Bernard Hickey cites new research showing that bank leverage for mortgage lending has increased dramatically since new Basel rules in 1989

Bernard Hickey cites new research showing that bank leverage for mortgage lending has increased dramatically since new Basel rules in 1989
derived from a chart first published by The Economist

By Bernard Hickey

Why are house prices so ruinously high in New Zealand?

It is the question everyone asks every day in one forum or another. Is it too much migration or to few controls on foreign buying?

Bank executives certainly mused this week in a KPMG report that these foreign cash buyers were pumping up asset values.

They seemed most disappointed that this surge in demand did not involve a loan from a bank.

Is it not enough houses built in Auckland?

Reserve Bank Governor Graeme Wheeler made that conclusion in a select committee hearing this week when he concluded that a lack of new dwelling units, particularly in high rise apartment blocks in the leafy suburbs of Grey Lynn, Ponsonby, Parnell, Mt Eden and Epsom were responsible for the dangerous over-valuation.

He said NIMBYs (Not In My Back Yard types) should be put back in their boxes.

Is it way too many discounts from banks on fixed mortgages or Is it the lack of a capital gains tax?

Andrew Little has concluded the mere mention of a capital gains tax is too politically explosive to be associated with when asking for the right to govern and John Key certainly leapt on the opportunity to paint such a tax as an un-New Zealand death duty that most New Zealanders would reject as an unpatriotic attack on a sacred New Zild right of wealth creation.

So New Zealand's policy makers have decided that even if a lack of a capital gains tax is the reason, it's too sensitive to touch.

All of these reasons for over-valuation may be true and are certainly part of an intense political and economic debate New Zealand has had for years.

But what if the reason was closely connected to a bizarre European city that is about the size of Hamilton that no-one has heard of?

Maybe the astonishing valuations of Auckland houses have nothing to do with the fundamentals of supply of housing and demand of incomes. Maybe they're all about the ability to borrow more money to bid up prices.

That's the deeply disturbing conclusion of a an explosive new academic paper by economists from the US Federal Reserve and the Universities of California and Bonn.

They argue that banks have been lending much, much more to buyers of houses since 1989, which has contributed to the amazing doubling and trebling of house prices since then in most developed countries. It's the 'blame it on Basel' theory.

This Hamilton-sized city is situated at the point on the European map where Switzerland, France and Germany conjoin. It's the place in the world of financial diplomacy where bankers of the world get together to decide the rules on how much capital banks must put aside to back loans they make to all sorts of customers.

In 1989, the Bank for International Settlements (BIS), which is based in Basel, ruled that mortgages were the least risky form of borrowing and therefore banks had to put aside the least amount of capital for these loans.

The argument was that home owners would of course pay their mortgages first, which meant these loans would be repaid first and therefore banks could leverage up for mortgages. The end result of this piece of financial bureaucracy was an in-built bias in favour of mortgages.

It meant that banks were biased in favour of loans to home buyers, rather than business builders.

They offered lower interest rates and friendlier terms to home buyers rather than business builders.

The result was a sharp increase in the proportion of lending to home buyers, rather than business borrowers, since 1989.

The ratio of mortgage lending to GDP rose from two times GDP in the developed world in the late 1980s to about six times GDP now. Think about that for a moment.

Banks were prepared to lend three times as much for the same piece of property and the same income attached to that property as before 1989. Nothing had changed apart from the signal from the regulator and lower interest rates. New Zealand is part of this trend.

Reserve Bank figures show the proportion of lending linked to mortgages has risen from close to 40% of lending in the early 1980s to closer to 60% now.

This is a crucial piece of financial arithmetic and will no doubt factor in the thinking of the Reserve Bank as it considers new Macro-Prudential measures to slow mortgage lending, on top of the high LVR speed limit.

All around the developed world, central banks and financial regulators are grappling with this historical accident linked to the city of Basel. Many are trying to unwind the Basel experiment.

We will find out in the months to come if the Reserve Bank is as committed to reducing the leverage in New Zealand's banking system to mortgages.

Meanwhile, the debate about housing should include the questions around how much money banks pump into property.

-------------------------------------------

A version of this article was first published in the Herald on Sunday. It is here with permission.

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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Mortgage lending is about 6xGDP, am I reading that right?
Obviously if you reduce the interest rates, you increase the amount people can borrow.  Though unless there is more to the story I don't see how business lending could be effected.  For the banks it's not a trade off or zero sum game, they don't have to cut back on business lending in order to allocate more to housing.  The bank never runs out of money. 
 
There is also a cultural shift from people viewing a house as a home, to viewing a house as a financial asset, which they are.  Even if you forget about capital gains, the rental yield on property has outperformed every other asset class, and continues to do so, add in capital gains and the ability to use leverage and you have an attractive asset.  Even in that scenario though, Auckland housing is still overpriced.

Mortgage lending is about 6xGDP, am I reading that right?
 
I think you may wish to revisit that thought with a view to equating the current capital value of the housing stock as a mutiple of GDP.
 
The ratio of housing mortgages secured against a portion of that stock is closer to one dependent on whether the GDP divisor is adjusted by NZ Stats deflator data.
 
You can review the RBNZ mortgage claims data against the latest.nominal and real GDPE release.
 
What Bernard is driving at is the much lower level of regulatory capital banks have to set aside as a percentage of residential.household mortgage assets in relation to other forms of lending - hence the former is more profitable and executed on a growing scale.
 
The RBNZ Banking Supervision Handbook link references the various the regulatory documents. As a starter page 47 of the Capital Adequacy Framework (Standardised Approach) sets out the capital risk weight adjustments that apply to different bank asset types including residential mortgages.
 

I would also add that farm lending even though it is riskier has also crossed the rubicon into uneconomic territory.  Returns on capital are so low I wonder why people would ever want to own a farm. 

House prices are inexpensive in Gisborne, Wanganui, Palmerston North, Hastings, Invercargill, Timaru, etc. in fact many of these places have falling prices. 
If interest rates were mainly to blame for the Auckland housing bubble then UK, USA, Canada, German etc house prices would be far far higher than they  currently are  as mortgage rates in these countries are from 1% to 4%. Their bubbles are no greater than NZs.  So interest rates are not the driver. 
If the OCR was hiked to 6% and mortgages were 7% it would have little effect on Auckland housing prices.  
 
 

I strongly sustpect it is not just about mortgage rates but also momentum. The majority of money in the modern economy is created by commercial banks making loans (http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/... ). So if house prices start rising, banks create more money/debt fueling further rising prices. But if there is no price inflation then banks will not approve larger mortgages for no good reason. This is just my theory (so it could be crap) but it does explain why we see rising house prices in Sydney/Melbourne, Toronto/Vancouver, London but falling prices in the provinces of NZ, Australia, Canada, and the UK. Foreign investment is another hypothesis for this phenomenon (or perhaps a combination of the two). However, if anyone has a link for a solid explanation of this (rising prices in big cities with falling prices in the provinces on a global scale) I would be most interested.

Agreed Bernard, you could add to that the other systemic conflicts of interest the banks have sprinkeld into the stew by relaxing policy on:
Independent valuations which aren't. When I was a lad buying my first house..not that long ago either, the valuer was instructed by the bank, not the client (nor were they tame valuers pushed forward by agents).
Financial 'innovation', in the repackaging of debt into vehicles that remove the risk from the Lender, the result of which we saw in 2007/8, and which continues apace.
Deregulation of LVRs over 65%.
Basing lending decisions on whole household income instead of the main earner/applicant income only. In the case of the latter, affordability on the North Shore (as one of the worse exmples) would jump from 100% of income to about 165% of income (ever had a partner out of work or pregnant?).
Administrative direction of market pricing, instead of free market price discovery.
And who has been put on the hook for all of this? The sensible people who live within their means and save, forced to lend to banks at more or less zero return after inflation, whilst still shouldering the banks risk of failure.
Anything that can't continue, won't. One area that may spoil the party for banks is disintermediation. Peer to peer lending is a tiny but fast growing part of the market. Technology savvy gen x-ers and later will be quite comfortable making their own lending decisions as more platforms become available, without the 'expert' management offered by the banks, much higher rates of return even after risk adjustment.
 

Problem solver
Interesting point on peer to peer lending. The trouble for the PTP lenders is that the sorts of loan to income multiples they have to be compete with at the banks are not sustainable or economically viable for a normal investor without the defacto government guarantee that the banks have.
cheers
Bernard

Nearly all banks now insist that they choose the valuer or even use their own valuers.
However it works ot that whether the valuer is independant or "in house", the figures are about the same so no advantage has been achived except annoy a lot of independent valuers.

First I've heard of it.  Maybe they are just covering their arses so when someone inevitably asks why did you lend me 700k for a 200k house.

Not really. See my other comment on this matter.
Only time Banks tend to select valuer to use is when is going to mortgagee sale so a reserve can be set and they want to know what haircut they might be taking.

"So New Zealand's policy makers have decided that even if a lack of a capital gains tax is the reason, it's too sensitive to touch."

 

No. It's because places a cost across any whole industry doesn't reduce the cost or create competition, it just results in the prices being passed on to consumers.

 

 

"Maybe the astonishing valuations of Auckland houses have nothing to do with the fundamentals of supply of housing and demand of incomes. Maybe they're all about the ability to borrow more money to bid up prices."

 

Except the bank loan information _doesn't_ support this, as much new lending is done offshore and arrives in NZ as foreign exchange.  Just as private lending is good but not that great that if supports that argument.  Lower rates aren't sustained or reliable so those resident NZer's who would bid higher still can't manage the service cost.   The lack of incoming property means a "deflation-style" wait-and-hold approach is very effective, as is the option of NZ and foreign related loans using the property as security for equity release.   Works like this:  borrow money offshore, pump it into a relatives or alias account, enter NZ with enough cash to get the OIO salivating, buy property or other highly leverage asset,  pull money out using loan (or loan/buy/sell), take freshly laundered cash, pay some of original loan, purchase more leveragable assets in auckland as security. wait and watch demand drive up your portfolio worth.   Sell to others doing same scheme.  pay off to 80% original loan, original lender writes of unpaid 20% as tax loss, pocket profit and use it to lend to yourself as original lender for next cycle.

Hehe I think annoying valuers would be a good thing BigDaddy, they hate having their authority and ethics questioned, and that partly is the problem. Valuation works on comparable valutions, based on sales evidence, as you know; as long as a good portion of the valuers in the market have a conflict of interest, nearly all valuations will be using the same comparables . As an ex valuer,  I represented hundreds of valuation disputes at tribunal, and I never lost a case; even statistically speaking there has to be something wrong there?! But what if you changed the legal methodology where the valuation is based on the lowest of 5 sales over a minimum 12 month period, or 3 sales over a minimum 24 mth period, or the average of 10 sales over a minimum 10 year period, pick your methodology to support the price you want to see, very different results I'm sure you'd agree. Clearly valuation now is tipped in favour of inflation, but it needn't be that way. The valuers defence is that they don't make the prices, they are simply observing a transaction between willing buyer and seller, but as soon as the valuation report is out, the chicken is used to define the egg.

It was too easy to get "indpendent valuers" to add 10% on top of the valuation of properties when someone was going to the bank for a property loan.  By adding 10% to existing bricks and mortar, that gave security to the bank to lend that little bit more (ie 10%) which would then be bid/improved on the property.  Since the sale/improvement price then rose 10% the valuer wasn't actually being unprofessional or criminal, but it did mean that some less reputable valuers and bidders could take advantage to that process, (and also then reselling to themselves or related party) at a loss, take the tax write off, then repeat the process ... starting with selling the suddenly low value property (by getting a favourable valuation)...

Come on people.... that's exactly what started the 2006 Auckland/NZ property boom.  It's classic you-need-to-know industry information.   And why the valuers, real estate agent, and financier got jail time for this systemic rort.  (it was legal just unethical)

Things have changed Cowboy. You need to get up with the times in regards to residential valuations.
Now most, if not all mainstream banks have to use an indepentant process like Property IQ to arrange valnuations. The bank requests a valuation and Property IQ allocates out the RV to a pool of valuers in the location of the property so the bank or client does not know or able to influence who will do RV for them.
From my experience this annoys clients more who can't use their favorite valuer.
The whole process creates transparancy that may not have been there in past and has been driven by Australian  regulators (due to Australian ownership of most NZ banks).
 

Like fire needs three things to exist -heat, oxygen and fuel. Property booms need a range of factors. Easy credit is just one of them. The elasticity of the property market is another factor i.e. whether the easy credit translates to higher prices or more construction.
 
This was discussed by me in this weeks "Loss of Hope" article.
 
The important question to ask is why was it that easy credit in th 1930s doubled UK's homebuilding rate in a space of a few years but the recent QE has not had the same effect? Why does easy credit in some parts of the US induce more homebuilding and in other parts it creates a price boom?
 
In what way is the transmission mechanism between the finacial industry and the real economy broken?

broken because real economy requires consumption by consumers.  consuming is bad for the consumers own profits (it's better to invest in financial returns than to consume).

Everyone wants to invest, no-one has much money, and the consumers are going happily broke sucking up enough Greek-style credit supplied by hopeful German-esque investors to keep the wheels turning.
 That system is itself broken.   It is based on the idea that consumption is from _excess_ produce, and the expenditure is done from own stored surplus.  Credit and debt-money has destroyed the system (it's running on crack-cocaine)

Bernard I would not characterise Andrew Little's attitude to capital gains as some sort of third rail issue that cannot be touched. I think he is more subtle than that.
 
I believe Andrew Little is of the opinion that Labour has not explained to the public how capital gains is the cause of unafforable housing. Much like your fingering the blame on Basil banking rules, the explanation is full of holes.
 
I believe the NZ public want a return of an affordable housing market and are waiting for politicians to give them a clear and logical explanation of how that can be done.

I think the political answer has been to build moar houses, we are starting to see that, these things take time though.  With house prices at record highs, developers have all the incentive they could wish for.  They live for times like this.
 
Watch this space.

I think you are right skudiv building more houses of some form or other seems to be the political answer in NZ. I of course believe that is the correct answer and think the politicians should be more committed to the process. Waiting 7 years is a long time....

you can add a term from labour really so 10 years.
 

That is a shallow and wrong assumption about developers incentives.
In fact it is the price of SITES where all the costs are.
Development is a high-risk mug's game. The developer has to pay the site vendor, upfront, a cost that already incorporates the inflated housing prices that will be developed on it.
The cost of the site, and the finance costs of carrying this, are easily 10 to 20 times higher than in undistorted markets. When "house prices" have doubled or trebled, what has happened is the land costs have gone up 10-fold or more.
This is crucial to understanding why housing markets distorted in this way in the long term, have less and less "supply" response to demand-driven price shocks. The Poms have been at it the longest, and their elasticity of supply of housing is "0". That's right, it is undetectable in the data.
Higher than "1" means you will have housing affordability. The famously affordable US cities do have elasticities ranging from a bit above 1, to well over 2.

Do the Central Banks of China or Japan pay any attention to what the gnomes in Basel say?
 
Wouldn't think so

In the early/mid 1980's we had stamp duty if I remember correctly of about 1.5% of the value of a house purchase price and that could easily be reactivated by the govt, although hefty stamp duty on property sales and capital gains tax have not stopped house prices surging in Sydney and Melbourne. Back in the 80's you had to take out a principal and interest loan with a term of 20 or 25 years and actually pay your mortgage off. Now most mortgage lending is on an interest only basis and it is the banks who are at fault here. They also used to only lend to the level where your repayments would be no more than 30% of your income and you could only borrow two thirds of the purchase price. Now if you have equity in the family home and/or other rental properties you can borrow 100% of the purchase price at 5.29% fixed for 5 years and on an interest only basis, even if you are in your 50's or 60's. This is why investors in their 50's to 60's are having a field day buying up property and without competition from the pesky first home buyers who have been shut out of the market by the LVR rules. Add to this the current migration surge, Kiwis moving to OZ now out of favour and investors fed up with 4% before tax on their term deposits and it is no wonder property is the most favoured investment.

80s - a 15 year term was common. 
Not sure whether most mortgage lending is interest only - certainly not owner-occupied. 

How do you come to conclusion that most Lening is Interest Only?
Also you claim that you could only lend 2/3 of a properties purchase price is misleading as there was a whole range of sources where you could lend more than the banks retriction of either 66% or 75%. Second and third mortgages on property were not uncommon. from likes of building societies and solictors nominee mortgages. Most lenders now have no idea in regards to calulating lending valuers or how to document second and subsequent charges.
Now if the subsequent charge on property is taking you over 80% LVR you are in breach of the RBNZ LVR speed limits.

So long as building costs esculate as they are doing now, house prices will follow upwards.
Recent report suggest that building costs have increased by 20-50% depending where you are.
There is no sign of costs falling, quite the opposite, so house prices look set to continue rising.
 

Your logic is outstandingly  bad.
but you carry on praying.
 

Bernard asks - Are not enough houses built in Auckland?
 
 
Strewth, try finding an old knock-over pull-down hovel (within 40km of CBD), establish how much you will have to pay for it, add the demolition and clearing costs, then get a quote from a builder for (say) a single level 150 sqm compliant new-build
 
That will answer your question - you have no idea
 
Who is going to undertake a new-build when the end product is almost un-saleable without incurring a loss - certainly not spec-builders - so who is going to build them?
 
It is pointless sitting in Wellington and saying - not enough are being built in Auckland

Top insight, Iconoclast. I only just spotted it - note my preceding comment up above in reply to someone else, where I say: "Development is a high-risk mug's game. The developer has to pay the site vendor, upfront, a cost that already incorporates the inflated housing prices that will be developed on it."

Get a load of these auctions this weekend in Melbourne - ballistic - due to interest rate cuts
 
$1 million above the reserve for one ordinary house
 
What's coming to Auckland - and it is coming - watch the video
 
http://news.domain.com.au/domain/real-estate-news/reserves-smashed-on-melbournes-recordbreaking-weekend-of-auctions-20150228-13rkmz.html

"Due to interest rate cuts".  That is an unproven statement repeated from some media. 
If interest rates were 100 bps higher there may no difference. 
A number of factors: City focussed country economy, immigration, international students, foreign money indirectly financing purchases, investor buying from equity, tax shelter for trust assets, etc. 
I interest rates are a minor part of city housing booms. Check 2007 stats when rates were 11% 

Brenden pointed to some interesting research on low interest rates actually that seems to "prove" it.
http://www.voxeu.org/article/monetary-policy-and-housing-prices-lessons-140-years-data

Interesting article.  Their research of comparisons is difficult when each 5 year period contains many different variables as well as interest rate levels.     
The Greenspan 2001 to 2005 period definitely had lower interest rates as a driver.  Murkier now with lower rates but less exuberance, but more foreign investment influence.  
Anyway, nicely APA referenced! Lol.  

It is difficult by the looks of it, and especially to get robust data, so many variables, laws etc.
What is interesting is that if it had been land contriants (or if it was a significant factor) I would have expected it to stand out like a sore thumb, doesnt appear so.

Because the authors never even consider any of the variables that would make it show up, that is why. Like the price of land per unit of space. This variable is irrelevant????? DUH!

That is probably the paper referred to by Bernard in his article.
Here is a communication a few days ago from someone I correspond with on this whole subject:
Oscar Jorda presented a paper entitled “Betting the House” at the conference I attended at Princeton yesterday.  Jorda is apparently well regarded in the US, and is currently at the San Francisco Fed.  He blamed the massive escalation in house prices in places like Ireland, Spain and the US in the pre-GFC period on undesirably low interest rates (in the case of Ireland and Spain, interest rates set for the largest economies in the Eurozone, such as Germany, but far too low for Ireland and Spain). 
Michael Bordo, a highly regarded economist at Rutgers, raised a number of concerns about the paper, including the role of supply constraints in pushing up house prices, and from the floor I noted that the US provided a perfect real-life experiment – cities which had tight supply constraints, like San Francisco, saw a huge escalation in house prices pre-GFC while cities like Houston, without such constraints, saw very little in the way of price escalation.  Economists should understand that stimulating demand (through undesirably low interest rates) should not in itself cause prices to go up – that only happens when supply is constrained in some way.  (Low interest rates did not cause any increase in the real price of, say, cars.) 
There were plenty of economists nodding agreement.  Jorda’s rather weak response was that, in time, those cities with tight constraints would be obliged to release more land but there seems absolutely no reason why that should happen – there is just an enormous vested interest on the part of property owners in, say, San Francisco, to prevent such additional supply of land.

The Jorda, Taylor and Schularick paper is so statistically unscientific that one wonders if it is deliberate smokescreening on behalf of the one-percenters who want to see the racket in urban land maintained.
The following stand out like a sore thumb to me:
1) They only analyse actual "boom phases", like a medical study using only victims; which completely misses whether far larger numbers of normal healthy people might be subject to the same "causative" factors without succumbing. 
2) They are silent about the obvious correlation (pointed out at the actual conference I refer to above) between immunity to these price bubbles, and healthy housing supply undistorted by planning mandates. 
3) They make no distinction in the history of credit expansion related to mortgage debt, between periods of zero-sum inflation in price of existing owner-occupier stock, and periods of rapid growth in home ownership associated with the construction of large amounts of newly-affordable housing, as in the 1950's and 60's. In the latter case, there was no destructive "bust". It is obvious why: there are major multiplier effects in the real economy from building houses (versus merely inflating the price of existing ones); and the mortgage repayments involved are in most such cases, merely a replacement for rental payments, NOT an added burden from simple inflation of the amounts needing to be paid. 
Why does a non-entity like me spot this instantly, while x-spurts like Bernard Hickey don't get it, and don't get it, and don't get it, for YEARS while these issues have been urgent and topical? Bernard: are you simply too proud to admit: Hugh Pavletich has been right all along? For some reason it needs people grounded in reality, to spot the emperor's lack of clothes, or the elephant in the room; x-spurts seem to remain stuck in angels-on-pin-head arguments somewhere up in their ivory towers.

Brendon I think.
However the original paper is or appears to be of an academc level of inquiry (I need to re-read it in my offtime). Where the critques of it from the ppl you point to do not backup/sunstantial their claims, and neither do you actually. 
So its fact and math v opinion(s) with no substance.
In terms of San Francisco v Houston the paper also commented on the probably essentail use use of macro-prudential tools in the future, which Texas has (80% LVR).   Texas is also a low wage state V in effect silicon Valley. 
They do not appear to comment on the land supply issue, but another paper I have read did commenting that in the long run this factor corrected out.  ie bubbles burst.
So really you need to be pointing to work based on real research to back up your claims, which I note for 5 years you have never done.
These papers are also 2014 and show a level of concern so I suspect we'll see more and more real academic papers in this area blowing out the political derived opinions.
I look forward to real research.
 
 
 

Steven google Joseph Stiglitz (left leaning nobel-economics prize winner) and Piketty and you should get a Salon article where he fingers real estate price escalation for the growth in inequality that Piketty has highlighted.
 
This seems to me to indicate something is not working in the real estate market. Not that interest rates have been too low or credit has been too easy.

Surely the original paper / writers would show some comment if across all the years/decades and countries they looked at land restriction was a significant factor? Instead they came out looking at macro-prudential tools.
I am a bit concerned that they highlight/finger low rates but dont really discuss the immediate effects of too high rates.  Now in fairness low rates should have been used as a stop gap while teh issues were resolved, instead it is used as teh only "cure"
I dont disagree with Piketty and JS overly much on high house prices (and indeed other assets amd commodity) manipulation increasing inequality, but that isnt identifying the cause and addressing it, it is saying its bad.
 
 
 
 

The original paper did not disprove land supply issues, it did not consider them at all; it did not even attempt to isolate any variables that might point that way. Such as the price of land per unit of space. And see my longer comment just above. 
50% or more of the mortgage-debt-run-up periods they should be able to identify, did not have a damaging bust afterwards. By including only the phases with busts in their algebraic analysis, they are able to claim "credit expansion did it". But what about the decades of growth in mortgage credit with no bust? The correlation with an increase in home ownership from a very low base, and with falling prices of space, would be a slam dunk. But you don't look for slam dunk data when you are out to smokescreen for a racket. 
I would say the best way to decide whose peer-reviewed papers are likely to be the honest ones, is whose most serve a major vested interest/wealth transfer? 
There is already a Bank of International Settlements paper "Can Non-Interest Rate Policies Stabilise Housing Markets", that finds in the conclusion:
“…..None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices. This has implications for the degree to which credit-constrained households are the marginal purchasers of housing, or for the importance of housing supply, which is not explicitly considered in this Study……”
At least that is one paper whose authors admit "we didn't look at it, and it might just be the deciding factor"
 

Texas is not a low wage State. It merely prices its housing so people of all income levels can live there, and the industries that can employ them, can locate there. 
"High wage States" merely exclude lower income earners and the industries that would employ them. Easy. But nothing to do with how to universally provide for actual wealth creation and social justice. 
And see:
http://www.businessinsider.com.au/houston-best-city-in-america-2014-6#it...

I also published the link for a critique of that article. Voxeu review all comments/critiques for academic validity so it is worth a read.

Great search function we have....
URL pls?
 
 

I don't know what it is about this site but it will not let me put up URL but if you go to my Loss of Hope article it is the next link after the Jorda link.
 
This discussion confirms my argument that there is no consensus at the expert level.

I think you mean this?
http://www.voxeu.org/comment/105240#comment-105240
however again its isnt a peer reviewed paper but an opinion, funny thing but when you follow it back we get to the same dogmatic ppl "its the land limits" etc etc

Very few comments are accepted to Voxeu because there is a review process. They don't accept dogma -you need a rational argument that is supported by good source material.

The comment by itself it just that, a comment. It has no references, data and is not a paper of same quality, ie I see no supporting documentation of his claim9s).  Now if the writer puts up something that goes through such a process I'll happily read it.  What I find interesting is there appears to be no such papers.
Anyway to sum up I am far from convinced that un-restricted building is the or only answer.  It may however be the least politically hot one.  On top of that we can see in the USA that over-building like over-drilling of oil and gas can in itself cause huge issues and losses.
Lets take that a bit further, the result of over-drilling is a 50% collapse in the oil price. Do that to housing market and that will cause an OBR event bankrupting us potentially as a country.
 
 
 
 
 
 

Steven, the original paper itself isn't peer reviewed either! It is a discussion paper.
I have given you plenty of references over the years to peer reviewed papers that say "supply of land for housing matters". You are just a typical selective-criteria stooge for the gougers. It ain't half obvious.
Even with peer-reviewing, it depends who the peer reviewers are; you can get published, peer-reviewed papers saying the opposite thing; this is how science and economics progress - airing of all views and a contest of hypotheses. 
If the critique holds water, then the original paper's peer-review doesn't mean much, does it?
I can guess whose side you would have been on back in Galileo's time.

If you look at it you can see considerable research has gone into collecting the data, sifting through it in a robust manner on this doecument etc.  You can also see there are some real academics as authors, hence this paper carries considerable weight for me on first reading.
All you have supplied over the years is lots of opinions from ppl who's academic background is questionable to say the least. Someone politely described some of the work your authors have done as "simplistic".
That doesnt mean they are wrong, but it doe mean you have to carefully look for bias and other supporting papers that concur to build an independant weight of evidence for an alternative view.
Now its quite simple for me I do not intend to take anything an idealouge such as yourself says at first sight, its been more than proven for me you cannot be trusted  to give real information/true information.  Of course that is only me.

Ad Hominem ad absurdum

I look forward to your letter to Paul Krugman telling him his academic background is questionable.
 
So just to remind you Krugman's speciality is economic geography and his Nobel laureate is for work on international trade.
 
While I don't agree with all of the analysis in this post Krugman is very clear that elastic supply of housing is the key to robust economic growth in the US South. And that it leads to lower costs of living.

Steven you, Bernard and Jorda do not have an answer for the obvious question. The one I put at the top of the comment stream.
 
Why did easy credit conditions in the 1930s when Britain left the gold standard mean house production doubled within a space of a few years while today QE has not caused a similar response?
 
Why does easy credit mean some cities in the US boom in price while others increase in house construction?
 
When people avoid answering obvious questions it makes me doubt what they have to say.

Clarification
When I refer to interest "rate cuts" I am referring to the Reserve Bank of Australia which cut interest rates for the first time in 18 months on Tuesday 3rd February 2015
 
The cognoscenti are demanding another rate cut this coming Tuesday 4th March to 2%.
 
From 14th January through 14 February the "smart money" drove the ASX200 share index up 10% (in one month) and, in the next 14 days, another 2½% to a 6 year high. A spectacular rise of 12½% in 1½ months.
 
As for property, you can follow the feverish activity in the Fairfax press
 
It's behavioural in the short term. The smart money is betting on another rate cut in March and exiting fixed interest securities and rampaging into property and shares. Mortgage money is currently being offered at 4.3%

The housing bubble in Melbourne and Sydney is driven by many factors.  Interest rates are really not the main driver.  

Exactly! It is all about demand versus SUPPLY as dictated by planners with no more clue about economics than those who wrecked the lives of millions of Russians and Eastern Europeans.
While low interest rates were getting blamed for California 2000 - 2006, Australia and NZ were having equally as absurd a price inflation, with interest rates 3 times as high. We just haven't had our bust yet. When we do, we will wish we had got it over with in 2007, instead of the establishment using every dirty trick in the book to re-start the bubble. Like changing the immigrant investor criteria to include property, and like NOT insisting on reform of council planning, which was freakin' obvious in 2008. The John Key government are traitors to ordinary young Kiwis. I still don't believe they really mean to restore social justice in housing; the reforms so far are all perfectly hijack-able by the vested interests. "Special housing areas" - BAH. A cronies, rentier's paradise. 

The evidence of the government's lack of commitment to affordable housing is black and white. Their own Productivity Commission told them in 2012 that the main cause of inflated land prices in Auckland is the Rural Urban Boundary.
 

  • Has the government passed legislation banning RUB's? No
  • Has the government submitted on the Proposed Auckland Unitary Plan against the RUB? No.

 
Quod erat demonstrandum.

Recently I have been educating some younger nurses I work with about the Peter Ellis Christchurch Creche case. Lending out my book 'The City Possessed'. Peter served time for NZ's version of the global playcentre abuse hysteria of the 80s and 90s. Very few people now consider him guilty because of the flaws in how the children were interviewed. Basically the kids were repeatedly question until the produced the 'correct' response. There were further filter processes so only the most believable stories were presented to court.
 
Logic, reason and common sense was lost -it was a modern day witchhunt.
 
We are doing the same with our residential land supply market. The process to find what is the cause of unaffordable ignores evidence that it is restricted land supply -that is not the correct response. 'Interviewing' must continue until the correct response is found.
 
Again logic, reason and common sense is being ignored.

Oh dear, or it isnt the issue. "we'll keep the beatings up until you accept our point of view"
The problem is "common sense" often isnt.. That is why academics publish  work in a peer reviewed style/methos so their logic and evidence can be picked over that way as far as possible they ensure the work isnt biased and wrong.  Now Im not saying its perfect, but its the best way yet to enhance our learning.
If you have the time (58mins),
https://www.youtube.com/watch?v=LNPRgR-2o-A#t=2493
You may understand more of where I am coming from.  Not on these particular subjects but the goings on to debase science due to idealogy. 
Now as a Mental Health nurse consider that we dont do electric shock treatment carte blanche any more  (at all?) or various other physical tortures to try and make ppl with mental health issues better.  We have moved out of the dark ages somewhat, Im sure we can do better but that is always the case.
Wierd thing when I worked in a MHU 2 decades ago were wards full or rows of such machines, quite frightening really.

Steven the support for doing something about land supply is not from a few whacko's. There is major support from various academics, including now Stiglitz, people in the development industry and in NZ the Productivity Commission as Kumbel states found against the Auckland RUB. Why is this evidence being ignored?
 
P.S ECT is still done, it is not common but it can be very successful in treating major depression, especially in the elderly. I recently saw it work with a Canterbury farmer when all other treatments had not, it has allowed him to return to his farm. Modern anaesthitics have made a big difference. The main side effect to consider is short term memory loss but this is probably less of a side effect profile compared to long term use of anti-depressant tablets.

I expect you don't think we should be carving up rural land for foreigners to buy up, now, are you?

Don'tgemegoing personally I am against non-citizens and non-residents buying land and believe that immigration could be lower but most of our immigration movements are outside of our control. Australians including over 1/2 million kiwis resident over there have free movement and family ties immigration is not something that can easily be slowed/stopped.
 
NZ's natural population growth is leveling off and the years of massive % increases in population are behind us.
 
But even if NZ had zero poulation growth we need the right to build on rural land to cope with internal migration and for disasters, like coastal changes, earthquakes and so on.
 
Regarding how much rural land will be consumed by urban areas. In my neck of the woods -Canterbury -it is the size of the Netherlands, which has 17million and we have less than million. We might one day get to be the size of Adelaide and still only have 10% of the population and urban areas of the Netherlands.

Steven re the youtube video. I didn't have time to watch all of it. But I accept the market failure of businesses/customers not paying the full cost of environmental externatities. I think NZ has an opportunity to move to a carbon free economy and we should be encouraging that as one remedy for a certain type of environmental externatity/market failure problem.
 
But there is another market failure in NZ and many places globally and that is in monopolistic land supply for urban areas. I believe we need to correct that market failure too.

Steven never learns anything that is a basic principle of economics no matter how many times you explain it to him, no matter how patiently.
Like: got an unpriced externality? Price the externality.
Simple. The only reason for using something like land rationing instead, is to set up wealth transfers to the vested interests who support the advocates of that policy approach in the first place.
 
Eco loonies like to think they are on the side of the little people against the evil big-moneyed interests. Actually they are the biggest useful idiots in political history, to the biggest vested interests in political history. 

The problem is real economics isnt a basic thing, it is way more complex.  All you explain is your simplistic economic view of the world, which persoanlly I do not consider based on reality.
 
 

And yet the best economics (like the best science) can be expressed very simply. In the case of affordable housing you only need the economics fifteen year olds learn at school to understand why rationing rural land for conversion to housing leads to sky high house prices.
 
Most of the arguments we end up having are along the lines of
 
1. There are other supply side problems so it's not land cost (yes there are, but none of the costs of processing consents or inefficient construction add costs to houses the way overpriced land does)
 
2. It's demand not supply (cutting immigration, foreign owner registration, CGT won't make any difference to prices, LVR's haven't made a blind bit if difference either. Lifting interest rates would make a difference to demand but don't expect any gradual lift in interest rates to have much effect on prices in Auckland.)
 
But no-one has really ever had a go at knocking over that basic premise: rationing leads to extortion.
 
And then many millions of words are poured out over the best policies for getting house prices back down. Remember that the outcome we advocates are calling for is that the middle household be able to buy the middle house in any market for no more than three times their annual household income. Our politicians are currently trying to co-opt the "affordability" word to mean the thin slice of housing just above social housing. We mean everything.
 
In this world heuristics will do. I don't need lots of peer-reviewed academic papers to tell me what I can see with my own eyes. I will listen if anyone wants to convince me that enabling developers (whether private or public sector) to buy rural land at rural land prices for conversion to housing is not the highest priority policy to achieve the outcome I have defined above.
 
There's a chocolate fish in it or a beer for anyone who lives around Christchurch.

How much of the rural land are you talking about?
And why shouldn't immigration and foreign buy up of land be controlled, to better suit the citizens of a country? We wouldn't be the first to see the harm that can come from an open door policy. And while we are here, do you have any idea what sort of numbers you think we should "grow" our population to until we have an optimal number. A few years ago it was 5 million, we are just about there, so we should be just about right, shouldn't we?

There is no "should" about population growth. Demographics is a given like the length of the day.
 
As for immigration. You could have zero but during four of the last ten years our population would have shrunk even with all the babies being born. Think of immigration as an insurance policy that stops us from having recessions just because a whole bunch of Kiwis decide to leave to live on the Gold Coast.

As for maximum population we will be able to choose in about 20 or 30 years when our natural increase falls to zero and out population will be dtermined entirely by our immigration policy. Japan fits 120m into a similar land area, Great Britain about 70m so there is no practical upper limit.
 
There is no "right"answer. When our children make that decision it will be based entirely on values and feelings.

Our children make the decision? How about us making it?. And Japan does NOT support 120m nor Britain 70 if they import one drop of palm oil from desecrated rain forest and have to raid waters way beyond their shores for fish then they do NOT support their numbers. You squash any number of people onto small amounts of land but seeing as we are destroying oceans and rain forest then we are NOT supporting the numbers we have and surely cannot support many more.
There is a right answer, it is here, the planet is already overpopulated.
I believe the immigration decision should be made by us, we are those children, not pass it on to another generation so that we can just carry on raping the planet

"The planet" is over-populated therefore New Zealand should flagellate itself???
Actually Ed Glaeser makes a damn good point in his book "Triumph of the City", that one of the most practical things smart humanity could do, is allow mass migration to temperate climates from intemperate ones - and enable it with affordable housing in the temperate climates. 
He points out that California becoming all exclusionary deflects people to places where they need to operate airconditioning 24/7 twelve months of the year, and robs California of critical mass to make its heavy investments past and future into rail-based infrastructure more fiscally sustainable. 

Basil system is great but the unintended consurquenses are what happens.To much money running to any market makes a bubble. It is happening in goverment debt world wide. While some people need money but because of Basil they can't get it because the banks have to put aside to much capital compared to housing.