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Richard Prebble’s The Letter


Richard Prebble’s The Letter

A Property Price Bubble

Last week the Reserve Bank cut interest rates again. Is the bank just feeding a property price boom? The editor of influential The Economist (31 May) says the stockmarket bubble has been replaced by a property price bubble that will burst. Property is the biggest business worldwide. Over 60% of NZer’s wealth is in property. Studies show that changes in property prices have twice the wealth effect of changes in shares.

THE HOUSE PRICE BOOM Worldwide property prices have dramatically increased. In the last three years house prices in Britain have risen 55% while shares have fallen 40%. House prices in real terms in Australia, Ireland, Spain, the Netherlands and Sweden, have risen in real terms more than 50%; US house prices by 30%. The OECD exceptions are just Japan, Germany, Canada and Italy. The Economist says that the US house price increases are the biggest of any previous real estate boom. In New York prices have increased 47%. House prices increased 18% in Australia last year.

IS IT A BUBBLE? Allan Greenspan, the Chairman of the US Fed, and NZ economists like Adrian Orr, say there is no bubble. High house prices can be accounted for by low interest rates, rising real incomes, growing population and a fixed supply of land. The Economist disputes this. If property rises are driven by supply and demand then it follows that rents would be rising in step.

WHAT’S YOUR HOUSE WORTH? The traditional way to measure the worth of shares is the price to income ratio, the p/e. The price of a share should reflect its future income. So The Economist has calculated the p/e ratio for housing by dividing house prices by rents. US house price p/e ratios are at record levels. The Economist calculates house prices in Australia to be 30% too high. The magazine points out it is a myth that property prices can never fall. There was a major price correction in NZ after the 1987 sharemarket crash. Prices in Germany and Japan have been falling for a number of years.

HAVE WE A PROPERTY BUBBLE? Comparing house prices to rents from 1975 to 2002, rents have increased 772% and house prices, 712% - no bubble. But since 1994 rents have increased 10% and house prices 43% - a bubble (but Labour’s state house rent reductions are part of the reason). The house price to income ratio says property is overpriced. From 1992 to 2002 house prices have increased 69% and wage and salaries by 19%. Auckland house prices from 1994 to March 2003 have risen 80.3%, compared to 17.8% increase in nationwide wages (no data for Auckland wages exists). What’s very worrying is the record level of household debt in this country – it has risen from 64% of GDP in 1990 to 117% a year ago. The increase in house prices seems to have eased; the real question is, will property prices fall? For more data see www.act.org.nz/property.

PACIFIC ISLAND RADIO In the middle of Niu FM’s broadcast on 3 June 2003 it went off air. The station discovered that the government had switched the frequency to a premise in Ponsonby where it started to broadcast, using some of Niu FM’s staff it had persuaded to break their employment contracts. Today in the High Court, the Pacific Island community-owned radio station 531 PI is attempting to get an injunction against the Crown to return their radio frequency.

HOW TO STEAL A RADIO STATION Labour decided to finance a network of Pacific Island FM stations. The National Radio Pacific Island Trust was set up with Labour’s political appointees. A tender for the supply of PI FM stations was issued and a community owned Pacific Island radio station 531 PI won the tender. The trouble started from day one as the government appointed trustees realised there was nothing to now justify their existence. In December the government secretly registered a company in the station’s name Niu FM Ltd! Despite the claim by the government that there were ‘irregularities’, the auditors say there is no money missing. What has really outraged the Labour government appointees is that 531 PI has appointed Arthur Anae, a former director, successful PI businessman and National MP, as station manager. That’s when, with ministers’ approval, the Crown decided to simply steal the frequency. Now why is

ACT CLEARED The Auditor General wrote to the Speaker last week advising him that he was declining Donna Awatere Huata, Winston Peters and Rod Donald’s request that he investigate how ACT runs its out of Parliamentary offices. After looking at ACT’s arrangements the Auditor General concluded that the funding was within the rules, which was what The Letter predicted.

LIBERAL THINKING Richard Prebble and the ACT MPs are tomorrow launching ACT’s latest book Liberal Thinking. You’re invited to attend the book launch at 5.30pm, Portrait Gallery, Bowen House, Wellington, Tuesday 10 June. It is new ground for ACT as the book seeks to set out what classic liberals think and then apply this to different issues. The book is available in all good bookshops from 23 June. Liberal Thinking will also be available along with other ACT publications at www.act.org.nz/merchandise. Richard Prebble will also be conducting book signings at the following places and times:

Wednesday June 11, 10:00 am University Book Shop, Canterbury University. East on High Books, Christchurch.

Thursday June 12, 1 pm Chapters & Verses, 272 Stafford St, Timaru.

Paper Plus, 181 Thames St, Oamaru.

Friday, June 13, 11:00 am Preston’s Paper Plus, 234 George Street, Dunedin. Books and More, Golden Centre, 251 George Street, Dunedin.

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