Tuesday, 6 May 2014

Cunliffe Waves Hands, Brings House Prices Down [updated]

Last week the Labour Party’s “finance team” floated their new boat, a “new tool,” a  variable-compulsory savings rate tool which can be tweaked when necessary, they say, to assist the Reserve Bank in keeping the inflation genie under control.

Yet the boat they floated already looks holed beneath the water line.  Responding this morning to claims that his "new tool" just isn’t a big enough lever for the Reserve Bank governor to pull – suggestions that compulsory savings rates of 15% or more might even be necessary to have anything like the effect on inflation claimed for it1,2 – Cunliffe waved his hands at the criticisms. This “new tool” he said is but a part of a “suite” of tools – making the variable-compulsory savings tool they said last week was a “big tool” not the big tool at all, but just a tool.

Got that?

It turns out, in Cunliffe’s mind at least, that the the variable-compulsory savings tool is but a “complementary” tool to his real big tool. The complementary variable-compulsory savings tool is going to act in the short-run, stabilising monetary policy (how? somehow!) while the “real big tool” will bring down housing prices over the long run, so that even low-income folk will be able to make the high and higher compulsory Kiwisaver contributions that Cunliffe all but conceded might be necessary.

So what’s this real big tool? No, it’s not his spokesman for finance David Parker. Their real big tool, it turns out once the hand waving subsides, is their old friend the Capital Gains Tax which, he insists is going to “cool” house prices and rents so markedly – by up to a third, he told Radio NZ’s Suzy Ferguson this morning! – that this will leave ample room for folk forced to save to afford the forced-saving his little “complementary” tool of a variable-compulsory savings rate will still require.

Do you see a problem here?  It’s called a reality gap – a gap that no amount of hand waving can massage.

It’s a little like the realty gap with Labour’s housing policy itself. …

Their housing policy requires homes by the thousand to be built for well under $300,000 or else, as Labour’s Phil Twyford concedes, the Labour Party's Kiwibuild policy "will quickly run out of money." Yet the room full of experts in which Twyford had made that concession had already established that homes by the thousand could not be built for well under $300,000, leaving the Labour Party's Kiwibuild policy as little more than a wet rag to wave around on the election trail that will quickly run out of money if they ever get a chance to try it.

The ‘suite of tools” Cunliffe began to reveal this morning has a similar reality gap: because just as Labour’s housing policy relies on a figure the industry can’t produce, Cunliffe’s “real big tool” relies on house price reductions that no capital gains tax anywhere in the world has delivered.

What he seems not to have noticed is that virtually every western country in the world apart from ours had a capital gains tax, yet every one of those places still experienced a housing bubble just like ours.

So the way they hope to bring down housing prices, down enough to make their complementary big tool affordable for low-income earners and others, is to point to a real big tool that in nowhere in the world has done what they say the tool will do.

It’s as if by saying house prices will fall they will, as a consequence, fall.

This is worse than hand waving. It’s more like a failed conjuror who simply expects his tricks to work because he sys they will.

So what would they do, in both housing and monetary policy, were they to be given the chance to introduce their tools in government only to discover reality had other ideas than the outcomes they’ve announced?

Your guess is as good as mine. But you can bet than one of those hands currently waving away the problems with their policy tools will be thrust ever further into your wallet to pay for the blunder. 

1. As Fran O’Sullivan pointed out last week, for example, when the Reserve Bank tinkers with mortgage rates they’re playing with a residential mortgage pool that’s $191.8 billion big --$75 billion at floating rates with a further $64.9 billion on one-year rates. But the size of the compulsory savings pool is at this stage only about $1.5 billion with 53 per cent of the eligible population, so even if the scheme were to (optimistically) double the size of the pool, the low degree of leverage given by this small pool would mean that to have any real effect the variable-compulsory savings rate would need to be both very volatile, and have a very high amplitude

2. “Steven Joyce has estimated "in a couple of hours with the help of a couple of boffins on the back of a cigarette packet" that Labour would have to increase the KiwiSaver contribution rate from 9% to 15% to have the same impact as a one percentage point increase in the OCR. Joyce again challenged Labour on Tuesday to produce its own figures on how much the Variable Savings Rate (VSR) would need to increase to prevent a one percent rise in interest rates…
    “Parker and Cunliffe also refused to say how much employers would need to contribute to increased KiwiSaver rates, saying they hadn't yet made up their minds on the matter. They promised an answer before the general election.”

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