Fighting the last war is always a problem.
Where is the risk sitting these days?
Some people think it’s still sitting on bank balance sheets – but there’s an argument that the cumulative effect of Basel capital structure adjustments and Dodd-Frank has reduced that significantly since the GFC.
Some people think it’s sitting in ETFs and ETPs, because some have high levels of liquidity despite being made up of illiquid debt instruments. It’s all interesting conjecture.
No one really knows, and the people who do know and are making bets against those instruments which are the riskiest are probably unknown until those bets pay off massively and there is a John Paulson of 2016 and another investigative book for Michael Lewis to write about how the GFC happened but all these lessons were forgotten in just 6 short years.
So, if these projections are reasonable, which I’d say they are, what is the subsequent impact on the cumulative housing supply deficit?
What is the point in having a far bigger labour force over the coming decades if there’s nowhere to house them in the style to which Kiwis accept as part of the social contract in this country i.e. no slums and a back yard?
Also, if the 65+ labour force is 10% of the labour force, and the natural rate of unemployment as considered by the Reserve Bank of New Zealand seems very high i.e. above 5%, then what policy options are there to incentivise their retirement?
If a few hundred thousand people who “qualify” for the NZ Super benefit were income tested and denied NZ Super that would cumulatively reduce the cost of NZ Super as a means of reducing elderly poverty by billions of dollars. Can we put that on the table please?
Source: Statistics New Zealand
Housing affordability can’t be solved under the status quo. There are too many vested interests in keeping house prices high. The capital losses required to make housing “affordable” relative to median household incomes around the country are too damn high.
Thus, housing can never become affordable unless there is an enormous reduction in demand or increase in supply. The supply side can’t keep up – new houses are an order of magnitude below that needed to impact prices and deliver the kinds of houses newly formed households both want and can afford.
What does the phrase “housing affordability” actually mean? That surely depends on who is doing the complaining.
From the perspective of an older person, “housing affordability” means capital losses, the value of their main asset going down instead of up, up, up.
From the perspective of a politician, “housing affordability” means sound bites, and occasional pearls of wisdom that can never actually be implemented at sufficient scale to solve the “problem”.
From the perspective of a “first home buyer” housing affordability means stretching their median household income to Ponsonby as opposed to Papakura. Who knows? Is there even a stock meme for what constitutes a “first home buyer” demographic profile?
It’s not clear that any policies attempting to address the housing affordability issue can actually achieve their intended policy objective without accepting that they will impose capital losses on people already owning houses. This means that because it’s not politically possible it’s not actually going to happen.
Many people on social media were disappointed that Red Peak didn’t win the first flag referendum.
This is a real-world reminder that social media, particularly Twitter, is not representative of the broader New Zealand electorate.
I don’t think the flag should be changed – but also don’t think that people voting for Kyle Lockwood’s designs should be dismissed so quickly.
There is a real problem in New Zealand with a disconnect between the everyday lives of people who live in the bubble and those that do not.
This can be seen in the regional inequality data – households in central Auckland, central Wellington, some areas of Christchurch and several rural areas – have far higher incomes, educational attainment rates and levels of average wealth than the rest of the country.
This means that the frame of reference for new policy proposals or even the sorts of concerns that give rise to lobbying the council or government on a particular issue are completely at odds with how most New Zealanders live their lives.
There are real concerns to be had if many of the people who start with blank Word documents and draft policy proposals are dismissive of the idea that people outside the bubble shouldn’t have their say in our democracy because they don’t subscribe to design thinking or vexillogy.
This book by David Lough is excellent.
The story of how his financial fortunes waxed and waned in tune with his writing and political fortunes and how he was a gambler, speculator, and wasteful spender is fascinating. Well worth a read if you are suffering from war account / History Channel fatigue and want something lighter but nevertheless insightful into how his risk taking in his personal life spilt over into his public life. Things you knew about Churchill make more sense when the extent of his precarious financial situation are matched up to his timeline.
Geoff Simmons has a good piece at Interest where he points out that road and rail aren’t measured on the same basis and ripping up the rails could impose substantial increases in cost for maintaining and upgrading roads.
If you want to see what happens to roads when there is no rail or reduced rail have a look at the East Coast. The roads north of Gisborne are stuffed from all the forestry trucks and the roads to the south are stuffed because what used to be transported by rail now goes by road!
Over the next few decades tens of millions of dollars more than it would have cost to sort out the washed out rail link will be spent on keeping those roads alive will be wasted. Yes, the geography is difficult but forestry plantation owners not cleaning up after harvest should be sent that bill.
All of this obsession over roads and roading shows no one thinks clearly about the value of time. Yes it’s cheaper to build or buy way out in the suburbs but the cost of commuting is that you literally trade away years of your life over the course of a few decades in the labour force for the sake of “affordable” home ownership. It would be funny if it wasn’t such a tragic waste of the most valuable thing any human being has – time!
There is no political will or incentive to “solve” house prices in Auckland or even around the world. When most households having nothing outside of their home in the way of retirement assets, writing down the value of that “asset” basically impoverishes them when their labour market earnings are on the decline.
No city in New Zealand is world class nor on the same level as Sydney or London or New York. House price to income multiples will fall because of their relative over-valuation when you think about the bundle of goods attached to an Auckland house at some point, but trying to predict when is futile. Under-estimating the political power of one group of people in society and their sheer relentnessness in exercising it is the ultimate sin of columnists.
Housing affordability is a problem that can never be solved because there are simply too many vested interests in ensuring that house prices never fall and if they do fall fast, enacting policies to bail out the same group of people who would be outraged if anyone else ever received a bail out! #irony
I’ve written before about how people pick a team and then choose policy positions that they think their team would support and defend those positions as opposed to investigating the data, the literature and the law for evidence to support the validity of taking a position for or against something.
The US presidential primary season is a great example of team politics in action. But there are clear problems that arise from an individualist approach as opposed to a collective approach – all of the internal infighting and division makes it harder to “jump the message” from the primary campaign to the presidential campaign.
Jumping the message means ending the attack narratives or deep background investigations that can sometimes derail political campaigns once the nomination has been announced. Theoretically everyone should get in behind the leader of the team, but that’s not always going to happen. There is always the risk that someone acts in such a way that they’re not as concerned about in-group status as other members of the same team.
An example of how this could play out would be the reaction of talking heads sympathetic to the Obama supporting infrastructure of the Democratic party reacting to a Hillary Clinton nomination. Can we really expect a national offshoot of the Chicago political machine with exceptional voter targeting ability and social media savvy to roll over and play along?
I think that’ll be one of the more interesting things to watch over the next year or so. Will Joe Biden be thrown in at the last minute? Maybe the infrastructure that Hillary Clinton’s campaign is building at an astonishing cost will overcome all of this and this post will look really stupid.
Apparently house prices are hitting new highs, particularly in Auckland where they are up 25.4% year-on-year. The median house price in Auckland is now $771,000 so a 20% deposit equals $154,200 or about 30 times median household financial assets of about $5,000.
It will be really interesting to see what happens if prices start falling. If you read through how the ratings agencies assign ratings to Kiwi originated residential mortgage backed securities there are some really interesting details about mortgage underwriting in New Zealand and the intricacies of gross loss estimates that more commentators should understand and think carefully about when reckoning about house prices.
Robo-advisors differ from normal financial advisors in three main ways: they manage your portfolio primarily through automated software (rather than having humans pick stocks and bonds for you), they’re much cheaper than traditional financial advisors, and they custom-build an efficient portfolio for you based on your very own personal risk profile. (“Efficient”, here, is a technical term: it means a portfolio on the “efficient frontier”, where you get the lowest amount of risk for any given return, or conversely the highest return for any given level of risk.)
The excellent Felix Salmon explores one of the fastest growing segments of the wealth management industry. His exploration of the asset allocation to cash that Schwab Intelligent Portfolios take is one that many Kiwisavers might find interesting, but his broader theme that investing comes after you have no debt and emergency savings is something pretty important for Millenials.
If you read the reports you get from your Kiwisaver provider, you may find that a higher allocation to cash than you expected is there, which is an interesting situation to be in and further reinforces arguments made by the likes of NZIER that Kiwisaver is important in household asset allocation and obviously diversification away from residential property.