Housing xenophobia, again
Update: Seamus discusses the policy here – appropriately focusing on the mechanism through which speculation (and information) impact upon prices. Also here is Shamubeel Eaqub in the Dom Post. The Civilian also posts – oww wait, that’s satire 😛
I see the Labour party has joined the Greens housing xenophobia party, fun fun fun!
Obviously, this doesn’t go far enough. We should ban all non-Aucklander’s from buying in Auckland as well – let’s be honest here, the REAL problem is the South Island … wait, what?
Now, I’ll start this post where I call lots of people xenophobes by answering a common comment to this. So, before you say “learn to define xenophobia” lets grab the definition off Wikipedia:
Xenophobia is the irrational or unreasoned fear of that which is perceived to be foreign or strange
As banning property sales to non-Australian or New Zealand residents is an unreasoned policy response, and given that it is popular based on people’s irrational and unreasoned fear that foreigners are the cause of the issue (poor housing affordability?) xenophobia does fit here. People that support the policy are being xenophobic, people coming up with the policy to get themselves votes are being xenophobic. You might not like the name, but I honestly don’t write to make you feel good about yourself – if the shoe fits you should just wear it 😉
Anyway, I’ll step back from being antagonistic for a second – after all people mean well, but may not have considered the full consequences of such actions. I wrote about this recently here (with added rant here) and Eric Crampton also touched on it here when discussing LVRs. So all that is there – I won’t repeat it.
Now, let’s try to find a policy justification.
“I will restore the Kiwi dream of home ownership that has slipped out of reach for tens of thousands of Kiwis. I don’t want to see our kids become a generation of renters,” says Labour Leader David Shearer.
“House prices in Auckland have risen by 28 per cent since June 2009. The problem is clear – there are just not enough affordable homes. And overseas speculators are adding to the problem.
…
“By itself this is not a silver bullet for housing affordability – but it is part of the solution.
Ok ok ok, so from this it looks like they want a relatively long-term ban. Otherwise “I don’t want to see our kids become a generation of renters” would make little sense. They are targeting affordability here, not a temporary spike in house prices. There is a difference.
And as a sidenote, ignore this speculators term – it is being used as ideological rhetoric with no real content.
So they are aiming to reduce the pool of people who may buy property, driving down the price. So they want a transfer of resources from property owners to the young. So if I’m reading this correctly they are trying to take on the issue I said people may have some concern about in my Rates Blog article. Let’s repeat that:
Some may say that a bubble right now makes house prices expensive right now, thereby reducing affordability right now. However, why do we care if someone cannot afford to buy a house at this very second – couldn’t they just wait till the bubble is over?
However the concern here is that, New Zealanders that go out to buy a house during this bubble end up facing all the risk and expected drop in house prices associated with the bubble.
Generally these people are young New Zealanders who intend to start a family, and as a society we feel a bit rough about the fact they are in that position.
Now don’t get me wrong – on a personal level I disagree with this, but if that is where society’s head is at that is that. But if we actually meant that this was our concern then:
Worst case scenario, one-off tax all property, given money to group who is “hard done by” – if you aren’t willing to do that, you are faking your belief in a distribution issue.
If you aren’t willing to do this, you are actually willing to hurt current property owners by MORE to achieve the same transfer to people who don’t own property. And you are hurting foreign buyers as well. This is WHY the policy is only “reasoned” if you actually dislike or irrationally fear foreigners – it is the only way it all adds up. I am being polite by calling the fans xenophobic instead of straight racist 🙂
(Note: Think of it this way, the higher price, if this policy does anything, is indicative of the fact that people overseas have a higher willingness to pay – the surplus above what a resident will pay would be split between the current owner and foreign buyer. A broad tax and transfer system will transfer surplus, banning sales will just destroy it).
I’d also point out something else here – this policy isn’t going to suddenly make housing affordable. Labour admits it isn’t a silver bullet – but it doesn’t even fit in as a tiny part of a solution.
On Q+A Shearer claimed that other countries like Hong Kong and Singapore already have these rules about foreign ownership, so we were the chumps worrying about being seen as racist rather than just following NZ’s self interest. Do other countries do this in spite of it being bad policy, or is he wrong on that?
I also remember Gareth Morgan a while back saying that of the multiple houses that he owned, he didn’t even bother to rent them out because “they just mess up the place”. You can call speculator talk just ideological rhetoric, but when you’re complaining about housing supply, hearing about empty houses at the same time and the people who turn profits on it inevitably makes a mark, regardless of its actual prevalence. Other people have the same sort of visceral reaction to interfering with voluntary trade.
“Do other countries do this in spite of it being bad policy, or is he wrong on that?”
Other countries do indeed do it – but it is still bad policy. That is why you see a lot of economists overseas writing editorals complaining about it 😉
“I also remember Gareth Morgan a while back saying that of the multiple
houses that he owned, he didn’t even bother to rent them out because
“they just mess up the place”. You can call speculator talk just
ideological rhetoric, but when you’re complaining about housing supply,
hearing about empty houses at the same time and the people who turn
profits on them inevitably makes a mark, regardless of its actual
prevalence.”
I am sure Gareth Morgan did say that – but that sounds like a situation where he is talking relatively “out of his ass” to use the technical term.
If an investor is going to buy property and not rent it out, then they are essentially saying they are completely unwilling to get any sort of rate of return on property – and they are relying on capital gains solely (like buying a bond that is protected from inflation, but has no interest rate). This isn’t a profit maximising investor, this is an idiot 🙂
“Vacancy rates” are not that high – that is the only actual data around on this business. Given that, there isn’t even loosely related evidence that foreign investors are coming in and keeping housing empty. If evidence appears that foreign investors are coming in, buying houses, saying no-one wants to live in them, and then laughing with pure evil, I’d accept this as a strange second best solution to an incredibly bizzare episode of life 😉
In this context, I dislike the term “speculator” as no one is defining “what it means”. It is a word being used to create an emotional response in people. We need to ask “what” these speculators are – are they people who are coming in expecting capital gains, investors who are willing to take on more risk than NZers, or investors who are willing to accept a lower rate of return. In all three situations we see different things occur in the long-term, although I would note that banning foreign buyers isn’t really a clear “policy response” to any concerns we have in any of those situations!
The first case I mentioned here – capital gains with a quick turnover – is the one I believe most people are nervous about. But in this case we have a quick turnover of property, this isn’t a long-term affordability issue at all but an issue with how easily and cheaply foreign investors are willing to turn an asset into an actual yielding asset. If we want to make ourselves feel better about this, get overseas investors to sign something saying they will “do their best” to rent out property and get the department of building and housing to monitor it – don’t just ban people. This seems unnecessary, it sounds like us “hunting for a problem to fit our solution”, and even in that case we haven’t been able to jusitfy banning foreigners – that is how strange this policy really is!
Ok, if it’s common among countries I doubt Labour really has to worry too much about the xenophobic accusation. You seem pretty angry about people getting offended over your xenophobic comments, in the rant link. If there were clarity over the insanity of the policy then that accusation would be easier to make, but the mere accusation makes people less receptive to the arguments that would produce the clarity. But I guess that’s what blogging is for 😛
“Ok, if it’s common among countries I doubt Labour really has to worry too much about the xenophobic accusation”
To a degree – it doesn’t really stop it being xenophobic though, and it doesn’t change the fact that it actually a net negative for NZer’s in any case!
“You seem pretty angry about people getting offended over your xenophobic comments, in the rant link.”
If you knew my voice and mannerisms it wouldn’t sound quite as angry – but I see where you are coming from 🙂
What got me was that in that article I was discussing the way of viewing a trade-off, and how blanket bans don’t actually “work” as solutions for any of our perceived trade-offs. Then lots of people talked about selling houses like it was some sort of football, or zero sum, game. It actually doesn’t make sense – if someone from overseas is willing to offer a higher price for an asset than its fundamental value, we are the winners and our concern should be with distributional issues (where people actually get hurt).
That is why I wrote the Rates Blog piece linked above in the first place – to try to make that clear. I’m not just interested in stopping arbitrary bans – I’d also like it if we ask society what distributional issue it is upset about, so government policy can actually help out. Unless society actually negatively values non-residents, these bans are never the solution 😉
“the mere accusation makes people less receptive to the arguments that would produce the clarity”
Fair point – and I appreciate that. The hard thing is the “lets ban foreigners” group has never made a real “argument” – I’ve heard people say “it is demand”, which makes very little actual sense. I’ve tried discussing the trade-off for a long time – culminating in this:
http://www.tvhe.co.nz/2013/03/19/bubbles-fdi-winners-and-losers/
And other economists have been walking around saying these things all over the place.
But the calls to ban non-residents and blame non-residents have just gotten louder and louder. At this point, it is xenophobia (as the ban is based on fear they are the cause) – and all I feel I can do is call that out.
What caused the property bubble from around 2000-2007?
Hard question – as it involves also defining a bubble and it is possible we may accidentally take different definitions!
If we switch it to what caused the evolution in house prices over that period, it is still a hard question. We saw prices go up significantly, and around half of the country prices remain 20% (in real terms) below where they hit in 2007. Some of the factors that would have contributed significantly were positive shocks to credit availability for households and a significant lift in the population during 2002-2004 which the building industry was unable to keep up with. Rising government transfers towards first home buying groups will have also boosted prices from 2005.
The most mysterious year is 2007 – it looked like (from late-2005) the economy was cooling, but then in the summer of 2006 things kicked off again, and the housing market went on a run. I can see how that looked like a straight bubble – given interest rates were straight high and rental yields were very unattractive! There was a strong lift in the TOT, and dairy farmers looking for somewhere to save after the collapse of a number of big provincial finance companies – so that makes sense as a maybe explanation.
But I definitely wouldn’t like to say I “know” these are the causes – they are just the events in hidesight.
Ok, yet you’re quite sure that current “bubble” is a supply problem.
Again, lets use increase in prices – bubble is a specific “component” of a price change, I like to work a bit more broadly 🙂
I’m sure that the current shift in prices is representative of the price people are willing to trade on – and for any explanation of that price, there are policy solutions that may well help us with any concerns.
If it is a shortage of property we need to ask why. Developers can’t get credit maybe, ok then Labour saying “let’s build houses” has some potential logic going!
Say it is a “massive inflow of foreign capital that is willing to take a lower rate of return/accept a capital depreciation” (not saying this is the case – but just for the sake of fun). In that case, someone in NZer gets to sell the house, the “bubble pops” in the future or whatever we may say, and a NZer can pick up the house for cheaper. Say they never sell, then the foreigner has to accept a low yield on property all the way into the future! In this case, it is a capital transfer to “New Zealand” – and if we are worried about distributional issues from the issue I point out in the post (a specific redistributional issue) the idea is a one off tax on property and a transfer.
In any case we paint, the price represents “something” and “banning non-resident purchases” isn’t the right solution.
Seamus discusses this stuff better in the post I link at the top of this 😉
I’d love to jump in here but don’t have the time. I still think the rational economic analysis of price is missing a crucial piece of the model, namely credit and how it is generated. There is also the “stickiness” of house prices….they might be supposed to be lower in theory (interest rates rise, supply increases etc) but as long as borrowers can fund the interest charge, they will not sell at a loss. Essentially, there is no market-to-market on housing, and so prices tend not to go down unless there are distressed sellers. No one likes to take a loss! So the story is a bit more complex than we tend to hear.
Also, I wouldn’t see this policy as xenophobic. Protectionist perhaps but that’s about the strength of it. I can Labour are doing their best to make houses more affordable. Sadly, none of their policies will make that happen. Bravo for trying though, as clearly it’s a big problem for your average wage slave. Unfortunately, the horse bolted a long time ago and isn’t coming back (except in a box and no one is going to enjoy that!)
” I still think the rational economic analysis of price is missing a
crucial piece of the model, namely credit and how it is generated”
Fair point – I suspect credit availability falls at least partially into this area.
“There is also the “stickiness” of house prices….they might be supposed
to be lower in theory (interest rates rise, supply increases etc) but
as long as borrowers can fund the interest charge, they will not sell at
a loss”
Indeed, house prices can stay out of line with fundamentals for a long period of time – and we would then expect to see low levels of transactions and real house price declines (I’m thinking the 1970s in this). However, this does also make new building more attractive – and points to low rents (both in terms of yield and from an oversupply of property) … or if investors are put off by the low rents, and builders cannot sell new property for the market price, underlying willingness to pay will actually decline, in which case we will see the price of trading housing adjust more quickly!
As a result, the big question for me, as always is what is going on in building 🙂
“Also, I wouldn’t see this policy as xenophobic. Protectionist perhaps but that’s about the strength of it.”
Protectionism usually involves a “prisoners dilemma” where there is some benefit from doing it – but it leads to a game where everyone is worse off. This policy doesn’t do that – it just make both countries worse off to start with 😛 . Hence xenophobia – unfounded fear!
Is there anything in the idea that its easier to get credit to buy a house (good old residential mortgage) than it is to get credit to develop and build?
Yes – very much, it is an issue I have been trying to think about over recent years. This is indeed an issue of contention among economists. The principle is that lending on existing property has historically been less risky, and is expected to continue to be less risky.
I would note that the RBNZ imposed capital requirement differences between the two types of loans is less than in many other developed economies – as a result, even if we analysed the regulations and found them wanting they don’t explain any cross-country differences and so we can’t go far as Gareth Morgan:
http://www.tvhe.co.nz/2013/06/19/gareth-morgan-housing-and-blaming-the-rbnz/
One thing that occured to me. What if foreign investors (amongst others) could keep property prices away from “fundamental” levels for long periods of time?
If the foreign investor was a large conglomerate with market power, sure. They are a series of individuals who are competing with each other though – so they can’t “control the price”!
But if a group of people (whoever they may be) want property and have a higher budget than the average, and since real estate is still good value here (and is so even after the booms we’ve had) compared to the globe, then why couldn’t this group of RE buyers keep prices up for a long time?
Hola,
We have to ask exactly what is happening in order to work through this example.
Allow me to oversimplify to find the core of the case. Say there are no foreign buyers, but then suddenly they appear! These foreigner buyers are willing to accept a lower yield than other home buyers in New Zealand – in this case they bid up the price.
The higher price is a capital transfer to current home owners, but at a point in time the “rental” cost doesn’t change. Seeing that the price is higher than the replacement cost of property, people will then build more houses!
So the introduction of foreign buyers (or in the current NZ case we could say foreign buyers willingness to accept a lower yield) will lead to higher prices (which represent a transfer to current property owners), no change in rents at first, and then lower rents (and a partial decline in prices) when the housing stock expands.
So, if this was happening this is the sort of situation we find ourselves in – potentially “oversupplied” with property as we have investors coming in who accept a lower yield. Here the housing is only “good value” if people overseas are willing to accept a lower yield than people here – for me this begs a much more important question, why is that? (This is a major issue of interest in NZ)
This also points out that foreign buyers aren’t really the central point of any “affordability” issue – that we may well be undersupplied if that issue is cropping up (either in total terms, or in sections of the housing stock). It is important we keep this issue in mind when thinking about longer term affordability business!
And also note here they are not co-operating and “holding the price up” – we would need A LOT of buyers to work together to actually have a “monopoly” on house sales to do this. This is not representative of the housing market at all! Now if there was a “competition issue” in house sales, this would be something that would concern economists IMO
“The higher price is a capital transfer to current home owners, but at a point in time the “rental” cost doesn’t change. Seeing that the price is higher than the replacement cost of property, people will then build more houses”. I don’t see how this necessarily follows – especially if most NZers are priced out of the market. And it all hinges on this. My feeling is that a home (to own) is becoming like a high-value luxury item. I don’t see a “market” solution here.
Which part doesn’t follow? I’ll try to give an answer – but just tell me if I’m answering the wrong sort of question 🙂 . Also as a side note we don’t really need tags like “luxury” and “necessity” – these matter when we answer a question like “what bundle of goods are a necessity for an individual in society”, but we can discuss the price and rental equivalent before moving on to this … which is all I’m doing in this bit!
If we aren’t able to build more properties/supply is not able to respond this directly suggests there are supply issues! In this context, that is the main issue.
Also remember the house is being purchased at an inflated price and being rented out for a low yield – NZer’s are still living in these houses, but the rent they are paying is low relative to the cost of paying for the property. So the cost of a housing service is unchanged AND we have had a capital transfer to the prior NZ owners.
And this is idea if overseas buyers are using it as a straight long-term investment – if instead it is “speculation” then the house will be sold for a lower price in the future (as the presumption in all this is that NZer’s willingness to pay is lower than people from overseas).
To understand the speculation line, we need to ask “why” people overseas are willing to accept a lower yield – and if they are willing to take a lower yield it will lead to an increase in the supply of property. Just like it has all through history! If the supply response is “insufficient” this just tells us that the supply constraints are REALLY BAD 🙂
But building new housing requires land. If this is going up as well, why would it become cheaper to build new houses, given they have to build them somewhere? That’s the causation I don’t get
There are cities with massively greater populations than Auckland in smaller zones – we have land, area for infill, and potential for densification. It is about zoning and the incentive to invest to get those things happening – the price provides the incentive, so the higher the price is going (over a prolonged period of time) the more likely it is other barrier (eg regulatory) are binding.
The idea that there is a “natural” constraint to the number of properties in Auckland that we are hitting now is a stretch IMO.