There are cities with massively greater populations than Auckland in smaller zones – we have land, area for infill, and potential for densification. It is about zoning and the incentive to invest to get those things happening – the price provides the incentive, so the higher the price is going (over a prolonged period of time) the more likely it is other barrier (eg regulatory) are binding.

The idea that there is a “natural” constraint to the number of properties in Auckland that we are hitting now is a stretch IMO.

But building new housing requires land. If this is going up as well, why would it become cheaper to build new houses, given they have to build them somewhere? That’s the causation I don’t get

Which part doesn’t follow? I’ll try to give an answer – but just tell me if I’m answering the wrong sort of question 🙂 . Also as a side note we don’t really need tags like “luxury” and “necessity” – these matter when we answer a question like “what bundle of goods are a necessity for an individual in society”, but we can discuss the price and rental equivalent before moving on to this … which is all I’m doing in this bit!

If we aren’t able to build more properties/supply is not able to respond this directly suggests there are supply issues! In this context, that is the main issue.

Also remember the house is being purchased at an inflated price and being rented out for a low yield – NZer’s are still living in these houses, but the rent they are paying is low relative to the cost of paying for the property. So the cost of a housing service is unchanged AND we have had a capital transfer to the prior NZ owners.

And this is idea if overseas buyers are using it as a straight long-term investment – if instead it is “speculation” then the house will be sold for a lower price in the future (as the presumption in all this is that NZer’s willingness to pay is lower than people from overseas).

To understand the speculation line, we need to ask “why” people overseas are willing to accept a lower yield – and if they are willing to take a lower yield it will lead to an increase in the supply of property. Just like it has all through history! If the supply response is “insufficient” this just tells us that the supply constraints are REALLY BAD 🙂

“The higher price is a capital transfer to current home owners, but at a point in time the “rental” cost doesn’t change. Seeing that the price is higher than the replacement cost of property, people will then build more houses”. I don’t see how this necessarily follows – especially if most NZers are priced out of the market. And it all hinges on this. My feeling is that a home (to own) is becoming like a high-value luxury item. I don’t see a “market” solution here.

Hola,

We have to ask exactly what is happening in order to work through this example.

Allow me to oversimplify to find the core of the case. Say there are no foreign buyers, but then suddenly they appear! These foreigner buyers are willing to accept a lower yield than other home buyers in New Zealand – in this case they bid up the price.

The higher price is a capital transfer to current home owners, but at a point in time the “rental” cost doesn’t change. Seeing that the price is higher than the replacement cost of property, people will then build more houses!

So the introduction of foreign buyers (or in the current NZ case we could say foreign buyers willingness to accept a lower yield) will lead to higher prices (which represent a transfer to current property owners), no change in rents at first, and then lower rents (and a partial decline in prices) when the housing stock expands.

So, if this was happening this is the sort of situation we find ourselves in – potentially “oversupplied” with property as we have investors coming in who accept a lower yield. Here the housing is only “good value” if people overseas are willing to accept a lower yield than people here – for me this begs a much more important question, why is that? (This is a major issue of interest in NZ)

This also points out that foreign buyers aren’t really the central point of any “affordability” issue – that we may well be undersupplied if that issue is cropping up (either in total terms, or in sections of the housing stock). It is important we keep this issue in mind when thinking about longer term affordability business!

And also note here they are not co-operating and “holding the price up” – we would need A LOT of buyers to work together to actually have a “monopoly” on house sales to do this. This is not representative of the housing market at all! Now if there was a “competition issue” in house sales, this would be something that would concern economists IMO

But if a group of people (whoever they may be) want property and have a higher budget than the average, and since real estate is still good value here (and is so even after the booms we’ve had) compared to the globe, then why couldn’t this group of RE buyers keep prices up for a long time?