House price inflation on the rise again? [update 2]
The eggheads at Infometrics have set cats amongst pigeons with their “prediction” that even in this slump house prices could now “grow” by as much as 11% over the coming year and by 24% over the next three years.
I put quotation marks around “predict” since as we know the illusion that economists can predict the future to three significant figures (note that it’s 24%, not around 25% or 20%) is farcical on its face.
And I put quotation marks around “grow” because, as we should have learned by know, more housing hysteria will not be “growth” only in the sense of being inflationary -- just another bubble looking for a pin.
Bernard Hickey’s blog has as much of the privately-commissioned research as the research’s owners wish to make public, so if you want to interrogate the workings of their predictions that’s the place to go.
And it’s also the place to go to debate one of the report’s defenders -- The Visible Hand’s Matt Nolan, who points out that Infometrics (his employer) is not saying this like it’s a good thing. What they’re saying is there are significant imbalances in the economy that still haven’t been shaken out, which is true, and which will soon be seen in more capital consumption, which would indeed be true should their forecast come to pass.
Without revealing their clients’ private information, Nolan makes four points that are worth considering when reflecting on their forecast:
For people wondering what has changed over the last two years to make house price growth stronger now lets say that the intense lack of building, extreme loosening in monetary policy, lack of movement on structural imbalances, and sharp increase in net migration are pretty significant factors.
Now all those things are true. Nothing has changed fundamentally to correct the “structural imbalances” that led to all the previous housing malinvestment. EnZed houses are still overvalued according to fundamentals (the average price of houses as a multiple of the salaries we earn here, for example, are still several time more than they should be), but there are factors that were at work inflating the last bubble that are still at work again.
That is the warning Infometrics is sending.
Consider that house prices haven’t yet fallen anything like what they should have if they were to come back to meet historic house-price trends, which is why Bernard Hickey and others recently revised up their predictions that house prices would need to fall around 30% to set things right again [NB: for “upturn” on the graph at right read instead “unsustainable boom.”]
Consider that monetary policy worldwide is now looser than a geriatric’s bowels. There’s more “quantitative easing” and counterfeit capital around now than any time before – and now that the US Federal Reserve has started illicitly monetising the government’s debts, even the world’s huge government deficits aren’t going to slow down another credit-fuelled inflation. So if credit-driven demand picks up again at the over-low interest rates we have now there’s every chance of another inflationary housing bubble.
Consider too that even at the peak of the housing bubble, building costs were so high that the replacement cost for a new house was approaching the inflated price a new house could be sold for – and nothing has been done since to change that for the better. Builders have still left the industry in droves (driven away by overregulation and the leaky house fiasco which governments largely created and have only helped to make worse), and the availability of land on which to build is still being strangled by town planners empowered by the Resource Management Act. [Read archived posts here on Building, Housing and Urban Design for more on these problems that haven’t gone away.]
So you might want to give some decent consideration to the idea that things can run away again – and I don’t say that like it’s a good thing either. Price inflation is never good, whichever “asset class” is affected.
And what about those “structural imbalances” then?
Well, consider this. In a decent economic slump, recession should mean economic recovery – the time when entrepreneurs correct their errors, reset their cost structures, and start off again in more profitable directions. If your "boom" is when the central bank's rocket fuel sends everyone out on a credit-fuelled bender, and your "crisis" is the part when you wake up in the morning and realise you've left your credit card with the hooker and her six cocaine-addled friends, then the "depression" is the part where you ring the credit card company and cancel the card. Your depression is your recovery phase.
It's the period when businessmen realise they've been swimming in the central bank's inflated money, and set about to restructure everything more responsibly.
A decent government -- a responsible government -- can help the process of recovery by removing all impediments to letting it happen: cutting their own spending, removing any legal impediments to changing distorted price signals so businessmen can see where resources are more urgently needed, getting out of the way of allowing viable producers to cut costs in the face of falling prices, tying the central banks hands to stop its profligate credit expansion.
But that long overdue structural change just hasn’t happened, has it. Nothing has changed fundamentally – how could they with a government committed to doing everything necessary to fake reality and attempt to maintain the status quo. We’re still consuming other people’s capital instead learning to do something productive with it. We’ve still got all those same structural imbalances that were shown up so tellingly in the collapse.
As I’ve said here before, there’s no choice about the pain of recession, only a choice of how long that pain might last. If Infometrics are roughly right, and there’s enough in what they say to at least consider seriously what they’re saying, then it’s clear that the “status quo merchants” need to start getting real. Because we can only consume other people’s capital for so long before we start eating our own seed corn.
UPDATE 1: “A premature housing boom would not be good for the economy and the Government will consider ideas, possibly a capital gains tax, to avoid one, Finance Minister Bill English says.”
Hey Bill, instead of another bloody tax (remember those tax cuts you once promised?, you thieving arsehole) how about getting rid of those impediments to house prices falling instead?
You know, like getting your Housing & Building minister to get rid of all the gold-plated gobbledygook building regulations keeping prices high and delays extensive?
Or getting your bloody Minister in Charge of the Resource Management Abomination to rein in the town planners who “ring-fence” cities and whack on those ginormous “development levies” that new-house buyers end up paying for?
Or, more radically, sacking your Reserve Bank Governor, closing down his monopoly and letting banks issue their own assert-backed currency?
Why this ever-present leap to a new tax every time your competence is threatened? Is your middle name “Cullen”?
UPDATE 2: On a related note (related to the monetary inflation mentioned above), there’s this piece from BreakingViews at TheTelegraph [hat tip Bernard Hickey, who disgracefully backs Beneficiary Bill’s tax grab trial balloon]:
Many countries have suffered their worst GDP declines in generations. Consumer prices are still falling in the US, Japan, the eurozone and China. But stock prices are once again hitting crisis highs, the oil price has almost doubled, distressed debt is selling at 90pc of face value and credit spreads are steadily narrowing. This financial mini-boom cohabits oddly with deflation.
Money might solve this puzzle. More precisely, in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates “excess liquidity” - which may be feeding a new series of stock, commodity, property and bond bubbles.
How might this end? With global demand still weak, unemployment rising and global industrial over-capacity a problem, there are strong forces to keep a lid on consumer price inflation. Central banks aren’t about to raise interest rates or reverse their additional money creating efforts.
That policy may not be right. Policy easing may need to be reversed some time before consumer price inflation rises. Excess liquidity could lead further asset-price inflation - and to multiplying financial bubbles.
When they burst, the real impact on consumer finances, investors and banks may again be heavy, bringing renewed downward pressure on the global economy.