Over on Gareth Morgan’s blog there is a piece saying we should look into controls on foreign investment in housing. I disagree with the case. Let’s put the argument here:
If in fact foreign money isn’t flooding in to New Zealand housing, at worst the pre-emptive policy will be redundant and the costs involved in implementing it wasted – hardly an excessive price for reducing potentially serious economic risks.
Central to all of this are foreign speculators.
Speculative investment by foreigners brings added risks to the economy because, not only does it tend to leave as quickly as it arrives, it can involve very large amounts of money relative to the size of the market it is invested in.
Large volatile flows of foreign money can cause mayhem to a small economy like New Zealand.
Foreign speculation in New Zealand’s housing market would be bad news because in New Zealand housing is the predominant way people save.
When house prices fall people feel poorer and cut back sharply on their spending – which has repercussions throughout the economy.
Speculators would push house prices higher than otherwise and when they leave house prices would fall more sharply too – so the boom – bust housing cycle and economic repercussions that followed would be more severe than they needed to be.
To me this has a series of major flaws, which is why it doesn’t change my view about the policy at all. Four major issues are:
- If a speculative flow magically leads to foreigner residents overpaying temporarily, then selling for less not long later (exactly what is being described here) this is a net wealth transfer TO New Zealand as a whole. They are giving us goods and services for free. Any cost from “volatility” needs to also take into account the BENEFIT from this transfer – we can’t just ignore it.
- The housing wealth effect doesn’t come from house prices per se – it comes from credit conditions loosening. See here and here (there is an excellent Bank of Norway paper on this as well – but I’ve lost it … if anyone has it, pop it in!). This is quite a different beast.
- If the idea is that prices go “above” fundamentals, then back to fundamentals, we would expect consumption to go “above” its prior level then back – this isn’t really the large disruptive flow being mentioned.
- The concern here is that “demand” and the economy will accelerate too quickly given the inflow of capital – this is exactly the thing the RBNZ will lift interest rates to combat accelerating consumption. Is this really the situation we are in? If so, then we should be looking at rate hikes …
Now people may claim, “aha, but the RBNZ’s response takes time, what happens if the capital flows is in a “unanticipated” fashion and then flows out suddenly straight afterwards”! It is at this point I just stare blankly – a sudden lift and drop in house prices is completely aimless, the process of “higher house prices feeding into looser credit conditions” takes time, and is something the RBNZ would monitor and respond to. If there is an increase in consumption because of a sudden 1 month inflow and outflow of capital, this is because there has been a straight increase in wealth – this is a positive not a negative!
My best argument FOR banning sales is that if there was a massive inflow of investors, then when foreign investors will pull out is unknown, and as a result this creates risk for NZers who buy property now – this is a distributional argument, which means thinking about it in that sense. A blanket ban on sales tries to “solve” this by just reducing wealth – this is very strange!