Speaker: House prices and the "Magic Money"
162 Responses
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David Hood, in reply to
The change in the scale of movements on Fig. 2 coincides with the adoption in 2004 of a new methodology for calculating the HPI
I can rerun things with the detached series next week (that will be the first substantial free time I get) but a couple of things make me suspect there won't be any difference (or if anyone wants to substitute in the detached series and run it yourself, go ahead):
- the uptick started in 2001, and I think we can rule out the wild changing inconsistencies from 2004 would imply sudden quarterly changes in housing stock composition as that would have notable effects in other data
- they say on the page that the calculation was back dated to 1989 so all the data has been calculated in the same way "This broader index has been backdated by QV on the new methodology to December 1989." -
David Hood, in reply to
Some regional breakdowns for you (5 years).
I've tucked that away for when I have the time to extract the graphs back to data. If there is some regional information on debt, that would be just perfect. But even just with this estimating the kind of turnover that is generating the value increases should be possible.
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David Hood, in reply to
Those already in property would make a killing.
Up to a point. Some living in NZ presumably does still need to buy a house in the NZ market if they are living here. So they can stay in the game but not leave it to realise the profits. If a NZ resident sold to someone from Gondor, the Gondor housing market they are in may (almost certianly did) see different rates of increase through the same period of time.
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Swan,
I will need to look at this in more detail, but it is not clear to me why increases in debt would need to match increases in house value. A huge amount of the increased value in the housing stock is simply people who own their own houses which have been revalued upwards. The additional value of my house since I bought has no debt associated with it, it is simply a revaluation of an asset.
So while I am sure your "missing money" is indicative of something changing, it doesn't necessarily have anything to do with "extra money" coming into the housing market.
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David Hood, in reply to
Try this:
- Housing Valuations are based on house sales.
- House prices going up makes Housing Valuations go up.
- For house prices to go up, people have to pay more money than was previously paid for the house (or similar houses)
- They have to get the money from somewhere
- In NZ historically, and all around the world presently, that extra money comes from banks in a predictable way.
- In contemporary NZ, the money is not coming from banks.
- It is not detectably coming from any other sector of the NZ economy. -
. - For house prices to go up, people have to pay more money than was previously paid for the house (or similar houses)
Yes but as Rich pointed out above only 1 house needs to be sold for an increased price for the value of all houses to be increased (House valuations are based on sales) but there is no corresponding massive increase in debt levels (except for the 1 person that bought the 1 house that was sold).
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David, I think Swan's point is that when you say "they have to get the money from somewhere", many of them will be getting the money from the sale of their house, which has gone up in value.
e.g. A village has 10 houses. All the people living in the houses own their homes. They bought them in 1965, when the going rate was 30c and a penny whistle.
One family leaves the village. Someone new comes to town and buys their house. They have lots of money, and they pay $1m for the house. So now all the houses in town are "worth" $1m. The townsfolk have a flurry of real estate activity, rearranging themselves amongst the 9 other houses, and paying each other $1m each for the properties. Noone has to borrow any money, because the value of their own home has gone up too. So the value of the houses has gone up, but the debt hasn't.
I'm 100% certain there's a reason why such a scenario wouldn't explain the graph you've provided, but I can't quite figure it out myself. I'm looking forward to hearing it.
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David Hood, in reply to
That is true, however it is not linear- the sold houses form a representative sample that is adjusted by subsequent sales. So if one freakish sale saw a general increase, that would be brought back down again by subsequent sales. The graph of sales prices of REINZ tracks the graph you can make from the housing valuation data, so when looking at the relationship one explains the other.
If you are trying to argue that it could be caused by a freakishly large drop in the number of houses selling (so that the small number is distorting things) I have never seen any evidence of that, and it is the kind of thing that would leave traces in the economy elsewhere. But by all means if you have evidence, bring it.
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Lucy, I'm focusing on the increase in value, so lets step it through
- the first sale pushes up the values
-everyone sells there houses to each other at the new values. Effectively swapping housesIn this second step, nothing happens that generates an increase in values, it just confirms the status quo. This case does not appear in the figures because the price is not increasing. Only the first event that generated the increase is counted.
If a local wants to push up the price, they need to get the money from somewhere to pay for an increase (rather than the not counted status quo).
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f you are trying to argue that it could be caused by a freakishly large drop in the number of houses selling (so that the small number is distorting things) I have never seen any evidence of that, and it is the kind of thing that would leave traces in the economy elsewhere. But by all means if you have evidence, bring it.
I was trying to use an extreme example of 1 house to demonstrate to you that an increase in the estimated value of all houses in the country does not require a corresponding increase in debt. Nothing more, I'm out.
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BenWilson, in reply to
I was trying to use an extreme example of 1 house to demonstrate to you that an increase in the estimated value of all houses in the country does not require a corresponding increase in debt
I don't think David is disputing that. He's arguing that a corresponding increase in debt hasn't happened, after all. The idea that it should seems to be received wisdom in economics. It's also how it works in most countries that don't have such open floodgates. When foreign money either can't or just isn't coming in, then debt is the main source of new money in the economy, thus the main source of this kind of inflation. If it hasn't been issued, then the money had to come from somewhere.
I get that you're saying that it doesn't take 300 billion of actual money to inflate valuations by 300 billion. And I think that's true - we haven't had 300 billion in loose money flowing around the NZ economy. It would be hard to not notice that. But the current valuation is not based on 1 sale. It's based on thousands of sales happening on a monthly basis. Furthermore, the 300 billion is a problem not because having loose money is bad, but because that's 300 billion of asset value standing between NZers and home ownership at the moment. Even if it's not realized money, that doesn't stop it being an impenetrable barrier to entry. It's money that NZers would have to have just to afford to buy the housing stock in their own country.
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Is it possible that very large chunks of money is flooding in from the very very rich Chinese who are allegedly looking for places to invest? (I don't mean that in a racist way. It seems to be a fact that such money is flooding other countries as well.)
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David Hood, in reply to
To be completely clear, I think ethnicity is irrelevant to this discussion- the lift that began in 2001 is part of the same problem, and if it is foreign capital distorting local conditions, it would have been a different set of countries way back then.
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Swan,
"I don’t think David is disputing that. He’s arguing that a corresponding increase in debt hasn’t happened, after all. The idea that it should seems to be received wisdom in economics."
Why? What is the reason for debt to go up because peoples houses have been revalued. Sure they could all go out and load up on debt to spend on holidays (the wealth effect) but there is no reason why that should be so, and certainly no reason why they would draw down some large proportion of their equity.
Having had a bit more time to think about this, one potential hypothesis is that since the "magic money" change point in the graph, the increase in the value of the housing stock has been associated more with revaluation of existing assets and less to do with real investment.
For example, if I build a new house, then that is a real investment that requires money from somewhere - very likely in the form of debt. This investment will cause a rise in the value of the housing stock. Similarly if I renovate a house.
So before the change point, more of the rise in housing stock value was due to the rise in the real value of the improvements on the house.
After the change point, the rise was more about revaluation of existing assets, and specifically increases in the value of the underlying land. We know land values have increased hugely in our cities over the last decade.
Incidentally this fits in perfectly with the argument that land supply is the main culprit when it comes to housing affordability.
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Swan,
Sorry that should say "the real value of improvements on the land"
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David Hood, in reply to
Why? What is the reason for debt to go up because peoples houses have been revalued.
Because the revaluation amount is based on sales information- so the sales price going up leads to the revaluation figure. The debt is going up for the people buying the houses at the higher prices which is the trigger for the revaluation of other houses. Would I help if I link to a Real Estate Institute of New Zealand graph of house prices.
That is the same graph as the valuation information- valuation and price can be used interchangeably, and REINZ do not release their actual data that their graph is made from, but in terms of plugging numbers into a calculation, the valuation numbers which make the valuation graph will give the same figure 2 because the graph is the same shape.
Because the amounts on the REINZ graph are in "Housing Price Index" dollars, it is tricky to talk about the exact amount, but because the graphs are the same shape, it will come out to 3/8ths of the amount spent on increasing the value of actual sales is not explicable by household mortgages or obvious other parts of the economy.
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James Butler, in reply to
After the change point, the rise was more about revaluation of existing assets, and specifically increases in the value of the underlying land. We know land values have increased hugely in our cities over the last decade.
Incidentally this fits in perfectly with the argument that land supply is the main culprit when it comes to housing affordability.
With the caveat that "land supply" is shorthand for something like "excess dwelling capacity" - let's not forget that we could build more dwellings on our existing land - I think I agree.
Consider Lucy's case, except the village is on a tiny, crowded atoll with extensive viewsheds of the neighbouring volcano. What happens to the total value of houses in the village when someone new needs a home, whether they arrived from another island or are the grown-up child of existing villagers?
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Che Tibby, in reply to
But it occurred to me that this is where there is supposed to be a relationship and the numbers stopped adding up.
yeah, hence my suggestion that *part* of the equation might be on-shore investors.
otherwise, yeah, totes off-shore money from somewhere.
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BenWilson, in reply to
Sure they could all go out and load up on debt to spend on holidays (the wealth effect) but there is no reason why that should be so, and certainly no reason why they would draw down some large proportion of their equity.
Nor is there any particularly strong reason why they shouldn't.
The question of why rising debt is traditionally strongly associated with rising asset prices is interesting. But I'm not asserting that it must be so, and from what I understand of David's point, he's asserting that it isn't so, here in NZ, right now. So I'm not sure that we're having a head-to-head argument here.
one potential hypothesis is that since the “magic money” change point in the graph, the increase in the value of the housing stock has been associated more with revaluation of existing assets and less to do with real investment.
For sure. Nothing re-evaluates existing assets like people coming in with a whole lot of money and bidding them up. That might be what's happening here. If it isn't what's happening, it would be interesting to hear your theory about why there has been a national reevaluation that added 300 billion to our estimation of our net asset worth?
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David, thanks for doing this. It's a clever analysis that can't be turned into a racist dogwhistle. We need a lot more of this sort of thing.
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David Hood, in reply to
But I’m not asserting that it must be so, and from what I understand of David’s point, he’s asserting that it isn’t so, here in NZ, right now
I would say I'm asserting that, by the numbers
- it used to be so
- it isn't any more
- as it isn't, the money pushing up prices (which in turn push up values) has to be coming from somewhere.
- it is nowhere easy to see alternative sources from within the NZ economyyou can think of it as a case of "follow the money" where we can rule out the traditional suspects.
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David Hood, in reply to
Thanks. I had to make a few judgement calls about not winding too many information sources together to make the basic point in a way people can follow along.
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Katharine Moody, in reply to
you can think of it as a case of “follow the money” where we can rule out the traditional suspects.
David, I've invited the chap who maintains this data analysis on RBNZ activity to have a look at this discussion;
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The argument from volume ("this is based on thousands of sales") doesn't hold, because almost all the transactions can be swaps of assets at their new purported values. You'd need a pretty small number of above-value transactions to set a new benchmark, and you can borrow the same total amount spread across fewer purchases to get that. You can also have a small number of outside transactions with the same effect, or a mixture.
There could be many reasons that behaviour has changed (e.g., initial disproportionate increase in paper value vs income leads to creation of landed class, collective delusion).
It's probably not the most likely explanation, but the analysis doesn't exclude it; it's suggestive only at this point.
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chris, in reply to
but the actual immigration numbers are not a match to house price rises
The issue I’m unclear about is not so much related to immigration per se, but to residency and purchases by expats. New Zealand being one of the more convenient countries to immigrate to, get residency and then leave. Wikipedia is giving
stats like this:Between 1991 and 1995 the numbers of those given approval grew rapidly: 26,000 in 1992; 35,000 in 1994; 54,811 in 1995
and:
In 2005, almost 20% of New Zealanders were born overseas, one of the highest percentages of any country in the world.
and
In 2004–2005 Immigration New Zealand set a target of 45,000, representing 1.5% of the total population. However, the net effect was a population decline, since more left than arrived. 48,815 arrived
and
Nearly 100,000 people were issued work permits to work in sectors ranging from IT to horticulture in the 2005/06 year. This compares with around 35,000 work permits issued in 1999–2000. Around 52,000 people were approved for permanent New Zealand residence in 2005/06. Over 60 per cent were approved under the skilled or business categories.
When spreading these kinds of residency/ immigration numbers over 15 years one can get an inkling as to how many purchases may be being made by residents/ skilled immigrants with offshore money. In addition there are those like Paul who’ve returned. In addition there are also citizens/ permanent residents (roughly a million New Zealanders) who moved abroad, some of whom have continued to own/ buy property here.
If we divide 300b by say (plucking a number) 750,000 people that comes to about $400k a piece. So I’m wondering what impact these – shall we say legitimate – trends would have.
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