, roading, walkways etc. The physical space remaining, the resources remaining, and the support options ramaining, must dwindle with time, and dwindle exponentially with exponential growth.


Atop that, we invented a marker-system for trading, in all that space, resource, and work. Both the marker system and the trading it marked, grew in tandem - which required a system of issuing new markers. So far so good. The rate at which markers got exchanged for the items, tended to lag - you can't spend it until you've got it. Some hoarded their markers. Some tried to make more markers from existing ones. Some tried to make more from renting out markers.


The game got ahead of itself - more markers in the game, than there remained bits of land, resources, and energy to process/deliver those resources. So - those who expected to rent markers, can't expect a return. Those who borrowed them, can't expect to pay the 'return' back, and may fall short of paying back the original sum too. Th reason for this is the dwindling supply of all the items, in the face of attempted growing demand.


Pumping more markers into the system, won't change anything. There is the land stock, , resource residual,  and energy supply, that there is. Presumably, a bidding-war with all those markers (heck, let's call it 'proxy' :) must result in a reduction of their 'spending power'. It's too obvious, So prices go up. Houses - being the most land, energy and resource-gobbling thinge we'll ever own - will 'go up'.


That's the numerical 'up'. Obviously, it's also relative to incomes. They are reliant on the doing of something to our desired items, or they are parasitic (a masseur buying a house, for example) on same. The incomes are hamstrung vis a vis the available options, the same availability creates increasing scarcity - the MM does the splits.


It's a physical problem, not a fiscal one. The only thing fiscal change can do, is to advantage one sector against another. That's what we are seeing, from this Govt, and it's increasingly blatant. Changing Govt won't fix the problem - you can't - but it might change which sector gets what slightly.



Well done. Your summary makes sense to me, and the maths you've found certainly support the view.

Matt reasonably challenges the causation that Manning's paper suggests. E.g.Is the borrowing driven by demand or supply? Matt then also seems to come down on the side of demand being first, without any evidence to support that. I'm not sure it is that important. The government and Reserve Bank have been very involved, both by actions and omissions, in the exchange rate being considerably and progressively overvalued, as both Mr Wheeler agrees, and a large and growing current account deficit confirms. The progressive element of this ensures the carrot is kept in front of the donkey, in terms of tradeable industries, but they can never catch up with it.

I do agree with Matt and I think Roelof that Manning did not make a compelling case for the foreign exchange tax as the best solution. Mechanisms that many (nearly all) other countries are following, both because they are understood, and their effects clear enough, and also because they have to be politically acceptable internationally if most countries are following them, would seem preferable. Not having the government borrow overseas to fund its fiscal deficit would be a good start. Most certainly not selling government assets offshore would be helpful, for not only the keeping of the assets, but for the positive effects on the exchange rate.

I also agree with Matt that building or improving houses is a perfectly valid personal choice; and even in aggregate, improves the lot of more New Zealanders.

The current price signals though set by the always too high exchange rate, mean highly leveraged housing (and farming) is the only game in town. If the exchange rate was managed to a level where the current account was close to neutral; and with those price signals, people still chose to build and improve houses, then absolutely fine. If they chose to invest in a tradeable business, also fine. I know there are heroic producers, manufacturers, traders out there now, but I do believe for many, life would be a lot easier and more profitable if such policies were followed. 




Central Bankers have allowed our Monetary system to be demand driven.. ie. the demand for credit determines how much money supply grows.

So ..yes.. I do agree with you and Matt on that.

I'm  not sure about the solutions..

Point I was making.. that I thought Lowell was alluding to... is that it is the role of the Reserve bank to maintain Price Stabilty ... in regards to the Money supply.

lowell has shown that excessive credit growth has had an effect on house prices..  ie. there is a relationship between asset price inflation and Credit growth.

And there is a connection between the exchange rate and excessive credit growth because we borrow from over seas..

Maybe the Reserve Bank has been myopic and fixated by just looking at the CPI in regards to maintaing "price stability"... 

I do notice that Wheeler is paying far more attention to credit growth than Bollard ever did...  





PDK… Can I carry ur story on…

Instead of markers .. ..I’ll use the term “money”.

Suppose I an individual… found a way to “counterfeit “ money…

I could start off by just printing enuf to buy myself a house…… a car ….and a few toys.

Nobody notices and it seems to harm nobody.

I get a little greedy and print a lot more…   I start buying up the neighbourhood… and a few farms.

And what the hell..  I look after my friends.

People are starting to notice that I’m out bidding them everytime…   and that prices are starting to go up.

I’m starting to appropriate all the ….”resourses”…. a concentration of wealth..   ( people are stupidly.. swapping good , resource base assets for my little bits of paper )

I become a “big time “… rent seeker.

I can keep doing this until I’m either …”found out “… or people start losing confidence in the money ( markers) we use.

To delay the inevitable….. I can create “smoke and mirrors “… and  do lots of “ PR “…  and I try to make everyone believe .. for a while…   that what is happening is “growth “..and prices going up is not my counterfeiting but is just supply and demand… blah…blah.. blah.

 I grease a few palms …  t change a few rules… so I can do it a little longer..


This counterfeiting analogy  is the best way I know of, to  describe how money printing ( expanding money supply ).. redistributes wealth.

It  shows the how and the why of the growth of the financial sector…   a sector that does not really produce anything.

It shows that there are some major beneficiaries of monetary expansion…  and it shows there  are more losers.

This has nothing to do with the underlying resourses … or energy…  ( It is about how the cards are shuffled and the hand is dealt.)

Don’t get me wrong…   for a while monetary expansion/credit growth helps to generate a period of wonderful economic growth…  but it is transient..   just like a drug high.   ( leads to mal investment,  exploitation of resourses, over consumption… mispricing of risk…etc…etc…    )

Western Man does not have the  strength of character , moral compass or spiritual fortitude to be able to handle and manage a “fiat Monetary system “…     History shows how it is a slow death for a nation… 

Just my point of view.


I agree completely. Good analogy.


I see that as the first-class passengers screwing the steerage passengers, and the Titanic as the finite system. Yes, it happens. Yes, it's unpleasant, in fact downright nasty. The overriding thing, though, is the collision with the iceberg. Now it doesn't matter how fine the frock-coat is, or how stuffed the wallet; if the wearer isn't on/in something floating come daybreak, they're out of the game.


So the strategy at that point, regardless of where you come from, is either to make it into a lifeboat, or steal something from the White Star Line (they will be a tad preoccupied soon enough) and make yourself a raft. You can decide who - if anyone - to take, but you can't take everyone. The time to go is early - before the sinking drags you down, or others take it off you. No point in hanging around - if it is going to still float you come sunrise, it'll do an extra 10 minutes. And - considering the inevitable consequences, you've nothing to lose. Those who wait (denial) end up at the stern, riding it down. That's no strategy at all - no matter how understandable.


And those from first-class?  Well, if you make it ashore, deal with them then. You may find they're just bedraggled, looking sorry for themselves, and you'll decide to do more useful things.     go well             :)


To extend your last para, one of the Qs I have is the first class who make it ashore (ie here) you may well find have more muscle to take a bigger share than they are entitled to. In effect these are the ppl flying in here with money to "invest" today.... the "others take it off you" scenario.  So its not just having debt (mortgage) that makes you vunerable but actually having liabilites ie rates but the inability to pay, and rates are going up at 6% or doubling evey 12 years or so, but at the same time  so is council debt so the true increase is greater.  Now why the fools cant see this I dont know.







To complete the analogy - Matt Nolan monitors the speed at which the food goes up the dumb-waiters, the rate at which the coal is used, the amount the purser dishes out, the number of deckchairs hired out and the amount the attendant pockets in the process.


But if the Titanic will never again dock, first we have to avoid the iceberg (Climate Change, choose your metaphor). No amount of on-board capital-exchange can do that - it needs a physical change of course, and a decision to do so.


If we're smart enough to do that, we have a finite system, a supply of coal, a set of resources, a supply of food, and of water. Neither of the latter will indefinitely support the numbers currently on board. Clearly, rationing of coal for essentials, and food/water until a sustainable growing-system is established, is the logical first leadership step. In a free-market, however, the rich would be the survivors - but only if they can physically hold off the starving steerage, and avoid a pandemic sweeking the decks.


Ulitmately, the on-board population will reduce to that which the sun-facing surfaces can grow food off, and the rain-catching surfaces can supply water off. The tanks are our planetary aquifers, the initial stores our fossil-fuelled BigAg.


Again, no efforts by the purser, no amount of printed cash, no amount of juggling with money, will alter the physical facts. Being 'rich' becomes a useless skill - as does monitoring the rate of those dumb-waiters. What happens to all those who thought they could 'retire' living off renting out cabins? Can Matt turn deck-chairs into fishing-rafts? Plant a spud in a porthole-hung pot? Build a solar water-maker?


Matt, am i seeing signs of individualism in your piece?

An economy is made up of many individuals. Each individual make their own decisions based upon their own beliefs and circumstances. The aggregate of these decisions is the direction the whole economy and parts of an economy move.

As economists and others, most importantly Central bankers and Governments, have no idea how an individual thinks, then they have no idea as to the aggregate of those decisions being made. As such they can only guess as to the direction an economy, or parts of an economy, will move.

Governments, and others, can only meddle with an economy, they can, and often do, stuff things up. Therefore everyone should stop meddling and let the economy get on with doing what it does. Lets leave it to all the individuals.


I don't support free market individualism. maybe i judged you wrong.