Posts by Jim Cathcart
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Auckland still remains one of the most expensive cities in the world to live in terms of house prices to income. What has Auckland Council implemented or achieved to alleviate this? Or is it one of those situations that "can't be helped"? Shouldn't this be the priority of a mayor and a council or do they feel that the issue is beyond their control? Surely this was an issue where Len Brown could have really made a difference from a local government position and a much more socially minded legacy that he could have left.
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Speaker: House prices and the "Magic Money", 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.
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Speaker: House prices and the "Magic Money", 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.
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Speaker: House prices and the "Magic Money", 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.
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Speaker: House prices and the "Magic Money", 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’.
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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.
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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.
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Polity: House-buying patterns in Auckland, in reply to Katharine Moody,
And the Japanese probably need it, but there are far more sensitive issues to consider there.
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Polity: House-buying patterns in Auckland, in reply to BenWilson,
I know full well that what would happen is that the banking sector would be bailed out by the taxpayer, because that’s one of the only two scenarios that ever do happen. Either that, or the whole system shits itself big time. Both can and have happened.
Yes, there is an implicit guarantee. Much like SCF. We know that banks won't suffer in the slightest, which I think is appalling.
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Polity: House-buying patterns in Auckland, in reply to Alfie,
Keep in mind Ben that the housing bubble is pretty much confined to Auckland. When (not if) that bubble bursts, the damage will most likely be confined to Akl. The housing market in the South Island – except in ChCh, cos earthquakes – is relatively stable and tends not to suffer the up/down cycles of more volatile markets.
You probably want to consider the relationship between house prices and consumer spending. Using the extreme case of Japan, the impacts on the hinterland were devastating, including 2nd-tier cities.