Ryan Greenaway-McGrevy on why Auckland house prices need to fall, a US Oil Tax, China, the TPP & homemade jam, Paul Verhoeven & more

Today's Top 10 is a guest post from Ryan Greenaway-McGrevy, a senior lecturer at the University of Auckland. Prior to that he was a research economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington DC.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Auckland House Prices.

The latest from the REINZ shows that the median house price in Auckland fell by 6.5% between December and January. I remain surprised that this figure has not received more attention: This is the biggest month-on-month decline in the index since, well, since the REINZ index here on interest.co.nz begins in 2001. By no means am I saying that the market is about to collapse, but I do find it curious that the figure has not been put under the microscope. Let’s do just that.

2. To be fair the decline did occur over the holiday period. In a market in which demand varies much more than supply over the short run you might attribute the decline to seasonal factors. And this thinking does ring true – to an extent. Prices typically decline between December and January – by 3.5% on average since 2001. When put in that context this is perhaps a moderate decline. They also typically rebound over February and March – by about 6% on average. I’ll be keeping a close eye on how strong the rebound is this time around.

3. Of further interest is the fact the mean house price in the greater Auckland region – as tracked by the QVNZ value index – decreased by only 0.5% over the same period. How can we explain such a big difference? The REINZ index is based on the median house price, and as such, is less sensitive to the upper tail of the distribution of prices. The decline in the median house price is probably being driven by declines in the middle and bottom end of the market, rather than the top end of the market, which is still going strong. 

4. Admittedly housing prices have cooled off considerably in Auckland recently, and some pundits have gone on record as stating that it would be best if prices plateau. Perhaps. I am certainly concerned that over-stretched households could exacerbate a recession. 

But supposing that house prices do stay constant from here until eternity – how long do we have to wait until housing becomes affordable again? The 2016 Demographia report puts the median house price to income ratio in Auckland just shy of 10. If we take a price to income ratio of five as reasonable (which is the ratio that the Auckland Council is targeting), this means that nominal incomes have to double before we reach affordability. How long would that take? We’d reach that target in a mere ten years if nominal incomes grew at 7% per annum.

But this is New Zealand: we simply are not that lucky. In this period of global deflation I think we’d be lucky to see 3% growth in nominal incomes… which would push out affordability to 2040 or so. If incomes grow at 2%, we will be waiting until 2050. Gulp. The bottom line is that house prices have to come down – and come down a lot - if we are to get serious about housing affordability. However this doesn’t necessarily mean that all investors will have to take a bath - provided that the Unitary Plan allows for further intensification.

5. The Oil Tax. President Obama recently proposed tax of US$10 per barrel of oil. I can’t see this going anywhere in the current political climate, but this one is a no-brainer for the US. The US consumes roughly one-fifth of the world’s oil production. If this tax went through, the rest of the world will be footing some of the tax bill, including that long-surviving cartel OPEC. In other words, the US would extract back some of the rents it pays to OPEC. (Despite oil being at record lows, the cartel is alive and well, and looking to expand its influence, at least over over the short-term.) Throw in climate change and the fact that Saudi oil revenues are thought to finance terrorism, and this is a slam-dunk case. 

The tax should have gone through years ago. But now is the right time to try again: with oil already at record lows, it wouldn’t hit consumers too hard. This time around the issue does not have to fall along the usual partisan lines: sensible conservatives like Charles Krauthammer have been calling for a similar tax for decades. Don’t hold your breath. 

6. What kind of top ten would be complete without the usual eye-on-China report? Eric Burroughs is less pessimistic than many China commentators, pointing out that much of the reduction in China’s forex reserves is probably not due to capital flight.

7. Eye-on-China continued. Ambrose Evans-Pritchard thinks that George Soros is wrong to expect a hard landing in China, but then suggests that growth will be supported by further government stimulus. Sigh. 

8. The TPP: everyone’s favourite trade agreement. Because negotiations remained secretive for so long there is a lot of misinformation out there regarding what is actually in the agreement. And let’s face it, there is some hyperbolae floating around. One relative told me with a straight face that the TPP would stop her from making homemade jam. 

Some of the provisions in the agreement that we can and should be happy about are those related to environmental and labour standards. Here’s the Wall Street Journal:

The major Pacific trade agreement that officials unveiled Monday includes stepped-up powers for the U.S. to put pressure on developing nations to improve labor practices—such as requiring Vietnam to allow independent trade unions and Malaysia to cut down on human trafficking. 

9. On the other hand, one part of the trade pact that scares people is the investor-state dispute settlement (ISDS) clause. It is largely because of this clause that many Kiwis feel we are ceding sovereignty to multinationals, because it gives corporations the right to sue foreign governments. A recent example is TransCanada suing the Obama Administration for dithering and ultimately reneging on the Keystone XL pipeline. They are asking for $15 billion. Jeepers.

So, what to make of the ISDS? Gary Clyde Hufbauer at the Petersen Institute thinks that these concerns are overblown.

The record shows that, far from a record of multinational corporations trampling sovereign states, investors have won fewer than a third of the cases resolved by the ISDS process.1 Arbitration procedures were formalized in 1996, when the World Bank created the International Center for the Settlement of Investment Disputes (ICSID) as a neutral forum to handle ISDS claims. Similar fora are based in London, Paris, and Stockholm, but ICSID oversees the vast majority of claims. To date, ICSID has handled almost 500 cases.2 Of these, 36 percent were settled between the parties before going to arbitration. The arbitrators declined to hear 16 percent of claims for want of jurisdiction. They dismissed 19 percent of claims for lack of merit. Only in 29 percent of cases did the arbitrators uphold some or all of the business claims.

Righto. So the multinationals win less than a third of the time, although you could also consider out-of-court settlement as a win for them too. Todd Tucker over at The University of Cambridge’s Centre for Development Studies is more cautious, pointing out some of the more uncomfortable law suits: 

Under these rules, foreign investors can legally challenge host state regulations outside that country’s courts. A wide range of policies can be challenged: Argentina has had its macroeconomic policies challenged, Australia its anti-smoking efforts, Costa Rica its environmental preservation laws.

He also points out what he calls “creeping multilaterialism”: 

Under many investment treaties, mere incorporation in a claimed “home” country is all that is needed to be considered an “investor” of that country, and benefit from whatever treaties it signed. For example, Australia and the U.S. have a trade agreement, but not with ISDS. Australia has an ISDS pact with Hong Kong however. Philip Morris was able to use its Hong Kong subsidiary to launch a claim against Australia — something it could not have done directly from its U.S. headquarters. 

Look on the bright side, people. This does create perfect setting for George Clooney to fight back against the evil Omni Consumer Products megacorporation in the courtroom. Throw in Paul Verhoeven to direct and *boom*. Box. Office. Gold. Which brings me to your number 10:  

10. Seriously people. Paul Verhoeven. Please come back. For our children.