The Labour Party's plan to use changes to Kiwisaver contribution rates rather than interest rate hikes to take steam out of consumer spending would act as an inadvertent boost to house prices, according to BNZ chief economist Tony Alexander.
In his latest Weekly Overview Alexander said that under the proposals as outlined by Labour this week, the risk of having a large mortgage that is posed by the potential for high interest rates would be reduced. Therefore this would likely push up house prices as people could buy houses less worried by the prospect of very high interest rates.
"Additionally, because of lower average borrowing costs and because of reduced returns on the likes of term deposits plus the increased volatility in share prices we would expect to see more investors divert toward residential property.
"This would again tend to boost house prices, reduce home affordability, and again bias the housing market against young buyers, Alexander said.
He thought there might also be implications for the housing market in Labour's proposals to put the brakes on immigration - a move in part targeted at taking the pressure off the housing market.
"This sounds like a good idea, but this is why we economists spend years at university," Alexander said.
"We learn that if you base policy on one obvious relationship between two variables you will probably make your macroeconomy worse because you are missing all the other linkages.
"To whit.... if you cut immigration when your economy is strong you risk boosting inflation overall because you will reduce labour supply and push wages higher.
"Reduced house construction in particular will push house prices higher and work to offset the price effect of decelerated population growth," Alexander said.
He questioned whether migration had actually been pushing Auckland house prices in particular higher.
"Not at all," he said.
"Auckland house prices rose by 38% between January 2009 and July last year. It was in July that the net annual migration flow for NZ rose above the ten year average of 10,000 people on its way to the latest reading near 32,000.
"Thus prices soared during a period of below average migration gains."
He reiterated that what Auckland needed was more houses "and for that it needs more of lots of things including land and builders".
"Restricting immigration may have the opposite effect to what Labour intend."
Alexander said "good on" Labour for showing a willingness to look for solutions to their identified problems.
"But just as subsuming Kiwisaver's focus on building retirement savings over the long term to the dictates of monetary policy under the control of the Reserve Bank is a bad idea, so too is making migration policy a slave to the monetary policy cycle."
A number of other bank economists released commentary on Labour's proposals this week. Some of these commentaries are available here, here, here and here.
43 Comments
Chris - where's he wrong in that regard ? What he doesn't mention is that the banks are also the large Kiwisaver providers and more funds flowing in there are definitely guaranteeing largers bank profits. Plus lower interest rates keep the debt bubble blowing with their floting rates and easier debt servicn ability. I think he understates how good Labour's plans are for banks, in fact I'm sure the bank CEOs will be voting Labour
I liked this part given conventionally trained economists apalling record and devotion to demonstrably false models and assumptions....
"This sounds like a good idea, but this is why we economists spend years at university," Alexander said.
And
"To whit.... if you cut immigration when your economy is strong you risk boosting inflation overall because you will reduce labour supply and push wages higher.
Can't have full employment or higher wages can we. The current ideology bakes a "natural" or "structural" rate of unemployment of 4-5% into the system to control inflation by suppressing wages (and making the low paid anxious and compliant at the same time). Give them just enough welfare to stop them rioting. Too bad for those 4-5% that they have to be sacrificed for the greater economic cause.
Well said.
For me an economy is there to support a society ppl want and not the other way around.
On top of that,
a) If wages go higher, productivity tools become more economic, a huge part of NZ not improving productivity is our labour is cheap compared to automation.
Example its cheaper for me to employ a student at $40k a year to monitor screens looking for red flags and tell me than it is to spend several $100k and 25% of that in support to auto alert me.
Frankly that is nuts.
b) The returns on tertiary education to get skills become higher and worth while for individuals to train.
regards
He questioned whether migration had actually been pushing Auckland house prices in particular higher.
He reiterated that what Auckland needed was more houses
Eh what? Migrants are moving to Auckaland. They need a house to live in....but he reckons they arnt pushing up prices? Weird logic. Looks to me like the bank boys don't like this new idea..so it must be a good one.
Indeed, why would you need more houses if net migration was flat or declining? The problem is high prices in general and the affordability of entry level property, not supply per se. None of the big developments proposed look "affordable" for first home or low income buyers. Instead they'll be snapped up by property investors and add to the rental supply.
All the south africans I know have no capital, ergo they rent. I wonder for other nationals how common that is also. On top of that if ppl are coming in and its significant then I'd expect rents to also be going up, yet they are not. So based on this my suppostion is apart from the rich foreign investors pushing up high end properties and property speculators in the mid band we have no real housing shortage.
I agree on the not liking bit, LOL...
regards
Just as an aside - we are right now going through the process of obtaining quotes to build a house in the SI. Not too big. Not too small. Single level. Definitely not a McMansion. The quotes received are jaw-droppingly astronomical. I'll tell you this. At those prices there wont be too many speculators building spec-homes. That's one reason all new migrants and non-resident buyers should be restricted to buying (building) only new houses.
Outside Auckland and maybe Christchurch you be looking at instant over capitalisation building new compared with the stagnating existing home prices in many smaller centres. Bare sections have languished for years in many towns, the asking prices slowly reducing but too slowly to offset the increasing council and building expenses
I was looking at building a new house in Brisbane last year. This quote I had was $280K for 220sqm average house or 400K for 250sqm house, fully landscaped, pool and high quality fitouts (40mm engineered stone top, German appliances etc..) and most of all it could be done within 12 weeks from start to finish. Don't know why it's so expensive to build in NZ.
Yes, here in Melbourne the production builders are advertising 200 sqm house and land packages for $300,000
We are moving to Dunedin. Selling my partners house in Seaford, a suburb of Melbourne. The house is 200 sqm and it sits on 600 sqm land. Expected selling price AUD $450,000 thats for both the house and the land.
The lowest quote to build a vanilla single level 165 sqm house plus 35 sqm attached garage, excluding land, in Dunedin is $400,000 just for the build of the house
A quote from a franchise builder excluding the garage was $405,000
Pretty interesting stuff. Saw this after doing a google search:
http://8homes.rtrk.com.au/?scid=137541&kw=34088:13964&pub_cr_id=39913807818
165 sq m house on 400 sq m land just outside melbourne for under $300k.
Why are those rubbish 80 sq m 'affordable' auckland properties in mt wellington and Hobsonville so expensive?
I think someones making a killing.
If they built them with a reasonable margin (instead of an excessive margin) you'd be getting something similar to Aussy; new houses 150 sq m under 400k. And what would that do to the Mt Wellington housing market? Who would buy a dodgy second hand 100 sq m house in mt welly for 500k when you could get something bigger and new for less?
Looks like Melbourne have set up satelite towns where these cheap new builds + land packages are available.
Heres a pic with auck and melb on same scale to give idea of spead of cities and distance to these satelite towns in melb:
Auck is surrounded by undeveloped land that could easily produce a number of sprawling options like these satalite towns in melb. No reason why they can't happen at similar prices too.
Well, few simple facts:
In QLD, when someone lodge a building permit; it goes to private certifiers if the build is within planning rules; Council will be involved with the permit if it's outside the planning rules. So they don't have council monopolising their fees.
Walking into Masters or Bunnings, you have several choices of the same building material. In NZ; plaster board you can choose any brand as long as it's made by Fletchers
In QLD, it's the laws here for builders to insure their work so that they don't have the same leaky issue we have back home.
And the economy of scale
There are a lot of good tradies out there. The trouble is the bad ones get all the press and tarnish the whole industry. I think there needs to be a better way of targeting the bad tradies rather than the blanket approach which puts up the costs across the board. I would relate the blanket approach to the whole populace having to line up when a crime is commited and one by one prove that you are not the criminal.
I agree with the materials issue and have stated on this site previously that one option is for builders to form their own CRT/Farmlands cooperative type structure. This issue has recently been brought to the wider media's attention and it was suggested that CBANZ could look into this concept.
It costs too much to get materials BRANZ appraised. There is a preference in the industry to use BRANZ approved materials as there is some come back if there is product failure.
OSH costs have escalated astronomically in recent times which has added significantly to the cost of most projects. The same blanket approach is used. Maybe a register with the Company/trade name of the entity and injury type etc would be a better solution. It would name and shame repeat offenders and/or those who have bad practices and allow for better information flows and education.
Unsurprisingly...Icon.....you should have moved to Panama Road, the Crowning glory of all things affordable, hereabouts.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=112…
Cheap at half the price.
Or if you do not want a Mortgage to haunt you, in a real McMansion....here you might stand a ghost of a chance....Real cheap at half the price.
http://mokena.patch.com/groups/around-town/p/historic-joliet-mansion-in…
Comparitively speaking....a bargain.
During our travels we came across a house north of Dunedin, that had just been completed, we rocked up to the front door and knocked and talked to the owners. They had just added a 35 m2 detached unlined garage. The garage alone cost them $70,000. Shite. Building costs are out of control.
I have the same experience with South Africans. I'm going out with one at the moment and neither she or any of her friends own a home (except for the real estate agent). All left affluent lifestyles in SA for lower wages and higher house prices here. All have seperated from their partners since arriving. Money woes do not help. None of them can save a deposit on $40-50,000 pa with dependent children
Excellent discussion about building costs with Tony Sewell CEO of Ngai Tahu at NZ Herald -"House of the rising sum". My new computer is doing strange things so you have to google it. He asks why tradies don't form a buyers co-op to get international prices + freight. If you think the problem is NZ size and isolation then think about Western Australia that has a smaller population and is further from other urban centres.
Tony Alexander is playing with semantics to make Labour look dumb.
The point of Labour trying to reduce interest rates is to make housing more affordable.
TA scrapes the bottom of the barrel to turn this into a bad thing by saying that lower interest rates will increase prices - an assumption based on an obvious link but misses all other linkages. You need to spend more time at university.
He then goes further and mentions volatility in share prices will make people steer clear of the stock market and invest in property! Which is the more risky investment again?
Of course migration has pushed Auckland house prices higher. By TA's logic, if next year we had a 1000% increase in migration gains, that would mean that any time period before that could be called "a period of below average migration gains" and therefore in his logic the migration gains would have had nothing to do with the house price rises during that time.
When restricting immigration, I'm pretty sure there will be more analysis on the labour supply than what TA is imagining.
I wonder what scenario he would have come up with if National had suggested this policy.
Um, I think the reality is that Auckland prices are only going to go up no matter what any party will do if they come to govern NZ. Until that is, the real reasons are addressed. We all know that aint ever going to happen and so prices will continue to soar.
But as a glass full kind of guy, I think there will be excellent growth in more affordable regions as the young and educated say 'stuff it' to the big congested smoke of Auckland and take their skills else where in the country.
The rising influence of Chinese investors in the Australian property sector means the Reserve Bank of Australia has lost its ability to use the official interest rate as a tool to protect Australian investors against the risk of a housing bubble, UBS regional chief investment officer Asia Pacific said in Sydney on Wednesday.
Chinese buyers won't be deterred by marginally higher interest rates the investment strategist said. "They are buying properties with mostly cash.
Australia has had a spate of robust capital city housing data in recent months, but Chinese buyers have been pushing prices up. Rate hikes will now be an ineffective tool to push down property prices and that is why UBS does not think the RBA should do it.
Instead, Australia should consider introducing other regulatory reforms designed to mitigate the risk of a housing bubble, he said. "Australia should follow the lead of jurisdictions like Hong Kong that have successfully introduced tax reforms that target people who buy and sell investment properties"
http://www.smh.com.au/business/the-economy/chinese-buyers-mean-rate-ris…
Tony would you care to explain to me what would would happen to house prices if foreign buyers were banned, CGT was in place and enforced , favourable tax incentives to property were changed, land suply was increased, more hosues were bulit and cost of production due to better technology for mass productions of houses combined with more competition in buiding materials supplies ? in my view there is no signle silver bullet and it has to be a package that of reforms that would deal with the housing madness and vested interests of people like Bank Economist and others who only care to make quick buck .
Only thing stopping me from voting Labour for the first time is a well founded scepticism that they have any real intention of delivering. Do just enough to give the appearance of change but really maintaining the status quo like National. Parker has been very neo liberal to this point. Maybe that overseas trip to talk to a range of "experts" caused a genuine epiphany. Maybe Cunliffe has changed too. Maybe McCarten is having an impact.
Fact is though, both Labour and National are committed to a "too big to fail" property market and banking sector. Neither want price falls despite this being the only way affordability can be restored. Turn off the wealth effect of property and the economy will grind to a halt. Keep it going and it will implode.
Parker knows about peak oil, yet chooses to ignore/not believe it and carries on making promises he should know cannot be kept.
"Neither want price falls" that is correct IMHO. Those already in property far outweigh those who'd like to be in it, so collasping the market is one fast way to lose the next election.
ergo its set to implode...
regards
National are no better.
Tell you what rather than voting for whomever makes you the biggest promises, try voting for a party that's best for NZ.
Labour of course have a double problem, they need to attract the centre voter who has the choice of them, NZF or National, plus at thier back are the Greens and mana chewing out 11~15% of the left vote.
regards
So, to sum up...
if things change that means house prices go up.
If nothing changes that leads to house prices continuing to go up.
If I breathe in and out it leads to house prices going up.
Easy to sum up this article...and I didn't waste my time at uni studying economics - I got a real degree and a real job.
http://www.theguardian.com/money/2014/may/01/housing-bubble-boom-bust-a…
Same in UK, Same here....Houses, houses, houses.
Particularly liked this below comment here picked out by me between the dotted lines.
(Cos its the ....Same in UK, same here...Foreign investors...greedy landlords.....is this a theme or what, or pure folly, on the part of the Governments, like ours too ).
This is the comment below, but read them all yourself in the link above...same here, same in UK. Sounds familiar, all too familiar.
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Boom Boom Boom - once again stoked by foreign investors buying up exclusive houses in and around London. House prices are on the march again despite what the article says. These foreign investors/oligarchs displace other slightly less rich people, who in turn, look to fan out further afield, which then results in inflating prices in other areas as they go.
Followed by rent increases by private landlords who capitalise from the over inflated house prices resulting in increasing numbers of people unable to afford a mortgage so have to pay inflated rents from greedy and profiteering landlords.
Therefore tighter controls on foreign investors and rents should be introduced - housing policy needs to be based on need not greed.
For a start, none EU citizens should not be able to buy properties in Britain. Just because they are rich and want to send their kids to Eton they should not be given special treatment. They are one of the main reasons for the significant rises in prices in and around London and the South East. Which the rest of the population ends up paying for in the long-term.
The current and future generations are and will pay for the folly of Britain's failed housing market. Need not greed should be central to housing policy - not the free for all shambles we currently have.
----------------------------------------------------------------
End of comment.
Tack yours on.....
BELOW.
After reading this one......
http://www.theguardian.com/commentisfree/2014/apr/29/rent-tenants-priva…
I have no doubt that if this policy goes ahead, people who have mortgages will be paying more overall, and will have less disposable income. Banks won't want to lose money. It is sort of enforcing the risk of borrowing money for buying over priced houses, across the whole popualtion, rather than just the house buyers. So it gives house owners an advantage over non home owners, which will in turn make home ownership more attactive, and push up prices.
Labour must be the new darling of the Managed Funds industry now, what with their plan sure to bring more money for them to play around with and more fees..they must be salivating, because National is sure to adopt some of that policy, to preempt labour before the election. Win-win for the rich again.
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