I am not sure if there is anywhere we are fundamentally disagreeing.

Land constraints have held up prices – but even so house prices have risen at an even greater rate. Without construction we might lose the “froth” – which economists are terming a bubble – but the land constraints are seen as fundamental, and as an issue involved with policy and relative price changes.

In the long run most economists expect this to be solved as well – leading to another round of house price declines.

Overall, dropping house prices do hurt homeowners – but on the other side they benefit people buying houses. Changes in house prices alone do not concern me.

What does concern me is when people are fooled into believing the current house price is actually wealth – as then they make poor decisions. Another issue that concerns me is when CDO are made, and the risks associated with them are not clear – as that is an asymmetric information problem.

Regulators, and economists, will need to keep a strong eye on these issues going forward – I’m sure this is where we can all agree.

The work that is being done by those like Hugh, focusing on the land supply issue, is of tremendous value and can only get more and more recognition as time goes on. Quite frankly, our economies will only continue to suffer until this vital factor is recognised, and meanwhile any country that sets a good example, like hopefully NZ will thanks to Hugh’s rapport with the current government, will serve the rest of the world well by forcing the economists and politicians to take notice.

Notice that the latest OECD report refers to NZ’s need to get investment moving away from property and into things that increase productivity. I couldn’t agree more. See what I said on THIS thread:

http://www.interest.co.nz/ratesblog/index.php/2009/04/09/housing-special-why-the-march-housing-market-surge-is-an-indian-summer/#comments

I think something you guys need to ask yourselves is – has the performance of the economics profession here in NZ and around the world, with respect to these housing bubbles – been satisfactory?

Put another way – is the economics profession playing a constructive role in exploring solutions, so that we dont have a repeat of these housing bubbles going forward?

I am looking forward to the day when you guys focus your attention on the structural problems of our housing markets.

Put simply – to rate as affordable – urban markets should not exceeed the 3 Multiple and to ensure they stay in the affordable catagory, new starter supply of an acceptable standard needs to be going in on the fringes at the swing Multiple of 2,5.

And the hugely important fringe DEVELOPMENT RATIOS (I have yet to hear one economist in this country even mention these) should be 17 – 23% serviced lot / the balance the actual house construction.

Normal urban markets with population growth around the 1% mark – should oscillate from a floor Multiple of 2.3 through the swing Multiple of 2.5 and top out at the ceiling Multiple of 2.7 – to get optimum performance out of the residential construction industry.

Why dont some of you guys actually research the existing housing churn rates of the affordable 2 plus million housing unit of Houston with the 1.6 million plus unit NZ market? The grossly inflated numbers of our market here are way way higher – pumping massive additional liquidy in to the economy. Yet – according to the US Dept of Commerce BEA – the Houston GAP is threee times NZs GDP as well.

The above are just two of what I would consider extremely simple aspects of the massive structural distortions that need to be researched further.

And heres a little quote to finish up on chappies and chapettes from the woman Savant with the highest IQ in the world. There was an excellent article in the FT about here recently –

“We gain knowledge by reading – but wisdom by observation.”

We sure as hell desperately need copious quantities of wisdom in the economics profession.

We can kiss any real economic recovery goodbye when most of our potential productive investment money remains sucked into the black hole of a housing price bubble. These bubbles actually worsen the likelihood of income increases enabling a catch-up of the fundamentals that underly home affordability. Business investment simply could not match the returns,(temporarily) from property investment. Interest rates that would prevent a property bubble would kill business. Reserve Banks are pushing on a string once the bubble mentality takes over.

We are surrounded by people talking the house buying market UP again, and persuading us that the time is good again for making that purchase. This is balls. It is economic Darwinism. Here we are, with some of the world’s most unaffordable house prices, a situation that developed mostly in 4 years, 2002-2006; graphs that show what can only be described as one of the world’s worst house price bubbles; here we are surrounded by house price bubble collapses all over the rest of the world; here we are with our economy in recession; and we are talking home buyers INTO the market and talking price expectations UP?

I am personally acquainted with various family friends who I have been unable at any time, even with all my background knowledge, to persuade them that buying a house 2 years ago or now, was not and still is not a good idea. We still see on interest.co.nz, comments from people who should know better, that “NZ is different”; “Buy”! “Buy”! “Buy”!.

You tell me what is going to fix this?

“…..When the building industry starts running again, prices will fall again…..”

You tell me what mechanisms are going to result in new homes hitting the market at a price that reflects the value of land for other uses, plus development costs, plus profit. Where are the $40,000 sections now, even after half the property development industry has fallen over? Why are even the bankruptcy sale prices attached to an invisible skyhook?

Some commenters are pointing out that homes are for sale in Atlanta Georgia for US $20,000, and using that as evidence of a housing bubble crash in Georgia. But this is missing the point. Brand new homes on the urban edges of Atlanta were always available for as little as US$120,000. Oversupply and economic downturn has resulted in bankruptcy sales for a little less than this. But tumbledown old dumps in ghetto areas were also always available for $40,000 or less. Why would a first home buyer pay 7 or 8 times average annual income for a tumbledown old dump in a ghetto area, when there are brand new homes available for 3 times average annual income? This is the option that has been denied to the first home buyer in California – or NZ.

Or look at it this way. A subprime mortgage in Atlanta might be an unemployed solo mum with a mortgage of US $40,000 or $50,000. A subprime mortgage in California is a professional yuppie couple with a mortgage of US $500,000. Where do you think the problem of toxic CDO’s has really originated? Some of the studies I link to in my essays on interest.co.nz point out that California is responsible for 45% of all the mortgage related losses of equity in the whole USA so far – and New York is responsible for another 10% and Florida for another 10%.

New Zealand is tracking California, not Georgia or Texas. A high proportion of our mortgages ARE what the USA would call “subprime” – we are just insensible to it. Our younger and poorer people are being screwed by having to pay hundreds of thousands of dollars for ANY home, whether on the outer limits of cities or for tumbledown old dumps in ghetto areas. Californians could emigrate to Texas much more easily than Kiwis can escape the property price trap. Are you aware that California spent years leaking population on net even as their house prices escalated, while Texas attracted large in-migration while houses remained well-supplied and cheap?

What do you think the flow-on effects are throughout NZ society, of unaffordable housing?

That is why I argue that the inhabitants of particularly desirable areas should NOT be “entitled” to prevent further in-migration to their area through policies that make property unaffordable. If greed and selfishness on Wall Street requires legal restriction to prevent damage to whole economies resulting, then so does greed and selfishness in green and pleasant local communities. People have to live somewhere, and these selfish policies at root are saying to people of the next generation and poorer people, “…do us a favour……don’t exist….no, you can’t live THERE…….no, you can’t build THAT….yes, that is the cheapest accomodation you are allowed to live in…”. The bottom 3 rungs have been knocked out of the social mobility ladder. But “combating inequality” is all about “transferring wealth” via taxes and government spending, isn’t it…. not about ensuring that homes are affordable.

But Hugh P. tells us that there is good cross-party progress in getting a grasp of these issues in our current parliament. I wish him all the best, the consequences are of paramount importance economically and socially.

I have done many hours of research into this, and as I say in the essay I link to, I think that people like Hugh Pavletich and Wendell Cox and Alan Moran and Oliver Marc Hartwich are right, and we are making a mistake to write off their research in favour of areas of economics that we might be more comfortable with.

You say:

“…..As a result, the bubble is a result of demand – movements in supply are more fundamental…..”

Yes, but is it not obvious that $40,000 sections on the edge of the urban area will be a safety valve for any price bubble? But where supply has to involve $240,000 sections, no less, there you have a major predictor of the potential for the size of the bubble. I do not accuse land developers of gouging, in many cases they are taking huge risks buying and holding land outside the “zone” for long periods of time, and risking bankruptcy if the whims of planners do not follow their guesses. (The scope for corruption is huge).

You say:

“….Aussie and NZ are different to Ireland and Spain and the US, as we have high building costs and undersupply……”

We do not have high building costs, as the submissions to the Commerce Committee Inquiry on housing affordability from the NZ Master Builders Federation and the Reserve Bank pointed out. Almost ALL the increase in the price of new homes has come from increases in fees and meeting regulatory requirements, and from land rationing premiums.

You say:

“……there is more of a “foundation” for prices here – but this foundation is built on waste and inefficiency rather than true value….”

The NZ Master Builders Federation would be deeply offended. So would Hugh Pavletich. You are absolutely right that this “foundation” is not built on true value, but it is not built on waste and inefficiency either. It is built mostly on the rationing premium, but councils fee gouging has not helped either.

“…..When the building industry starts running again, prices will fall again…..”

What mechanism is going to bring LAND prices down? Because that is the problem. Land zoned for residential use commands a premium, compared to other uses such as agriculture, of up to 3000 per cent. It is not at all necessary for this to be the case, and was not the case historically, before “green” conservation and local community empowerment and planning for urban limits and density became fashionable.

Hugh Pavletich has years of experience in property development and has also spent years researching this issue in tandem with the experts at the Demographia Institute. One of the things that makes me sick, is hearing the apologists for the land rationing status quo, accuse Hugh of having “vested interests”; as if Hugh’s desire to bring sub-$200,000 new homes on the urban fringe to first home buyers is somehow a vested interest to be condemned, while the vested interests in maintaining the status quo of $400,000-plus new homes are somehow honourable. The difference is almost entirely in land prices. As recently as 1992, the relationship between land prices and incomes was closer to the first situation than the second.

Please take it from me if you do not have the time to do the research. The consequences of our modern world’s ever-deepening land rationing policies are drastic in numerous ways, and the destructiveness of the economic bubbles that result from the lack of a “safety valve”; i.e. low-cost new supply; is the biggest consequence.

You say:

“……Bubbles are fine – as the people who get burned are the people that made dumb calls. As long as people have the tools to analyse the risk, this doesn’t matter…..”

And young people wanting to buy their first homes, listen to who…..? We are talking about bankruptcies and destroyed lives and marriages and relationships and families and traumatised kids. And there are social penalties in the first place from having declining levels of home ownership in younger generations, due to affordability issues. Bob Day, in “The tyranny of urban planning: home truths about home affordability” discusses this is detail. Robert Bruegmann, in “The Housing Bubble and the Boomer Generation”, describes the assumption of huge mortgages by the young, while the older, baby boomers cash out their equity increases, as “the greatest intergenerational wealth transfer in history”.

Lastly, you say:

“…..Now in the US people didn’t have information about the assets behind their CDO’s – this was the problem, not the fact that they had a housing bubble…..”

Excuse me, they did have the information; all they needed was “these CDO’s are based on mortgages, and everyone knows that these are safe investments because property prices never go down”. The CDO’s would be safe today if they had not been entwined with a property price bubble. CDO’s based on mortgages outside of California, New York, Florida and one or two other States, would be safe today. CDO’s based on mortgages taken on in a housing building BOOM would be safe today.

As I have said again and again, the unique factor to this time, was a supply-restriction induced house price bubble. The UK has had them before, because they had the supply restrictions decades sooner. There have been stock market bubbles over and over again. The housing bubbles you refer to have mostly been construction booms in which prices were kept low precisely by the availability of further land at all times. That is not to say there cannot be localised bubbles, but obviously economy-wide PRICE bubbles should be avoided at all cost in the future. And as I say, some wasteful over-supply, with house prices kept low, is probably on net a good thing.

This post isn’t on the cause of the bubble – so I’m not really going to discuss that here. I do think that land zoning is an important issue – but it is one of many issues that have led us to where we are now.

“occurring anywhere other than where there are conditions of land use rationing”

Well bubbles occur all over the place even without rationing – all we need for a bubble is the belief that someone else will pay more. Vernon Smith has shown this occuring in lab experiments where people KNOW the final payoff – as a result, I suspect that it has to do with expectation formation, and issues that economists may not fully understand in this area.

Other features have fed the bubble for sure – and the poor zoning in some regions will hold prices higher than they “should be”. However, this isn’t a bubble persee – this is just an inefficient allocation of resources that has led to a higher price.

As a result, the bubble is a result of demand – movements in supply are more fundamental.

Now – Aussie and NZ are different to Ireland and Spain and the US, as we have high building costs and undersupply, while they are oversupplied. As a result, there is more of a “foundation” for prices here – but this foundation is built on waste and inefficiency rather than true value. When the building industry starts running again, prices will fall again.

“But I presume you do follow these debates on interest.co.nz”

Sorry, I only have the chance to really look at things when it is an Infometrics article – otherwise I’m quite caught up in the current crazy environment.

“avoiding PRICE bubbles is clearly of all importance to our economic future”

I’m not convinced about this persee – educating people around how to save and value assets is what we should be doing, not trying to prevent bubbles themselves.

Bubbles are fine – as the people who get burned are the people that made dumb calls. As long as people have the tools to analyse the risk, this doesn’t matter.

Now in the US people didn’t have information about the assets behind their CDO’s – this was the problem, not the fact that they had a housing bubble.

“….If these sanctimonious and anti-human (essentially fascist) policies were in the trashcan of history where they belonged, California would be a lot more populated and the people living there would have smaller environmental footprints than if they were forced to live somewhere unpleasant like Texas…..”

And I should have added; we wouldn’t have financial meltdowns resulting from housing bubbles.

Paul Walker, that comment is good sense too.

I have commented before, that interest rates should be driven by economic fundamentals and house prices should be driven by economic fundamentals. Interfere with the laws of supply and demand for housing, and you set off a chain of economic events whereby the economic fundamentals are swamped, to the detriment of the productive sector and its requirements for capital, and to the detriment of monetary policy effectiveness.

Have you followed my longer arguments about this?

As I said above: […] the demand curve for mortgages slopes downward, so higher interest rates means a lower quantity demanded for mortgages and fewer people taking out mortgages and thus less demand for houses.

Less demand for housing will lower its price. Holding all else constant, the reserve of the above mechanism will be what happens when interest rate are lowered.

If empirically you don’t see this happening it will be because the all else constant requirements doesn’t hold. For example, if demand for housing (and mortgages) is increasing enough then you could see a positive correlation between mortgage rates and house prices in the short term.

This is just as basically anti-human as the “Green” conservation policies are. It says in effect, that if these policies are the only right ones, that not only are humans not wanted here, they are not wanted anywhere. I am not joking or exaggerating. Sanctimonious Californians condemn Texas for its policies of cheap housing, growth, and high energy living (due to the heat and aridness).

If these sanctimonious and anti-human (essentially fascist) policies were in the trashcan of history where they belonged, California would be a lot more populated and the people living there would have smaller environmental footprints than if they were forced to live somewhere unpleasant like Texas. As usual, the sanctimonious policies have the exact opposite consequences than what they are alleged to be in the purpose of in the first place.

Greed and selfishness are clearly seriously destructive of humanity whether they occur on Wall Street or in green and pleasant neighborhoods.

New Zealand could, and should, have ten times the population it does have.