NZ Initiative’s Jason Krupp says low interest rates and high population growth are not to blame for spiralling house prices - try red tape

NZ Initiative’s Jason Krupp says low interest rates and high population growth are not to blame for spiralling house prices - try red tape

By Jason Krupp*

Unlike broken clocks, bent rulers can still be very useful provided the same faulty instrument is used to measure differing items. That way comparison is still useful.

So it is with Demographia’s housing affordability methodology. Every year the group produces a report that compares the median house prices against the median household incomes across a host of cities to assess how affordable housing in these cities is.

This year Auckland made headlines because the ratio of incomes to house prices hit 10:1. In other words it now takes ten years of the median household income to pay off the median house in Auckland – a record high for the city.

A common critique of this approach is that it fails to take interest rates into account. Indeed, that is exactly what Harshal Chitale and David Norman of Auckland Council’s Economist Unit have done in their latest newsletter.

The pair argue that “House prices have surged in Auckland and similar cities because people want to live and invest here and because much lower interest rates have made it easier to service debt.” They support this position by noting that other coastal cities like Sydney, San Francisco and Vancouver have experienced similar house price inflation pressures.

In other words, excessive demand is the problem.

Unfortunately this only tells a portion of the story. Chitale and Norman have a point that Auckland has seen high levels of in-bound migration swell the city’s population, and interest rates are pinging around historical lows, allowing households to take on more debt.

This is where Demographia’s broken ruler tells the other side of the story in that it looks at cities around the world and ranks them. What it shows is that while some cities have seen housing affordability decline, for some it has improved or remained static.

If interest rates were a reliable predictor of housing affordability all cities would have seen affordability decline in 2016 because borrowing costs are low across the world. Also, low interest rates have not made the price of other goods that are usually acquired with borrowings shoot through the roof, such as cars. This suggests that there are other factors at work.

Another possible explanation is population growth. High rates of immigration have certainly increased demand for housing in Auckland. But if this is the true explanation for Auckland’s housing woes, then all cities that experienced high population increases would also have experienced significant house price increases.

But again, the Demographia ruler shows this is not the case. Houston and Dallas-Fort Worth, two cities in the state of Texas, were two of the fastest growing metros in the United States in 2015. And yet they remain some of the most affordable cities in the Demographia report, with median multiples of 3.5 and 3.7 respectively.

If low interest rates and high population growth were the true cause of spiralling house prices all the cities in the chart below would have seen housing affordability deteriorate in lock step with each other. Clearly that is not the case.

It is not the things that Houston and Dallas-Fort Worth have in common with these cities that is interesting, but rather where they differ. In the two Texan metros it is far easier for the housing market to respond to rising demand and greater ability to pay because there is so little red tape to prevent building.*

Meanwhile Auckland, Sydney, San Francisco, and Vancouver are drowning in regulations on home construction and land supply. The results are reflected in the state of their respective housing markets (see chart).

To use the car example again, when private vehicle sales rose in the December quarter, riding the tailwind of positive net migration, prices did not shoot up to record highs like in the housing market. That’s because dealers ramped up supply to meet demand.

With housing the market cannot do this because regulations have choked off the ability of business to respond quickly. The regulatory logjam is extensive. At a local level things like the Urban Design Council, Cultural Impact Assessments, height restrictions, and rural urban limits have severely limited the city’s build rate (admittedly things have been improving in some of these areas).

At a national level, the Resource Management Act, Building Act, Land Transport Management Act, and the Local Government Act have turned New Zealand’s planning framework into a byzantine nightmare.

To be clear, it is supply that is the problem. To suggest that demand is the root of all housing evil ignores the real lesson of the Demographia report.

In their note Chitale and Norman say the fix to Auckland’s housing problem will take “collective action from central government, the building industry, land owners, banks as well as the council.”

Again, they are only partly correct. The building industry, land owners and banks are merely operating within an existing framework that they do not control. That responsibility for the framework lies with central and local government.

Central government is currently working on its latest amendments to the RMA, which are a bit of a mixed bag. But as the NZ Council for Infrastructure Development previously noted, the reforms are pointless unless the other parts of the planning system are aligned. Work by the Productivity Commission on what a fit-for-purpose planning system would look like is also promising, albeit on the blue sky side of the policy spectrum.

For local government the focus needs to be on where councils can remove red tape from the system as so to free up building supply. More broadly, the focus on supply constraints needs to be redoubled. Dragging up the thoroughly debunked notion that demand is the problem is a step backwards. If there is any doubt on this, I suggest they consult Demographia’s useful ruler, even if it is a little bent.

(*Demographia does not cover cities in continental Europe, but the same housing affordability pattern is observable. In countries like Germany and Switzerland, with few restriction on residential building, house prices have remained flat after adjusting for inflation. Where building regulations are high, such as in Britain, housing tends to be unaffordable.)

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*Jason Krupp is a Research Fellow at The New Zealand Initiative, which provides a fortnightly column for interest.co.nz.

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47 Comments

26
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Why the hell is this NZ Initiative being given so much air, they are nothing but a bunch of right wing immigrants, hell bent on forcing their views on us, if they don't like how we do things here, there is always the exit door.

12
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yes yes and yes - x 2

16
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NZ Initiative are getting rich selling off our low population statistic. Bunch of immigrants getting rich perpetuating the housing ponzi scheme. Perhaps they will pay for the infrastructure that all this population growth needs. Our exports can't pay for it as our export earnings are down.

Never again do I want to hear you becrying Donald Trump.

Donald Trump is crazy, this does nothing to diminish that.

Leave Donald Trump alone. He is what he is but boy is he shaking up the Ivory Tower, which is long over due for a make over. Go Donal Go

18
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Yes, at this point - especially given all the actual investigation that's been done of recent times in Vancouver - it's verging on outright propaganda from The New Zealand Initiative.

It's blatantly dishonest to try to cover up the role of demand both local and foreign, and especially sweep foreign purchase demand under the carpet. What motivation - to keep prices going up and personal portfolios inflating at the expense of the next generations of Kiwis?

This is exactly what happened in Vancouver - and just like here, any who dared to point out what was happening were quickly silenced through cries of "Xenophobe!" But now the facts are coming out.

http://vancouversun.com/opinion/columnists/douglas-todd-canadas-public-g...

We've had plenty of investors even on this site noting the slow down in auctions since China clamped down on capital outflows - yet these clowns at The New Zealand Iniquity are pushing the party line that only the supply side of Economics 101 has a role to play in these runaway markets.

What a crock!

NZ Init are obviously set up to run interference on the headwinds against immigration and foreign ownership. Vested interests - say no more.

Lets see some equivalent air time from some of the following:

Auckland Action Against Poverty
Salvation Army
Kids Can
Christians against Poverty
CPAG
Catholic Caring Foundation
Auckland City Mission
Solo Parents in Poverty
....................................................

The list is endless as housing costs have gone through the roof yet all we hear is Verbung from people like Krapp who have hoisted on themselves the lofty title of "Research Fellow"

Self serving claptrap from the NZ initiative yet again to back up their funders rightwing idealogue point of view - really Jason Krupp you have no shame spouting such waffle. Yes red tape is part of the problem but only one of many factors and you ignore all the others.

Has Jason Krupp ever been to Houston and spent time there?

Houston was Pavletich's and Best's cornerstone yardstick
Depending on your metric it probably is a great place to live

You need to ask yourselves do you want to live there
Would like to know if there is anyone with an independant unbiased view of Houston?

read more ....
http://www.interest.co.nz/opinion/83605/rules-around-body-corporates-nee...

A key differnce in Texas is that they dont have state income tax, but they do have a large state property tax. This, with acres of land, means there isnt house price appreciation, largely. Houses are for living or generating cashflow through long term rentals (US rental laws are much more protective of and conducive to long term tenure). In an environment where house prices do not appreciate and incomes are still increasing, obviously affordability is better.

That being said, anyone that whinges at Auckville traffic should have been on Texas freeways first. They are a shocker, even 100 plus miles from city, due to urban sprawl. Everything is bigger in Texas.

12
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again another think piece from an immigrant trying to explain away demand is not a problem.
https://nz.linkedin.com/in/jason-krupp-3b741b15

13
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The simple truth is that low interest rates and high population growth ARE to blame for spiralling house prices, TOGETHER with a lack of supply due to red tape

While low interest rates, high population growth, overseas investors, and appalling red tape preventing construction are all factors creating demand for housing, none of these would flow into the recent crazy house price increases but for the availability of easy credit. Poor lending by banks enabling reckless borrowing (DTIs>6) is the factor that means a housing shortage is reflected in ludicrous prices (e.g. value of income >6).

18
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Surprisingly in analysis - how can one forget the role of foreign/non resident buyer speculators and tax policies that motivate them.\
Vested interest of one and all.

How true but in today's time with internet and social media hard to suppress the truth and influence the mind of the people.

Everyone stands exposed today and the result is for everyone to see what happened in UK and USA and will be happening in rest of the world unless people in power who matters take note of the problem and understand the mood of the people.

I love how you imply that social media is where one finds truth. #posttrumpera eh

16
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Please give up on the comparisons with Dallas-Forthworth and Houston. There is really no comparison to NZ cities. Both Dallas-Forthworth and Houston are surrounded by essentially endless flat and easily to develop land, they have massive economies of scale for supply and production, and they have access to the US labour market of many million tradespeople (not to mention the Mexican/Latin American legal and illegal labour market). Even with less red-tape in NZ the houses could not be built under current production methods. The one thing that can be dialed back is demand, but we cannot touch that sacred cow...

15
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Why are we still debating whether supply or demand is the problem? It's both! To say it's a supply side issue only is to have a vested interest (as if there was any doubt).
And please do not try to put up Houston as a model for NZ (lol). Houston is a sprawling mess where half the buildings are carparks.

We aren't debating. Well, no educated economist is - only the comparatively ill qualified commentators on interest are. If you want vested interest, the Auckland Council Newsletter is the place to start.
The core issue is supply. Sure, demand isn't helping, but unless you address the core issue, you are never going to fix the mess. To repeat...The core issue is supply.

Forget the Houston example, then. Use his car sales analogy, or the case of Brisbane, or any other relevant economic example.

10
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So we wave a magic wand and supply is no longer an issue. What will we have? Another over populated city the planet could well do without. One long tarffic jam from Auck to Tauranga to Hamilton. No thanks. I'd rather we closed off demand.

Okay, cut demand then - you'll still have extremely unaffordable housing for the next 30 years as wages catch up..
Not really fixing the issue, is it..

15
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..cut the demand, get rid of the landlord tax rorts..exit the speculators and land bankers and we'll be most of the way there.

...But we still have the same amount of people to house without increased supply. Net social welfare balance isn't going to change.

So, you propose that we increase rental prices for tenants - how is that going to impact demand for property?

Exit the speculators - silly idea and unenforcable.

Exit the land bankers - sounds a lot like addressing supply to me...

We've been over this before. It's becoming tiresome to have to point out the obvious over and over.

Rents have not gone up with prices. If it was all just a shortage of places to live, rents would've kept pace (or near pace).

So far it doesn't seem we have the same shortage of places to live, as places to invest in. Investment demand is creating the soaring house prices, while demand for places to live lags far behind.

Sources in the industry (brokers, builders etc.) suggest high levels of empty houses. And high levels of foreign purchasing parking money in NZ real estate.

Addressing investment demand will free up more dwellings for people to live in.

If your argument is that it's all only about ratio of people to houses, explain why rents have not gone up like prices have.

..the core issue is too much demand. So you suggest .build build build...until it's all gone.

Critical habitat for some of Auckland’s most threatened native animals is being destroyed as the government uses the housing crisis to circumvent democratic processes. Forest & Bird will be opposing the Point England Development Enabling Bill at a hearing today. The area is home to up to 90% of the remaining native shorebirds in the Tamaki Estuary. If allowed to go ahead, the new legislation will remove the protected reserve status on 11.7 hectares at Point England Reserve, which is a main roosting site for threatened native birds including dotterel, pied stilts, variable oystercatchers and shore plover. Protected reserves like Point England are among our native birds’ last refuges. Pressures from coastal development, increasing population and the sea-level rise are escalating, and pushing these birds closer to extinction

Just repeating yourself doesn't make it anymore true.
The fact of the matter is that the issue is in existence, cutting all new demand now won't do hardly anything to make housing more affordable.

Yes, it is a tragedy that we are loosing wildlife sanctuary. It represents piss poor planning on the part of NZ and Auckland (If you watched "Making New Zealand" last night, you'll see that this has been endemic for the past 70 years in Auckland) but it shouldn't be your basis of an economic argument in this context.

Rents haven't gone up like prices have - suggesting speculation is fueling demand more than just requirements for somewhere to live. Builders, brokers, those in the business all suggest large numbers of houses being held empty just for capital gains. People have been buying because of the promise of future gains.

If the shortage was really all just about places for people to live, rents would've tracked much more with house prices.

Address demand side factors and I bet you'll see significant movement in the market.

You confuse the rental and purchase markets as being the same. In fact, they are largely distinct and by nature substitutes for one another.
So, an increase in purchased property for investment results in an increase in rental supply - this is why rental prices have been suppressed.

The fact of the matter still remains though, if supply is unable to react adequately to demand dynamics then the issue is always going to be present. Sure, we might turn off the demand tap tomorrow however this won't address affordability issues in the near term. Plus, due to not fixing the underlying issue, the moment it is turned back on, we will be in the same situation.

Totally agree with u nymad...

My little mantra is..... minimum govt/council regulation = an elastic supply curve..

With NZ.... I'd add in the duopoly nature of building materials supply... as a factor of building cost inflation.

Definitely need to address the materials market as a supply issue.

No government is going to touch Fletchers, though. They'll grind NZ to a halt the moment the govt. threatens to stimulate competition in any of their markets.

But nymad. Rentals reflect demand because of population. This shows the population pressure argument is not so much as some portray. The disconnection of property price from rentals is cased by a dfferent driver frm population. In my view thats bubble fever.

Funnily enough, demand side measures have worked on reducing prices caused by speculation in other markets. And they've worked in NZ's own history before - Land Tax policies are part of the reason land banks were initially broken up and you own a house today.

The car analogy has faults too. If we could source good quality, massed produced housing from offshore, in the same way that we can source cars (think Toyota etc), then it could be a good analogy but as things stand we can't (as yet). Maybe we could do so, with less red tape, but then is that what life is about? - cramming more people into more little boxes? I'd prefer the less demand due to lower population growth option so we can live in a little more space and comfort. Mr Krupp, living the good life in the Wairarapa, clearly prefers the later mode of living for himself...

You've nailed the point right there Kauri. Nymad et al think people don't understand supply versus demand economics. Actually, whether you see it as a demand side problem or a supply side problem, comes down to what you see as preferable as a country. Economics ultimately is a social science.
There is a large middle ground here, as in most situations, so as I said above, this is both a supply and a demand issue.
Personally I would like both supply to increase and demand to be reduced, as I would rather the primary focus to be on affordability for young NZers as soon as possible.
Those (like Nymad) that see only one side, most likely have vested interests.

Other factors ..…
Wasps and bees, and other animals.
Supply supply supply supply……….
Contrails
Dust patterns on Mars
Transistor densities on skylake CPUs
DDT ground contamination
Ocean currents
Donald Trump
Anything, anything but……..
Foreign speculators, and Chinese capital flight….

13
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I'd suggest the reason why National will never act is that their most honest statements about the housing crisis were "We don't want to see house prices come down".

Everything else is lip service. They're tinkering with supply because they know it'll have no effect on their voter base (landed boomers, speculators etc.).

But they WILL NOT do anything that has a danger of moving house prices down.

I have heard that it was John Howard -former Aussie PM convinced John Key that voters never complain when their house values go up, so not to bother making affordable housing reforms. Apparently this was John Howard's mantra when he was in government -and he was a PM in Australia for 9 years to 2007 so worth listening to.

I believe the National Party sang from this hymn sheet up until recent times. Now they realise the public is deeply concerned about affordable housing but they do not know what to do. Sometimes they deny there is a problem -or they say the problem is a sign of success. Other times -sometimes only one sentence later -they say they are concerned about the high prices of housing and the solution is to build more houses.

What this all adds up to is National has done too little too late on housing and now it is a cluster... which they are afraid of. Hence we get from the government a whole lot of distraction, BS and spin.

Govts pander to the greedy and self interested sides of their constituents.
We live in a very self interested world, so lacking in care for the fellow human being, so it is hardly surprising.
Although a very significant minority of NZ is now suffering as a resulting of this housing crisis, the most powerful and the majority of the voting base are very happy for prices to keep rising.

Therefore,although there are plenty of things that the government could do to solve the problem, they won't. Therefore, the only thing that will 'solve' the problem is some kind of nasty external / internal economic shock - which would obviously have lots of nasty consequences which would probably cancel out the benefits of a house price crash.

Govts pander to the greedy and self interested sides of their constituents

You'd rather that Governments used taxpayers' money and voter support to provide goods, services and regulations that their constituents don't want?

We live in a very self interested world, so lacking in care for the fellow human being, so it is hardly surprising.

Again - how is a Government to demonstrate that it cares for fellow human beings, other than by doing what it believes those human beings want?

although there are plenty of things that the government could do to solve the problem, they won't

They may not be doing the things that you think would solve the problem. But that is not the same thing as saying they won't do anything. The government is in fact doing quite a lot, despite the best efforts of the opposition parties and some local councils, to make it easier and more commercially attractive to build houses, including by addressing the system that effectively makes it illegal to build an affordable home anywhere that people want to live.

MdM the government could have done lots of things to improve the housing markets supply responsiveness. It chose to do very little. See here http://www.interest.co.nz/property/86082/labours-employment-goal-rbnz-mo...

On the demand side they have done even less.

There is no way that anyone can argue this government have been good economic managers of the housing market. It is a complete and utter failure. A shemozzle of epic proportions.

Given how many MP's on both sides of the house, IRD lackeys, council lackeys etc have their whole economic future tied up in houses it's a perfectly rational outcome.

The foremost problem with rulers is the confidence attribute as suggested by Taleb.

“Wittgenstein's ruler: Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.”
―Nassim Nicholas Taleb

The second contributing problem is the right wing Rulers of Fort worth with their garage sale regulations and lawn height rules .

http://fortworthtexas.gov/planninganddevelopment/permits/garage-sales/

http://fortworthtexas.gov/codecompliance/high-grass/

of course if you try to cut the grass with a lawn mower,the fw noise abatement act says it must not be heard by a person within 30 feet,so good luck with your sickle

And local investors as well. People with 2-3 rentals plus their main property are also to blame, but that's due to the fact there's no real taxes on property. You can also blame the govt for that.

It is more to do with money laundering and that is by foreign buyers.

You sort of wonder why the NZ Init bothers with these clearly ideologically-driven reports that are then rubbished on these threads etc.

The answer of course is that the average Interest.co.nz reader isn't the actual audience. It's English, Joyce, and their ilk. They just lap it up ..... like, well, lap dogs. An appropriate analogy.

National are most right wing Govt in NZ's history (ACT has been squeezed out of existence) - which is why they have had to re-create a fake right wing party to 'appear' centrist - They love this rubbish from the NZI - but they also know - most NZers's dont want a bar of it.
Nz is being strangled by failed Right wing chicanery .