Speaker: House prices and the "Magic Money"
162 Responses
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David Hood, in reply to
The argument is supported by the REINZ price index though ,which is only based on sales and shows the same pattern. So if it is a collective delusion it is a delusion that someone is putting up the money to fund.
I have two big problems with "small number of sales having a disproportionate effect" arguements.
- there is no evidence for a dramatic drop off in sales,. Indeed, if anything whenyou look at the figures, there have been more houses sold in the recent period of rises than earlier periods of less rises. and larger volumes would mean that the proportion of house sales contributing to house value is higher. Yet mortgage debt is going down as a proportion of the price (because the price is rising so much but not debt). That logical incosistancy is enough to make me rule out the small sample effects theory.
- any one of small sample altering things is followed by other sales periods, and a small freak event would be cancelled out by subsequent sales events in a central limit theorm kind of way.But, while I feel that renders the arguement moot, I am happy to suggest what you do to test it. Get hold of a sales volume time series, and see how well sales volume predicts price (you could pretty much take the data file I put on github and replace the debt data with volume data and see what the graphs are like. For the "it is low volume that is not representive" arguement to work there would need to be a relationship between lack of sales volume and dramatic rises in price. I you want to test your theory, please post the graphs as while I don't think it makes logical sense I am always willing to be convinced by data.
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David Hood, in reply to
Chris, I've only really glanced at the immigration pattern long enough to dismiss it without worrying about why people were immigrating- I basically did the things you normally do with time series- see if it lines up in a time (in this case) quarter on quarter way and seeing if it fits better with a time offset (like the Irish and US graphs upthread become a perfect fit with a time offset, not so much NZ). Didn't really see much so moved on.
People can argue for a unusual change in the kind of immigrants (in terms of their ability to access capital) but at that point you are arguing against the lack of trend among immigrants generally so the small set needs to be exerting a more and more powerful effect (since it is clearly not all immigrants) and if people want to start arguing that I think they need to bring some postive evidence that overwhelms the general immigration pattern.
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Russell Brown, in reply to
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.
Well, yeah. With each official valuation the value of improvements as a proportion of the the overall valuation of my central Auckland residential property decreases. But I’m guessing that location (ie: land) has been the primary driver of residential property prices since way before 2001.
Also, what form of demand would cause an increase in Auckland land prices so tremendously out of proportion to population increases in the past five years? If demand for land is driving up prices, where is that demand coming from? It doesn’t seem to be related to external or internal migration. I think this relates to David’s point about the difficulty of planning housing supply when the demand indicators available to you don’t tell you anything useful.
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Michael Homer, in reply to
there is no evidence for a dramatic drop off in sales
You're responding to something I just didn't say.
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Swan, in reply to
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?
Well my hypothesis is in my comment above - constrained land supply has resulted in prices being bid up.
But also lower interest rates.
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linger, in reply to
"small number of sales having a disproportionate effect” arguements.
- there is no evidence for a dramatic drop off in sales,.The argument being made probably isn’t about there being a smaller total number of sales (’cos, as you say, that’s a non-starter), but rather, that it may only take a small number of high-price outlier sales to shift the price expectation for most sales in the same region (through a false consensus effect).
The central limit theorem does not apply to psychology – because our reactions do not follow a normal distribution.
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David Hood, in reply to
Michael, since I misunderstood where you were going previously, perhaps you could work through an example.
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Swan, even if thos are reasons for the prices going up, we come back to the problem of where is the money coming from for paying for the bidding up? Because the increase in prices is not being paid for by increasing borrowing (people are not borrowing more to pay for the increase), household income increases are flat, and there is no obvious shifting money out of the sharemarket or things like that.
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David Hood, in reply to
linger, the Central Limit Theory may not apply to psychology,, but the arguement is that it if you get an outlier event in one year, it will get brought back into line by eventts from subsequent years. If it doesn't it isn't an outlier. Hence the CLT.
If the hypothetical high priced outlier sale does shift all the neighbourhood, it is not an outlier and the sales of the other houses is at that value, and people have to find the money to play those prices. If it is an outlier, things revert.
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So: over this period, we’re probably seeing an increase in external-sourced funding for land sales. That much seems a safe conclusion.
This may also translate to an increased absolute number of sales involving such funding – which could mask flat or declining local-funding-based sales totals. But we really don’t yet have sufficient information to support that interpretation.—
The “it’s-not-really-an-outlier-if-the-market-shifts” argument isn’t convincing, as it assumes that the market is rational and that bubbles don’t happen. Things don't have to revert immediately, especially if more air keeps being pumped into the bubble from outside.
I'm not sure we're entirely at odds here?
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David, that response to my question put to Stephen Hulme was responded to on the other website thus:
the last graph in your linked article can be, more or less, reconciled by the RBNZ's estimate of foreign debt.
External Debt in New Zealand increased to 247182 NZD Million in the first quarter of 2015 from 243036 NZD Million in the fourth quarter of 2014. Read more
The correct assumption that this debt is cross currency basis swapped and thus designated off balance sheet and not included in the official RBNZ M growth series data releases is suspect in my view because the swapped NZD's should show up in official lending stats. But I don't hold out much chance of getting a coherent official response. I find it's commonly declared "commercially sensitive", hence inexplicable.
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David Hood, in reply to
linger, I think I would agree to that. Which is why I've been describing it in terms of influence- the volume of the explicable money but into the hpusing market vs the unexplained. We have no idea about how those volumes break down in terms of number, price and location of individual houses.
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Katharine, I am sufficiently not an economist/banking person that I will say “It sounds from that like there is a similar sized pool of money out there that has something to do with cross border currency movements”
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Michael Homer, in reply to
What linger said.
people have to find the money to play those prices
I can swap my tulip bulb for another tulip bulb with a similar valuation without finding any actual money.
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David Hood, in reply to
but if you swap your tulip bulb for a tulip bulb at the same valuation, this method will zero out the transaction as it is only looking at increases.
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Michael Homer, in reply to
No, it won't, because your volume data is obtained by counting transactions. There are two of them here.
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step me through this then, because I'm not seeing it.
- in the tulip swap no increase in price is generated.
- the sale of your first tulip and pruchase of the second tulip, each for the expected price are reported to the tulip valuation authority TV
- as both tulips changed hands for the expect amount (a tulips worth of Guilders?) this leads to zero change to the total value of tulips
- as there is no increase in the value of tulips my method that looks at how much people are increasing borrowing to pay for tulips, and how much tulip value has increased correctly picks that there has been zero borrowing and zero increase in price. -
BenWilson, in reply to
Well my hypothesis is in my comment above – constrained land supply has resulted in prices being bid up.
I can see that constraining land supply will mean that rising demand will lead to rising prices. What I don't see is where so much demand came from. If land supply were rising at the same pace as demand, then prices would remain stable.
Are we seriously suggesting that Auckland is meant to grow at roughly the rate that it's property prices have been rising? So 26% in the last year alone? We're meant to build a whole quarter of the city in one year?
Not even the crazy unconstrained growth of an anarchic third world country bursting into the industrial revolution can keep up with that. This is a stable and mature democracy with a high standard of living. It can't supply the labour to build so many houses, it can't get the goods to make them, it can't possibly allow consents that rapidly because there isn't enough manpower to consider all of the planning issues. As it is, the city is turning into a sprawling suburban nightmare - is the answer really to intensify that? Or is it to try to come to terms with the sources of the demand? To ask ourselves as a nation whether it's actually in our interests to allow it? Of course it's in the interests of a rich minority. That much is obvious.
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Michael Homer, in reply to
A tulip is valued at $500. Alice buys Bob's tulip for $1000. Tulips now have a paper value of $1000. Carol sees a good deal and sells her tulip for $1000 to Dan, who sold his own tulip to get the money. Carol uses the money to buy Erin's tulip, and Erin buys Dan's. Four transactions have occurred.
Alice borrowed her $1000. Two other people shortly afterwards didn't buy any tulips because they were now too expensive, so they didn't borrow $500 each.
Total borrowing is the same. Transaction volume has increased. Asset value is doubled.
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BenWilson, in reply to
I can swap my tulip bulb for another tulip bulb with a similar valuation without finding any actual money.
Good luck with that. Try it down at the plant shop and see what they say.
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Katharine Moody, in reply to
Yes, that's how I interpreted it as well - and the RBNZ refuses to adequately explain the balance discrepancy (the post immediately above the previous one linked);
New Zealand's official overseas reserves are now at NZ$26.5 bln (including other FCY assets), the highest they have been since May 2012 when they reached $28.3 bln.
A fair chunk of this figure is tied up in the USD swap leg associated with RBNZ settlement cash creation and lending out hedged crown deposits. View D10, section 10 and R3, memorandum items.The unexplained balance discrepancy is a matter of ongoing fruitless investigation on my behalf.
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chris, in reply to
I just assumed that was the purpose of all the marketing and advertising.
Speaking as a nation, I think you’ll find there are a lot of non-Auckland sellers desperately hoping those prices overflow into the regions, a lot of non-Auckland buyers pleasantly surprised that they are for the most part not and a lot of non-Auckland long term tenants who can’t for the life of themselves understand why anyone would want to live there. Not a great time to buy in Sydney but we're moving into a fantastic window to buy in Perth – as they say.
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David Hood, in reply to
OK I will agree that in the hypothetical case that in a closed tulip market you can get the same result if all of the following criteria are met:
- there is a jump in tulip prices large enough to cut people out of the market (permanently- if they enter later they will be taking on a bigger debt and everything would be back in sync)
- the records of volumes in tulip sales are kept up by everyone at the same tulip price points swapping tulips (if they move to a higher price point they will need to take on debt)
- they keep swapping tulips among themselves at the same price point to stop the volume falling back.
- no one ever exits the market by having to sell to the people that were cut out, otherwise the price will fall back.But to be honest, I can't see the explanation working if any of those are violated.
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chris, in reply to
To ask ourselves as a nation whether it’s actually in our interests to allow it?
Then there’s of course this:
City’s loss contributes to Auckland’s gain 05:00 20/01/2012
While some may have returned home to shaky ground after a short stint in Auckland, three times more Cantabrians moved to Auckland in 2011 than in 2010.
According to New Zealand Post, since last February’s earthquake about 896 Christchurch residents or businesses changed their postal addresses to Auckland. In 2010, 288 Christchurch residents or businesses did so.
The change-of-address figures are backed up by Ministry of Education statistics showing 1494 Cantabrians were newly enrolled at schools in Auckland after the February quake. While the stay was temporary for some pupils, about 767 remained enrolled in the region in November.
[…]
Statistics New Zealand has said that Christchurch’s population decreased by 8900 in 2011, while Auckland’s increased by 6600.
Sarah Miles has some more:
Christchurch Exodus – Cosmetic only?! May 4, 2014
Since that time, it is said that in the year to June 2011, 10,600 more people left Christchurch than arrived.
[…]
Additionally, Christchurch’s tertiary sector is said to have experienced a 37 per cent drop in international-student numbers.
Equal if not more pressing questions for our nation. As if millions of tulips suddenly cried out in terror and were suddenly silenced
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James Butler, in reply to
Also, what form of demand would cause an increase in Auckland land prices so tremendously out of proportion to population increases in the past five years? If demand for land is driving up prices, where is that demand coming from?
Remember price isn't driven just by demand; it's the combination of demand and supply. In the case of a finite resource, if there is still demand for the resource after the finite source is used up then prices will increase. It's trivial to say that land is a finite resource, but the real case of a city with new developments opening and new dwellings being built on old land is more complicated. But it's not unimaginable that if a city passed the point where new development and intensification was easily keeping up with population growth, then it might see a great increase in prices as the supply tightened, even if the population growth was more steady.
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