Is it a bubble?

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I was at the Press Gallery Christmas function last night in Wellington. Great do. I have renewed respect for journalists’/government relations types’/politicians’ drinking ability.

At some stage I got cornered on what would happen to Auckland house prices. Having no good answer I resorted to the Keynes line that markets can remain irrational for longer than you can remain solvent.

This morning I thought I would have answered it more as The Economist writes:

“Manias can last much longer than investors think, as many contrarians discovered to their cost during the dotcom boom of the late 1990s. Nor do investors know whether a bubble will be resolved through a sharp fall in prices or a long period of stasis, in which inflation erodes prices in real terms.”

And the folly of forecasting asset prices is neatly encapsulated by Irving Fisher (Professor of Economics at Yale University), in 17 October 1929, soon before the crash:

“Stocks have reached what looks like a permanently high plateau.”

LVR restrictions: exempting new construction

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The RBNZ today exempted new home builds from high loan to value restrictions.

The reason for putting the policy in place is financial stability. That is to reduce the accumulation of high-risk debt in the banking system. By this test, and this should be the reasonable test, this is bad policy.

By this exemption the RBNZ is saying that it is less risky to borrow to build a new house than to buy an existing house. I disagree that new house prices move less than existing house prices. So, the RBNZ is now exercising a policy of exclusion – against those high LVR borrowers who want to buy existing homes.

The justification that we need to build more houses, surely is retorted with, is this the right policy to address that problem? It also raises the question of why was this not a consideration before the LVR policy was implemented? What did the RBNZ actually know about how high LVR loans were being used, by whom and where?

By increasing highly leveraged credit flow to new builds will not solve issues to slow land release and planning restrictions.

By seemingly bending to industry and political pressure, the RBNZ has tarnished its shield of independence. I am fearful of ongoing lobbying and political interference it invites heading into the 2014 election.

Politicians vs policy analysts

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Jonathan Portes has an interesting post on the Department of Work and Pensions’ analysis of Mandatory Work Activity. Jonathan does a great job summarising the research and it’s fantastic to see good evaluation coming out of the Department. The political headline of the post is less positive: “DWP analysis shows mandatory work activity is largely ineffective. Government is therefore extending it…”. The implication is that, whatever the evaluation shows, the Government is committed to the policy.

Iain Duncan Smith’s welfare reforms have not been universally welcomed.


That sad state of affairs is not unusual: many studies have been unable to link bureaucrats’ cost-benefit analyses with any change in regulatory efficiency. Read more →