Bernard Hickey gives 6 reasons why Jesse Colombo's warning in Forbes about New Zealand's housing bubble bursting disastrously is over-blown

Bernard Hickey gives 6 reasons why Jesse Colombo's warning in Forbes about New Zealand's housing bubble bursting disastrously is over-blown

By Bernard Hickey

I have a lot of sympathy for Jesse Colombo's somewhat startling article published in that listed 12 reasons why New Zealand's Economic Bubble will end in disaster.

It certainly stirred up a lot of debate over the news-lite Easter weekend about our bubbly house prices and that's a good thing.

I agree that New Zealand's housing market is over-valued and I made the same mistake in early 2008 of assuming that a financial crisis would burst that bubble of over-valuation and 'of course' drive prices 30-40% lower. In the end, they only fell 10-15% and have since rebounded way past the 2007 peak for a bunch of reasons I'll touch on below.

It's one thing to say that a market is over-valued relative to incomes and rents and another thing to say that it will 'automatically' burst and 'therefore' trigger an economic disaster. What Jesse has done, and I did in early 2008, was fail to take into account the responses of both markets and authorities to an economic shock to our housing market.

In short, New Zealand's housing market is too big to fail, and New Zealand's shock absorbers and buffers would quickly kick in to soften the blow of a fall in house prices. Also, the Reserve Bank and the Government have already taken a lot of action to lessen the risks that Jesse rightly identifies with those house valuations and their connection to our banking system.

So in response to Jesse, here's 6 reasons why his warning of an economic disaster is over-blown.

1. NZ has a floating exchange rate and flexible interest rates

There are plenty of candidates to generate a shock to New Zealand's economy that could cause our house prices to start falling. The IMF warned in March that a sharp slowdown in China could do the trick.

Here's the warning in the 'Tail risks and downside risks section of the IMF's annual assessment of the New Zealand economy:

A sharp slowdown in China could weaken growth prospects in Australia, triggering a broad-based fall in demand for New Zealand’s exports, and lead to a sudden decline in house, farm and commercial real estate prices. This in turn could weaken consumer demand and negatively affect banks’ balance sheets and their willingness to lend. The downside macroeconomic impact in a scenario where shocks compound each other could be large.

So if you think Jesse was scary, then the IMF appeared just as scary.

However, the IMF rightly points out in the very next sentence that New Zealand has some automatic stabilisers to deal with just such a shock.

The authorities have monetary and fiscal policy space to respond to shocks. The RBNZ has scope to adapt monetary conditions to help buffer against a downside scenario, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. New Zealand’s modest public debt gives the authorities scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

Unlike America, Europe and Japan, New Zealand could cut interest rates sharply to respond to a surge in unemployment and a slump in economic activity that accompanied a fall in house prices. That's exactly what happened in late 2008 and early 2009 as house prices were falling 10-15%. The Reserve Bank cut the Official Cash Rate from 8.25% to 2.5% inside 12 months.

Also, our currency is floating and it also acts like an automatic stabiliser. It fell from 81 USc in February 2008 to 50 USc in March 2009. That helped reduce our demand for imports because their relative prices rose and increased demand for our exports, which became relatively cheaper. Ireland and Spain, where housing slumps caused all sorts of economic grief, did not control their own currencies and interest rates.

2. Our Government has room to borrow to cushion the blow

Jesse displayed an alarming chart showing a tripling in the Government's overseas debt in nominal terms between 1993 and 2012. Unfortunately, that didn't show the net and real value of that debt in relation to our economy, which is the most important thing.

New Zealand's net government debt has risen from less than 10% of GDP to under 30%. US Government debt is over 100% of GDP, Britain's public debt is over 70% and Ireland's debt to GDP ratio is over 120% of GDP.

As the current government proved from 2008 to 2012 when it kept spending high to cope with the recession and the Christchurch earthquakes, there is a buffer there to cushion the blow and stop a slump turning into a collapse.

3. The Reserve Bank and the Government would help the banks again

In late 2008 and early 2009 the Reserve Bank provided emergency funding to our banks because they couldn't roll over their wholesale foreign funding when the markets froze after the Lehman collapse. This Term Auction Facility (TAF) helped prevent the banks having to force marginal lenders into mortgagee sales, and again avoided a housing slump turning a housing collapse.

The Reserve Bank lent the big banks more than NZ$7 billion between November 2008 and June 2009. Here's more detail in this Reserve Bank paper.

The Government also gave the banks a helping hand by giving a Government guarantee for NZ$10.3 billion worth of bonds issued from November 2008 to February 2010. Here's more detail on that scheme, which has now ended, but could easily be restarted.

Those Minskyists who believe there is no such a thing as moral hazard should remember that most of the developed world's central banks and governments acted to use their balance sheets to stop banks from falling over and damaging their economies.

New Zealand's property market and its banking system were too big to fail. The Government and the Reserve Bank acted to make sure they did not fail in 2008 and 2009. They would do so again. My mistake in 2008 was to assume that the Reserve Bank and Government either would not or could not support the banks. They could and did. That implied guarantee remains and should be paid for with a deposit insurance levy, but that's a story for another day.

3. The Reserve Bank has already acted to reduce the risks of the housing market to our banks

Jesse's piece appeared not to have noticed the Reserve Bank's imposition in October of a speed limit on low deposit mortgages, which has slowed house price inflation significantly and reduced the amount of 'riskier' mortgage lending.

The Reserve Bank itself is well aware of the risks that an over-valued housing market poses to our banks, who are heavily loaded up with mortgages, as Jesse pointed out.

There's still an argument to say the banks are still more loaded up than they should be with high Loan to Value Ratio mortgages, but it's clear the authorities have not ignored this and have done something.

4. New Zealand does not have the over-supply problem that contributed to other housing crashes

One of the reasons the US housing slump was so severe in some states was that America's house builders are much better at rolling out large numbers of a 'cookie cutter' houses onto ample land supplies than we are in New Zealand.

Plentiful supply of new homes and a slump in demand equalled much lower house prices. That was also the case in Ireland and Spain.

Despite Jesse's comments here in a follow-up piece on Forbes rubbishing the supply argument ('it's always a shortage and never a bubble'), New Zealand certainly doesn't have the over-supply in its most over-heated markets of Auckland and Christchurch that would fuel a bursting of the bubble.

Auckland built around half the houses it needed in the decade to 2012 to cope with migration and natural population growth and is only now starting to catch up. There is a debate about whether there is a shortage, but I haven't heard anyone argue there is an over-supply.

Christchurch's housing supply was devastated in the 2010 and 2011 earthquakes. No one is arguing there is an over-supply there.

5. The Government has already acted to increase housing supply in Auckland to reduce over-valuation

The Government legislated last year to improve housing supply in Auckland, agreeing an Accord with the Auckland Council to speed up housing consents and free up greenfields and brownfields land to build new houses.

There's some debate about how quickly these changes have flowed through to housing consents and actual building, but housing consents are up 85% from their March 2011 lows.

6. A fall in Chinese economic growth doesn't necessarily burst our 'bubble'

Jesse made the connection between a bursting of China's own credit-fuelled housing bubble and a bursting of our bubble. He is right to point out there has been an increase in flows of capital out of China and into the New Zealand and Australian housing markets.

There is much better data to measure the surge into Australia, but the information is not so clear cut here.

But Jesse's assumption is that when China's 'bubble' bursts, those flows would dry up and demand from China for our exports would dry up.

Both of those assumptions are worth challenging. Firstly, China is slowing in part because it is trying to reduce its reliance on investing in infrastructure and apartments and increase its reliance on consumers consuming products and services. That increase in consumption includes New Zealand protein (dairy, fish, meat) and tourism.

Secondly, the surge of investment by wealthy Chinese property investors in other markets has only just begun. As China opens up its capital account, those flows will only increase, not decrease.

In summary, Jesse's argument that New Zealand house prices are over-valued may be true, but it doesn't necessarily mean a 'bubble' would burst or that a Government would allow it to burst.

That may mean that property investors can load up on moral hazard and cheap debt to capture their tax-free capital gains, but it doesn't mean New Zealand is on the brink of a crisis.

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

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So in other words, keep on borrowing.

And keep on printing.
I am with Ludwig Von Mises on this. 
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

BH you are a bit late. The key point is that governments should be doing something about bubbles before they get worse. This was well discussed over on Mondays Top 10 (damn this website, again its copy/paste function is FUBR, so no link). 
From your argument it would seem that NZ has a lot of protection and safegaurds to cope with a decline in house prices. Why isn't the government implementing policies that would allow kiwis to buy cheaper houses? When will journalists in NZ start asking the government the hard questions?

The inability to link to previous comments is a nuisance - I think everyone should visit the Top 10 on Monday thread.
"The key point is that governments should be doing something about bubbles before they get worse."
That is really "top comment that it is possible to make about this". Of course that is exactly what Colombo himself says; for example, in an article entitled "Why Bubbles Need To Be Warned About As Early As Possible"
Every MP in NZ should read it, and every pundit and journalist who is passing comment about Colombo. 

Why has it become so fashionable today attack the Forbes bubble commentator?  It's as if the entire New Zealand press corps held a meeting over the weekend and agreed to react with acrimony and disgust that anyone could think that NZ's economy (or at least some important components) were thriving on borrowed time?
Was surprised to see's response - which I read as more of a devil's advocate response.  We know you agree with Forbes - and you rightfully point out his hyperboyle.
Aside from there is really no competent financial press in NZ.  The NBR acted with utter outrage - how dare they say anything about our beloved property market?  Same with NZ herald.  Everyone loves to use this supposed property shortage as a safety blanket - although economists have pretty well disproven there is a real shortage.  
What will be what will be.  The NZ mainstream press is out to convince everyone it isn't true - buying a little more time...just a little more time...

I am convinced that the FIRE sector bears undue influence on the entire media, old and new, as well as on the politicians. It is probably as simple a matter as advertising revenue. 
Malthusians are often welcome in the media while econ libertarians are not, for the simple reason that the FIRE sector rentiers know that the Malthusians are the Baptists to their "Bootlegger" role, while it is the econ libertarians who are the big threat.
Of course there is also the little problem that many "financial" editors and journalists will likely be doing a little property investing themselves. 

I think that the Auckland housing market is hopelessly distorted by variuos factors , but I also think that Colombo overplayed his hand .
Housing in NZ is the only truly free market even Milk and the  used car market are more highly  regulated by laws , taxes and controls .
Buyers and sellers are free to enter the property market without any restriction , there is full information, there are no taxes or transfer duties , finance is available , and sales are often in an open forum such as an auction.... and they dont even have to live here .....its a perfect market   
The distortions in the market right now make a perfect storm and include

  • Overly generous tax treatment of housing investment
  • Encouragement of LANDBANKING
  • Massive migration to NZ
  • Low interest rates
  • Arbitrary city limits
  • Excessive local authority fees for  subdivision costs , including $9,000 for a water connection pushing up section prices

All of these elements are at play at once right now , BUT , the market will adjust becasue we are now creating subdivisions and building houses to meet demand , and thats what a free market does .
Prices cannot increase forever and there is always a ceiling price , just as there is a clearing price
As to whether its a bubble or not is a moot point.

Like FUN housing is a free market in NZ.
What is an "urban growth boundary"?
Why is land inside it, in Auckland, selling for $2,000,000 per acre, and land immediately outside it for $200,000 an acre, when global farmland values (held down by import substitutability) are seldom over $30,000 an acre?
And in every affordable city in the USA, with house price median multiples of 3, there are housing developments routinely going in on land that has been bought for under $30,000 per acre? And housing near the very centre of the city is on land whose price is still nowhere near as high as FRINGE land in cities with a UGB?
As Brendon complains, you can't link to previous comments on this site, so here is what I said yesterday:
It's called "option values".
Here's how it works.
If you can build stuff on $10,000 per acre land 30 kms from a major city, the land 20 kms away from it will probably be around $20,000 per acre and the land at the fringe will probably be around $30,000 per acre.
The land right in the CBD itself will be around $200,000 per acre.
The above is literally true in the affordable, median-multiple-3 US cities. 
This is classic economics of "consumer surplus" - stuff gets to market at whatever competitors can get it to market for, trying to under-cut each other. 
Impose a growth boundary, and the land immediately inside it, in Auckland, is now selling for $2,000,000 per acre. The land immediately outside it is fetching a few hundred thousand in anticipation of the UGB being moved one day. Even 30kms away there are some effects of speculation due to the distortions - some developers do manage to spend years getting special plan changes and so on, at millions in legal costs and finance carrying costs.
But there is land around NZ for under $20,000 per acre on which a master planned community like "The Woodland's" could be built. If you watched the video above, you should have picked up that jobs-housing balance was achieved right from the start, minimising ultra-long-commuting requirements.
In fact there is no correlation in commute time data, with urban density by urban area. UK cities are typically 5 times denser than affordable US cities but average commute to work times are roughly the same in both. This is because employment is dispersed, congestion is far worse in higher density, and systemically unaffordable housing (as in the UK) results in more people being "priced out" of location choices near any one job they might get. 
Affordable US cities (all low density) function largely as a whole lot of small towns superimposed on each other. Most people can afford a home relatively near to any particular job they might get. If they get a job in "The Woodlands", they can move to "The Woodlands". If they get a job working in one of the many Fortune 500 companies head offices based in Houston CBD (more there than in any other US city), they can move to near the Houston CBD.
Zip Codes beginning 770-- are inside the ringroad in Houston. 
Can you get anything in any equivalent location in Dorkland for those kinds of prices?

Phil .... to back up your Houston scenario, relatives have moved from California to Texas as there is so much more work there.....and of course housing is cheaper than CA.
You get "good bang for your buck" with well made and insulated houses ....give me a US made house over an Auckland one any day for build quality etc.
In the Maryland/DC area where I have a property, I'm getting a 16% gross return on capital...where in Auckland can you find that ???  
I really like how they do those "wooded areas" in MD....lots of forested areas ...then a patch of houses and business then over the hill you will come across a farm, then a shopping mall etc
Never ceases to amaze me how Auckland locals are "conned" into thinking they have a great standard of living.....well, my take on that is if you can't afford to enjoy it, what is the point ?
A good take to see just how well the financial standard of living is, is to look at the average age of the private vehicle fleet .... it's about 10 years here and driving down the I95 in MD probably 3-4 years....
This country NZ,  is just run for a "select" few ........

Thanks, Crazy Horse.
It is sad that "sprawl" gets so much bad press when in fact it is how most people want to live. It does need to be well designed, but it maximises green space and access to wooded areas and parks and so on. And of course the continued farming on "fragmented" land that is NOT worth millions of dollars an acre, thanks to the absence of UGB's.

What data do you have to back up your claim that most people want to live in sprawl?
Last i checked small inner city house prices were far higher than new sprawl McMansions in flat  bush etc.

NZ welcomes a return to 2001 values for property. Then the underwater homeowners can enjoy floating rates of 1%.

This seems like one of Bernard's better pieces. Maybe because I agree with it but also as it seems well argued and based on a decent understanding of how things work here. It is the first time I can remember him explaining why his 30% house price prediction turned out to be wrong.
The over valuation of houses in this country is concentrated in two markets. Christchurch is obviously a result of widespread destruction of houses and the delays in rebuilding/ repairing. There is a real shortage therefore prices rise. 
The Auckland situation is a bit of a mystery. Flatlining rents seem to suggest no actual accommodation shortage so the reason is probably some of that quantitative easing flowing this way causing prices to rise in Auckland as that is the only city in New Zealand anyone has ever heard of. Once prices start to rise there is a tendency to assume they will keep rising and the market gets a life of its own unrelated to real demand. Seems a lot like tulips to  me.
Outside Auckland and Christchurch not much is happening that should worry anyone. Tbe last thing we should do to fix the problem is let Auckland sprawl. That will have all sorts of environmental and quality of life implications down the track. What we should do is let it continue towards being a place noone either wants to live in or can afford to .
With a bit of luck those crazy prices will normalise over time as population growth evens out around the country rather crashing between now and xmas and taking a bank or two with them.

This seems like one of Bernard's better pieces. Maybe because I agree with it but also as it seems well argued and based on a decent understanding of how things work here. It is the first time I can remember him explaining why his 30% house price prediction turned out to be wrong.
The over valuation of houses in this country is concentrated in two markets. Christchurch is obviously a result of widespread destruction of houses and the delays in rebuilding/ repairing. There is a real shortage therefore prices rise. 
The Auckland situation is a bit of a mystery. Flatlining rents seem to suggest no actual accommodation shortage so the reason is probably some of that quantitative easing flowing this way causing prices to rise in Auckland as that is the only city in New Zealand anyone has ever heard of. Once prices start to rise there is a tendency to assume they will keep rising and the market gets a life of its own unrelated to real demand. Seems a lot like tulips to  me.
Outside Auckland and Christchurch not much is happening that should worry anyone. Tbe last thing we should do to fix the problem is let Auckland sprawl. That will have all sorts of environmental and quality of life implications down the track. What we should do is let it continue towards being a place noone either wants to live in or can afford to .
With a bit of luck those crazy prices will normalise over time as population growth evens out around the country rather crashing between now and xmas and taking a bank or two with them.

Overtime bubbles are either going up or down. The most likely trigger to burst this bubble is a major external event which will change sentiment perhaps sometrhnig which forces the RBNZ  to raise interest rates to defend a collapsing dollar a major international sharemarket collaspe who knows when the timing will be but it will happen.But when it truely bursts nothing the Govt the RBNZ do will stiop it. it's so far out of whack.

One of the most irrational arguments I have ever heard, is that the bigger a bubble gets and the longer it lasts, the more the people who say it isn't a bubble at all, are right and the LESS credible the alarmists are.
Seems to me that Mr Hickey has fallen foul to this kind of irrationality. I am with Steve Keen. These bubbles have to burst eventually, even if someone who said it was a bubble when median multiples reached 6, is now "discredited" because they have risen to 8 since.
DUH....! At 8, it is merely a BIGGER BUBBLE than it was at 6, and MORE likely to burst, and the damage when it does, will be BIGGER. 
As Brendon complains, you can't link to previous comments on this site, so here is what I said yesterday:
Immediately prior to his piece on NZ, international bubble analyst Jesse Colombo’s most recent article on Forbes is called "Why Bubbles Need To Be Warned About As Early As Possible".
The whole point is so that governments can do something about them before they get even worse. Ironically, every time a bubble gets bigger, its deniers claim that the doomsayers to date have lost their credibility, because "the bubble they warned about hasn't burst". This is a perverse, "no winners" dismissal of an argument.
Of course after the crash, the boosters and the suckers will claim that “no-one saw this coming” except a few "stopped clocks" who had no credibility, yadda, yadda, yadda; and of course the State will be expected to bail out all the suckers, and worse - the deliberate Ponzi boosters themselves in the FIRE sector.
NZ has been warned for years by Hugh Pavletich, Don Brash, the late Owen McShane, and others. Unfortunately, the Clark government refused to act in 2004 when Auckland’s house price median multiple breached around 4.5, let alone in 2007 when it breached 6.5. This is the level Dublin – Ireland’s most expensive city - peaked at before their famous crash.
The Key government had several years during which price rises took a breather, in which to act; they too refused to do so.
Now Auckland's median multiple is around 9, (the last Demographia survey said 8 and the market has inflated nearly 20% since) there are no good options. 3-4 is historically normal. Nick Smith talking now about 4 being desirable, is like the stable boy trying to put on a happy face after the horse has disappeared over the horizon taking NZ's economic future for at least the next decade, with it - especially the future of the young, and especially the future of anyone who bought their first home since about 2005. 

Yep Michael Cullen was one of the worst Finance Ministers we've had. Porked a property and consumption binge by encouraging private debt and then patted himself on the back for using the tax from that excess to pay down government debt. And now National want to walk a tightrope doing the same, but not too much, and with no more intention than Labour of reigning in either property or the banks that back it.

Bernard, you make some interesting points and of course you are right about them all but I still think your 2008 view is the one you should stick to (first instincts an' all..).
If you are saying that when prices started to fall, mechanisms would kick in and arrest the fall and avoid bank-run-like fever, then are you saying that prices would continue their merry way upwards in short order and it would soon be business as usual? The maths on that doesn't stack up I'm pretty sure. Small issues such as why would you buy in NZ when you could go and buy in nicer places etc and multipliers getting to the point where people could only dream of getting a deposit on a deposit. Of course we could just wait for real prices to drop as nominal wages rose, um, can't see that one happening can you?
The mechanisms you describe are really about saving banks while they stuff this country. Their money-creation-through-lending has created a mob of middle-class bozos and starved those people who still have a grasp on reality.
The banks have to take a massive hit, it's the only way and avoiding it and nursing us along cannot go any further. The game is over, bond markets will dictate what is about to happen and you'll be writing how you were right in 2008, you're still one of us Bernard.

just a footnote: the Reserve Bank of course didn't have their hand on the right lever, reef ahead!

 From Olly Newland's website"" whch showes that Colombo is a free lance writer who is merely trying to grab headlines.


Jesse Colombo sent some ripples through the media in the past few days predicting the end of the NZ economy in almighty bubble driven crash.
Who is this Colombo fellow?
He is a 28 year old “expert” born in Marseille, France to a French father and an American mother, and was raised in the United States, on Long Island, New York. He developed an interest in finance, economics and investing at age 15, and self-educated in those subjects throughout high school.
It appears that in the few short years he studied and successfully graduated in MBb cum laude to become Master in Bubbleology.
Below are the articles he has written on his speciality just over the last 6 months alone.
It goes to prove that if you give 10,000 monkeys 10,000 typewriters for 10,000 years they will eventually type out Shakespeare.

"12 Reasons Why New Zealand's Economic Bubble Will End In Disaster"

"A Guide To South Africa's Economic Bubble And Coming Crisis"

"Why The Worst Is Still Ahead For Turkey's Bubble Economy"

"Why Singapore's Stock Market Is At A Critical Juncture"

"How Central Banks Are Popping The Emerging Markets Bubble"

"How To Trade Singapore's Stock Market In This Panic"

"Why Southeast Asia's Boom Is A Bubble-Driven Illusion"

"Why Singapore's Economy Is Heading For An Iceland-Style Meltdown"

"Gold May Be On The Verge Of A Waterfall-Style Decline"

"Bitcoin May Be Following This Classic Bubble Stages Chart"

"Are Philippine Stocks Heading For A Bust?"

"Twitter's IPO Is More Proof That Tech Is In A Massive Bubble"

"Thailand's Bubble Economy Is Heading For A 1997-Style Crash"

"Why Stocks Are Undoubtedly Experiencing A Massive Bubble"

"Bubblecovery: Why Our Economic Recovery Is Actually An Illusion"



Of course nobody ever needs to listen to people like Colombo. Not in the US prior to 2007, not in Spain and Ireland prior to 2008.......
Colombo is all the more justified in getting up the noses of economic and socio-economic parasites and gougers like the PI class and the finance sector. It is time to start promising to jail people after the crash; the seeming institutionalising of the "TBTF" and the "bailout" principle globally is what has made people like Newland so arrogant.
As Charles Murray said the other day in a WSJ interview, these people are simply giving the Left cause to "finish capitalism", no-one believes any more that the game is not rigged in favour of the top 1%, and it is time for the restoration of a genuine free market "centre right" in politics. 

I am picking that China will demonstrate how to deal with a crash, when it comes. They will do an Iceland on a monumental scale. The greater suckers and the crazed financiers will all take running jumps. Any nonsense from them and it will be jail if not bullets. They already are jailing corrupt officials at quite a rate. Any crony capitalist in a one party State like China or Russia is "living dangerously" even if the good times roll for a while. 

dude... physics.
10,000 monkeys on 10,000 typewriters for any length of time will never write shakespeare. You never get order out of chaos.
However, 10,000 monkeys with 1 computer will type in billions of fiat dollars for you though. And that will still end in chaos.

Whistling in the dark.

Bernard........ I read your predictions in 2008 of a sharp housing decline and I have been shaking like a leaf ever since.. lYour  piece today makes a lot of sense and seems like quite a U turn in thinking but the fundamental drivers for a sharp decline in house prices still exist and it would be a perfect storm to suggest that the govt would bail out the banks.You have built up a chorus of fellow worriers Bernard but what do we do now.?

Hugh Pavletich got an excellent analysis up pretty quick on Scoop, confiming from a "structural" perspective, Colombo's analysis from a "financial" perspective.

He got it up pretty quick because he hasn't analysed anything Colombo said.  It's the same old Pavletich low density sprawl lecture with a paragraph about Colombo top and tailing it. 

As long as building costs exceed second hand housing costs then any notional bubble will not burst.
A new house, which includes the developers margin, plus 15 percent GST always end up dearer then the equivalent "used" house next door.

Something else that is misleading, is the point about "overbuilding".
California UNDER-built, but LA and SF and San Jose's median multiples rising to over 11 and falling to below 5, did MOST of the damage to the whole US economy. 
The UK has systemically under-built for decades, but that has not stopped them from having serious downside volatility periodically.

As an aside - we have about 5,000 to 7,000 too few houses in Auckland.  This is hardly the stuff that blows bubbles.  And the NZIER did a fine job the other day of saying how the building programme underway - coupled with the Housing Accord - could very well do away with that shortage, and even produce a slight oversupply of residential properties (although no one seriously considers that to be a risk with the NIMBYISM replete through-out our planning processes).
But the bottom line is this: housing shortages create a floor on how far house prices can fall.  They do not create bubbles in their own right.
And yes absolutely - rapid bursts in net migration creates excess demand which cannot immediately be supplied which drives prices up - all things equal.  But the rapid increase in house prices over the last 2.5 years proves that other influences can have a greater impact on the direction of prices than migration or physical supply.
As evidence: in most of 2011 and running until mid 2012 seasonally adjusted net migration fell and became negative.  New Zealand had strong levels of net outflows, but at the same time we had rapidly rising house prices.  Normally that would mean falling house sales and falling house prices but the inverse happened.  So what else was happening when this unusual dynamic occured?  The greek debt crisis and more QE from the USA dropped global wholesale funding costs and domestic mortage costs dropped dramatically.  The influence of interest rates is now so great (particularly when viewed in the context as the proportion of mortgage servicing costs relative to income) that it actually lifed demand and prices more than the negative impact of net migration outflows.  It is only in the last 12 months that migration has become positive (and very positive at that) and everyone points to it as a justification and safety blanket that prices are not overvalued.
In the final analysis the impact of interest rates in this highly leveraged environment is so great that IF they continued to rise (OCR plus QE undwinding and growing US and EU confidence resulting in higher offshore inflationary environment) it would have a far greater (negative) impact than the positive impact of high levels of net migration.  This would push volumes and prices down, but net migration and a roughly in-balance supply of phsyical houses would put a floor on how far prices could fall.
But as the house market crumbled and interests rates went up it would also make NZ's employment conditions relatively less attractive to Australia's - whose east coast economy seems to be where NZ's was 2 years ago.  Net migration cycles are usually fairly short - about 18 months - and net migration wont stay strong forever, eventually falling to more normal levels, or nil, or negative.  This would remove the last crutch holding up overvalued prices, and housing market activity, after previously falling and then stablising, would enter a second round of compression - which would be far more significant and detrimental to equity value of New Zealand's housing stock.
And gosh - could you imagine that if this scenario played out what would happen if it coincided with the slowing and inevitable end of the Christchurch rebuild?  It would be a career limiting decision for bank economists to say it publicly - but you can bet many worry about it privately. 

And Texas never under built or over built, their system allows them to build supply equal, in almost real time, to the rate of demand. That is the key, that the demand and supply cycles lie on top of each other, and that the supply is built at truly affordable prices ie 3 x medium multiple.

NZ property market and the banks that support it have been too big to fail for at least a decade. There was a small window after the GFC hit to rein in the credit creation of the banks but the government and the RB followed their counterparts overseas, stuck their fingers in their ears and opened the taps again. More debt to fix a problem caused by too much debt. Too big now to deflate proactively. No politician wants a crash as their legacy. Until the credit creation of the banks is reigned in it will be rinse and repeat until every last cent of income is flowing in their direction.
I made the same mistake as Bernard in underestimating how the Fed, RBNZ and government would support the banks here and postpone a rout. No question that if faced with insolvency the government will bail out the banks, OBR be damned.

I have no idea wether Jesse Colombo is right or wrong,but he has certainly being dumped on by a lot of economists in NZ,including those from theANZ and ASB.My question would be this.If he predicted the GFC what were the ASB and ANZ economists saying at that time.?It appears as though its 1 nil to MR Colombo with a possibility it could end up being 2 nil.

According to PB the reason we have high house prices is because we have too many town planning controls, including planning for where growth can occur. Apparently "Affordable US cities (all low density) function largely as a whole lot of small towns superimposed on each other." Apparently 'The Woodlands" is what we should emulate in our town planning if we want affordable housing.
So I've looked at "The Woodlands". It's a suburb 30km's from CBD, just like Papakura. Surely Papakura is a small town superimposed on the greater Metropolis? I know people who have moved to Papakura to live and work so "The Woodlands" isn't any different in that regard. Papakura population 30K The Woodlands 105k.
"...Affordable US cities (all low density)...". So obviously one important aspect of "The Woodlands" success is it's low density. Clearly there's no apartments because apartments aren't low density - except that's not true at all. "The Woodlands" has a huge amount of apartments (25% of dwellings are in mulit-unit) of a scale that dwarfs anything outside our CBD, here's a few at 7-8 floors:   
Ok so "The Woodlands" clearly doesn't have growth boundary or much control on subdivision as that's PB's main point ... except it does - it has more control over subdivision than anyone in Papkura ever dreamed of. Every single site is masterplanned by the planners and there is no subdivision at all.
Incedentally the city appears to add an extra few % GST to every purchase on top of the Govt sales taxes.
So "The Woodlands" has way tighter masterplanning and more town planning constraints on subdivision than us. It has stacks of apartments. Presumably it at least has loose controls on what you can do with your own property... except it doesn't. The controls on what you can do your own house are beyond anything our planners have ever dreamed of. It has Deeds, covenants and design review committees on every site. Want to paint your house in Papakura you just paint it. In "The Woodlands" you need the equivalent of a Resource Consent:
"Colors and materials: Exterior painting or re-staining and roof replacement require an application and review and action by the Residential Design Review Committees, prior to installation. Changes in exterior color or material must be reviewed by the Residential Design Review Committees. This standard applies to doors, shutters, trim, and changes in siding. Limited colors and selections in muted shades are strongly encouraged. Canvas awnings and roofs must be of solid muted shades and require an application and review prior to installation." 
You can't even stick up a kids basket ball hoop without consulting the rules.
So PB verbosely argues that we will get affordable housing once we go Laissez-faire on town planning and MUL's and avoid apartments, just like "The Woodlands". Except that "The Woodlands" has far far tigher town planning controls than us and stacks of apartments.
To emulate "The Woodlands" as PB advocates we would need to zone for bigger suburban apartments and have a s-load more town planing controls.

Check out the streetview of "The Woodlands" Waterway Ave where it crosses the water. It's exactly what the prosprawlers campain against - right in the middle of their proposed model of perfect town planning. It's like the Viaduct basin in Auckland, but with taller apartment buildings...

My whole point is that someone paid $10,000 per acre for hte land and built The Woodlands

"My whole point is that someone paid $10,000 per acre for hte land and built The Woodlands"  - in 1974 when it was incorporated? presumably they bought it then built it? Before hundreds of millions of $ were spent on infrastructure and masterplanning or after? 
...and how does what someone on another continent in a very different society paid for land at an unspecified time lead to you to campaigning against density and for uncontrolled sprawl for us? Neither are characteristics of 'The Woodlands".
I can see how you would look at the Woodlands having 25 out of 100 dwellings high density and look at auckland with 11 houses in 100 higher density and think maybe we should head for a similar proportion of housing typology. For starters they are paying a lot less to build and maintain infrastructure per household with those proportions (given the apartments they have require about 1/10 of the roading and reticulation of their freestanding homes 75 +25/10 = 77.5  to our 89 +11/10= 90 - we pay 20% more per household). If we wanted their household mix the next 70,000 dwellings built would need to be multiunit before we need to worry about extending the MUL. 
I cant see how you logically get from 'we should copy "The Woodlands"' to 'get rid of MUL's and high density'?

Many of us would love to build "Woodlands"...

but the median NZ income doesn't support it  (nor do our "among highest interest rates in the world" banking system)

Hi Cowboy, if we used similar methodology to how they develop land and built for example at the Woodlands, then the price of the end product would be a lot lower than how we presently do it in NZ, irrespective of the density.
This of course would result in a lower medium income multiple. Interest rates are another issue but at least the amount you had to borrow would be lower under a Woodlands methodology, so you could pay it off quicker.  
It has to be understood that what we pay for land on the fringe is linked to what we have to pay for land further in.
This link is there, worldwide, irrespective of whether restrictive zoning is used or not.
Therefore the lower the price of the starting development land on the fringe, the lower it will be going further in.
So of course the Woodlands has high density, medium density and low density. This is just the developer building for what the market wants, but of course he can offer all forms of density at a lot lower price they we presently can.
Rural land is artificially inflated in value because of the likes of MUL’s. It was bare land prior to being rezoned, and is still bare land afterwards (prior to development), but the value has increased from say $50,000 per ha, to $1,000,000 plus per ha, for no added amenity value. There is no need for this to happen. 

demand will push up prices anyway.   with regard to rural land, it will make the 50k/ha suddenly 200k, and 400k as people start land banking the fringe areas.   It also means less farm improvement will occur within 20-50km of a city/town as the owner will know that soon they can sell to developer or banker.  (and actual farming business will be pathetic yield compared to straight cap gain....speaking of which people - still asking what a farm (dairy) should be worth as a business, with NProfit of around 30k.  (ex tax, inc dep & 15k int)

Sadly if we used a lot of methodologies that made sense, rather than the exist system, the price of the end product would be lower.   Thus the important thing is not looking to places like Woodlands and Houston and saying "if only"...but to find and confront those that are deliberately using influence and political means to profit unethically.  (hopefully this will also similar uncover those who push councils to meet ridiculously expensive demands).  Until we can unmask those individuals, no solution can reduce prices, they will simply be blocked (and usually after the supporters have wasted money/time chasing the wild goose)

But can you build another Papakura or Woodlands in the lifestyle block only zones around Auckland? PB argument is you can around Houston but not around Auckland. This lack of competition/ crony capitalism is the fundamental problem. That is why you can buy a house for half the price in Houston compared to Auckland. It is basic economics and mostly the people who don't get it seem to have an incentive in not getting it.

You mean the Papakura which is monozoned sprawl? - why don't you advocate zoning Papakura so that it can have apartments in a similar proportion and scale  to "The Woodlands" ?
Why just pick one typology out of "The Woodlands" mix and advocate that we should only zone for that? 

Has the last bear thrown in the towel to signal the end of the suckers rally and the beginning of leg C down in the ABC correction?
I agree that the article was a bit sensationalist.
One thing surprised me, a claim that finance is NZ #1 industry.
Checked the GDP figures and this is actually not true. "Financial and insurance services" are slightly smaller than agriculture (both around $7B). Manufacturing is #1 at $20B. Quite a few are larger including retail, wholesale, media/telecomms, real estate, construction...
See table 26 in the link above.