Hard to short housing

Mike Reddell points to Phil Twyford's speech on housing and wonders why, if folks with money on the line take him seriously, house prices haven't started dropping yet: The housing supply agenda looks good, but if it were credible, house prices would already be dropping.

It's a good question. My answer to it: it's darned hard to short housing.

Think about other markets covered by the NZX or futures markets. People there are betting all the time on whether prices will go up or down. If you think prices will rise relative to current price expectations, buy now or buy futures. If you think they'll drop, sell futures or buy options to sell in the future. There are lots of ways for people to trade in future prices, regardless of which way they think things will go.

Suppose you wanted to bet on Twyford's being right and you only own your own home. You might sell your house, rent another house, and hope to buy a house at a much reduced price in a few years time. But you'd have to live in a rental for a few years, and current broken housing markets have meant that the rental market sucks. It's an expensive option. If you think the price of soy beans will drop in a couple years, you can make a few clicks and have some options in your portfolio. You don't have to go without food for a couple years.

And everyone who thinks Twyford is wrong - well, it's easy to put a bet on house prices increasing. Maintain your current property portfolio or expand it.

There is a related literature. During the GFC, there were bans on short-selling. Those bans reduce the efficiency of prices and lead to bubbles that can persist and make crashes more likely.

There's no ban on short-selling housing here. But neither is there any obvious ability to do it. There are no Case-Schiller indices here. Other mechanisms are more complicated. Short companies or funds with lots of exposure to property? Even if house prices drop, the value of a set of properties could rise if more intensive land use is allowed. If there were some company that owned a pile of landbanks on the fringes of Auckland, and it were publicly traded, you could try shorting that one.

Just because I can't see any obvious way of shorting housing doesn't mean there isn't one. But the asymmetry in ease of going long versus short can make prices more persistent.

I put reasonable odds on Twyford's actually being able to get this done. Here's a likely sequence of events in that case.

After new infrastructure financing vehicles come on-stream, new leapfrog developments are announced. The first few advertise all-up prices (including the levy that funds the bond that funded the infrastructure) not far below current prices, but far enough to attract interest.

Existing landbankers see what's happening, recognise Twyford's serious, and rush to get their properties developed and sold before prices fall the rest of the way down to paddock price plus infrastructure cost plus construction cost.

Capacity constraints in construction will be even more binding. That will slow down the price drop unless government is able to progress other parts of the supply agenda that are less advanced, or not even yet on the table. Building material supply regulation. Ability to access foreign construction workers. Ability for foreign developers able to build at scale to work in the New Zealand market given the constraints of the OIA, the foreign buyer ban, building material supply regulation, and ability to bring in their own workers.

And Council risk-aversion in consenting driven by joint-and-several liability remains an issue - though if the government's Urban Development Authorities can not only provide resource consents but also sign off on final building certificates, that might help.

So without complementary policy easing other constraints, the path to new equilibrium prices will not be a fast one.

If you want a handle on why prices haven't dropped yet, it'll be the combination of those other capacity constraints pushing out the date for getting much lower fringe prices and the inability to short.

If Case-Shiller markets in Auckland housing existed, I'd be looking about 4-5 years out - but I'd also want to be talking with some construction folks before doing anything.