Thursday, 25 January 2018

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.




  1. I think its not always quite as simple as the list makes it out to be. Hong Kong has obvious issues with land availability - its darned hilly. I love the place but could never afford to buy property there.


  2. A huge part of the problem in Vancouver, Sydney and Auckland is Chinese speculation on top of speculation from the locals. Which is why the respective governments refuse to collect comprehensive data.

    1. Barry, I have 2 quick questions:

      1) Why single out Chinese speculators. Surely all speculation is equal, irrespective of the origin?

      2) What are these speculators (irrespective of origin) speculating with

      You'll find that pretty well covered in the post, so it should not be hard to answer.

      Which brings us back full circle: the problem is not speculation per se (Chinese or otherwise) but rather easy money to speculate with.

      No racism required.

    2. Easy. 1) Check out the ethnic makeup of property auctions and real estate agents. When I sold my house last year I found it's common to have 'teams' of one white agent for Caucasians, and one Asian agent for Chinese prospective buyers. Considering the enormous amount of Chinese money looking for a home it's not hard to join the dots.

      2) If speculative borrowed money is the problem, then why allow an enormous tidal wave from China on top of speculation from locals? We can't stop China from implementing irresponsible monetary policy, but we can stop said money from contributing to the inflation of our housing bubble.

      It's not racist to candidly talk about other countries who are obviously contributing to our housing bubble. That was National's favourite excuse to shut the debate down.

  3. Come on Roedolf.. Dont be too PC... Why the quick cry.."racism".

    I've seen the growth in Aucklands Chinese population.
    Pretty obvious to me that chinese purchasing power has been very active in Auckland real estate.. ( whether as permanent residents or foreign investors )
    Check out this list of top Barfoot salespeople and draw your own conclusions
    20 of the top 25 look to be chinese. Only 4 are white..

    Whats so racist about anyone suggesting that Chinese purchasing power has strongly influenced both Vancouver and Auckland house prices..??
    AND.... it seems like common sense as to why wealthy Chinese might want to invest outside of China. (Nz with its robust property rights legal system, and freehold title, with its relative freedoms... would seem very attractive )

    1. Roelof,

      Quick tip: spending time to classify real estate agents by their apparent racial features is not a great way to argue that you're not a racist.


      I'm not saying you are a racist, I'm just saying that you're not helping your case.

      A better idea would be to actually argue my first point: Why do you say that Chinese fiat money is worse than British fiat money? Why not criticize all fiat money equally?

    2. Roedolf,
      Arguing that Fiat money creation (easy money ) is the cause of high house prices... is far too macro.. ( just like saying that price is a function of supply/demand, and thinking that means something about a particular mkt. )
      Of course , money + credit = demand ., in any particular mkt.., BUT unless one can do the hard work of determining the different "players" in a market, and how they participate , one has no idea about how prices will unfold, and to what extent.
      The house price rises in Auck.. have been at a much higher rate than the rate of credit growth in NZ..
      In 2005 we had 16% credit growth in housing this current cyle it was around 7% growth..

      If the Chinese have been, price setting, active buyers in the Auckland mkt, it seems obvious to me they might prefer dealing with agents who speak their language and share their cultural understanding... If that was the case, and if the Chinese do have big purchasing power, then it makes sense those agents would do very well...
      The ethnicity of Barfoots top selling agents, kinda confirms this for me..

      When I last looked ..the dictonary definition of "racism" was :

      prejudice, discrimination, or antagonism directed against someone of a different race based on the belief that one's own race is superior.

  4. The asymmetric nature of Central Bank monetary policy has conditioned people to believe house prices can only ever go up.
    The "great moderation" was the utopic idea that we could do away with the business cycle.
    A recession should be treated as normal and important, as part of a healthy , evolving economy .. it is a process of renewal, of creative destruction...etc..
    Each time there was/is a recession , central Banks respond with stimulus...
    The real Estate mkt is never allowed to properly readjust to its excesses..
    People end up believing house prices can only ever go up.
    My view is the NZ is only 1 business cycle behind the USA... and we will have our own version of the "GFC".... ( I'm guessing we will survive a mild recession, say in 2019, and then the next one will be huge )
    Since the GFC all Central Banks have been practicing a form of financial repression.. so it hardly surprising that we are in the midst of what will be the biggest asset boom ever...
    ( the fact that there is over $10 trillion invested in at -ve interest rates , says alot about the upside down, kinda alice in wonderland, reality the Central Banks have created)
    eg... Chronic debtor nation , NZ, has extremely high house prices..


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