We should embrace and accept Auckland's housing bubble - but do something about it as well

By David Hargreaves

And it's such an inoffensive and, well, frothy word...

But be that as it may, the recent attachment of the term 'bubble' to the Auckland housing market seems to have caused some, ahem, excitement.

I'm not really sure why.

One problem, I think, is that some words when said out loud are heard and construed by listeners differently to what's actually been said. As one who often desperately craves solitude I am always perplexed that the word "alone" is generally heard and digested as "lonely". Not the same thing.

Likewise, I think 'bubble' when used to imply asset prices maybe getting out of line with 'fundamentals' is actually heard as 'burst'.

So, if one chooses to apply the b-word to current trends in the Auckland housing sector then what one is apparently saying is that in about five minutes time the whole thing's going to come crashing around its ears.

Well, no.

We're already there...

One thing about bubbles that I reckon stands as a truism, is that if you are talking about the possibility something's a bubble, then it already is. But that doesn't mean it is about to burst. And that's the trick/trap really. The other great truism about bubbles is that the bigger they get the more comprehensive the potential mess if they burst. Which, in a nutshell, is why the Reserve Bank is rightly concerned about the Auckland house market.

Prime Minister John Key's authoritative response has been a letter-writing campaign. It is to be presumed that the formation of a committee will come next.

If we cast our minds back to the early and mid-2000s we can probably just recall that the then Labour Government blithely ignored warnings of a 'bubble' in the finance company sector. How much money was lost for good in the carnage that followed is not abundantly clear, but it was billions, and the misery visited on those affected was (and probably still is) extensive.

In denial

In the same vein I can't recall too much official acceptance at the time of the New Zealand sharemarket's bull-run of the mid-1980s as a 'bubble'. Two generations of Kiwis basically shunned share investment altogether after the 1987 crash, which was more disastrous in this country than possibly anywhere else on the planet.

But no, when asset values are riding high, people like trotting out excuses such as a 'new paradigm' and talking about permanent changes in how assets are valued. Permanent that is until the asset values crash.

So, Auckland.

I don't want to seem like I'm picking on HSBC - because I don't see what they are saying as markedly different to some other market participants - but I thought the reported comments from their chief economist Australia and New Zealand Paul Bloxham rather aptly demonstrated 'bubble denial' thinking.

Bloxham was reported as saying the pace of Auckland's house price rises was "unsustainable" and prices were "excessive", however, this was not a "bubble". 

I'm sorry, don't the terms "unsustainable" and "excessive" rather imply "bubble"?

Bloxham's reported explanation for why the Auckland prices were not a bubble was because they had mostly been driven up by "fundamental factors".

"Demand is strong and supply is weaker than it needs to be. There is strong inward migration…and interest rates are still below neutral and foreign money is flowing into the market as well," he is reported as saying. 

So, okay, we now accept do we that high and ongoing inbound migration, strong investor demand, interest rates below neutral and foreign money "flowing into" the market are 'fundamentals' of the housing market?

Well, excuse me, but these all sound like temporary things that could reverse. Even the shortage of supply might be remedied at some point and cease to be a 'fundamental'.

Accept it

The point is, I don't think that accepting something as a bubble means it is about to burst catastrophically. For what it's worth I think global sharemarkets are currently in a bubble, inflated by the climate of practically zero interest rates. The Kiwi dollar is in a bubble for pretty much the same reason.

Are share prices about to crash? No, I don't think so because there's nothing on the horizon at the moment that looks like a pin that will prick that bubble. And the Kiwi dollar? Again nothing looming imminently that will change things there - even the thought of higher interest rates in the US is still not an absolute definite in the near term.

But would I be betting on continued high share prices and continued strength in the Kiwi dollar? No, I wouldn't. I would be real cautious.

What is really needed here is for people to accept the b-word and embrace it. Realise that 'bubble' is not a synonym for 'burst' and that just because something is given that label this doesn't mean that crash city is just around the bend.

But what accepting a 'bubble' does mean is facing up to the fact that something has to be done about it.

The Government has chosen to, erroneously in my view, and for political expediency, make Auckland's rising house prices all about supply. Therefore it is solely targeting that.

Operation Bubble

Well, the demand is clearly there and it needs tackling. Operation Bubble is required.

There are some pretty interesting ideas floating around.

I still think a capital gains tax would be, sorry, fundamental - and yes, I can hear the screams out there as I write this. I find it interesting that the CGT naysayers always look at places like Britain (which has one) and point to its high house prices. What they don't and can't say is how much worse the house prices in Britain might be without one!

Certainly a CGT is not a panacea, but I think an essential foundation, a place to start, in levelling the playing field between investment in housing and other asset classes.

...And then you could put some other things in on top of it.

I'm loving the idea of a land tax on undeveloped property and can't think of anything that would better apply to the situation in Auckland.

We do need buying restrictions and/or taxes put on offshore-based investors. I read somewhere this week suggestions of an infrastructure tax on offshore investors. This sounds like a fiendish plan that would certainly help out with what is a very contentious (IE who pays for infrastructure on new developments) issue.

But of course, we need to get past the politics of such issues - which is why I think Gareth Morgan's idea of an independent tax authority is an absolutely splendid scheme.

The nuclear option

We already have an independent Reserve Bank of course - much to this Government's apparent chagrin.

It does occur that the RBNZ would have a 'nuclear option' available if nothing else was forthcoming - and that would be to break away from the international regulatory framework for the banking sector by bumping up the risk weightings given to residential mortgages, bearing in mind that at the moment banks only have to count something like 30%-35% of the value of their residential mortgages in their solvency calculations.

Imagine how much capital they would need to raise if that was bumped up to 100%!

Yes, that last one would be pretty drastic. But the point is, there are things that could be done about the errant Auckland housing market.

Accept that is it a bubble. And get on with it.