On Breakfast this morning I heard the presenters querying why house price growth is so strong (5.7%pa in October) while unemployment is at a 13 year high (7.3% in September).  What is especially perplexing is that the house price growth is primarily in Auckland (with Canterbury also important – but this is due to the earthquake reducing the stock of property) so has the increase in unemployment!

How can this be?

Well I’d note a few things:

• House price growth is strong in Auckland especially the old Auckland City.
• Growth in rents is relatively strong in Auckland.
• We know there has been very little building in Auckland.
• Occupancy rates have been pushed up in recent years at a relatively rapid rate.
• Credit growth is still slow (albeit picking up).
• We suspect that job loses are focused in Manukau and Papakura, given the weakness in wholesale trade and manufacturing employment.
• Although jobs have been lost, underlying “real wage” growth has been good relative to recent years – giving households with income a bit more money to spend.  Banks are competing like there is no tomorrow to give out mortgages.
• House sales volumes relative to population are still “low” relative to history – even after rising sharply.

Now, the lift in house prices is starting to boost building activity in Auckland, as you would expect.  However, there is a significant supply shortage.  In the face of that, houses are more scarce and so we would expect prices and rents to rise.  Furthermore, there are people with jobs and with access to credit at very low interest rates who are interested in moving or changing house – while there are people with houses who are relatively unwilling to sell in the face of uncertainty and the knowledge that there are “too few houses”.

In many ways this doesn’t look like, or at least is largely not, a bubble – as borrowing and investment in housing is still so low, and so is turnover.  Instead this is an indication of the supply issue in Auckland.

This does not mean that we should expect rapid house price growth going forward, or that unemployment and house prices aren’t linked – it just tells us that there are other factors going on that explain the difference, other factors that indicate the importance of supply side constraints in the building industry.

I’m a little perplexed to see Gareth Morgan come out railing against the Productivity Commission’s report on the housing market.  Now when it was released, I thought the focus and justification were a bit funky – but that the analysis seemed largely sound.

Gareth’s posts have been found here and here.  He says that supply is not the issue, its demand due to the tax status of housing and the Reserve Bank.

Seamus Hogan at Offsetting has covered off why this critique of the PC seems weird, so I’d suggest reading that.  As Seamus says, it is incredibly strange to treat the supply and demand factors as mutually exclusive – both can exist.  In fact to justify house prices being “too high” while the volume of the housing stock is “too low” REQUIRES a large supply impediment.  If what Gareth said was the whole story we would be experiencing overbuilding!

Why is that?  Well if something is boosting the demand for existing housing beyond what is “socially optimal” this bids up the price for existing houses while the cost of making a new house is unchanged.  As a result, there will be a lift in demand for new houses as well, leading to a lift in building activity (and building costs) such that we are building more houses than is “socially optimal”.

We could well debate whether this was the case pre-crisis – we know that expenditure, and volumes, or residential investment were very high between 2002-2007, but we also have some suggestions that much of this was due to increases in the size and quality of housing.  We were buying “more house”, rather than more houses.  Even during 2007, there were still concerns that there was not enough houses in some key regions – unlike the US experience there was not a wide view that we were “oversupplied” in terms of our housing stock.

Come to the post-crisis period and it is widely believed that we have a massive undersupply of property in Auckland (and Canterbury, but that is due to the quake).  House prices are still elevated, RBNZ policy is still “friendlier to mortgage debt”, but building activity is damned low!  This is far more than a cyclical downturn – there are significant issues of financing and co-ordination in the industry. “Reducing demand” doesn’t change this – and doesn’t make policies that are looking at the supply-side issues irrelevant!

The key point against supply side issues will be the fact that rental growth hasn’t gotten scary at any point – is there are “too few” houses, then we should really see the cost of housing services/rent pick up.  This suggests to me that any perceived demand side issues are also important, and should be taken into consideration [Note:  Think of demand issues in this context as things that increase the wedge between the individual rate of return on housing and the social rate of return - as this leads to people being more willing to use housing as an investment vehicle for a lower relative rate of return, the rent ].  Once again though, supply and demand are not mutually exclusive.  The fact we are looking at one doesn’t mean we throw the other away.

One final note – the Productivity Commission spent a long time getting together facts and figures in order to make its case for why the supply issues were dominant.  And they also made note of perceived “misallocation” issues and the such stemming from the demand side.  Gareth’s decision to just out of hand dismiss what they are saying and state that the answer is “obvious” is a touch grating.  I don’t think the Productivity Commission (or myself for that matter) would disagree with the points he raised … as they aren’t mutually exclusive – I’d say I just weight them less severely than he is because I am willing to accept that there are supply side issues which are behind part of the price lift.  And I think this is the reason the supply issues are being attacked … just to increase the “weight” people place on the demand side.  I’m not sure I agree with this.

Note:  Remember that show Heroes, where they say “save the cheerleader, and save the world”.  The building issue in NZ has had a significant impact, both in terms of the run up of debt and the allocation of resources – in many ways people have been “saving” in a vehicle that might not give them the return they expected in terms of future goods and services!  Given this, understanding these issues is important.  You could even say “save the housing/building industry, save New Zealand”.  I’d avoid that though, because “saving things” always seems to involve subsides and bailouts which is not really what analysts are suggesting …

Update:  Seamus cleans up some of the places where my language is too loose.  His clarifications are entirely right.

I wrote down post trying to give some perspective of what the “QE for NZ” policy of the Greens was suggesting.  However, I’d also like a link of what other people have said – so I’m writing this post and just putting in the links

• Dim Post
• Rates Blog/NZIER
• Gareth Morgan
• Anti-Dismal set of links (I’ll link directly to all the posts in here when I’m back from Columbia)
• David Mayes
• Pundit

Note:  I’m just linking – I am not saying I agree or disagree with anyone by linking.  Except for myself, I mostly agree with myself.

Any other links around, pop them in the comments if you’d be so kind

The opposition parties are calling for an inquiry about what is going on in the country.  This is alright – but I’m not sure we actually need another inquiry per se (I spelt it right this time!).

We’ve long recognised that NZ has a high real exchange rate/high real interest rates (most recent related posts involved *,*).  A factor that is due to real economy savings/investment decisions – not monetary policy.

So the country has already had the savings working group, the tax working group, and now there is a working group on the sustainability of government finances (report due towards the end of the year I think).

Do we really need another inquiry, or do we just need to actually face the trade-offs involved with any policies fully?

I was impressed to see Geoff Bascand, the head of Statistics New Zealand, come out in defence of the labour market data – specifically the way unemployment and underemployment are calculated.

It is true that the labour market data jumps around, and that what it defines might not be exactly what everyone trying to use it “wants” – but Statistics New Zealand is transparent about what they are recording and the shortcomings, and then a lot of this data is available free for us to help us make informed decisions.  How is that not awesome?

Lets be honest, we can’t accurately measure the exact thing we want in the social sciences – we are always working with incomplete data measuring something that is only related to the variable we are positing theories about.  Instead of complaining about it we just need to recognise that we need to use clear and consistent theory and logic to help us accurately use the data that is available.

Instead of complaining about the data – as many people who write on blog and in comment sections do – lets try to understand what is being measured, how that relates to what we are trying to discuss, and then use that to have a useful and open discussion about it.  Just because the data doesn’t fit your preconceptions doesn’t make the data wrong – either your interpretation of the data is wrong, or your theory has issues