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Act puts its housing view, with some quibbles from me

This item on Act’s housing views was destined for Propbd/Sectors/Residential until I started to write a few too many comments.


Instead, I’ve put it in Forward thinking because of the combination of my comments & Act’s view – which I find is


·         simplistic


·         equates price rises with good so long as they aren’t caused by local body planners


·         equates sprawl with good on a cost-to-developer basis while ignoring overall cost, and


·         comes out with a startling view that, from my reading of its real message, tells us the perception or illusion of gain from inflation is, Yes!, the way to go.



The Act Party’s view of the housing market relies on 2 inputs: the immigration number & the exchange rate.


In its weekly Letter, 19 July, the party says much of the stalling of Auckland house prices can be put down to immigration.


“Last year just 39,000 new immigrants were approved, 6000 fewer than the Government’s target of 45,000. Labour screwed up. The new skill category criteria were set so high that no one qualified.


“The immediate effect on the Auckland house market has given the Government a real scare. Minister Swain is now aiming for 50,000 new immigrant approvals this year, enough to give housing prices a boost.”


Statistics NZ will release the next monthly immigration figures on Wednesday.


The last figures, for the May year, show an inflow of 85,200, down 12,800, and an outflow of 61,200, up 5700 on the previous year. The net result was a 44% fall in the migration inflow for the year, from 42,500 to 24,000.


The way Act expresses its argument, house price rises are good, increasing demand by importing people is also good. It buys the Owen McShane line that curbing sprawl is bad because it unnecessarily raises costs by forcing development upward, which is more expensive for the developer.


Apartment market


On the apartment market, Act says: “There is some evidence to suggest it is only the inner-city apartment market where prices are weaker. Auckland’s apartment market is sensitive to the number of overseas students. Education is now the city’s biggest industry. Student numbers, especially from China, are in turn sensitive to the Kiwi dollar. If the Kiwi falls below 60c (possible) then the students will come back and an apartment investment does not look so bad.”


Not economic


On development costs, Act says: “Auckland house prices are not driven by interest rates or even the economy but by 2 factors. First – shortage. The ARC planners have created an artificial shortage of urban land. Infill is encouraged. Within the urban boundaries there is a real shortage of building sections.


“Of course there is really no shortage of land around Auckland; the planning process is so lengthy and the ARC planners are so committed to restricting the urban boundaries that there is only one way land prices can go.


“The 2nd driver is immigration, a lot of it internal (New Zealanders moving north). The planned increase in immigration, a recovery in international student numbers, strong growth in the economy and Auckland’s property market, regardless of the Reserve Bank’s actions, can only go up.”


The theory espoused above is simplistic. It would be easy, in a relatively short time, to paper the entire Auckland region, and a bit beyond, from coast to coast with houses. Then what?


It’s some time since I’ve looked at any analysis of costs:benefits in sprawl versus intensification, but I don’t recall seeing any calculations which express the conflict in a balanced way.


The last calculation I saw put a cost to the developer of subdividing greenfields land, but didn’t take into account the infrastructure costs, or the costs in servicing land subdivided in an unorderly fashion.


I also don’t recall seeing comparisons of value, cost & risk spread in developing to different heights, or between different intensities in medium-density hubs.


One of the beauties I find in criticisms of time spent in getting consent for any proposal is the start time: Should a consent be granted the instant it pops into the applicant’s mind? Should an applicant think before leaping? Should a proposal be weighed up just by the person proposing it or should other considerations come into play?


Act’s letter for the week finishes its piece on housing with this: “While house price inflation is detrimental in the long term, and makes first-home purchase difficult, it is popular. Increasing house prices creates a wealth effect. A continuation of Auckland’s real estate boom in election year will do Government prospects no harm.”


I’ve looked in 3 ways at the sentence: “Increasing house prices creates a wealth effect.”


One is to accept that the person who builds or buys at a lower price, sells at a higher price then sees a price slump will, by holding out of the market at the right time, gain real wealth.


The other is to accept that a person will also in all likelihood gain real wealth by levering off the valuation gain to grow an asset base exponentially.


The 3rd way is to see the term “wealth effect” as “wealth perception” or “wealth illusion” because, unless the gains are pocketed on the way through, the long-term effect for those who don’t trade is an inflationary rise, which from our 1980s experience amounted to a very small net gain.


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