Matt Nolan

The 24% price pick

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There were supposed to be a number of important points made today as I can finally cover the house price pick.  Here is a list of what I was supposed to cover:

  • The first house price increase (to June 2010) merely takes us back to where we were in December 2007 in nominal terms.
  • Real house prices don’t re-reach their peak for another year after the nominal level returns.
  • However, house prices remain 30% overvalued – structural factors imply that this is an “equilibrium”, although not a very nice one.
  • Ultimately, in the long-run, we agree with Bernard Hickey and Gareth Morgan that prices need to go back to “fair value”.  Our argument is only over the transition path.  There is a difference between saying that they economy needs to rebalance (true) and assuming it just magically will – we don’t think it will in the short-term.

Driving growth is:

  • Loosening credit conditions,
  • Low interest rates,
  • Limited supply on the basis of a weak build rate
  • Limited supply on the basis that people don’t really want to sell (unemployment stays moderate, interest rates low, lack of forced sales).
Matt Nolan

GST on rent

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In an excellent article from Brian Fallow, the idea that GST could be applied to rent is brought up.

I agree with this 100%.  By not taxing rent we are distorting incentives regarding the investment in housing – after all, rent is a form of consumption and should be captured by a tax on consumption.  (Note:  I haven’t been clear enough that the “revenue neutrality of the tax” is very important – this only makes sense if we are cutting more distortionary taxes as a result (eg income taxes).)

However, I would go a step further.  We should be taxing the rental equivalent of ALL properties with GST – as the rental equivalent (when you own a house) is consumption.  Now remember this doesn’t just impact on renters, it depends on the incidence of tax.  As a result, it will lead to lower net of tax returns to property investors – net returns that are more closely related to the relevant net returns among other asset classes!!

Part of the reason that New Zealand has overinvested in housing is because of favourable tax treatment.  A clean up of GST in regards to the housing market, combined with a revenue neutral increase in GST rates, would have a big impact on the housing market.

Update:  Kiwiblog comments here.  Not PC comments here.  Rates Blog comment section here.

Matt Nolan

Breakfast tomorrow: Defending the 24% increase in house prices

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I will be on Breakfast tomorrow (at 6.50am) defending Infometrics pick of a 24% increase in house prices over the next three years.

Although the last pick was a little off, house prices still only feel a little bit more than we stated (falling 10% vs our 5% – although if you look at median house prices the decline was only 5.4% :P) and this was really the result of a collapse in credit markets – something that had not fully eventuated at the time.  Once the credit crisis stepped up following Lehman Brothers we moved into the 10% fall camp.

Anyway, feel free to complain about things I say here – until I get a post up discussing what I went over.

Matt Nolan

“Mobility of labour” is not a reason for favouring GST

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There has been a bunch of good stuff written out there about the trade-offs between using GST and a (flat) income tax to raise government revenue.  However, there is one point I think has been slightly exaggerated – the mobility argument for a lift in GST.  An example of this comes from an excellent article by Vernon Small.

Put simply, since people can leave or  go elsewhere – and so can investment  dollars – they should be taxed the least.

On the other hand, local consumption – which attracts GST – can by definition only happen here.

Now the first paragraph has a lot of truth in it.  But in reality the idea that “people can leave” in the face of tax and the idea that “consumption can leave” in the face of tax are equivalent.

Why?  People value their income only insofar as they can buy things with it.  As a result, if someone is forced to either stay at home or move overseas then a GST rate of 25% is equivalent to a tax of 20% on labour – as both taxes drive a wedge between what an employer is paying and what real goods and services a employee is receiving.  This point was also raised by the Tax working group.

So remember, it is not true that switching a “flat” component of income tax to a GST rate will necessarily lead to fewer New Zealanders going overseas.  If it does anything it will change the timing – leading to more New Zealanders staying around to save up income, and then moving overseas to spend it.

Matt Nolan

NZ/Aussie Optimum currency area

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There is a little bit of talk about a ANZAC currency I see.  Lets be honest here, this effectively implies that New Zealand would be adopting the Aussie dollar. I remember arguing about this with my brother a while back, he was pro I was against.  Nowadays, I’m not sure – I’d like to see a few studies on it first.

Now there are costs and benefits from such a currency union.  Pages 633-634 in “Foundations of international macroeconomics” by Obstfeld and Rogoff covers these off as follows:

Benefits

  1. Lower transaction costs.  As Aussie is our main trading partner this is a biggie.
  2. Removes exchange rate risk for trade between nations, both in terms of relative prices and account reporting.
  3. Prevents damage from exchange rate verring from fundamental level.
  4. Makes trade protectionism more difficult.
  5. Added I would also add that, in this case, having the Aussie dollar will reduce the risk premium we have to pay for credit

Costs

  1. Can’t use monetary policy to compensate for region specific shocks – dairy price crashes and we can’t use a lower interest rate to help buffer the fall.  This is the primary concern.
  2. Can’t use inflation to lower public debt – our monetary policy is now determined by Aussie.  However, we don’t do this so it doesn’t matter.
  3. As fiscal policy is independent it can cause issues with splitting “seigniorage revenue“.  With a low inflation target this is not a biggie at all.
  4. Speculative attacks prior to the union.
Matt Nolan

Social harm and drugs: Is something missing?

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In a recent article on Cannabis seizures the police said:

Based on the New Zealand Drug Harm Index, it was estimated that $379 million worth of social harm had been prevented by the operation

So I looked up the drug harm index and found a release from BERL that stated:

Cannabis is estimated to cause harm of $11,800 per kilogram

Now, I’m confused here.  By social harm do we mean that this is the externality associated with a kg of weed?  If so that is huge and I am not sure where that is coming from.

If that is the total cost associated with weed it is largely policy irrelevant as (depending on market segmentation), I suspect, that this would mainly be the size of the private cost of buying weed.  Given that the transaction is voluntary as, I guess people must get some satisfaction from it when they consume it, this cost must provide a lower bound to the size of the satisfaction associated with the consumption.

In this case the police should say “we prevented $379m of pain AND $400m of pleasure” – when it is put this way it doesn’t sound quite as flashy 😉