Rising housing prices: It's frightening, and there are two leading causes ...

“The tidal wave of cheap money from … central banks has to go somewhere, so now it is flooding into housing and making serfs out of the middle class.”
~ Tweeter 'Rudolph E. Havenstein,' quoting Ken Sherman, in reference to WSJ’s article: 'Meet Your New Landlord: Wall Street'

Houses are generally paid for by borrowing. Each time a borrower borrows, a bank creates a new debt. This is now new money comes into existence, borrowed into existence to pay for either consumer borrowing or business borrowing. Debt organised into currency. It's what caused nearly all of history's boom-bust cycles.

Currently, around two-thirds of all the money borrowed into existence in New Zealand was created to buy (or borrow against) houses. [Charts here.] Think about that for a moment: nearly $250 billion of New Zealand's rapidly-rising $320 billion M3 money supply was created to buy (or borrow against) New Zealand's houses.

This is the demand side of the housing problem, about which too few folk have noticed -- demand (in the strict economic sense) being desire backed with money. In this case, borrowed money, and lots of it. This is where the purchasing power emerges to buy houses, and it's been growing each year of the last five by between five and ten percent!

This, ladies and gentlemen and other sane persons, is what monetary inflation looks like. And it's this monetary expansion that (eventually) causes all forms of price inflation, including asset price inflation.

So is it any wonder that the University of Auckland's Jeremy Gabe and Mike Rehm, and James Young, the Research Director of the Washington Center for Real Estate Research, argue

that it's not a lack of supply, zoning, or immigration that's the big problem [in rising house prices], rather easy credit. [Listen here to RNZ's interview with the authors.]

Young's research for example [summarised here on page 69] suggests

It was found that [Chinese immigration] had a significant negative impact on the neighbourhoods most favoured by Chinese immigrants, but only for a short period of time. However, the effect was not uniform with more persistent impacts occurring within higher priced market segments. The effects on house prices diminished greatly within 18 months...
....These findings suggest that the use of immigration policy to constrain house prices are likely to produce limited specific results and only for a short period of time.

That is an academic's way of saying that banging on about Chinese immigrants is banging a noisy drum, but the wrong drum. Because immigration is not the long-term problem here. [CONCLUSION 1]

Meanwhile, Rehm and Gabe's research (summarised on page 23 here, comparing rising borrowing with rising prices across 23 US housing markets) finds that those gobs of borrowed money created by the banks was found

to "Granger cause" house prices in markets that experienced comparatively high house price growth during the boom years leading up to the global financial crisis ...
.... [This credit-fuelled] purchasing power maintains a strong, statistically significant positive correlation with house prices after controlling for interest rates in every market analysed.

They do not however conclude with a clarion call, as I would, for a complete review of the system of organising debt into currency. But they do argue for measures

to foster financial stability and dampen housing boom-bust cycles made worse by unbridled credit expansion and contraction.

Which, for any academic, are stern words wrapped around a certain and predictable conclusion: that unbridled credit expansion fuels both boom-bust cycles and explosive house-price growth. [CONCLUSION 2]

Their abstracts, from which I've quoted, don't mention having made any study the "lack of housing supply [or] zoning." (That quoted above was Radio NZ's summary of their research. But it does seems clear that if this rising monetary tide is lifting all boats, then they will be lifted less in those more liberal jurisdictions in which boat-lifting is made easier rather than harder.

And if it's not clear enough, then this graph below from the latest frightening report from Demographia, who do measure that relationship, should make it clear enough (and if Auckland joining Hong Kong, Vancouver & Sydney to be the four most unaffordable cities out of more than 400 measured doesn't frighten you, then it should), i.e., that when purchasing power fuelled by inflated monetary demand meets more restricted supply then it has nowhere to go but up -- up, up, up into the stratosphere of highly unaffordable prices. But when it meets a place in which supply is able instead to expand to meet this artificially-inflated demand, then it can and does expand -- or as economist Eric Crampton puts it, "Easy credit in a city where land use regulations aren't nuts turns into more houses rather than house price appreciation" [CONCLUSION 3]-- and without creating the speculative frenzy that, in places like Auckland, begin to feed upon themselves until they (or the economies around them) just burst.

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MORE READING:

• The Housing Bubble and the Credit Crunch - George Reisman, GEORGE REISMAN'S BLOG
  
• The Organisation of Debt Into Currency: On the Monetary Thought of Charles Holt Carroll - Robert Blumen, MISES DAILY
• REPRISE: How the Stock Market, [Housing Market] and Economy Really Work - Kel Kelly, NOT PC
• Prices Are Stable? - NOT PC
• Land-Use Regulations Matter - Michael Reddell, CROAKING CASSANDRA

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