RBNZ December 2011 Bulletin

It’s good – and its pretty easy reading.  You guys should give it a go.

My main focus was on the starting paper on consumption, which just gives a basic overview of how to view total consumption in New Zealand, and then uses this framework to understand some stylized facts regarding NZ in the past decade.  I also agree heartily with the conclusion:

However as consumption as a share of income did nothing very unusual during an unprecedented housing boom, it is not obvious that there is a large role for house prices to play in explaining consumption behaviour during the period.

I like it because it supports my priors of course 😉 .  Fundamentally, we can’t rely on some “wealth effect” that has driven us to buy “flat screen tv’s” to explain what has happened in NZ over the last decade – a point that was, at one point, being pushed too hard IMO.  Debt has been built up, house sizes have increased, building costs/land prices have risen, non-house consumption goods have been cheap, financial markets have changed – there are a range of factors here that we need to tie together to make a convincing, and sensible, story of what has happened.  And once we have a clear and consistent answer, only then can we try to understand whether it is/was “good” or “bad” and whether there is anything that should be done to improve outcomes.

  • JC

    Interestingly, I don’t see a mention of 911 there, but that changed our behaviour somewhat! The first thing that happened was our Professional Liability insurance rocketed from several thousand to one quote of $40,000! Of course it settled down but we ended up with three times the pre 911 cost.
    I think it influenced the professional advice we gave.. being more cautious than before.
    The second thing that happened was the failure of a Tauranga Finance House mid decade that cost us a bit.. that impelled me to move a lot of money out of the sharemarket, a building investment and finance houses back into the bank.. where we were getting 7-8% anyway.
    Basically, those two events, plus the house price rises and petrol almost doubling looked to me like the familiar boom and bust cycles of the 60s to 80s and I stayed reasonably cautious.
    JC