Tag Archives: HousingBubble

Neoliberal New Zealand Government won’t commit to debt-to-income limits on house buying. Risk to economy not yet big enough! 

The Reserve Bank is asking the Government for new powers which would limit lending to home buyers if they did not earn enough.

If introduced, the restrictions would restrict what New Zealanders could borrow for a mortgage relative to their income. It is used in the United Kingdom, where buyers cannot get a mortgage higher than 4.5 times their annual earnings.

Reserve Bank governor Graeme Wheeler said he was not proposing to use the tool at this time, but he was signalling he wanted it in reserve, just in case.

“Restrictions on high [debt-to-income] lending could be warranted if housing market imbalances were to deteriorate further.”

NZ Herald 
Get on with it! 

Land-banking lessons from Britain. 

The upper end of the British housing market has slowed this year, with homes worth more than one million pounds down by more than 15 percent compared with last year. That weakening has been attributed to changes in stamp duty rates introduced at the end of 2014, introduced to make the tax system fairer for people at the lower end of the market. 

Annual price growth in Britain is tipped to further slow next year, to about 3.4 per cent, and Britain is facing a slowdown in the economy as household average earnings dip.

Inflation there is predicted to rise and wages slow, with real pay likely to be below 2008 levels even in 2021. Headlines about real wages have already dubbed it Britain’s “dreadful decade”.

Economies around the Western world face real challenges in the short to medium term. It can only be hoped that should any dire scenario play out in Britain it will not have too detrimental an impact on New Zealand, and the two countries do of course face very different challenges and trading realities, particularly in the wake of Brexit.

But the state of Britain’s housing market does have some parallels in New Zealand, and Auckland in particular.

While developers in an open economy are obviously welcome to do as they please in terms of buying and selling land, Javid’s threat will strike a chord with New Zealanders who are struggling to enter the housing market in this country.

It may well be that local authorities here will analyse any changes in the UK industry and consider similar tweaks to our own development laws. Many people will have sympathy for the idea of conditions being introduced to try to prevent land banking from happening.

NZ Herald 
Trump’s in. Interest rates have already started rising. New Zealand is very vulnerable. 

Symptoms of Irrational Exuberance. “Does your home earn more than you do?” – NZ Herald. 

The typical Auckland property now makes $8 a day more in capital gain than the average employee’s daily wage. NZ Herald 

A ‘dream home’ nightmare in the making.

“Sometimes we’ve had to wonder if it’s worth it to be that financially stretched, just to have a house. I mean we want it, so badly, but at what cost?”
 Their mortgage repayments are slightly over $600 a week, which was more than their $495 a week rental in Te Atatu, but they could afford it. NZ Herald

Stretched to the absolute financial limit at a time of record low mortgage interest rates. Real smart.

And buying at the ‘top of the market’. Even Smarter. 

A cautionary tale for New Zealand. We are ripe for our own ‘NZ Financial Crisis’.

The cause of the Global Economic Crisis: The collapse of the housing bubble in the U.S.

Dean Baker, from his book: The End of Loser Liberalism 2011

The picture of banks collapsing and a chain reaction of defaults and bankruptcies made for exciting news stories and provided the basis for several bestselling books, but this panic was secondary to the collapse of the housing bubble.

The housing bubble drove demand in the years since the 2001 recession, and when the trillions of dollars of bubble-generated housing equity disappeared, there was nothing to take its place.

The bubble in housing led to near-record rates of residential construction over the years from 2002 to 2006. Builders rushed to build new homes to take advantage of record-high home prices. The boom also generated an enormous amount of employment in the financial industry, which issued mortgages not just for new homes but also to refinance homes people already owned, as tens of millions of homeowners sought to take advantage of the run-up in prices and low interest rates to take equity out of their homes. This “housing wealth effect” is well-known and is a standard part of economic theory and modeling. Economists expect households to consume based on their wealth. At its peak, the housing bubble generated more than $8 trillion in home equity on top of what would have been generated had home prices continued to rise at their historic pace. Recent estimates of the size of the wealth effect put it at 6 percent, meaning that homeowners will increase their annual consumption by 6 cents for every additional dollar of home equity.

A bubble in nonresidential real estate led to a building boom in that sector that followed on the heels of the boom in housing; as construction of housing began to trail off at the end of 2005 and into 2006, construction of nonresidential projects like office buildings, retail malls, and hotels exploded. This boom led to enormous overbuilding in the nonresidential sector, and so when the recession kicked in, and especially after the financial crisis in the fall of 2008, nonresidential construction plummeted.

The impact of the collapse of these two bubbles on the demand for goods and services in the economy was enormous.

Consumers are spending in line with their wealth. Now that their wealth has been hugely reduced by the collapse of the bubble, they have adjusted their spending accordingly. The overbuilding and collapse of the bubble in nonresidential real estate led to a further loss in annual demand of roughly $250 billion. Adding together the $600 billion in lost residential construction demand, the $500 billion in lost consumption demand, and the $250 billion in lost demand in nonresidential construction gives a total drop in annual demand of $1.35 trillion.

The collapse of the real estate bubbles as the cause of our continued economic weakness stands in contrast to the financial crisis stories we keep reading and hearing about in the news. These stories hinge on the idea that the problem in the economy is the improper working of the financial system following the financial crisis of the fall of 2008. This story has an obvious problem: the reason we have a financial system is to allocate capital, and it doesn’t seem that anyone is having difficulty getting capital.