November 21, 2017

A Bubble Perspective

A report from the Press Democrat in California. “The rebuilding of fire-damaged structures in the North Coast would take over 6,000 construction workers three years to accomplish, an economist told business leaders in Santa Rosa. Attracting and housing so many workers will be hard, but the county’s economy won’t keep expanding without more homes, Christopher Thornberg said. Thornberg gave an overview of the national economy that was sharply critical of both President Donald Trump and the Republican-led proposals for tax reform. He then warned civic and business leaders that the county must provide more housing for workers. ‘You have to build now,’ said Thornberg. ‘Otherwise, the economy is simply going to stop growing.’”

“When the workers needed for a three-year rebuild are added in, the county’s total construction work force would far exceed the number employed here in more than 17 years, including at the height of a national housing bubble. Much of the U.S. is experiencing a shortage of workers, Thornberg said, which is why he strongly opposes efforts to take existing protections away from millennial-age children of illegal immigrants. ‘We need them,’ he said, prompting a burst of applause from the audience.”

From Think Pol in Canada. “The BC government has promised to tackle the housing affordability crisis in Metro Vancouver by ‘aggressively’ increasing supply. A new study coming out of Princeton suggests that the NDP government may want to reconsider that strategy. In Economic Consequences of Housing Speculation, researchers link increased supply to a more severe crash when the bubble bursts. Zhenyu Gao, Michael Sockin, Wei Xiong found that ‘housing speculation, anchored, in part, on extrapolation of past housing price changes, led not only to greater price increases and more housing construction during the boom in 2004 to 2006, but also to more severe economic downturns during the subsequent bust in 2007 to 2009.’”

“‘New housing supply stimulated by speculation during the boom period could have led to a supply overhang problem during the bust, which resulted in a contraction in construction-sector activity,’ the authors state. Supply overhang can both exacerbate the subsequent housing price bust and reduce demand for new housing, leading to a large decline in construction activity during the recession,’ they add.”

“The trio’s findings are in line with research done by the US National Bureau of Economic Research. ‘Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market’ identifies ‘mechanisms driving the house price boom by emphasizing speculation among developers on the supply-side of the market.’”

“‘Many of the largest price increases occurred in cities that were able to build new houses quickly,’ Authors Charles G. Nathanson and Eric Zwick conclude. ‘This fact poses a problem for theories that stress inelastic housing supply as the sole source of house price booms. But it sits well with our theory, which instead emphasizes speculation.’”

“Housing activists have long maintained that housing affordability in the lower mainland needs to be addressed on the demand side. The housing advocating group Housing Action for Local Taxpayers (HALT) lamented that the NDP government, especially Housing Minister Selina Robinson, is focusing all energies on increasing supply without taking any action to curtail speculation-driven demand. ‘Any demand side action, on speculation, tax reforms and addressing financial crime, in real estate will have to come from Ministry of Finance and office of Attorney General,’ HALT told ThinkPol.”

From on Australia. “For years, we have been told that rising property prices are linked to one thing. But it turns out we have the whole thing wrong. Researchers from the Australian National University analysed 15 years of Census data and building approvals and found Australia had an oversupply of 164,000 dwellings. In particular inner city areas of Sydney, Melbourne and Brisbane had the most extra housing, although other areas were experiencing shortages.”

“‘The surplus is not particularly substantial, but certainly suggest that housing supply in and of itself is probably not the primary driver of house-price growth in Australia.’ Associate Professor Ben Phillips said. ‘There are other factors that are going on.’”

“If housing supply is not the issue, it has implications for how governments try to tackle the issue of affordability — and construction of extra dwellings may not be the fix it’s been touted to be. ‘The standard line of governments and industry seems to be that housing supply is a big problem in Australia,’ Professor Phillips said. ‘No doubt there are some areas where it is. But overall we don’t see the housing shortage that’s often talked about — in fact we see that there is a surplus.’”

“The results suggest quite a lot of properties must be vacant and could be owned by investors, particularly foreign investors. ‘We’ve found that we’ve built more than what population growth would require,’ Professor Phillips said.”

“As for bringing affordability down, Professor Phillips said he didn’t think anyone fully understood what was pushing house prices up. ‘I don’t think anyone fully understands what the drivers are,’ he said. ‘They don’t appear to be strongly correlated to housing supply. I think investment will continue to push up prices, taxation arrangements are an issue and low interest rates are also increasing prices.’”

“If rising house prices were due to factors other than supply, governments need to be looking at negative gearing and capital gains tax if they want to improve affordability. ‘Certainly Australians — and it’s a global phenomenon too — think of housing as much more of a financial product rather than as a shelter,’ Professor Phillips said. ‘This includes owner occupiers who see it as a store of wealth and this could be pushing up prices, rather than supply.’”

“At some point the value of housing would have to align with its fundamental value and Professor Phillips warned that continuing price increases beyond this was a ‘bubble perspective.’”

From Radio New Zealand. “In a paper published earlier this year called ‘The mess we’re in’ - a dive into the Auckland housing market from the construction industry’s point of view - AUT Professor John Tookey says one solution to the bubble and market pressures around the country is to get ahead of demand. Sounds simple. ‘What is politically difficult to accept is simple to state. Improving housing affordability equates to reducing housing values,’ Professor Tookey says.”

“By reducing values, he means your house. Not the 10,000 that officially need to be built every year to accommodate a rising population, a rising population that’s mostly Kiwis, New Zealanders returning from elsewhere, and some pesky foreigners. (Disclaimer: the writer is a migrant and GFC economic refugee.) One of the reasons for the mess is that for years policy-makers passed legislation incentivising property ownership, and ordinary Kiwis with their money locked in the one asset everyone agreed on - property - have been busily selling properties to one another, buying to let, and driving up prices and rents.”

“Restrictions on lending have been introduced and more changes are on their way under the new government. But central government and policymakers don’t have a complete picture of who owns all the property. Only a rough picture exists. We know who owns the majority - New Zealanders - but once you factor in apartments, buy to rent, family trusts, second homes, baches, businesses, overseas owners and absentee landlords, it gets, well, messy.”

“In a BNZ analysis, economist Tony Alexander says the big trend in the last year was the flattening Auckland market, less FOMO (fear of missing out) and a slowdown (although he says prices will go up) for the next five years. The rest of the country will follow in fits and starts in the next year, the report says. Alexander also says anecdotal feedback is that some real estate agents are now standing forlornly in empty houses at weekends waiting for someone to show up, and there’s worse to come.”

“On the flipside, property listings are up on Trade Me, which demonstrates how hard it is to get a clear picture. ‘The hype has gone from the housing market in Auckland and the same will occur around the rest of the country. New equilibriums will be established. Before then, look for some panicked selling from a few unsophisticated investors now feeling FOMO in the other direction,’ Alexander says.”

“Next on the horizon is the government’s proposal to ban foreigners from buying houses in New Zealand - which made headlines around the world. Removing foreign buyers here takes out only a small proportion of overall property transactions - how big a share is anyone’s guess. What’s more, owners, landlords and businesses like to leverage their equity from being a property owner to buy more residential properties. This, as population demographics reach a turning point, leads to a scarcity of supply (or a perceived scarcity of supply) and, in turn, makes more people want to buy. They’re also told it’s a good investment, hence all those property management companies, adverts, and billboards promising property-owning paradise.”