The NBR has pointed to an article to the Economist that shows house price to income and house price to rent ratios – pointing out that the very high house price to rent ratio can be used as an indicator that the return on housing is very low/house prices are heavily overvalued.

Now one criticism that people may raise is that the “quality” of the housing stock and the rental stock has changed – and so the relative prices/spending from income could indeed change.  However, the Economist uses figures from Quotable Value New Zealand (as well as Stats NZ) – and so the quality of housing is in fact taken into account in these indices! [Note:  It is not necessarily clear the categories are comparable - so this argument could still be used]

As a result, we could say that this is true – the return for an investor in the housing market seems pretty low.

But what else can we tell from all this?  Relative to historic averages, the price to rent ratio is 68% higher, and the price to income ratio is 20% higher.  So this implies that price/rent is 168% of its average, and price/income is 120% of its average … which tells us that rent/income is 71% of its long-run average.  If we believe these figures, the rental cost … the cost of actually consuming a housing service relative to income … is very low! [Update:   So this is consistent with rising living standards, and having to spend less on housing services - a nice foil to all the suggestions that housing costs have been eating into incomes!]

I’m not sure how much I trust these figures overall, price to rent ratios in this index has been rising constantly over the last 40 years implying that there may be a “quality adjustment” issue in the data to me.

However, if we do use these figures to say that house prices are too high – they also tell us that rents are too low.  Any explanation we have needs to explain both of these parts of the data.  [Update:  This is not clear from the data - and is actually a misleading statement, so just ignore it.  In truth, we need to ask how much of the adjustment will occur through rents and how much through prices]

In an article on the Herald Brian Fallow, with the aid of Andrew Coleman, takes on the unaffordable nature of superannuation at present.

Essentially the argument boils down to two points:

1. The implied transfer from future generations to current generations is equitable given fair assumptions of technological and population growth.
2. A save as you go system would be a more efficient way of ensuring that the elderly save the required amount.

If they are saying these things I’ll believe them – especially given the underlying truth that changing population demographics will place a lot of strain on the country given the way institutions are currently structured.

However, there was one thing I felt was underplayed in the article – the transitional costs of changing from a pay-as-you-go system to a save as you go one.

The reason I bring this up is that Gen X and Gen Y have been paying for the generation above them – and in this way they will then have to start paying for themselves without any support from the generation below them.  That implies that a “sudden shift” is equivalent to stating that we think it is fair for a very specific generation to bear the cost of retirement for a much larger group.

No matter what we do with superannuation, someone will have to bear the burden of the shift.  Framing it in those terms, and deciding what we think is equitable as a society, will be an important step when figuring out how to move forward.

Rob Salmond has written a post claiming that New Zealand’s tax system is unfair on poor people and generally inefficient. His evidence boils down to this chart of tax rates across incomes:

Rob’s an expert on tax systems so I trust that the figure is accurate, but there is so much it doesn’t say that bears on his conclusion. There are a few points that immediately spring in to my mind, although I’m sure you can think of plenty more.

1. Most importantly, a tax system’s incidence should be judged by net taxes, rather than gross revenues. Taxes don’t disappear into a bottomless pit; they accrue to someone as a benefit. Looking at the net tax people pay, once government services are taken in to account, shows a different picture. As you can see, lower deciles receive more services and transfers from the government than they pay for in taxes, and the reverse is true for wealthier deciles. So, even if there is a flat effective total tax rate, that is not the same as a flat tax incidence. I have no idea how this compares to tax incidence across similar nations, so maybe we still have a high relative incidence on poorer people.
2. We might also ask why it is that Rob believes it so intrinsically unfair that tax rates are flat. From the same publication by the Institute of Policy Studies, here is the average income tax paid by each decile: Now we can have different views about what fair is, but it isn’t obvious to me that that distribution is unfair without a lot of normative judgments being mixed in.
3. Rob also claims that the high GST in New Zealand is unfairly regressive, which has been discussed by Matt numerous times previously. To summarise, GST is not regressive over a person’s lifetime but it may affect the welfare of low income people more than the welfare of high income people.

Rob finally concludes that the tax system is bad for efficiency and the economy. He doesn’t draw any causal links between his discussion and conclusions, and it’s not immediately clear to me why a fairly constant average tax rate across income groups generates any of the outcomes he describes. I haven’t read Rob’s book, so I probably don’t see the connection because it’s complicated enough that you need a whole book to explain it. At least, I hope so because no effort is made to draw the connections in his blog post. This is really the nub of what bothered me about Rob’s post: it suggests a lot more than it shows and the content doesn’t appear to support the conclusion.

Maybe I’m being unfair because he’s trying to summarise a lot of material in a very short post. But, when you’re a really smart political scientist, you don’t need to provide charts without context and conclusions without justification in order to convince people of something. Particularly if you’re so familiar with the arguments that you wrote a whole book about it! I really hope that this post is just a teaser and we’ll see more in this series to back up the hefty conclusions that have already been drawn. Or, perhaps, this is just a ruse to get us out to buy the book

I suggest sticking the September and December quarters together – and talking about the second half of 2011, including the RWC.

A lot of the “upside” surprise in September and the “downside” surprise in December was due to significant variability in stocks – part of which was due to the Rugby World Cup.  Adding the quarters together to smooth this out will give you a better idea of the more fundamental changes in activity that occurred.