What is it about housing policy that leads to people forgetting basic economic principles? Following on from the extraordinary Labour Party policy that Matt and I jumped on
at the start of the week, we had this blog post from Susan Guthrie, and this
press release from Labour. Matt has commented expertly on these here and here,
and I don't want to beat a dead horse. But in all the discussion about housing in the
blogsphere, a few basic principles keep being ignored, so I thought I would finish what has turned out to be housing week in the blogsphere by listing those prinicples in one place:
- The price of housing depends on the supply of available houses and the number of people wanting to live in houses coupled with their willingness to pay for housing. The price of houses depends on the price of housing today and the expected price in the future. Policies that affect who owns houses and the incentive to purchase existing houses as an investment are sideshows unless they change the underlying stock or the underlying demand for housing.
- Speculation works by buying assets when their price is expected to rise and selling when the price is expected to fall, thus reducing price volatility. Speculative investment that increases volatility in house prices is investment that loses money. If such speculation were coming from overseas, it would be a source of income to New Zealand.
- Speculation that leads to an increase in house prices and makes money, is only profitable because underlying factors are operating to push prices up even further in the future. Any policy that claims to be able to reduce house-price inflation by restricting speculative investment, is a policy that is an open admission of having no solution to the long-term problem.
- Policy can reduce the demand for housing or for houses by imposing taxes, but that can only lead to a reduction in the before-tax price not to the after-tax price and hence is not a route to making housing more affordable.
- More specifically, there is a tax advantages to owner-occupied housing over renting. But to the extent that has any effect, it leads to too much investment in creating houses and hence to lower house prices than would otherwise be the case. There may be arguments for eliminating the tax preference, but affordability is not one of them.
I think most people implicitly have a 'greater fool theorem' type story in mind when they talk about house prices, and I'm not so sure that they are completely wrong. I'm sure there are some (many?) people who buy houses with a greater fool outlook. Although I suppose that it is much less likely for international investors to be the greater fool types.
ReplyDeleteAlso, I think the best argument for eliminating the tax preference for owner-occupied housing is that it is easier for higher income people to take advantage of the tax incentives, making the tax preference a regressive policy. [Note that I say with no specific knowledge of the NZ housing tax rules, so please correct me I'm wrong here.]
Evan, I think some people do have a greater-fool model in mind, but even more who just throw the word "bubble" around with no clear idea of what they mean. But a bubble just means that house prices are going to fall soon and, to the extent that it is overseas-investor driven, that will be a source of income to NZ. Empirically, though, it is hard to see predictions of future population growth in Auckland coupled with sland-supply restrictions and feel confident that current prices aren't just capitalising high future costs of housing.
ReplyDeleteOn the tax advantage, NZ has a relatively high reliance on indirect tax, where there is no tax advantage to owner-occupied housing, so the distortion on the income tax is probably too small to worry about for either efficiency or progressivist reasons. But that is separate from the 5 points in this post.
Seamus... The whole debate or issue is within the context of "affordability"... ( the commonsense definition of the word).
ReplyDeleteYour 5 points , apart from showing the obvious, does not address that context.
Also pts 2 and 3 made me scratch my head.... ie. speculative activity leads to volatility...and speculation .... and at its' extreme relies on the "greater fool theory" as the factor that pushes prices...SO... speculation can bethe mother of extreme volatility . ( the father being excessive credit )
Keep in mind that most people ( especially 1st home buyers) simply want their own home.... Speculation is most likely a part of a boom bust cycle..and that is fine with markets like gold or even shares.... but I do think a simplistic "commodity" view of housing is myopic and does it a social injustice.... Ordinary people can't be expected to have the skills or knowledge to be ok .. in speculative mkts using high leverage.. ( eg 90% mortgages )
At the moment ... Aucklands so called "smart growth" policies has resulted in a diminished supply of new homes.... http://www.sra.co.nz/pdf/HousingInitiativesAug13.pdf
Within that context... don't u think it is reasonable to ask questions about foriegn investment in housing..??
Of course ... the real solution to affordable housing lies elsewhere....but don't u think allowing unfettered access to foreigners who have much greater bidding power is going to exasperate the current problems..??
Can u assure me that we will not get an extreme boom/bust cycle in Auckland housing... as things stand at the moment..??
Anyway... just my views..
Seamus...
ReplyDeleteThe whole debate or issue is within the context of "affordability"...
( the commonsense definition of the word).
Your 5 points , apart from showing the obvious, does not address that context.
Also
pts 2 and 3 made me scratch my head.... ie. speculative activity leads to
volatility...and speculation .... and at its' extreme relies on the
"greater fool theory" as the factor that pushes prices...SO...
speculation can bethe mother of extreme volatility . ( the father being
excessive credit )
Keep in mind that most people ( especially 1st home buyers) simply want their
own home.... Speculation is most likely a part of a boom bust cycle..and that
is fine with markets like gold or even shares.... but I do think a simplistic
"commodity" view of housing is myopic and does it a social
injustice.... Ordinary people can't be expected to have the skills or knowledge
to be ok .. in speculative mkts using high leverage.. ( eg 90% mortgages )
At the moment ... Aucklands so called "smart growth" policies has
resulted in a diminished supply of new homes....
http://www.sra.co.nz/pdf/HousingInitiativesAug13.pdf
Within
that context... don't u think it is reasonable to ask questions about foriegn
investment in housing..??
Of
course ... the real solution to affordable housing lies elsewhere....but don't
u think allowing unfettered access to foreigners who have much greater bidding
power is going to exasperate the current problems..??
Can
u assure me that we will not get an extreme boom/bust cycle in Auckland
housing... as things stand at the moment..?? And how would that impact on ordinary
people..???
Anyway...
just my views..
Roelof. I will do my best to reply, but I am finding it difficult to understand your comment, in part because I don't understand what your ellipsis dots signify.
ReplyDelete1. Affordability is not a well-defined concept, but it is very well defined that people who advocate particular policies to make housing affordable want housing to be cheaper than it currently is, and my blog posts (and Eric's and Matt's) have been directed to the issue of whether suggested policies will make housing cheaper.
2. Yes, housing is very different from a commodity like gold, mostly because there is an underlying value in use that underpins the value of it as an asset, and that it is that underlying value (housing services) that explains most ownership. But I don't see how that difference invalidates my claim that it is the underlying value (stock of houses, demand for housing services) that determines prices. I could understand the point of difference if you were saying that housing is *more* like the market for gold than I think it is, but this seems to be the opposite of what you are saying.
3. I totally agree with the link about smart growth policies. This is exactly my point #1. But I am lost for why this context means we should look at foreign ownership.
4. As best I can see, your argument after this, is unrelated to smart growth policies, but is the following:
a) Auckland house prices are priced not as they are because of a belief that the Auckland population will grow but governments will not allow more house construction.
b) Rather it is because of investors relying on a greater fool, and the market will come crashing down.
c) Furthermore, non-resident investors are the main driver of this speculative bubble, so that if we banned them, local investors would not have the same irrational exuberance, meaning prices would not be pushed up as far and the resulting crash would not be a big.
d) When such a crash happens, there will be collateral damage to people other than the silly investors who lost money betting on a greater fool, and this cost will outweigh the benefit to the country of having silly foreign investors transfer their wealth to NZ via loss-making speculation.
e) Despite the fact that NZers in this model are not as silly as foreigners, they will not simply switch to renting until after the bubble has burst.
This is a pretty long stretch of the bow for me.
Hi Seamus.... sorry about the dots..not sure why I do that.
ReplyDeleteyour pt 2... for me the main difference between gold and housing is the social/community/society aspect of housing.( this is where I make a distinction between owning and renting )
your pt 3.... this context is the reason why unfettered foreign purchases of Auckland housing is an issue. Because the supply side is unresponsive to changes in demand.
your pt 4..... a,b,c,d,e .. no that wasn't my argument. ( I was trying to say that speculation , in itself, leads to volatility, and a boom/bust cycle, which is the antithisis of the social aspects of housing ) It's not about winners and losers.
If I was a wealthy Chinese person, I would want to hold some of my wealth outside of China, simply because China does not have a robust legal system.. ie. my wealth is not safe.
I would buy houses in auckland and I would not really care what price I paid. The value of having my assets in a country that actually has property rights laws would be important to me and I'd be happy to pay too much. My bidding power would be like throwing petrol on a bonfire. (ie. a supply constrained mkt). I would be a real factor in the rate of price increases.
(The only reason I use Chinese as an example is that it is a Nation that is generating vast surpluses and wealth .)
I am saying that until the issues that are constraining supply are sorted .( such as failed smart growth policies).. it makes sense to regulate the extent to which foreigners can purchase houses.
( this is a social perspective ..not an economic one because economics does not care who owns the house). (and it might even take a housing crisis to get any real policy change.)
I sometimes wonder what an economists' point of view might be,about a country like the Cook Islands, in regards to foreign ownership of land . Common sense tells me the Cook Islands are doing the right thing by not allowing foreign ownership of land but I would not be surprised if an economist would argue that foreign ownership would generate wealth for the nation and would be beneficial long term....
The boom/bust cycle, particularly in Real Estate, is not a healthy thing.
is there a level at which you would become concerned about foreign purchases of Auckland houses.. eg. 10%...20%...30% of sales..??
do you think Auckland house prices could double by 2020???
If so... would you see that as a concern.... or just wealth transferring ??
anyway..I hear what u are saying and thks for responding.
The Savings working Group blamed house prices on high immigration and tax breaks for property investors. Price rises (they say) correlate to immigration swings and tend not to fall (this is disputed by a study that can find no evidence on the ground - a position accepted by the Productivity Commission). If so those who stand and out bid first home buyers are locals who have benefited from asset inflation, migrants with money earned offshore or high earners.
ReplyDeleteThey also said that we have a low wage economy and the cost of providing infrastructure is significant.
The green belt, town planning etc being blamed for restricting land supply are an expression of costs and budgetary constraints, reflecting the realities of our low wage economy?
As for foreign ownership and speculation, the student who bought 3 apartments for $5m (because they are cheap) is acting as though we are part of a wider market. You are saying he is a fool? What would other buyers make of behavior like that? People have different world views and arguments often fail to resolve because of this differing belief about the real world . We are told Auckland's population will increase and that people come here for the environment, to escape the lack of personal space etc. We observe that it is relatively easy for wealthy people to buy here and there are a lot of them. Politically we see (from left and right) anyone opposing immigration being ostracized. In this context I see Labours move as good as it sends a message that this is your country; we are still a nation not part of a globalized whole.
jh: Both in both your comment here and your sequence of comments at interest.co.nz, your concern is not with foreign-ownership of houses per se, but with immigration. There is not doubt that immigration will increase the demand for housing (whether immigrants want to own or rent), and one can have a reasoned debate about whether immigration is desirable. But this is not the relevant to the question of whether banning non-resident ownership of the housing stock would affect the price of housing.
ReplyDelete