Matt Nolan

Rents and house prices – do they move together or apart?

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Rental growth has been picking up in recent months, an interesting phenomenon given that house price growth has stalled, and rents and house prices have historically moved in the same direction. Some of the reasons why rents and house prices should move in the same direction are:

  1. Rising house prices drive people out of the market, which increases demand for rental property,
  2. Rising rents drives increases demand for houses (circular I know 😛 ),
  3. They are both influenced by similar factors (GDP growth, wages),
  4. Investors care about the yield on property – if prices are rising they have to lift rents higher to maintain the yield.

Ok, well why is rental growth picking up in the face of falling house prices? The common reason provided is that people that own rental property are struggling to pay the bills (with higher interest rates), and so are forced to lift rents – however does this argument make sense. Property Management in Miami-Dade & Broward County fix honest and fair pricing.

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Matt Nolan

Housing and the economy: How does it work?

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Skimming Stuff this morning I noticed the headline: House price slump ‘drag on economy’.  I thought that it might be useful, or possibly even interesting to discuss how a cooling in the New Zealand housing market could weaken economic activity.

When thinking about this issue we gave to ask the following question – how does house price growth influence household/consumer behaviour? For people that own houses, higher house prices act as an increase in their level of wealth, and houses are an asset. If a households wealth level is higher then they are both willing, and more able, to borrow money now to fund consumption – given peoples incentive to smooth consumption over time.

In this sense a fall in house prices would have a ‘negative wealth effect‘ (and a liquidity effect) on households, which would lead to households tightening their belts and saving more. This (along with strong wage growth) is part of the reason that so many New Zealand forecasters expect private savings to increase (along with the impact of tax cuts).

However, something is missing here. Read more

Matt Nolan

Capital market intervention: How can we make it sound like a good idea?

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A post at Kiwiblog reminded me of an issue I have wanted to discuss for a while – the optimality of capital market intervention. In this post I aim to discuss some of the basic issues surrounding capital market intervention from a selfish-country perspective.  Furthermore, I want to paint a picture where capital market intervention is actually optimal.

As DPF mentions it is fundamentally unfair that we want other countries to allow us fair access to their capital, but we are unwilling to give access to our own capital. Although this is true, the government of New Zealand is elected to maximise the welfare of New Zealander’s – not the welfare of people around the world. As a result, we have to ask if such controls are in the interest of New Zealand itself. Note: I would like it if other countries in the world cared about other people – sadly governments are really just local institutions that have been created to increase the bargaining power of a select group, so this isn’t the reality of it.

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Matt Nolan

Random economist prediction: A sidenote

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Kiwiblog discusses the musings of an economist at a Business Roundtable retreat in this post.

Now of course the economist had a number of good points (it is an economist after all), but there are a few points I would like to discuss in a little bit of detail (although not much 😉 ).

  1. The 90 day rate will fall to 6% in 2009 then rise to average 7% in the future,
  2. Mining in Australia only accounts for 7% of GDP and so cannot account for its strong economic performance,
  3. A decreasing ‘talent pool’ (meaning number of people) will decrease productivity,
  4. The higher cash rate to inflation cycle

Here are my musings:

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Matt Nolan

Growth forecasts and government

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I was just reading a post on forecasts for US economic growth at Econbrowser. In it the author says: “However, even back in December, the White House forecast was slightly more optimistic than the private sector consensus”. This ‘overconfidence’ in the economy seems to have been a common theme in US public sector forecasts over recent years.

Compare this to Treasury forecasts of the New Zealand economy, which have been consistently below the private sector consensus – that is the reason why tax revenues have consistently surprised on the upside in New Zealand.

Here we have two government authorities, one which constantly overstates economic growth and one which understates economic growth. Why do you think we have this difference?

Update:  My brief thoughts are below the flap:

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Matt Nolan

Record price for dairy products – are the manufacturers ‘taking advantage’ of us

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I fear that someone may look at the December PPI data and get a misleading impression about where the dairy money is going, this fear seems mildly justified by the tone of this piece by NZPA.

Looking at the December quarter figure by itself, we see a massive 15% increase in the price of manufactured dairy goods (the price dairy products are sold to clients of the manufacturer (eg supermarkets)), while the cost of inputs to the manufacturer rose only 0.8%. Furthermore, the price received by dairy farmers (where the income will be flowing in) only increased by 0.2%.
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