Public Address | Cafe | Speaker: House prices and the "Magic Money"

Katharine Moody

Tue, 04 Aug 2015 09:15:28 +1200

http://www.interest.co.nz/opinion/76847/caroline-courtney-argues-john-key-ought-take-leaf-out-his-mate-david-camerons-book

chris

Sat, 01 Aug 2015 14:30:18 +1200

For sure David, my post was talking around the data and was specifically in response to Katherine’s as I’m not convinced the drivers could be attributed to a single demographic as much as they are a perfect storm of the many factors that contributors have mentioned. For example this:

by…

David Hood

Sat, 01 Aug 2015 14:18:59 +1200

GV is based on the QV total value (it is the individual values). The revaluation of an existing house is a symptom of the growth, but the house doing nothing was not the cause. the cause is actual sales events. So where Katherine was worrying it was that proportion of…

Steve Barnes

Sat, 01 Aug 2015 14:09:23 +1200

So why not use GV, or is GV the product of the sales numbers?.
Is it like counting your chickens in the basket you shouldn't have put all the eggs in?

Michael Homer

Sat, 01 Aug 2015 14:00:01 +1200

The "total house value" metric is an estimate based on sales prices and total number of houses. If it doesn't sell it never gets measured, but if it sells multiple times they all drag the average sale price towards themselves.

Steve Barnes

Sat, 01 Aug 2015 13:49:50 +1200

If a house has never been sold in the period it is impossible for it to be part of the growth, if a house has been sold 15 times in 15 years, that one house will have contributed strongly to the growth in prices.

I can't see this. Surely, if…

David Hood

Sat, 01 Aug 2015 09:45:43 +1200

People do it in Germany

Just as a thought experiment (since the Government has not exactly overwhelmed us with data and actions pretty much any thought experiment solution is about as likely to happen) I was considering a hypothetical Germany+++ which is an environment where renting was so utterly tenant…

Ian Dalziel

Sat, 01 Aug 2015 09:42:36 +1200

'Magic Money' & slippery customers...
Maybe it's just the logical outcome of us becoming a 'BananaRepublic', and this is money laundering as Cameron says is happening in London's property boom...
...by all and sundry, oligarchs of many stripes and proletarian P Pushers – who knows?

David Hood

Sat, 01 Aug 2015 09:33:41 +1200

Chris, I would absolutely agree that New Zealand is a diffuse, geographically spread entity. Though I think that to use that as the "magic money" why could do with some fleshing out about how that could cause the sudden change in the early 2000s when there were, to my knowledge-…

chris

Sat, 01 Aug 2015 00:42:33 +1200

is this gap, this “magic money” (300/800 – roughly 37%, more than a third of our residential housing stock!) owned/purchased directly by people who live/work/earn/borrow and pay taxes offshore? If so, and the Reserve Bank knows it – then obviously the government knows it too – and neither are prepared…

David Hood

Fri, 31 Jul 2015 23:27:35 +1200

Just noting it is 3/8ths of the growth. This is not the same thing as 3/8ths of the houses. If a house has never been sold in the period it is impossible for it to be part of the growth, if a house has been sold 15 times in 15…

Katharine Moody

Fri, 31 Jul 2015 22:53:10 +1200

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,

This is the question…

Jim Cathcart

Fri, 31 Jul 2015 21:38:25 +1200

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…

David Hood

Fri, 31 Jul 2015 20:50:37 +1200

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…

Jim Cathcart

Fri, 31 Jul 2015 20:18:55 +1200

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…

David Hood

Fri, 31 Jul 2015 19:29:49 +1200

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…

Jim Cathcart

Fri, 31 Jul 2015 18:53:54 +1200

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…

David Hood

Fri, 31 Jul 2015 18:51:45 +1200

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

Steve Barnes

Fri, 31 Jul 2015 18:44:00 +1200

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…

David Hood

Fri, 31 Jul 2015 18:32:52 +1200

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…

David Hood

Fri, 31 Jul 2015 18:30:05 +1200

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…

BenWilson

Fri, 31 Jul 2015 17:23:10 +1200

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…

Jim Cathcart

Fri, 31 Jul 2015 17:22:52 +1200

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…

Michael Homer

Fri, 31 Jul 2015 17:12:01 +1200

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.

BenWilson

Fri, 31 Jul 2015 17:09:56 +1200

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?…

BenWilson

Fri, 31 Jul 2015 17:02:40 +1200

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…

Jim Cathcart

Fri, 31 Jul 2015 16:55:49 +1200

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.

BenWilson

Fri, 31 Jul 2015 16:55:07 +1200

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…

Jim Cathcart

Fri, 31 Jul 2015 16:51:05 +1200

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…

Russell Brown

Fri, 31 Jul 2015 16:22:49 +1200

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,

Brent Jackson

Fri, 31 Jul 2015 16:13:11 +1200

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…

Glenn Pearce

Fri, 31 Jul 2015 16:11:03 +1200

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…

David Hood

Fri, 31 Jul 2015 16:03:46 +1200

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)…

linger

Fri, 31 Jul 2015 15:36:23 +1200

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…

Katharine Moody

Fri, 31 Jul 2015 15:32:38 +1200

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…

B Jones

Fri, 31 Jul 2015 13:15:33 +1200

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…

Bart Janssen

Fri, 31 Jul 2015 12:48:49 +1200

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.

David Hood

Fri, 31 Jul 2015 12:46:26 +1200

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

I would rate this an very receptive audience on this blog, not necessarily in full agreement (which is fine) but most people are willing to talk through the data (which I would call the true goal) rather than…

Lilith __

Fri, 31 Jul 2015 12:45:39 +1200

All that together suggests that the market is not simply responding to a lack of supply but is instead responding to an increase in external buyers with external money.

What bemuses me is that people seem weirdly resistant to that idea. I honestly don’t see anything surprising in the idea…

Katharine Moody

Fri, 31 Jul 2015 12:37:51 +1200

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

Yes, perplexing.

Bart Janssen

Fri, 31 Jul 2015 12:10:28 +1200

While I appreciate the value of testing David's analysis, especially given that some of the way money moves around in banks and in housing markets is somewhat arcane, I also find myself somewhat bemused by the discussions.

Yes it's possible David's analysis misses something.

But it is also pretty clear…

David Hood

Fri, 31 Jul 2015 10:49:18 +1200

true, for permanently I would have been better saying something like "for as long as you are measuring"

linger

Fri, 31 Jul 2015 10:34:47 +1200

You also need the people excluded to be permanently out of the market
Not necessarily – people (in or out of the market) aren’t immortal. What you do need, though, is for the average lag time before people can enter the market to keep increasing over time.

David Hood

Fri, 31 Jul 2015 10:13:27 +1200

to some extent the fundamental difference between an internal market "tulip" boom and an external wave of capital is that in an internal boom someone inside the economy has to front up with the money at some point.

Katharine Moody

Fri, 31 Jul 2015 10:11:20 +1200

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

Then there is also the opportunity of rental returns growing at a rate higher than wage growth, regardless of underlying asset valuation. This is in part what happened in…

Greg Dawson

Fri, 31 Jul 2015 10:01:33 +1200

Thanks for explaining. Still think there is a factor down to the decreasing number of new entrants, but not the whole shebang.

It really would be good to have volume as well as value information. So much easier to try and figure things out if we could see variations in…

Katharine Moody

Fri, 31 Jul 2015 09:59:06 +1200

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

To make use of it as a refuge in case of civil unrest in ones country-of-origin, or in case one falls foul of the authorities in ones country-of-origin.

David Hood

Fri, 31 Jul 2015 09:50:13 +1200

obviously not via direct swaps, but managed transitions via helpful banking institutions)

That just adds the debt as small amounts for lots of people rather than a lot for one person, as soon as you start involving third parties or shifting between value ranges. the debt still goes up.

Also…

Greg Dawson

Fri, 31 Jul 2015 09:41:27 +1200

Under that scenario everyone else with a house would need to be not selling, as any non-loon sales at the then current price would be bringing the valuation figure back towards reality.

You also need the people excluded to be permanently out of the market, because if they do save…

David Hood

Fri, 31 Jul 2015 09:34:24 +1200

But I do agree that in a imaginary market where people only ever "buy" houses of the same value by swapping them in private sales with people of the same value houses for mutually agreed arbitrary amounts, then house value would be a meaningless measure.

I don't think we have…

David Hood

Fri, 31 Jul 2015 09:31:57 +1200

So are the two crazy loons "lending" each other the money for the transaction? I think that is verging towards real estate fraud cases you occasionally here about from overseas.

Under that scenario everyone else with a house would need to be not selling, as any non-loon sales at the…

Greg Dawson

Fri, 31 Jul 2015 09:23:35 +1200

is it leads to the next link in the chain of “who you are selling your house to"- either you sell your house to someone (and at the end of the chain someone needs to load up on debt).

But… What if there isn’t an end? As in, new entrants…

David Hood

Fri, 31 Jul 2015 09:23:21 +1200

While it hasn't really come up in this forum, this is an example what I mean by "not detectable in other sectors of the economy"- this is business debt to banks, which if there was a growing relationship to house price would suggest some kind of mass commercial move in…

James Butler

Fri, 31 Jul 2015 09:22:17 +1200

This is probably the right place in the discussion to push LVT and UBI. Subsidise low income buyers, and penalise high-income rentiers.

James Butler

Fri, 31 Jul 2015 09:20:11 +1200

Then we don’t have to have these futile discussions about which cause is most important. Instead we acknowledge that we should be both increasing supply and controlling demand, and then we do both at the same time.
[...]
The levers we can then tinker with are pretty clear. For supply,…

David Hood

Fri, 31 Jul 2015 09:18:45 +1200

While there might be an element of that, the bit you've missed when you say " if you’re over a certain age, debt is needed by those buying a house worth more than the one they have." is it leads to the next link in the chain of "who you…

Greg Dawson

Fri, 31 Jul 2015 09:13:46 +1200

Thing that has been bugging me about this discussion, which I think presents an alternate hypothesis for the magic money gap.

There seems to have been an underlying assumption by a lot of commenters that those buying houses have houses. Which is probably true, if you’re over a certain age,…

Russell Brown

Fri, 31 Jul 2015 07:26:42 +1200

Personally I think it should grow slower than wages and salaries to decrease the wealth gap.

The levers we can then tinker with are pretty clear. For supply, natural technological change is always a upwards driver, but it’s not controllable. Increasing the speed of approvals is a tap that can…

BenWilson

Fri, 31 Jul 2015 01:00:25 +1200

We know that housing prices are rising dramatically, and we can argue all day about why that is (and I’m sticking with “Auckland’s run out of all the easy places to add a dwelling” until I see good evidence that it’s not the case);

I don’t think you’ll find such…

BenWilson

Fri, 31 Jul 2015 00:07:24 +1200

No. Why would that follow?

I see what you mean, that you can't work out how much the demand curve moved from how much the price changed, without also knowing the shape of the demand curve and the supply curve, and how much the supply curve moved. And no one…

James Butler

Thu, 30 Jul 2015 23:37:36 +1200

I think I've worked out what frustrates me most about this discussion. We're talking about the difference between housing value and housing debt, and trying to work out where the "extra" money is coming from; but I'm sure most of us have seen first-hand this missing money being created. Someone…

James Butler

Thu, 30 Jul 2015 22:39:58 +1200

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…

James Butler

Thu, 30 Jul 2015 22:31:03 +1200

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…

chris

Thu, 30 Jul 2015 22:29:54 +1200

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…

David Hood

Thu, 30 Jul 2015 21:55:17 +1200

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…

chris

Thu, 30 Jul 2015 21:49:13 +1200

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…

Katharine Moody

Thu, 30 Jul 2015 21:47:41 +1200

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…

BenWilson

Thu, 30 Jul 2015 21:39:42 +1200

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.

Michael Homer

Thu, 30 Jul 2015 21:38:14 +1200

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,…

BenWilson

Thu, 30 Jul 2015 21:31:03 +1200

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…

David Hood

Thu, 30 Jul 2015 21:22:52 +1200

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…

Michael Homer

Thu, 30 Jul 2015 21:15:31 +1200

No, it won't, because your volume data is obtained by counting transactions. There are two of them here.

David Hood

Thu, 30 Jul 2015 21:10:04 +1200

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.

Michael Homer

Thu, 30 Jul 2015 21:07:29 +1200

What linger said.

people have to find the money to play those pricesI can swap my tulip bulb for another tulip bulb with a similar valuation without finding any actual money.

David Hood

Thu, 30 Jul 2015 21:06:56 +1200

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”

David Hood

Thu, 30 Jul 2015 21:04:42 +1200

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…

Katharine Moody

Thu, 30 Jul 2015 20:58:46 +1200

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…

linger

Thu, 30 Jul 2015 20:56:24 +1200

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…

David Hood

Thu, 30 Jul 2015 20:52:22 +1200

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…

David Hood

Thu, 30 Jul 2015 20:44:15 +1200

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…

David Hood

Thu, 30 Jul 2015 20:37:48 +1200

Michael, since I misunderstood where you were going previously, perhaps you could work through an example.

linger

Thu, 30 Jul 2015 20:31:22 +1200

"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…

Swan

Thu, 30 Jul 2015 20:27:39 +1200

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…

Michael Homer

Thu, 30 Jul 2015 20:25:44 +1200

there is no evidence for a dramatic drop off in sales
You're responding to something I just didn't say.

Russell Brown

Thu, 30 Jul 2015 20:14:34 +1200

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…

David Hood

Thu, 30 Jul 2015 19:41:50 +1200

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…

David Hood

Thu, 30 Jul 2015 19:32:39 +1200

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…

chris

Thu, 30 Jul 2015 19:31:01 +1200

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…

Michael Homer

Thu, 30 Jul 2015 19:06:36 +1200

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…

Katharine Moody

Thu, 30 Jul 2015 18:53:47 +1200

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;

http://www.omo.co.nz/

David Hood

Thu, 30 Jul 2015 18:44:44 +1200

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.

David Hood

Thu, 30 Jul 2015 18:39:52 +1200

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…

Lilith __

Thu, 30 Jul 2015 18:32:39 +1200

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.

BenWilson

Thu, 30 Jul 2015 18:19:22 +1200

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…

Che Tibby

Thu, 30 Jul 2015 17:45:10 +1200

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.

James Butler

Thu, 30 Jul 2015 17:44:23 +1200

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…

David Hood

Thu, 30 Jul 2015 17:41:41 +1200

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…

Swan

Thu, 30 Jul 2015 16:54:19 +1200

Sorry that should say "the real value of improvements on the land"

Swan

Thu, 30 Jul 2015 16:52:17 +1200

"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…

David Hood

Thu, 30 Jul 2015 16:46:35 +1200

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.

Ianmac

Thu, 30 Jul 2015 16:42:56 +1200

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.)

BenWilson

Thu, 30 Jul 2015 16:27:07 +1200

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…

Glenn Pearce

Thu, 30 Jul 2015 15:57:18 +1200

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…

David Hood

Thu, 30 Jul 2015 15:50:04 +1200

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 houses

In this second step, nothing happens that generates an increase in values, it just confirms…

David Hood

Thu, 30 Jul 2015 15:44:13 +1200

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…

Lucy Telfar Barnard

Thu, 30 Jul 2015 15:36:46 +1200

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…

Glenn Pearce

Thu, 30 Jul 2015 15:31:34 +1200

. – 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…

David Hood

Thu, 30 Jul 2015 14:58:03 +1200

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…

Swan

Thu, 30 Jul 2015 14:48:22 +1200

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…

David Hood

Thu, 30 Jul 2015 14:44:11 +1200

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…

David Hood

Thu, 30 Jul 2015 14:29:30 +1200

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…

David Hood

Thu, 30 Jul 2015 14:27:08 +1200

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…

Glenn Pearce

Thu, 30 Jul 2015 14:18:17 +1200

The change in the scale of movements on Fig. 2 coincides with the adoption in 2004 of a new methodology for calculating the HPI.

http://www.rbnz.govt.nz/statistics/key_graphs/1689413.html

Russell Brown

Thu, 30 Jul 2015 13:39:47 +1200

Kia ora. Thank you for popping by.

Indeed. And thanks also to David for participating so usefully in the discussion of his post. Y'all are good.

chris

Thu, 30 Jul 2015 13:39:40 +1200

Undoubtably, but without access to the information on where properties are selling, and for how much within each area, and both of those over time, I can think of no way to break it down regionally.

Some regional breakdowns for you (5 years).

Kumara Republic

Thu, 30 Jul 2015 13:04:16 +1200

Authority X said it was supply constriction due to RMA restriction. I am sure they did.

It's surprising how often this is offered as a received truth.

I've been having fun & games with yet another ACToid on Twitter about the inconsistency of said argument.

Sacha

Thu, 30 Jul 2015 12:22:42 +1200

Kia ora. Thank you for popping by.

David Hood

Thu, 30 Jul 2015 11:46:12 +1200

So, some sectors of the market may be valued more or less correctly, and others wildly inflated.

Undoubtably, but without access to the information on where properties are selling, and for how much within each area, and both of those over time, I can think of no way to break…

David Hood

Thu, 30 Jul 2015 11:40:26 +1200

Would any clues be gained from examining NZ’s capital account figures.

I last looked at it a couple of years ago, but what I found in that area then is that the inflow and outflow of capital from NZ used to be a really bad predictor of house value, but…

linger

Thu, 30 Jul 2015 11:39:27 +1200

our major national asset is worth about 60% of what we have been claiming it isCan we use an overall figure this way? If the “magic money” is from foreign investors/ speculators, it will likely be directed towards properties with the highest perceived (short-term) rise in value, mostly in big…

Tat Loo

Thu, 30 Jul 2015 11:26:02 +1200

Whatever the explanation is, it will also have to shine light on the divergence between change in value vs change in debt (Fig 2) in the period starting circa 2002 when the value line started racing above the debt line. Also in 2008 when the value line plunged below the…

David Hood

Thu, 30 Jul 2015 11:24:23 +1200

They are but perhaps it also needs mentioning that a great deal of added internal borrowings are likely based on leveraging the capital arising from QV revaluations without any corresponding house sale.

Yep, but if that borrowing was being used to buy houses, both housing value and borrowing should be…

David Hood

Thu, 30 Jul 2015 11:22:56 +1200

You’re not comparing apples with apples, you need the $ figures for houses actually sold to compare with the $debt, not the QV valuations.

I don't think you do. The quantum may be different, but the pattern is the same. So for example Figure 2 would show the same lack…

Katharine Moody

Thu, 30 Jul 2015 11:13:38 +1200

The REINZ sales graph and the QV values will always correlate because recent sales are used as input to calculate the QV’s.

They are but perhaps it also needs mentioning that a great deal of added internal borrowings are likely based on leveraging the capital arising from QV revaluations without…

Glenn Pearce

Thu, 30 Jul 2015 11:09:47 +1200

You're comparing the theoretical increase in the total value of the book (all houses in NZ) with the increase in debt used to pay for sale of part of the book (houses actually sold)

Katharine Moody

Thu, 30 Jul 2015 11:08:44 +1200

IMO the whole LGA arguments people make involve a bit of cognitive dissonance

I agree – same as the RMA arguments.

Glenn Pearce

Thu, 30 Jul 2015 11:03:09 +1200

…but if you look at the REINZ property sales graph is has the same pattern of rises and falls as the house values one, so without access to the REINZ sales data the similarity of the REINZ graph to the total value graph means that the lack of relationship between…

David Hood

Thu, 30 Jul 2015 11:02:17 +1200

The influence of LGA 2002 on house price rises

IMO the whole LGA arguments people make involve a bit of cognitive dissonance- Not only did prices go up, the amount of debt required to purchase the increased prices went down as a percentage of the price, which is really, really…

David Hood

Thu, 30 Jul 2015 10:59:30 +1200

$300billion

In reality the 300 billion is just an influence figure (not actual cash) and the meta point would be that there is a 3 to 5 influence that needs to be accounted for in any discussion. That is also a 3 to 5 influence across all properties in New…

David Hood

Thu, 30 Jul 2015 10:55:33 +1200

But the figure you have for “total house value” is a statistical valuation, right? It’s based on looking at actual sales prices versus a baseline (like GV) and applying that to all the properties.

It is, ...but if you look at the REINZ property sales graph is has the same…

Katharine Moody

Thu, 30 Jul 2015 10:50:56 +1200

Thanks David for taking the time to put this together. I have always expected that FDI in our housing market was a problem, but never expected that if and when quantified it would be;

300 billion of the 800 billion in the past decade

That is just mind-blowing. So much…

Glenn Pearce

Thu, 30 Jul 2015 10:49:15 +1200

Snap with Rich of Observationz

Glenn Pearce

Thu, 30 Jul 2015 10:48:09 +1200

The housing value figure is based on QV though, it’s not the value of houses sold.

$300billion injected into the economy would cause massive effects, a good year from Fonterra injects $1b and the effects are felt.

David Hood

Thu, 30 Jul 2015 10:43:02 +1200

One more graph- I was introduced to parallel coordinate charts this week, for showing the relationship between two variables. this is NZ Quarter on Quarter debt and housing prices. I didn't use it because most people have never seen it before so it can be a bit baffling. But the…

Rich of Observationz

Thu, 30 Jul 2015 10:42:14 +1200

And that one house is now worth 256 billion dollars

But the figure you have for "total house value" is a statistical valuation, right? It's based on looking at actual sales prices versus a baseline (like GV) and applying that to all the properties. So (at an extreme example) if…

David Hood

Thu, 30 Jul 2015 10:34:29 +1200

Here are a few other graphs, that didn’t really fit the post focusing on working out the values for New Zealand. Looking at debt in Ireland (internal boom and bust) and the United States (the size of the market means that nationally it is mostly internal buying) you can see…

Katharine Moody

Thu, 30 Jul 2015 10:29:35 +1200

I was think of the LGA (local government act) 2002., which free market types blame for red tape making house prices rise

The influence of LGA 2002 on house price rises relates to the provisions in that Act for Development Contributions as a means for local authorities to fund the…

David Hood

Thu, 30 Jul 2015 10:28:36 +1200

If you had a country where house sales were very unusual

It might be possible to contract a sufficiently unusual situation to explain it, but it is very hard for those explanations to to leave traces in other parts of the economy- sudden simultaneous remortgaging should affect household debt (since…

David Hood

Thu, 30 Jul 2015 10:22:00 +1200

Well spotted, opps.

I updated the github version to

Authority X said it was supply constriction due to RMA restriction. I am sure they did. The RMA came in in 1991 (thanks to Rich of Observations for a correction here) and the LGA (the other main target) came in in…

Rich of Observationz

Thu, 30 Jul 2015 10:11:39 +1200

Just trying to understand this:

If you had a country where house sales were very unusual (as was re-mortgaging to extract equity), but prices as indicated by the small number of sales were rising fast, then you'd get a corresponding rise in the value of the housing stock without a…

Greg Akehurst

Thu, 30 Jul 2015 09:59:48 +1200

Russell, in much the same way that the Bush administration used the 9/11 tragedy to launch an attack on Iraq (a totally unrelated party – but you know, they all look the same, right??), the National Government is using the real hurt the Auckland housing bubble is causing to attack…

Bart Janssen

Thu, 30 Jul 2015 09:50:24 +1200

Who benefits?

Why are the government(s) willing to allow those who benefit to continue to benefit?

Who is harmed?

Why are the government(s) willing to allow those who are harmed to continue to be harmed?

BenWilson

Thu, 30 Jul 2015 09:31:45 +1200

in reality it is somewhere between 0 and 4 billion extra houses needed to stablise demand. And because of the unknowns that is a pretty wide error range.

Yes, and hardly filling me with cozy feelings of security about the future stability of prices. If as few as 1 million…

David Hood

Thu, 30 Jul 2015 09:30:38 +1200

twenty four thousand stories high

It would give Epson a special character.

Greg Dawson

Thu, 30 Jul 2015 09:24:35 +1200

but in reality it is somewhere between 0 and 4 billion extra houses needed to stablise demand. And because of the unknowns that is a pretty wide error range.

So… we can build 4 billion houses in Epsom, right? They just need to be... (grabs fag packet) ... twenty four…

David Hood

Thu, 30 Jul 2015 09:23:18 +1200

Well spotted, opps. I was think of the LGA (local government act) 2002., which free market types blame for red tape making house prices rise (without debt increasing at the same rate, through the power of time travelling back).

Rich of Observationz

Thu, 30 Jul 2015 09:12:04 +1200

the initial launch point (third quarter 2001) precedes the RMA

The RMA was enacted in 1991 and a Town and Country Planning Act preceded it (1977). I don't think there's been a free-for-all in land development in NZ (or in most developed countries) for a long time.

David Hood

Thu, 30 Jul 2015 09:03:26 +1200

i’m no big-city economist

that's OK neither am I (data handling I know). But it occurred to me that this is where there is supposed to be a relationship and the numbers stopped adding up. I'll describe it as Cuckoo's Egg situation of a discrepancy in the numbers.

https://en.wikipedia.org/wiki/The_Cuckoo%27s_Egg

David Hood

Thu, 30 Jul 2015 08:56:37 +1200

what nature of demand are we even planning for?

I don't know what figure the government uses . Based on the past 15 years, a figure of demographic demand from local population + 60% would seem to be an optimal spot (I don't for a moment beleive this is the…

David Hood

Thu, 30 Jul 2015 08:52:36 +1200

I think more you should take out the portion attributable to mortgages, then do something similar for immigration (do people like me coming back from OE even show up on anyone’s radar?) and then look at the remainder

Let's describe immigration and local borrowing as both fairly flat through to…

David Hood

Thu, 30 Jul 2015 08:48:45 +1200

Could property investment be being made from fund managers?

Perhaps individually, buying an investment property with their management fees, but there is no direct sign of Kiwisaver funds investing in residential property.

Paul Campbell

Thu, 30 Jul 2015 08:48:43 +1200

You might individually have been part of that, but the actual immigration numbers are not a match to house price rises- I can go through much the same process showing a lack of relationship between arrivals and house value.

I think more you should take out the portion attributable to…

David Hood

Thu, 30 Jul 2015 08:44:21 +1200

crap, looking at that graph I must have started this, I came back from my OE in 2004 and bought my house for cash, no mortgage …..

seriously though people moving to NZ with money is one cause of this, all in all that’s probably a good thing for the…

Sacha

Thu, 30 Jul 2015 08:30:38 +1200

Could property investment be being made from fund managers?

I sure hope not, if a correction happens.

Russell Brown

Thu, 30 Jul 2015 08:26:45 +1200

Authority X said it was supply constriction due to RMA restriction. I am sure they did.

It's surprising how often this is offered as a received truth.

Russell Brown

Thu, 30 Jul 2015 08:24:51 +1200

__This is why I don’t think supply-side solutions are going to do much – the supply-side solutions are couched in terms of supplying the demand from local people, but we have no idea how big the supply would need to grow to deal with the demand from sources invisible to…

Paul Campbell

Thu, 30 Jul 2015 08:17:33 +1200

(and another view – Tremain from a few days ago)

Paul Campbell

Thu, 30 Jul 2015 08:16:18 +1200

And just to prove how people outside of Auckland feel about all this angst about Auckland housing prices here's today's Tremain (ODT's editorial cartoon)

Che Tibby

Thu, 30 Jul 2015 08:16:14 +1200

really like this post. i'm no big-city economist, but it seems pretty logical.

regarding where the money could be coming from: did you consider the two big changes in the mid-2000s, the Cullen Fund and Kiwisaver? Could property investment be being made from fund managers?

Paul Campbell

Thu, 30 Jul 2015 08:14:25 +1200

crap, looking at that graph I must have started this, I came back from my OE in 2004 and bought my house for cash, no mortgage …..

seriously though people moving to NZ with money is one cause of this, all in all that’s probably a good thing for the…

BenWilson

Thu, 30 Jul 2015 08:01:05 +1200

This is why I don’t think supply-side solutions are going to do much – the supply-side solutions are couched in terms of supplying the demand from local people, but we have no idea how big the supply would need to grow to deal with the demand from sources invisible to…

BenWilson

Thu, 30 Jul 2015 07:56:00 +1200

Thanks so much for this, David. Will check it out much more thoroughly later today.

Public Address

Thu, 30 Jul 2015 07:56:00 +1200

Discussion from blog post.