Our fifth meeting of the year is being held at Honest Lawyer Monaco on Tuesday 1 August 7:30 pm. We commence with our regular pre meeting meal at 6 pm followed by the meeting proper starting at 7:30 pm.
Michael Riddell a politically active economist and blogger is coming to speak to us again. I have asked Michael to speak on the impact of the ongoing damaging central bank interventions in our market. Last month Dr Nick talked about what he was doing to the industry from a legislative perspective. I do not recall him mentioning the various banking and taxation screws that are being applied to dampen things down. Some people are hurting but their screams are hard to hear over the noise of immigrants beating at our doors to get in. We all know if property investors are stopped from buying and providing more rentals then someone will go without a roof over their head. Some really desperate people will squeeze into unacceptable accommodation and the owners of those properties will be blamed for the situation.
Bank restrictions have had little impact on longer established investors like me but it cramps and restricts new younger investors. Difficult times like this are a great opportunity to advance your portfolio but you need to understand what is causing that pain in your butt before you dive off the deep end and hit the concrete below the wharf.
Send me your bookings for the meal. They are good value and it is always fun chatting to other investors. This newsletter is a little earlier than normal. I am off on holiday but will arrive back just in time for the meeting.
SOME HOME WORK BEFORE THE MEETING.
HERE ARE TWO RECENT ARTICLES THAT MICHAEL HAS WRITTEN ALONG WITH A COMMENT FROM ME.
Last week I’d been discussing house prices etc with a couple of friends whose kids are a bit older than mine, of an age where they might in years gone by (not that long ago) have been thinking of buying a house. As one noted, they didn’t know what to advise their kids. Another talked of the seeming inevitability of parental assistance – which, in many families, isn’t much of an option. I know of another friend who decided that parental assistance was probably inevitable, so bought another house himself so that at least his position was hedged – if house prices went down, so would the needs of his kids, and if they stayed high or rose further, there would be some additional wealth in the inflated value of the additional house. When this week’s Listener reports yet another poll suggesting housing is the most important issue going into this year’s election, we can’t be the only one having these sorts of conversations.
And then I found a Labour Party election pamphlet in my letterbox. There was a lot of text, but on only two issues – health and housing.
Jacinda says everywhere she goes, one topic keeps coming up: the housing crisis. “National has failed on housing. People are worried that they or their kids won’t ever be able to get on the property ladder.
Andrew can relate – he’s concerned about what the future holds for his 16-year-old son, Cam. “I want Cam and his generation to have the same opportunities I had, and more. But it’s getting so much harder for young people to buy a house. I worry that Cam and other young New Zealanders won’t ever be able to afford their own homes.”
That struck a chord with me. Partly because my (slightly younger) son knows his son. But also because my own first house was about 50 metres from Little’s current house which, according to a recent Herald article, is approximately valued at $920,000. I walk past both houses most days. It isn’t a fancy neighbourhood by any means – pleasant, but not fancy.
I bought my own first house in December 1988 – which I guess is almost thirty years ago, although in many ways it seems just yesterday. I paid $152000 for it, which at the time was less than twice my income. The Reserve Bank’s inflation calculator says that is roughly $287000 in today’s money. I looked up the same website the Herald used to get a value for Little’s house. It estimates – who knows how accurately – that my old house is now worth around $800000. The current owners have extended it a bit, but it is still a three bedroom house, and the bottom outside walls of the garage have rusted a bit more than they had in 1988. But then productivity has risen since then – real GDP per hour worked is up around 35 per cent – and with it earnings across the economy.
I’m not sure what the Reserve Bank now pays people who’ve been managers in their economics areas for just over a year (that was me in December 1988), but I’m quite sure it isn’t anything like $400000 a year – recall that I paid less than twice my then income for the house. In fact, in the Reserve Bank’s Annual Report last year, only four people were getting paid at least that much – the Chief Economist looked to be receiving just over $400000 per annum. It brings back memories of a training course I did at the Swiss National Bank in 1990, where they told us that house prices in Berne were so high that only the most senior managers could afford to purchase their
own house. I still recall the astonishment I felt, and never imagined it would be like that in New Zealand.
On Monday the Herald ran their regular supplement of QVNZ house values across all the different suburbs and localities in the North Island. Island Bay median prices have now, apparently gone just over $800000. No doubt that still seems quite cheap to Aucklanders – although I did find one North Shore suburb (Birkdale) that was cheaper – no one much else in likely to find them so. In the whole of fast-growing Hamilton and Tauranga, only one suburb is that expensive.
Which brings me back to Andrew Little and the Labour Party. I’m quite happy to take him at his word on his concern for his own son. But what does it amount to? It isn’t that long since Little told us (and here) he didn’t want house prices to fall.
But asked if he welcomed signs Auckland house prices were falling, Little said no.
and “Having the right number of houses, or closer to it, stabilises prices, it doesn’t collapse prices.”
Labour has a list of policies on housing (I’ll come to them in a minute) but are they simply supposed to stop already unaffordable houses getting ever-more unaffordable?
As I’ve noted before, if nominal house prices stayed flat from here, then even if productivity growth picks up quite a bit, it would still be 20 years before house price to income ratios halved from here. It isn’t much of an answer for today’s generation of twenty-somethings, let alone 16 year old Cam.
Flat house prices – while better than what we’ve had – just shouldn’t be regarded as an acceptable outcome after the house price inflation of the last 25 years. I know people who have bought recently, taking on lots of debt to do so, get very uneasy about house prices falling but (a) that is a minority, (b) an increasing number of those buying recently have been quite tightly constrained by LVR limits, and (c) perhaps most importantly, there has never been an economic reform where there were no losers. Yes, the more people who have entered the market on prices that assume the continuance of regulatory restrictions, the harder it is to undo those restrictions, but the restrictions themselves are pretty morally indefensible in the first place (just like
those that had us assembling TVs or cars, or making kids clothes, in New Zealand at vast expense to consumers).
I suspect there is an element of the concern is a worry – derived from, say, the US and Irish experience last decade – that any significant fall in house prices is somehow economically disastrous. When a sharp fall in house prices results from massive over-building, and a serious misallocation of credit, that is probably a quite reasonable concern, especially when (as in Ireland) the authorities have no monetary policy leeway to offset the fall in demand associated with the housing slump. It is a quite different prospect if the falls in house and land prices arise because regulatory restrictions are unwound – if anything that would be likely to stimulate building activity – in a country which has its own monetary policy and exchange rate. That is what could, and should, be done in New Zealand. We certainly don’t have a problem of an oversupply of new houses.
But what is Labour proposing? After the Labour Party conference last month, I expressed concern that in a speech largely devoted to housing, Andrew Little had not mentioned at all freeing up the urban land market. Labour’s housing spokesperson, Phil Twyford has been good on this stuff (and there is still reference to it in the policy documents on the website)
But in the entire speech – and recall that most of it was devoted to housing – there was not a single mention of freeing up the market in urban land, reforming the planning system etc. Not even a hint. I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause. But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence. Planning reform isn’t going to be easy. Few big reforms are under MMP. It probably isn’t something the Greens are keen on. And if the putative Prime Minister isn’t on-board, hasn’t yet internalised (or even been willing to simply state it openly) that this is where the biggest problems lie, it is hard to believe that a new government would really be willing to spend much political capital in reforming and freeing up the system, no matter how capable, hardworking and insightful a portfolio minister might be.
So when the Labour pamphlet landed in the letterbox, I looked to see what Labour was going to do about housing. The four point plan from Little’s speech, was now reduced to a two point plan (ok, so it is a pamphlet and there is less space)
There was also a pledge on “healthy rentals” but, whatever the merits of that, it isn’t going to make housig more affordable.
Perhaps I just don’t get out much, but I’ve seen very little talk of “foreign speculators” playing much of a role – any in fact – in the Island Bay market. They explain, almost certainly, precisely nothing about why my humble first house is valued at roughly three times (in real terms) what I paid for it.
But more importantly there is nothing, not a hint, in the entire pamphlet of freeing up the urban land market. Sure, one could mount an argument that it might be hard to put that sort of promise into catchy phrases that attract the attention of potential voters. But that is why you employ marketing people isn’t it? And successful political leaders find ways of putting their vision into language that resonates with ordinary people.
It all leaves me deeply discouraged about the prospects for meaningful change. No one else seems to have managed it, and now Labour – after toying with ideas of reform – seems to be getting cold feet, and won’t campaign on freeing up the land market. The outlook for 16 year old Cam isn’t great, and neither it seems is that for my kids. As I reflected on the friend who wasn’t sure what to advise his kids, I noticed in the Herald house prices supplement that median prices in my old childhood home, Kawerau, were still only $181000. My younger daughter wants to be a primary school teacher. She has been hanging around me too long because when we were in the Bay of Plenty on holiday over Christmas I was reading out Kawerau house prices, and her immediate reaction was “Daddy, I want to live there when I grow up”. Perhaps in time that’s what I’ll have to advise her – after all, there are national salary scales for teachers. Kawerau, for all its problems, isn’t all bad as a town, but New Zealand kids surely deserve better than that.
This is another article he wrote on 15 June 2017.
In the aftermath of the London fire, in some ways my heart isn’t in writing much about housing. Disasters don’t often get to me, but this one has.
Nonetheless, the Dominion-Post led with housing this morning, and when I saw that the first word in the entire article was “greedy” (followed by that other emotive term
“landlords”) it wasn’t promising. Just because people scoff when Fox News talks of being “fair and balanced” doesn’t mean the rest of media should abandon the aspiration.
Faced with rising demand for rental accommodation – in a city where central and local government have again combined to make housing supply not very responsive to changes in demands – owners (or their agents) of residential rental services businesses have faced excess demand for the limited stock available. The typical response you might expect would be for rents to rise.
There are different sorts of pricing structures used for different goods and services. Typical dry goods in a supermarket will have a fixed price, and occasionally the supermarket runs out of stock – which can be mildly annoying to you or me, but is presumably easier to manage for them. The value of New Zealand dollar (the exchange rate) is constantly changing, typically by quite small amounts, as pressures from potential buyers and sellers ebb and flow. Even at a retail level, petrol prices now change very frequently. There are whole literatures on the reasons why different structures are adopted in different markets (and I’m certainly not expert in that field).
Housing is typically nearer the variable pricing end of the spectrum. In the market for actual house purchases, fixed price adverts, “buyer enquiry over”, tenders, and auctions all co-exist. In the last two, the seller can reconcile supply (one house) to demand, simply by using the amounts bid. In a fixed price advert, if there is more than one interested party, the seller might have to use some other decision criterion (although I imagine that typically even then one bidder will offer more).
It is, as I understand it – not owning rental property, and not having rented one in this country for many decades – customary to advertise rental properties with a fixed rental price. Holiday home websites operate that way too – and, in effect, they just operate on a “first come, first served” basis. In a normal market, it probably often works quite well – if there are plenty of people offering rentals, and plenty of potential tenants, even if one misses out on one property, there is another not far away. If the property owners sets his or her price too high, they find there is little or no interest in renting their property, and eventually have to re-evaluate and revise the fixed asking price.
But the current situation seems to be one where lots of people are enquiring eagerly about almost any rental property on offer. Fixed asking prices are, in that sense, too
low to clear the market. Over time you’d expect that those fixed asking prices would rise – and thus take care of that particular element of the problem – but that doesn’t deal with the property owner’s issue on the day: when 20 people want one rental.
Wellington Central MP Grant Robertson knew of two cases of renting tenders in Wellington – both from around the start of the year when students were returning to the capital. “I think it is barely legal,” he said. At one, would-be renters turned up to view a flat with an advertised price. “When they got to the property they were asked, ‘how much are you prepared to pay?'”
At the other there was no advertised price and would-be renters were simply asked how much they were prepared to pay. “I think it is abhorrent. It is exploiting the fact we have a real shortage of rental homes in Wellington at the moment – exploiting people in vulnerable positions.”
So how is the property owner or agent supposed to respond? Just ignore the excess demand and draw straws to determine who should get the flat at the – evidently – too low advertised price? It is a market, and the property owners aren’t running charities for the homeless, but private businesses.
As is noted in the Dom-Post article, auctions aren’t always an ideal mechanism – as an owner you are likely to care about the quality of the tenant as well. But simply drawing straws doesn’t seem to have any particular merit – moral or practical – in this climate.
Don’t get me wrong. The housing market in New Zealand is, in many, respects a scandal, and the problems flow largely from the choices of successive waves of central and local governments. Since we are talking about right now, in this case it means the National-led central government, and the Labour-dominanted Wellington City Council. But attacking a symptom – rising rents, and alternative techniques to reconcile supply and demand – isn’t a particularly meaningful response. Owners of rental properties are, in many respects, the last people who should be being blamed here.
But I also learned something new from the article. The journalists approached, and got some comment from one of their officials
Ministry of Business, Innovation and Employment national manager tenancy compliance and investigation Steve Watson said the practice was allowable under the Residential Tenancies Act.
“Any party who feels that they are being asked to pay rent that exceeds ‘market rent’ has the ability to apply to the Tenancy Tribunal who can review and determine the appropriate amount of rent for a residential property,” Watson said.
Really? I know there has been centuries of philsophical and theological debate around concepts of “just prices”, but have we (or rather our Parliament) really legislated to provide for cases where some arbitrarily determined “market price” differs from a price being paid in….well…the market. It seems that our politicians had done just that.
Here are the relevant bits of section 25 of the Residential Tenancies Act
25 Market rent
(1) On an application made to it at any time by the tenant, the Tribunal may, in accordance with the succeeding provisions of this section, on being satisfied that the rent payable or to become payable for the tenancy exceeds the market rent by a substantial amount, make an order reducing the rent to an amount, to be specified in the order, that is in line with the market rent.
(2) Notwithstanding anything in subsection (1), no application may be made under that subsection in respect of the rent payable under a fixed-term tenancy later than 3 months after—
(a) the date of the commencement of the tenancy or (in the case of a tenancy that was subsisting immediately before commencement of this Act) the date of the commencement of this Act; or
(b) the date of the last review of rent,—
whichever is the later.
(2A) …..
(3) For the purposes of this Act, the market rent for any tenancy shall be the rent that, without regard to the personal circumstances of the landlord or the tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for the tenancy, taking into consideration the general level of rents (other than income-related rents within the meaning of section 2(1) of the Housing Restructuring and Tenancy Matters Act 1992) for comparable tenancies of comparable premises in the locality or in similar localities and such other matters as the Tribunal considers relevant.
Initially I wondered if this might be some historical provision to deal with, say, a situation in the Great Depression where there was a long-term fixed rent, and the general price (and wage) level fell sharply. But that can’t be – at least for fixed term tenancies these provisions can only be used within three months of the tenant taking up the tenancy, or of the most recent rent review.
It just looks like an extraordinary piece of “feel good” law. The standard (in 25(3)) is the rent that “without regard to the personal circumstances of the landlord or tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay, for the tenancy, having regard to the general level of rents”.
It isn’t clear at all why the “personal circumstances” should be irrelevant. If someone desperately wants to live on a particular street, because they want to be close to aged parents (say) why shouldn’t that be something that can reflected in the price they pay for a rental tenancy? One bag of flour might be much the same as the next one. But except perhaps in high-rise blocks, almost every rental property is different from the others, even if only by location – and location preferences are often quite idiosyncratic and personal.
I have no idea how often this provision is used – perhaps more often now having been highlighted on the front page of a major daily paper. Various readers have a lot of exposure to running rental businesses, and I’d be interested in any perspectives they can offer. But you also have to wonder why the MBIE official felt it appropriate to add in this information when he commented. After all, the one common element, agreed (it would seem) by all parties in the story, is that the rental market in Wellington is very tight. The general level of rents is presumably rising. (And if, perchance, someone does agree to pay a level of rent “above the market rent”, it was a contract voluntarily – even if grudgingly – entered into: not great perhaps, but better – for the renter – in their own assessment, than the alternative.)
I was interested to see Grant Robertson stating that Labour will soon be announcing a package to “strengthen renters’ right”. There may well be merit in some of that. But the best way to protect the position of renters, and all others coming into the accommodation market (whether as renters or buyer) is surely to fix up the land use and housing supply markets. Abundant responsive supply in the face of changes in demand is the best assurance of genuinely affordable and secure accommodation.
This is my response to Michael re his article
Good article. Spot on with what most property investors, landlords and perhaps most tenants would agree with. However whilst mentioning the hideous fire in London, Michael did not link the two sides of the argument to the fire. Is not this fire the extreme example of what happens when the State / City provides public housing at income related rents. Suddenly a different standard unrelated to the achievable rent applies to the quality of the property and the management of the tenancies. Politics become the litmus test of building technology and economics. Some social properties are clearly substandard and some well in excess of minimum standard required to house needy people. This is the core issue in New Zealand criticize private landlords and force them to provide facilities regardless of the economic merit of so doing but then have a different set of economic judgements on social housing based on politics. If economics did not come into the issue of providing social housing then clearly we would not have a shortage of social housing.
Regards
Glenn
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