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Bank Economists At Sea On Housing

“Bank Economists At Sea On Housing”


Hugh Pavletich
Co author
Annual Demographia International Housing Affordability Survey
New Zealand

September 1, 2008

Following a recent article in New Zealand’s South Island leading daily newspaper The Press “Leaky homes and the housing bubble“, the writer responded to comments by the New Zealand ANZ National Bank Chief Economist, Mr Cameron Bagrie with an article “ Understanding Housing Bubbles “.

Within the article “ Understanding Housing Bubbles “ I pointed out the need to focus on “supply and demand”, structural issues, the increasingly recognized shortcomings with respect to the training of economists and that “they need to live in the real world”.

While the comment “they need to live in the real world” may be seen as rather direct – it had the desired effect of stirring the economists at the ANZ National Bank in to action by opening up further - with a full blown follow up response (see attachment) within ANZ National Bank Property Focus August 2008 Edition “Putting Humpty back together again”.

This engagement by the Banks economists is to be applauded and encouraged – and other professional economists, urban valuers / appraisers and planners need to emulate the socially responsible approach of the ANZ National Bank economists - by participating actively in public debate and discussion of these important issues.

One of the major reasons why we have the current “housing bubble” in Australia and New Zealand today – is because professionals – and professional organizations - have too often failed to exercise their professional responsibilities to engage effectively in these important public issues or reverted to “weasel words” for reasons of misguided commercial convenience.

The Property Council of New Zealand has regrettably reverted back to “weasel words” of late – an issue I had discussed earlier within a widely distributed communication “The Need for Clarity” to the Housing Industry Association of Australia

Within the follow up article “Putting Humpty back together” –the ANZ National Bank economists commence by stating that there is some support for the hypothesis that structural urban issues account for housings relative unaffordability.

In reality – the international intellectual debate on this issue overwhelmingly supports the position that regulatory impediments and inappropriate infrastructure financing are by far the major reasons why housing exceeds three times annual household incomes in stressed markets. Much of this international research can be accessed via the Demographia website and referenced also via the writers articles on Scoop New Zealand ( here and here ).

The writer also attempts to explain these issues “in layman’s terms” within “Getting performance urban planning in place “, within the April 2008 article “Scoop: Urban Planning Degrades Housing Productivity“ and “Scoop: Housing: Dealing With Real Structural Issues”.

Within the April article I set out clearly the degrees of degradation of the pricing and performances of the United Kingdom and New Zealand housing markets in particular. These are the issues economists and other professions need to focus on.

The focus now is on “workable solutions”.

Put simply – if urban markets housing exceeds three times annual household incomes and acceptable new starter house and land packages at two and a half times median household income are not being provided on the urban fringes (which are the only supply and inflation vent) – then this clearly proves that there are supply constraints that need to be dealt with.

The Bank economists attempt to suggest that “supply and demand”is only one factor to consider – then make the astonishing assertion that housing is not a “pure market” (whatever this term may mean). This description is rather unfortunate – because it illustrates that they do not adequately understand the importance of the issue of constraint on supply in constrained urban markets (such as those in New Zealand and Australia).

They fail to mention that most of the urban markets throughout middle North America are not constrained (their definition supposedly of “pure markets” – which regrettably they appear unaware of) and that they are easily supplying affordable housing below three times household incomes.

I touch on these matters within recent Op Eds on the United States Planners website “The Housing Bubble: The Planner's Role and Lessons Learned | Planetizen” (reprint Frontier Center for Public Policy, Canada “The Housing Bubble” ) and the Houston Business Journal “Affordable housing no accident in Houston” (19 US Business Journal reprints to date) .

The point is then made by the Bank economists that downwards pressure on the pricing of housing is “sticky”. Try telling that to the Californians, Floridians, the British and the Irish! I One only has to read “Scoop: US Association Of Realtors July 2008 Report” and “Scoop: Housing: The Disaster Zone Of California” – to learn how “unstuck”, unstable and destructive artificially created bubble urban markets are

The ANZ National Banks Property Focus article then embarks on what can only could be described as a long winded ramble, in attempting to explain what the roles and responsibilities of policymakers are with respect to these issues. It is necessary to reprint the entire paragraph –

“Second, we have a few issues with the notion that housing policy being predominantly set with a view to providing a match between supply and demand. For sure, housing affordability and related issues are substantial policy challenges that should materially influence policy settings. Yet there are other areas to be mindful of. For one, there are strong lags involved, and by the time policymakers typically respond, or realize that a response is necessary the horse has typically bolted. Additionally, policymakers track record is very poor. Who or why should we suddenly make them God in terms of trying to fix market disequilibrium’s? You can certainly try to iron out extremes. But just like the RBNZ and currency intervention, it is neither a policymakers job nor desire to turn trends. All the international research tells people firmly that they can’t. Finally, decisions by policymakers are taken for a host of reasons. A fair degree of Auckland housing policy for example is being influenced by a wider regional strategy for transport. Policymaking is neither black nor white. It involves tradeoffs. As we head in to the election debate will no doubt rage about tax cuts. The potential economic benefit, who gets what amount and how they are to be funded, or potential implications for spending. But the key point is simply that for every policy decision. There is a winner, and other pockets that don’t benefit”.

The above example of “mangled English” would suggest the ANZ National Bank may need to consider English speaking classes for its staff - before embarking on “Structural Urban Economics” classes for its economists.

Then the paragraph that follows commences with the extraordinary statement “Third, supply demand indicators have not been seriously out of whack”.

It is to be hoped that the ANZ National Bank economists will enlighten their readers in their next Edition – about how “demand” would be influenced, if Local Authorities allowed (as their counterparts in middle North America do) the construction of 234 square metre (including double garages) starter homes on 700 square meter lots for $140,000. And further to this –manufactured housing of 180 square metres inclusive of serviced lots for $73,000 all up.

It is to be hoped too - that in upcoming Editions of ANZ National Bank Property Focus – they explain to their readers what the costs and consequences are to the public and wider economy of having our housing market inflated out to in excess of four times our GDP – whilst the affordable housing market of Houston for example is around 1.3 times its GDP. According to the US Department of Commerce Bureau of Economic Analysis – the Houston GDP (population 5.6 million) is in excess of three times the size of New Zealand’s (population 4.3 million). Yet even expressed in US dollar terms (at current exchange rates) New Zealand’s generally poor quality 1.6 million residential units are “worth” considerably more than the 2 million generally much better quality residential units in Houston.


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