A timely reminder of where we're at?

[Propoholic]

Auckland house prices overtake Australia's big cities!!

https://www.nzherald.co.nz/section/8/story.cfm?c_id=8&objectid=10447536&ref=rss

[Commercial Dan]

Great article, thanks.

A timely reminder for people to box with extreme caution at the moment. A buy, do up and sell is a very dangerous proposition in the current market as we are almost at tipping point.

Good luck everyone, we are about to see 'who has been swimming against the tide'.

[Perry]

And a new international housing affordability
survey describes Auckland, Wellington and Christchurch
as "severely unaffordable". Of 157 international locations,
Auckland ranks 21st least affordable city in which to buy
a home, with its median price almost seven times the
median household income.

I'm interested to hear, succinctly, what other PTrs
consider to be the prime reasons for this 'phenomenon.'

You can interpret that to mean, "who's to blame?" if you
wish. But, the reasons are perhaps more important than
the perpetrators or their motives.

[Monid]

Greed & fear.
Greed because people want to be wealthy in a quick fashion.
Fear because they feel they are missing out if they don't buy now.

I think the market has in the last few years been driven by rampant speculation, mostly based on the fallacious assumption that recent past performance will predict future performance. Certain property 'educators' have done nothing to help in this regard.

Cheers
David

[Gerrard]

Something like 34% of people live in rented accomodation, therefore I can assume approx 34% of properties are owned by investors. That's big enough to have a pretty significant impact on the market, but the number hasn't changed wildly in the last 5 years.

It's moved by a few percentage points since the last census but so I'm not sure that all the new investors are really having that much impact. Perhaps a lot of people get enthusiastic about investing but never make it a reality.

I don't see that home owners are rampantly speculating - afterall it's a home to live in and prices generally move relative to each other so there's no scramble to the next level up.

There is however still very strong employment (so more people have more money to spend), there are more people entering the country than leaving, and there seems to be real issues getting new land on stream. All of this comes back to government policy. Be ready for a big shakeup when National win the next election.

Gerrard

[Julian]

I agree it's a good time to tread cautiously.
Julian

[Perry]

In her book, What Your Accountant Doesn't Tell You,
Fiona Clayton-Law has this sentence in the second
paragraph of Chapter One:

The government tells you to save as much as
you can - I will show you why saving money in
the bank for your retirement and paying off your
mortgage is a sure-fire recipe for financial disaster.

Have enough people actually grasped that notion?

From my view, I see people buying houses for the sorts
of reasons Fiona may have had in mind. Succinctly,
a hedge against inflation and government duplicity.

[poormastery]

Golden Years

Hi Perry,

Perhaps, in a world of fiat curencies, property is seen as comparable to the Gold Standard of times gone by...

Regards,
*poormastery*

[Perry]

The Malfeasant Monsters

Perhaps, in a world of fiat curencies, property is seen as
comparable to the Gold Standard of times gone by. . .

I think you have it nailed. If, as GK reports, the NZ
government is printing 'new' money at 16% annually,
while GDP moves (slumbers along) @ circa 3%, then
the NZ government is deflating the buying power of its
citizens' money at a rate of something like 13% per
annum; certainly more than 10%.

If my general observation is accurate, I could not write
here what I think of said W'gton woodenheads and their
acts of monstrous malfeasance. As someone once observed:
such actions defy reasoned comprehension, so the only
explanation must be profound ignorance or thoroughly
well-informed self-interest. Neither possibility makes me
feel at all sanguine.

[poormastery]

Demographics

Hi Perry,

Curiously, poormastery used to post on property forums in Britain for many years, some of which I was virtually the only bull. Most bears were generally deflationists. The humble poormastery’s basic argument was that under a system of global fiat currencies, deflation is very unlikely.

Anyway, one of the greatest economists of the 20th Century was undoubtedly Professor Milton Friedman. He famously revived the Quantity Theory of Money from the Classical economists. Ceterus paribas, it says that a doubling of the money supply will cause a doubling of the price level. In other words, the money supply is neutral.

I suppose a question could be that if Mr Friedman believed the money supply was neutral, why was he so anti-inflation? I think that the answer to the riddle is that Mr Friedman realised that inflation is essentially redistributive.

A good hedge fund trader is more interested in movements in relative prices (and valuations) than in figures which are essentially aggregations, such as the overall inflation rate. After all, it is identifying relative mispricing and anticipating future relative price movements where the money is to be made.

The general rule is that the young and the old tend to get hammered by high overall inflation – the people in the middle ages usually do rather better in inflationary times. The first group of people often have fixed incomes, whilst the second group more often do not. Pensioners often have high savings, but middle aged people often have the highest debts (big mortgages). Inflation hurts savers and helps borrowers.

In this respect, poormastery would not necessarily blame the government for the monetary phenomenon we see – perhaps the government and the reserve bank are simply reflecting the demographics of the country?

Regards,
*poormastery*

[Paul34]

I think that the analogy with the gold std is an interesting one. I think the diff. is that unlike the gold std the house has a practical utility that can be easily understood by most. This I think is the driver of its stability. It is why so many got involved in prop. because unlike other investments they seem less complex and as a rule people are not that predispossed to engaging too much in cognition!

Property is a set of basic laws that you can propbably get to half a page to value the investment.

[poormastery]

A Store of Value?

Hi Paul34,

Money functions are as a medium of exchange, a unit of account and a store of value.

http://en.wikipedia.org/wiki/Money

The point of the legendary yellow standard is that it gave assurance in terms of money being a store of value – countries could swap your money for gold, if a country printed too much money.

Of course, gold has a reasonably fixed total quantity (there is a small amount mined every year, but not that much). Consequently, under the Gold Standard you might believe (at least while this standard held together) that your money was a good store of value.

Property is also a good store of value, but it also has more uses than gold.

In expensive parts of London, the "store of value" attribute of property is rather important. For example, wealthy Russians and Arabs pay crazy prices for exclusive addresses. After various rouble crises over the years, the logic for doing this is not necessarily too shabby. Although they may lose some money short term, London prestige properties will probably be a better store of value than leaving the money in their home countries...

Regards,
*poormastery*

[Paul34]

Having worked in Dubai aquetely aware of this phenomena! You shoul see the land banks that the Saudi's pump their money into. It is interesting too to see this in a gold capital.

Understanding the store of value is indeed a crucial concept to undertsanding real wealth.

[Perry]

Obfuscation

To me, there seems to be more than a few presumptions in
your brief dissertation. Not the least of which might be the
attribution of mental acuity where there actually may be
a paucity.

"Orthodox economics is in many ways an empty box."
That's roughly what Professor Paul Ormerod said, in his
book, The Death of Economics, as I recall. I concur.

There's also another quaint quote:

"Civilization is what happens in cities, and the city is
dependent on there being a surplus from the food producer
and on some existing organization which can take it away
from him. With this food surplus, the political organization
feeds kings, priests, armies, architects and builders, and the
city comes into being. Political science in its earliest form is
the knowledge of how to take food surplus away from the
food producer without giving him very much in return."

Further:

If the cities are laid waste
Yet the country-side prospers
Then the cities will come again.
But if the country-side is laid waste
Grass will grow in the streets of the cities.

The 'guts' of that, to me, is simple. All wealth comes from
the soil (or water). If the primary producers cease work,
people start starving, quite soon, thereafter.

I have a deep suspicion of economics, as it's presently
presented to the world. For one, it seems to ignore the
basics of Maslow's Pyramid. But maybe human nature does
play a part, as you seem to aver . . .

In this respect, poormastery would not necessarily blame
the government for the monetary phenomenon we see
– perhaps the government and the reserve bank are simply
reflecting the demographics of the country?

. . . if that's another way of saying that we get the
government we deserve. And all the consequences
that must inexorably and inevitably follow.

[poormastery]

Reply

Hi Perry,

I enjoy your posts – you manage to be even more cynical than the humble poormastery. Whatever next!

To me, there seems to be more than a few presumptions in your brief dissertation. Not the least of which might be the attribution of mental acuity where there actually may be a paucity.

The status quo tends to continue on in the absense of any widespread clamour for change. My argument is not that there is some sort of central bank / government cabal involved in conspiracy. Rather, my argument is that the outcomes that we see are essentially the unconscious result of self interest.

As for the quote about political economy (and your physiocrat ideas), I disagree with you (and the author).

David Ricardo’s “Theory of Comparative Advantage” changed the world. It set the stage for the abolition of the Corn Laws (which involved huge protectionism for agriculture in Britain). The Industrial Revolution was then launched. The world changed dramatically, and one of the great economic booms in human history was started, which broadly continues to this day.

With regards to getting the government we deserve, poormastery would observe that the British government is generally woeful. The Swiss government is generally superb. The New Zealand government is somewhere between these two.

The answer, I believe, to achieving improved performance out of government is generally decentralisation. Decision-making needs to be handed back to the locals.

I would also observe that running good government is one of the hardest things to achieve.

Perhaps you should run for Parliament, Comrade Perry?

Regards,
*poormastery*