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Speaker: House prices and the "Magic Money"

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  • Bart Janssen, in reply to David Hood,

    Yeah and I'm by no means suggesting folks shouldn't test your hypothesis and the analysis behind it. We all miss stuff that can make a beautiful hypothesis fail.

    Auckland • Since Nov 2006 • 4460 posts Report Reply

  • B Jones,

    I think just about every good comments thread tends towards argument, just because a whole string of people agreeing gets boring real fast. So either a conversation finds the point where people have a reasonable disagreement (no matter how tangential to the main point) and keeps going thrashing out that disagreement, or it peters out.

    I was wondering whether changes in the amount of deposit required might influence things. If all of a sudden people need a 25% deposit rather than a 5% deposit (or whatever you could get away with in 2007), that might show up as lower levels of debt vs housing value? Or is that small potatoes?

    Wellington • Since Nov 2006 • 976 posts Report Reply

  • Katharine Moody,

    What I find most interesting/disturbing about this analysis is the fact that the "magic money" is also unaccounted for by other Reserve Bank transaction records. In other words, we often expect our politicians to pull the wool over ours eyes about such things - but when the Reserve Bank refuses to give a coherent explanation, well that's just really serious.

    Makes me think, David, that you might want to send your analysis and workings to RBNZ as an OIA request for a 'please explain' this magic money. It's all their data after all.

    Wellington • Since Sep 2014 • 798 posts Report Reply

  • linger, in reply to B Jones,

    It seems fair to assume banks tightened mortgage lending criteria post-GFC.

    What David’s differential graph of month-on-month price change shows is a sharp drop in price immediately post-GFC, followed by an accelerating price increase since.

    I can think of two ways to get that initial drop (and both may be true):
    (i) failure of finance companies leading to a temporary glut of mortgagee sales by receivers, at bargain prices;
    (ii) price drop in response to decreased demand resulting from higher lending criteria (the resulting drag on demand should also be temporary, but over a longer term).

    The first of these is self-limiting. The second should be an ongoing condition, leading to a new equilbrium position (imposing an initial lag, but with a subsequent rate of increase consistent with inflation) – which didn’t happen; instead the increase has been above inflation.
    So the first was probably more important than the second; and in subsequent years, both have been dwarfed by a third demand driver, fuelled by finance external to the NZ economy.

    Tokyo • Since Apr 2007 • 1942 posts Report Reply

  • David Hood, in reply to Katharine Moody,

    Makes me think, David, that you might want to send your analysis and workings to RBNZ as an OIA request for a ‘please explain’ this magic money. It’s all their data after all.

    They don't need to explain it. If they are confident their data is correct (and they are) then buying houses without NZ debt is a perfectly reasonable explanation.

    They only need to be worried that banks are reporting their activities correctly (which they are confident of), that they are assessing risks in the economy to the banking sector correctly (which they are confident of), and that they are making banks take adequate precautions based on those risks (which they are confident of).

    Houses being bought with NZ debt is expressly not in any definition a Reserve Bank problem with banking security, because it is not involving NZ banks.

    What alarms the Reserve Bank is if NZ mortgage debt goes up. And that has not happened to a huge degree- yes it is somewhere around 4th worst in the developed world, but had it gone up to match housing increases it would be worst in the world by a long way and that would be a concern.

    (I did run this by someone at the reserve Bank a few years ago in a informal "any comment" kind of way).

    Now, a lot of people misinterpret the role of the Reserve Bank vs something the government should actually be doing. About the only criticism of the Reserve Bank is that I don't think you can fully count housing as a household asset in modelling, as we actually have no information on how many NZ households own NZ houses. But I don't specifically know the modelling formula they use, so don't know how conservative they are about it.

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • Glenn Pearce, in reply to Russell Brown,

    Although things may be changing a bit in Berlin.

    When interest rates are so low you have to pay to keep your money in the bank you'd go looking for an alternative too.

    We are currently experiencing the lowest interest rates in literally a lifetime, if you have some existing equity in a property you can borrow $1m and it will only cost you 50k a year.

    IMHO low interest rates are the single biggest cause of the increase in property values.

    Auckland • Since Feb 2007 • 504 posts Report Reply

  • Brent Jackson, in reply to James Butler,

    why would anyone who doesn’t want to live here want to invest in an asset whose value grows slower than wages?

    Exactly. If the value grows slower than wages, then it's not an asset for investing in, so people only buy houses to live in. Isn't this a good thing ?

    We need to transition our economy from property as a favoured investment, to one where it is not so great. It needs to be done quickly so it doesn't keep exacerbating, but also slowly, so the bubble does not burst. It will not be easy, but the alternative is worse.

    Auckland • Since Nov 2006 • 620 posts Report Reply

  • Russell Brown, in reply to James Butler,

    why would anyone who doesn’t want to live here want to invest in an asset whose value grows slower than wages?

    People do it in Germany because it provides a steady, long-term return. But the rental market is different there,

    Auckland • Since Nov 2006 • 22848 posts Report Reply

  • Jim Cathcart,

    This is great work and I appreciate it getting to read this. However, it seems to miss some quite important points that I think are possibly important:

    1. Foreigners do not come to NZ with bags of NZD. Our money supply is fixed (but ever increasing) and foreign property purchasers need to purchase property by excahnging their foreign currency for NZD. Therefore, the idea that "capital is bought to NZ" is somewhat fallacious.

    2. Our banks are primarily owned by the Australian banks who rely on wholesale funding from offshore (borrow at cheap rates and lend at higher interest rates). The banks operate like an intermediary. Easy work if you can get it. The extent to which this global capital flow has on house prices cannot be underestimated and it is unclear what the multiplier is. We know that banks can "create debt from thin air" by issuing mortgages because the resulting mortgage creates an "asset" on the bank's side. Intuitively, it's difficult for most people to understand how banks can get away with this. Once again, the paradigm has to influence house prices when this is the status quo.

    3. The cultural tendency for NZers to "save in their homes" is probably greater than in most developed countries. While I don't have any data to support this, we do know that the Australian banks generate more revenue from mortgage lending compared to other countries (off the top of my head: north of 65%). Saving in existing housing stock is intuitively broken as nothing is really been added except for services. The point is about the sustainability. Is it really possible to increase relative wealth by diverting all income to housing stock?

    4. What are the consequences if house prices actually fall? How well do we understand the relationship between house prices and consumer spending? Given that consumer spending is the lifeblood of the NZ economy, we are now forced into a situation where any depreciation in house prices is likely to be devastating. Anywhere with an interest in the overseas experience should understand that. We are not Japan. We're too reliant on the perpetual increase in house prices to support our living standards.

    Since Nov 2006 • 228 posts Report Reply

  • BenWilson, in reply to James Butler,

    Restricting foreign investment is a tool you might consider using, but I suspect that if you can keep price growth down other ways then it simply won’t be needed – why would anyone who doesn’t want to live here want to invest in an asset whose value grows slower than wages?

    Well you might have other reasons than price growth to want to live here. Like ... living here. But you're predicating this on foreign investment NOT being a big factor in price growth, saying we got it under control some other how. That other how might be really, really straining to keep prices down if foreign investment IS a driver. It could cost NZ a lot. We'd be paying to build houses just to keep the prices low so that foreign investors (after nothing more than money) would not be attracted to it? Or, maybe simpler - don't let them do it so easily. Even better again - let them build the houses themselves. Then they drive the prices down. Definitely worth thinking about.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Jim Cathcart,

    Also, I appreciate you posting the R source. I am currently doing an analytics course through edX focused on regression so this is very interesting to see what you've done.

    Since Nov 2006 • 228 posts Report Reply

  • BenWilson, in reply to Bart Janssen,

    What bemuses me is that people seem weirdly resistant to that idea.

    Word. There's two main hypotheses here:

    1. Unusual foreign demand is driving up prices in Auckland
    2. Collective local lunacy has gripped Auckland

    I don't see 2 as any kind of null hypothesis. Both hypotheses say "there's something going on". The null hypothesis is that there's nothing going on. That one is already clearly rejected in the way, way out of normal growth in Auckland prices.

    You have to actually have the strange ideological view that some economists seem to have that money does not exist, and everything works as a perfectly balanced bartering system to think that 2 would be a case of business as usual.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • BenWilson, in reply to B Jones,

    I was wondering whether changes in the amount of deposit required might influence things. If all of a sudden people need a 25% deposit rather than a 5% deposit (or whatever you could get away with in 2007), that might show up as lower levels of debt vs housing value? Or is that small potatoes?

    That already happened, didn't it? LVRs were changed. David, did you notice it affecting debt/value ratios?

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Michael Homer,

    The main issue with the analysis is that it's overconfident. I don't think it's necessarily false in its general thrust, but you just can't actually know the magnitude involved from it because of all these confounds people have identified.

    Wellington • Since Nov 2006 • 85 posts Report Reply

  • Jim Cathcart, in reply to Michael Homer,

    The main issue with the analysis is that it’s overconfident. I don’t think it’s necessarily false in its general thrust, but you just can’t actually know the magnitude involved from it because of all these confounds people have identified.

    I agree but sectoral balances suggests that the idea of "magic money" comes from the bank's ability to create money out of thin air.

    Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Since Nov 2006 • 228 posts Report Reply

  • BenWilson, in reply to Glenn Pearce,

    IMHO low interest rates are the single biggest cause of the increase in property values.

    Could be. But other factors could be nearly as big as low interest rates. To think we can fix things only with interest rates because they are strongest is akin to saying you can fix my swimming by just working on my right arm because it’s stronger than my left one. Actually, you want to work on the left, and also the legs (despite a far smaller contribution each), and also look at other refinements, like abdominal tension, breath control, shaving your chest, etc.

    I say all that without even accepting the dominance of interest rates. If we somehow proved that foreign investment were the biggest lever, that wouldn’t mean that we should stop worrying about interest rates either.

    The way I see it, any time there’s any control we could use to tweak the economy, we should consciously aim to have it in the arsenal for use, even if we don’t always use it. That makes our system less fragile. It takes pressure off the other controls. We design vehicles to go backwards and forwards, even though they could get to most of the same places by just going forwards and steering. It’s just way less easy, and can get completely stuck. Let’s not design our economy like a car with only one gear and a wheel that can only be turned in one direction, because it’s conceptually purer. Let’s design it with maximum functionality, much of it completely redundant (until the day we need it – like our ABS on that one wet day some idiot crosses the centerline at us).

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • David Hood,

    As far as I know the only LVR limits were in October 2014, which you can eyeball on figures 2 through 4. It might have stopped debt climbing a bit higher (the amount we cannot know because history only happens once) but looking at the graphs I am inclined to say it did not have much effect on the debt /value ratio.

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • David Hood,

    Jim, even if banks are in a quasi creation process, doesn't the money still enter the economy through loaning it out? There is no evidence of banks buying houses directly.

    p.s. welcome to R. Though I tend to be more involved in courses on Coursera than EdX (I happen to find the Coursera discussion forums suit me better) there is a vast potential for people to learn things of interest out there.

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • Steve Barnes,

    So how does this work?.
    As with affordability of pensions, with an aging population. Surely we are looking at those people who have, over the years, paid off their mortgages at the same time as their property values going through the roof, as it were.
    With the House prices in Auckland rising as the rest of the country virtually stagnates, these people could well be cashing up and "Retiring to the Country", cash rich, one less mortgage on the books?.
    It needn't be offshore money, it could just be that the "Magic Money" is coming from those that made the "Big Bucks" since the 80's on spiraling house price inflation, trading down to the cheap rural properties and buying an "apartment in town" for the kids, who will never be able to get on that mythical "Property Ladder".

    Peria • Since Dec 2006 • 5521 posts Report Reply

  • David Hood, in reply to Steve Barnes,

    Steve, who are they selling the houses too when they trade down to the country? That is where the debt comes from.

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • Jim Cathcart, in reply to David Hood,

    Jim, even if banks are in a quasi creation process, doesn’t the money still enter the economy through loaning it out? There is no evidence of banks buying houses directly.

    The point is about debt creation is that it still balances out. The loan creates the asset, which is recorded in national accounts. Ownership is really irrelevant. I want to take the time to go through what you've done. BTW, I'm not really sure about your approach to inflation because it seems that your position is that asset prices increase, which is fine, but I'm sure that you will see a relationship with the money supply.

    Since Nov 2006 • 228 posts Report Reply

  • David Hood,

    Jim, you may need to talk me through how it applies in this particular case in more detail. From my perspective we've got two data sources:

    Household Debt- The Total amount of money borrowed by people from banks. So money that has been loaned to people and used by them in some fashion, almost entirely for buying houses.

    Housing Value- A Total figure of the value of all houses generated from the money changing hands where a house is sold.

    And a traditional model of house purchase- that most people, when they buy a house, loan some money from a bank.

    The ultimate creation point of the money in question doesn't seem to enter into it in this particular analysis, which is looking at the breakdown of the relationship between NZ mortgages and house purchases and failing to find the source of the added money from other areas of the New Zealand economy,

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • Jim Cathcart, in reply to David Hood,

    Yes David, I hear you. There is no reason why this doesn't balance. The definition of household debt is a bit surprising as the composition needs to be considered, Also, for housing values, I'm not sure how the total value is calculated across the housing stock. Australia's central bank uses a hedonic index but I have no idea what is done in NZ.

    Since Nov 2006 • 228 posts Report Reply

  • David Hood, in reply to Jim Cathcart,

    Since you mention Australia, I'm going to say I am really frustrated by Australia housing data. The only major time series for housing value seems to be the major cities one, which means comparing national household debt to partial housing value without knowing what is going on outside the major cities. That creates too large an unknown for me to be comfortable with- this is why I just don't talk about Australia.

    Dunedin • Since May 2007 • 1445 posts Report Reply

  • Jim Cathcart, in reply to David Hood,

    Since you mention Australia, I’m going to say I am really frustrated by Australia housing data. The only major time series for housing value seems to be the major cities one, which means comparing national household debt to partial housing value without knowing what is going on outside the major cities. That creates too large an unknown for me to be comfortable with- this is why I just don’t talk about Australia.

    Quite interesting that approx only 60% lives in the key capital cities. NZ perhaps is more concentrated in the key urban areas compared to Australia. Also, comparatively, cities such as Newcastle are well developed with relatively stable, affordable housing costs. The Gold Coast is a typical bust / boom environment based around speculation.

    Since Nov 2006 • 228 posts Report Reply

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