OCR now 3.5%

January 29th, 2009 at 9:32 am by David Farrar

ocrjan09

I remember the days when a 50 basis point drop was a big thing. Now we have 150 point drops that are in line with expectations.

This should start to push mortgages back into the affordable category for more people.  Of course depends where retail rates go.

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94 Responses to “OCR now 3.5%”

  1. dime (9,442 comments) says:

    hopefully the banks get mean and insist on 20% equity etc… just for another year…

    dont need demand pushing prices back up when im ready to buy another house :)

    its all about Dime!!!

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  2. aardvark (417 comments) says:

    Low interest rates are only any good if you can get them.

    It’s a bit like those shops that advertise a 44″ plasma TV for $599 but when you get there you find they don’t have any stock.

    What good is a very low interest rate if the banks aren’t willing to lend?

    Surely this simply advantages those who already have lots of money and collateral rather than the people who need to borrow for a first home with little in the way of deposit.

    And what happens to the elderly who are dependent on their investments for an income. A low OCR (and thus low returns on deposits) completely kills their ability to participate in the economic recovery process.

    What’s more, a low OCR will likely push many people into the arms of the comparatively high returns of rogue money-lenders who played a big part in this whole fiasco in the first-place.

    Managing the OCR is a very crude, blunt and ultimately ineffective way to try and manage the economy.

    Surely we can come up with something better than this?

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  3. berend (1,634 comments) says:

    And it makes the NZ dollar worthless. Thanks again Bollard. With Bernanke you will be remembered as the disasters you both are. Remember that 90% of our debt comes from overseas. They’re calling their money home.

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  4. Grant Michael McKenna (1,156 comments) says:

    I believe that there is a need to revisit usury laws; I admit my prejudice for Roman law and would like to see a solution similar to Roman law’s restriction on the interest charged on loans- and a limit of interest to the amount of the original debt. I see people charged in effect several hundred percent interest on smallish loans, and it is the poor who take those loans- as aardvark says, those who already have lots of money and collateral don’t need worry.

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  5. KiwiGreg (3,177 comments) says:

    …yeah and cars and butter and petrol are too expensive so the government should pass laws to say how much they should cost. I think it would be helpful if the government could also set standards and define things like what colour cars are allowed to be. God forbid people charge what others are prepared to pay for money.

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  6. 3-coil (1,200 comments) says:

    The flip side is that our incentive to save money (at least in the bank) is undermined…and are we not supposed to be increasing our savings habits?

    As interest rates on savings accounts (and interest paid to the saver is then taxed) equal the rate of inflation, many will decide that they’re better off to “invest” in a new widescreen TV (before the big price-rises ahead) – much more enjoyable than scrimping and saving to watch your net savings at-best effectively increase by nil.

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  7. Nick Archer (137 comments) says:

    KiwiGreg: “God forbid people charge what others are prepared to pay for money.”

    Yeah good thing there are sleaze ball loan sharks and rug merchants aplenty especially in times like these…

    This cash rate is good news for those who can get a mortgage, house prices should hopefully come down too. We need a buyers market to kick in really soon because in a recession you need buyers to get the next upward swing, sorry property speculators…

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  8. tknorriss (327 comments) says:

    Berend “And it makes the NZ dollar worthless. Thanks again Bollard. With Bernanke you will be remembered as the disasters you both are. Remember that 90% of our debt comes from overseas. They’re calling their money home.”

    I’m not so sure about that. Remember, interest rates are being cut quite savagely through the rest of the world too. In relative terms our rates are still probably quite good; compared to near zero in the US for instance. Any currency flight is more probably to do with perceived risk and a desire to keep capital close.

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  9. dime (9,442 comments) says:

    aardvark – sorry, the lower class have ha dtheir time in the sun. tough shit if they cant afford to buy a house. they have had a free ride for 9 years. heres an idea – upskill!

    the middle class needs to be looked after now.. ya know, the people that keep the country going.. the cash cow that has been milked for years under labour.

    the economy will be back up and running in 7-8 years.. then dumbasses will vote the left back in again and you can go about taxing everyone in the name of “fairness”.

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  10. aardvark (417 comments) says:

    Even middle-class people have to buy their first home at some time!

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  11. Murray (8,838 comments) says:

    Well that glide path is going to lead to a heavy landing for someone.

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  12. Bullitt (137 comments) says:

    Cant say Im surprised but this is totally the wrong thing to do. If anything the OCR should have gone back up.

    (Most) People have more money than they did 12 months ago, the only thing is lack of confidence rather than lack of money. Sure this helps some people with mortgages but it wont help anyone who dont have one (which as far as I know is a larger proprtion of the population) and the cuts are not being passed to businesses where theyre actually needed anyway.

    I wonder if Brash would like his Job back.

    I wonder if we have now passed Moldovia as having dropped the cash rate by more than anyone else in the world.

    Cheap credit got us into this mess, Im sure itll help us get out of it…yeah right

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  13. Glutaemus Maximus (2,207 comments) says:

    This is all about balance of payments!!

    ie. Sovreign State cash flow in the world trade.

    No more no less.

    We will have deflation for 6-10 months and watch it go up with a bang with the OCR being used to try and get infront of that curve.

    In airline parlance the trolleys have appeared, the crew advise that you remain in your seats, whilst we scare the fuck out of you!!

    This was the wrong call for NZ. But they are following WW governance advice

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  14. dime (9,442 comments) says:

    aardvark – yes the middle class do have to buy their first home too.. and they can ummm save for the deposit? make scarifices to get there? maybe buy somewhere they dont like.. do it up.. make some cash etc struggle, get ahead slowly… how it freakin should be! not relying on the govt to give them anything!

    the government takes from you and provides basic services… the govt isnt there to give you hand outs at other people expense, just because you arent on a high income. upskill!

    if you cant upskill in the world we live in, youre an idiot. its freakin easy! just takes effort.

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  15. s.russell (1,563 comments) says:

    Surely we can come up with something better than this?

    Yes, I think we can. My idea is this:

    Instead of adjusting interest rates to stimulate or suppress demand have a compulsory super savings scheme (compulsory KiwiSaver) with an adjustable contribution rate controlled by the Reserve Bank.

    Rather than cut interest rates the RB would cut the savings contribution rate, leaving people with more cash. Rather than raise interest rates the RB would lift the savings contribution rate, leaving people with less cash.

    The immediate macroeconomic effects would be similar to changes to interest rates, but would a) be more broad-based, affecting all income earners rather than just those with mortgages; b) would have more immediate effect because it is not delayed by fixed-rate mortgages.

    The huge advantage of such a scheme would be that it avoids all the horrible side effects of mucking round with interest rates and (this is the killer) instead of being forced by high interest rates to give more money to Japanese, Russian and Arab savers via banks, we would be forced to give the money to ourselves – we would get all of it back on retirement.

    I would be interested in genuine critique of this idea… I can see there would be some practical challenges, but is there any fundamental reason it would not work?

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  16. Hoolian (220 comments) says:

    Dammit – I lost out on iPredict. I thought there would be only a 100bps cut. Who knew our RSNZ Governor had such daring.

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  17. Bullitt (137 comments) says:

    SR I would be strongly opposed to any form of compulsory superannuation. Why should I be saving for my retirement at the same time Im saving for a house deposit/mortgage. Its not easy to get a better return than that from paying a mortgage once tax is taken into account.

    The only way saving for super works is if its heavily subsidized by the government or employers. In which case the money is coming from my taxes or lower wages anyway.

    The example I always site is find me one media commentator supporting Kiwisaver who recommends putting more money into it than the minimum required to get the full “tax credit” (God I hate that term in that context). On an individual basis kiwisaver is good for most people to join (not me though) but on an economy wide basis its a disaster.

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  18. burt (7,820 comments) says:

    Hoolian

    I grabbed a fist full of OCR.OTHER when they were around $0.09-$0.11… Happy today :-)

    OH, I had no OCR.100 when they closed, the ones I purchased at around $0.30 were disposed of when they got to around $0.50… Happy today :-)

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  19. georgebolwing (611 comments) says:

    What is discussion shows to me (and I should declare that I am a trained economist) is that New Zealand is right to have an independent central bank with a sole focus on price stability.

    Using monetary policy for any other purpose, like trying to counteract economic cycles or to pursue social goals like housing policy are doomed to failure. As others have pointed out, for everyone who benefits from a change in the OCR, there is another group that will incur costs. And then there is Milton Friedman’s famous, and still correct, comment that monetary is subject to long and variable lags: it just cannot be used for short-term adjustments to economic conditions.

    What Bollard is continuing to do is his job: keep New Zealand’s prices stable in an uncertain world.

    We should not be asking him to do Bill English’s job or, for that matter, our job (which is to respond prudently and rationally to economc signals).

    There is only one way for our economic cirstustances to improve that that is to improve productivity. I can’t see how running bad monetary policy directed at the wrong target can help that.

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  20. paradigm (507 comments) says:

    S Russel, if the money is saved until retirement and then comes back into the economy would you run into some problem whereby you eventually (over several generations) reach a steady state situation where the amount saved = the amount coming back into the economy? If so then it would only be a stop gap measure for inflation control until the savers begin to retire en mass.

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  21. s.russell (1,563 comments) says:

    I think this would not be a problem, because the return of people’s savings money (plus compound interest) when they retire would be entirely predictable, and the supply side would adjust accordingly. (Inflation is not caused by the quantity of money coming in but by the imbalance when demand outstrips supply.) It could hardly be a bad thing if everyone were richer after all!

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  22. PhilBest (5,117 comments) says:

    Here is the problem with housing affordability. As long as the politicians focus on the OCR as the tool to make housing “affordable”, without addressing the issue of housing undersupply (thanks to urban development restrictions), the low cost of finance will merely drive prices up again to the point where even at the low interest rates, first home buyers cannot afford to buy a house, and the price bubble will burst, once again. Eventually, it will burst for good, and the longer this is delayed and the bigger the inflation of the bubble in the meantime, the bigger the mess will be in the end.

    Consider this: the USA has a GDP of around 14 trillion, and a “total housing stock” value of around 25 trillion; and THEY have had a housing bubble, in which some 3 trillion or so has been wiped off the value of housing.

    NZ has a GDP of around 43 billion, and a “total housing stock” value of around 600 billion………!!!!

    Er, excuse me, is there something wrong with this picture……?

    We are talking about “restoring affordability” to the point that an average household “only” spends 60% instead of 70% on servicing their mortgage….? While the figure in Dallas, Texas, is 20%?

    Take a look at the graph on page 15 of last years Demographia report:

    http://www.demographia.com/dhi2008.pdf

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  23. PhilBest (5,117 comments) says:

    And of course, the latest Demographia report is essential reading:

    http://www.demographia.com/dhi.pdf

    The scope of this years report is considerably broadened, and the mechanisms by which our whole economies are affected by the land supply issues are thoroughly explored. Our policy makers are completely without excuse.

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  24. s.russell (1,563 comments) says:

    Bullitt,

    I actually share your disquiet over the idea of compulsion. But consider this: Which would you rather:

    a) The RB forces you to pay an extra $50 per week in interest payments to foreign investors; OR
    b) The RB forces you to save an extra $50 per week for your retirement.

    Compulsion is operating either way.

    georgebolwing,

    I agree wholeheartedly about the independence of the central bank and focus on price stability. That should NOT be compromised. But I hope there might be more than one way to achieve the goal.

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  25. dime (9,442 comments) says:

    Phil – can you ever see a govt addressing the undersupply sufficiently? imagine how many people would end up with negative equity…

    then again, imagine how awesome it would be if houses cost half of what they do now!

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  26. PhilBest (5,117 comments) says:

    Read “Scoop” coverage of Demographia report:

    http://www.scoop.co.nz/stories/BU0901/S00265.htm

    “……The Demographia Survey found with respect to New Zealand, that of the 8 markets surveyed, 7 were severely unaffordable with one seriously unaffordable.

    “This is nonsense” said Mr Pavletich “when one considers that the total population of New Zealand is just 4.3 million people, with a land area much the same size as the United Kingdom with 61 million people”.

    Both the United Kingdom and Irelands housing grossly exceeds the affordable ranking of 3.0 times household earnings and below – at 5.3 and 5.4 times household earnings overall.

    Mr Wendell Cox, the co author of the Demographia Survey said “It is heartening to see the long overdue first steps taken by the Brown Government, following the Turner Review, urgently opening up more land supply in rural areas and smaller towns”.

    Housing in both the United States and Canada is mainly affordable or moderately unaffordable. The stressed markets are generally on the east and west coasts and it was the foreseeable collapsing of the California housing bubble, that precipitated the global financial crisis aggravated by the inevitable bursting of other global housing bubbles.

    The authors of the Survey are of the view that if these artificially created housing bubbles (where housing exceeds three times household income) had not occurred, we would likely not have a global financial crisis today.

    If the median household income of a particular urban market is $50,000, the median house price should not exceed $150,000 (3 times earnings) and acceptable new stock should be allowed to be built at the fringe for $125,000 (2.5 times earnings). If the local median household income is $60,000, housing should not exceed $180,000, with new housing stock being provided on the fringe for $150,000.

    The fringe is the inflation or supply vent of an urban market.

    (Note to local media – please refer to your local annual median household income as stated within this Demographia Survey and where appropriate, ask your local politicians and regulatory authorities, why housing in your urban market exceeds 3 times annual household income and why new housing is not being provided on the fringe at 2.5 times your local median household income. And most importantly ask what they intend to do about it.)…..”

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  27. MT_Tinman (2,993 comments) says:

    I am not a trained economist and need some help on this.

    It seems to me that by reducing the official cash rate Mr Bollard is simply reducing incentive to invest in NZ.

    As NZ and it’s major banks will have to renew debt in the reasonably near future I see this only as a handicap.

    Internal benefits from the reduction appear to be minimal with most who will benefit from lower interest rates simply using that benefit to save and/or reduce debt rather than spend and stimulate the economy.

    While NZ has had most cheap debt carried by mainly now defunct finance companies and therefore should be affected less by the crisis than those countries that were heavily exposed to bank based debt it seems to me that that refinancing is the major hurdle NZ faces and the reduction makes that so much harder.

    I leave it to the experts to put me right on this.

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  28. PhilBest (5,117 comments) says:

    Within the Preface to this years Demographia Survey, Dr Shlomo (Solloy) Angel, Adjunct Professor of Planning at New York University, Lecturer at Princeton University and author of Housing Policy Matters states – “Protecting adequate amounts of green areas surrounding our cities be it for conserving fertile farm lands, creating public open spaces, or protecting sensitive natural habitats indeed is a lofty and sensible goal, and environmentalists the world over should be commended for championing it. But the protection of open space is not without cost. If the selective protection of open spaces is translated in to blanket containment policies that restrict the supply of urban land in one way or another, then land markets are affected. The effects need to become more transparent and we need to explore the impact on the efficiency, equity and sustainability of urban development. Unfortunately, most of those chiming in on this debate reflect ideological positions of one kind or another rather than investigating the available data and exploring the causal connections in the data more rigorously.”

    “In the hundreds of cities with overpriced housing characterized in the Survey, first time home owners and renters will continue to confront exorbitant expenditures on shelter, while the public debate continues on whether or not to relax the strangleholdon the supply of land for residential construction. We can only hope that by continuing to focus attention on the issue, one of the most critical issues now facing our cities, the authors of the Survey will continue, as they have before, to broaden the discussion and to improve the evidence necessary, to arrive at the right political choices now confronting growing cities everywhere.”

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  29. georgebolwing (611 comments) says:

    The Reserve Bank and the Treasury looked at the issue of alternatives pretty comprehensively recently. For the truly keen, there is a publication of the procedings of a conference held in 2006 on the RBNZ’s website that contains the views of some of the best scholars and practitioners in the world on this subject:

    http://www.rbnz.govt.nz/research/workshops/12jun06/2837468.html

    It includes a non-technical summary by Bob Buckle, now dean of the Commerce at Vic and Aaron Drew of the Bank.

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  30. PhilBest (5,117 comments) says:

    S.Russell, the trouble with enforced savings schemes is, that most people do in fact take on substantial debt in buying a home, and forcing them to put savings aside as a separate issue would merely result in them remaining saddled with debt just as much, or more so, than if they had been able to use the money to pay off debt.

    We do have a class of people, the more well-off, who can save money but may choose not to do so as the fiscal incentives are all wrong. But it is pointless to penalise everybody because of this.

    Basically, if we didn’t have absurdly overpriced houses, NZ-ers on average would be able to become debt-free a lot sooner and then we could look at the incentives for getting them saving money. I suggest abolishing tax on interest.

    Another problem with the kind of house price increases we have been experiencing, is that it has never been worthwhile for anyone to save money for the purpose of buying a house, because prices went up faster than anyone could save money. You could spend years working and saving, only to have to get a bigger mortgage than if you had just bought the house at no deposit in the first place.

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  31. ThinkBig (40 comments) says:

    Well there’s no point in saving now. I don’t really see why this had to come down any more after already coming down 4% in the past. Seems people who saved for their retirements or otherwise when everyone else was playing cowboy with high interest rates are being punished for being prudish.

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  32. Bullitt (137 comments) says:

    PhilBest where did you get that $43b GDP figure? IIRC even the tax take is slightly higher than that (about $50b)

    MT. The NZ OCR has very little impact on the rate banks can borrow at overseas, New Zealand is small enough they have to meet the world market – whatever that is. Dropping the OCR provides lower funding costs to the banks because their settlement account rates drop and so do the rates they pay to New Zealand depositers.

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  33. PhilBest (5,117 comments) says:

    MT_Tinman,

    I doubt anyone truly understands this. The real world is a complex place. Are interest rates “too high” or “too low”? Apparently the USA has had interest rates that are “too low”, and this has led to too many people being able to get credit. But NZ, where interest rates were much higher all along, ended up awash with money from Japanese investors chasing the higher interest rates (and taking the risk on the currency movements).

    NZ-ers seem to have a much greater willingness to prostitute their lives to the mortgage repayment treadmill; in the USA, with their famous “subprime mortgage crash”, it is regarded with horror if a home buyer’s repayments are more than 50% of their income; 20% is the norm in some markets of the USA; but the NORM for first home buyers in NZ has been much higher than 50% and we are now patting ourselves on the back because we might get it DOWN to this LOW….!

    The Japanese investment money has been willingly sucked up by NZ mortgagers. Interestingly, even as we cut our OCR, we are still a better bet than the Japanese investors can get anywhere else; until we, too, have cut our rate as close to zero as everyone else…….

    Trouble for NZ is, we are probably the most horrifically exposed country in the world, to the consequences of those Japanese investors finding better places for their money. If Peter Schiff’s predictions about the US dollar sound bad, MATE!, you watch NZ when the capital flows reverse direction. It won’t need much in the way of initial movement, and the dollar will start to drop in value, and then all the Japanese investors will want their money out quick, as their principal is suddenly losing value……..

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  34. PhilBest (5,117 comments) says:

    NZ Gross Domestic Product, Reserve Bank website:

    http://www.rbnz.govt.nz/statistics/econind/a5/data.html?sheet=1

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  35. PhilBest (5,117 comments) says:

    Housing Stock Value, Reserve Bank website

    http://www.rbnz.govt.nz/keygraphs/Fig4.html

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  36. georgebolwing (611 comments) says:

    There are numerious problems with forced savings schemes.

    The most telling is that they seldom work to actually achieve higher savings.

    The Australian experience is instructive.

    While Australians are required to save about 9% of their income via compulsory savings scheme, and thus have nice little nesteggs building up, they have responded rationally to this increase in wealth by increasing their borrowings, mainly in the form of housing.

    You can see the motivation very simply if you think about the idea of being debt-free in retirement. Pre-complusory savings, this meant having the mortgage go to zero at the time of retirement. But if you are going to get a big cheque when you retire, the aim is to have the mortgage equal to that cheque when you retire.

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  37. PhilBest (5,117 comments) says:

    Sorry! That is quarterly GDP; annual is around $170 billion.

    Rerun the comparisons with the USA; we still have a problem.

    NZ $170 billion GDP versus $600 billion housing stock

    USA $14 Trillion GDP versus $25 Trillion housing stock…….and it is the USA that has a “crisis”?

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  38. toad (3,669 comments) says:

    PhilBest said: Here is the problem with housing affordability. As long as the politicians focus on the OCR as the tool to make housing “affordable”, without addressing the issue of housing undersupply (thanks to urban development restrictions)…

    For once I agree with you Phil, although urban development restrictions are only a part of the problem. I think a bigger part is the bizarre tax incentive through LAQCs and the absence of a capital gains tax for people to invest in property rather than productive enterprise.

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  39. mike12 (183 comments) says:

    I’ve got 2 mortgages rolling over later this year so todays cut is good for me
    I was budeting on 5.9% but hell but by june its anyones guess now…

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  40. georgebolwing (611 comments) says:

    PhilBest: that GDP figure is for a quarter, and looks to be real, not nominal.

    Nominal GDP (i.e. in current prices) for the 2008 was $178 billion.

    From the Stats NZ website: see Table 6.1 at: http://www.stats.govt.nz/NR/rdonlyres/21E1681B-6012-475A-9666-5683C3D584B0/0/gdpsep08alltables.xls

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  41. burt (7,820 comments) says:

    This is so NZ…..

    I get -ve karma for saying I did well on ipredict…. tall poppy bashing lefties out in force today !

    I bet if I said I lost a bundle the lefties would give me +ve karma. No wonder our economy has been in recession for longer than almost all other countries – it was being run by people who love to see people loose.

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  42. PhilBest (5,117 comments) says:

    Georgebolwing, that is a good comment at 11.30.

    Do you agree with Don Brash’s comments on how the housing market is affecting the Reserve Banks ability to achieve its objectives?

    The economist Paul Kasriel warned in 2004, that a serious downturn in the housing market consequent on the creation of the bubble, could “render monetary policy impotent”; which is a pretty blunt way of saying it.

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  43. PhilBest (5,117 comments) says:

    Toad, I am warmed by your agreement on housing affordability. And we are in complete agreement on the disastrous effect of investment money being lured away from true productive activities, by a bubble in housing values.

    If all that Japanese investment money coming into NZ had gone into productive activities, our economy would have been romping.

    That is why a much lower company tax rate does wonders.

    I actually argue that there should not be company tax at all, just tax on profits that are distributed as income. A tax on profits made BEFORE it is distributed as income, is a tax on economic growth, period.

    But where do your concerns about social justice and so on, fit in to THIS assessment?

    Robert Bruegmann; “The Housing Bubble and the Boomer Generation”

    http://www.newgeography.com/content/00452-the-housing-bubble-and-boomer-generation?ref=patrick.net

    Bruegmann argues convincingly, that the escalation in house prices has benefitted existing owners of older generations, at the expense of the younger generation who have to mortgage themselves to the eyeballs just to buy a house at all. He calls it “the greatest intergenerational wealth transfer in history”.

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  44. adam2314 (377 comments) says:

    I think that TOAD has a good point.

    Stop the LAQC’s and see the prices tumble..

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  45. PhilBest (5,117 comments) says:

    In case you missed this from earlier on the thread, Toad:

    “The authors of the Demographia Survey are of the view that if these artificially created housing bubbles (where housing exceeds three times household income) had not occurred, we would likely not have a global financial crisis today.

    If the median household income of a particular urban market is $50,000, the median house price should not exceed $150,000 (3 times earnings) and acceptable new stock should be allowed to be built at the fringe for $125,000 (2.5 times earnings). If the local median household income is $60,000, housing should not exceed $180,000, with new housing stock being provided on the fringe for $150,000.

    The fringe is the inflation or supply vent of an urban market…..”

    I have pointed out before, that when land gets rezoned from Farmland to residential, it goes up in value around 15 to 20 times…….

    THAT is a “racket”. As the Demographia authors point out, starter sections on the fringes of Texan metropolises, DO sell for around their value as farmland, plus cost of development, plus an ethical profit in the region of a few percent. NOT two thousand per cent.

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  46. Bullitt (137 comments) says:

    While I agree on the LAQC issue I dont think thatd be sufficient. Nothing stopping rental properties being bought by individuals or in partnerships. Could even buy them through a trust if the trust could generate other income to offset it.

    Its a lack of capital gains tax on investment property or at least a ring fencing of losses which would have a bigger impact.

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  47. georgebolwing (611 comments) says:

    I think that conducting monetary policy in a small open economy in the face of any asset price bubble is really hard.

    For that matter, conducting monetary policy to achieve price stability anywhere at any time is really hard.

    Always better to not have asset price bubbles.

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  48. s.russell (1,563 comments) says:

    I fully agree about the misincentives that direct money toward housing instead of more productive investments. But I am not too optimistic about any Govt getting tough on this: too many people benefit (or think they will benefit) from rising house prices, and buying property.

    How ironic: the Govt’s tax regime encourages people to buy houses and create a housing price bubble. Inflated asset values encourage people to borrow and spend. So the RB puts up interest rates to restrain the housing market and business suffers because borrowing for expansion becomes less affordable.

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  49. georgebolwing (611 comments) says:

    LAQCs are a red herring. They are just a low-cost way to negative gear property. As Bullitt notes there are lots of other tax effective strategies.

    The root cause of the problem with the tax treatment of assets is that we have a tax on the income from capital. These are hellishly complex things that distort behaviour all over the place. Capital mobility is making it worse.

    In the long-term we will have to move away from taxing income from capital towards taxing income from labour (which is roughly equivilent to taxing consumption).

    So my big ideas would be:

    dramatically reduce government spending, especially middle-class churn (taxing people and then returning the money to them in the form of publicly provided goods and service)

    repeal the income tax

    put GST up to 25%.

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  50. Gordymac (139 comments) says:

    Lets see what the banks do. I have a floating with westpac and the last 1.5% drop resulted in the bank only dropping .6%.

    So I get .6% and they get .9%

    Scumbags

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  51. BlueDevil (92 comments) says:

    One thing the authors of Demographia don’t seem to take into account is the actual physical problems of developing sections in some markets. Dallas and Atlanta are on wide open plains, which must be very cheap to subdivide. Wellington is a little short of flat land and I know from experience carving building sites out of hillsides is not cheap.
    Could someone point out where the cheap flat near Wgtn is?
    What changes to regulations in Wgtn would release more land that would be cheap to develope?
    What would be nice to see was some analysis of the regulations in the NZ markets that support Demographia assumptions.
    Chch & Hamilton would appear to have the closest physical similarities to Dallas & Atlanta.

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  52. Ratbiter (1,265 comments) says:

    Bluedevil – I schemed this up in some detail on one of these threads several months ago.

    Wellington is overdue for another big satellite dormitory town like Porirua or Lower Hutt. I propose a bridge across the harbour entrance from Seatoun to the coast south of Eastbourne. from there you build a 10-15km highway through/under the hills to the huge flat area around lake Ferry. There, the group housing firms and a lot of little guys could keep themselves busy indefinitely building new spec houses and what have you.

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  53. dime (9,442 comments) says:

    Toad – the green solution is another tax? didnt see that coming :P

    Cap Gains Tax – just for housing? or shares as well?

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  54. BlueDevil (92 comments) says:

    Ratbiter
    I would have thought this would have happened all ready as there is already a good comuter train service from Masterton and what you are proposing would be very expensive and have to be recovered from the development some how.

    The real question is what regulations and restrictions would have to be removed to lower the cost of housing in Wgtn.
    Demographia suggest that
    “the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land”
    I think they have discounted the effect of physical restrictions, on land prices and building codes for earthquake and wind for building costs, for example.

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  55. aardvark (417 comments) says:

    Dime said “if you cant upskill in the world we live in, youre an idiot. its freakin easy! just takes effort.”

    And if everyone upskills, who’s left to sweep the streets, clean the toilets and offices, make your coffee at the local cafe and perform a thousand other minimum-wage jobs?

    And, in case you hadn’t noticed, it’s been almost impossible for most people to outpace inflation (particularly in the property sector) and save enough money for a deposit while also paying rent, food, power and petrol.

    When the real value of your savings keeps going in a negative direction (despite an increasing balance) then even the middle-class can’t save for a 20% deposit.

    Now that we’ve got such a low OCR, deposit rates on accounts people use to save for a deposit will be absolutely awful and once the housing market starts to settle, they’ll be right back on the same treadmill.

    Your arguments are a fine ideology but a flawed reality.

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  56. PhilBest (5,117 comments) says:

    Ratbiter, were you posting as “RRM” back when you made that suggestion; because I certainly remember RRM making it, and I certainly agreed with it, and do do now; and am just as surprised to find myself agreeing with you now as I was with RRm then……

    Bluedevil; how much time have you spent reading the Demographia reports? Sure, some places will have higher development costs than others. But when a whole country, with 4 million people, in a country the size of other countries with tens of millions of people; does not have one single city with “affordable” housing; not even cities where the cost of development is not a factor; then obviously, questions have to be raised about what is messing with the normal laws of supply and demand.

    And it is absolutely ridiculous when even a wide-open-space like the Wairarapa, is off limits to significant new development, because we want to preserve the unique character of the little Hicksvilles over there, and of course, generally appease the Gaia god.

    It is not that these factors have not been studied before.

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  57. PhilBest (5,117 comments) says:

    Regarding Capital Gains Taxes, there is a study somewhere by World Bank economist Alain Bertaud, in which he points out that the effect of capital gains taxes on property values is largely neutralised by the adverse effect that these taxes have on new developments; i.e., the cost of the tax is of course taken into account by the developers, when they price the land they are developing. If they currently expect a thousand percent or more return on the investment in the land they have been sitting on until it is rezoned, they will simply add the cost of the tax to this; and two hundred grand sections over the back of Tawa will become two hundred and fifty grand sections. This is exactly the opposite of what is needed: new developments acting as a release valve for demand; not a license for wealthy developers with the right connections, to print money.

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  58. PhilBest (5,117 comments) says:

    aardvark (161) Vote: Add rating 0 Subtract rating 0 Says:
    January 29th, 2009 at 2:41 pm

    “………it’s been almost impossible for most people to outpace inflation (particularly in the property sector) and save enough money for a deposit while also paying rent, food, power and petrol.

    When the real value of your savings keeps going in a negative direction (despite an increasing balance) then even the middle-class can’t save for a 20% deposit…..”

    Quite so.

    As I said at 11.58am;

    “…..it has never been worthwhile for anyone to save money for the purpose of buying a house, because prices went up faster than anyone could save money. You could spend years working and saving, only to have to get a bigger mortgage than if you had just bought the house at no deposit in the first place…..”

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  59. gd (2,286 comments) says:

    and so we continue to accept the concept of a control on the price of money Because thats what the OCR is And can you imagine the economists and others if I suggested we have a price control on any other commodity Like petrol milk bread rents etc etc but we did back in the early 1980s and economists at that time argued that it was absolutely necessary that we did. Except I and others argued against such control at the time

    the OCR is a crock of shit An unecessary interference. If you argue for it so you must be consistent and argue for all other commodities to have controls.

    Debate

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  60. freethinker (681 comments) says:

    “Bullitt (23) Vote: 0 2 Says:
    January 29th, 2009 at 12:49 pm

    While I agree on the LAQC issue I dont think thatd be sufficient. Nothing stopping rental properties being bought by individuals or in partnerships. Could even buy them through a trust if the trust could generate other income to offset it.

    Its a lack of capital gains tax on investment property or at least a ring fencing of losses which would have a bigger impact.”

    The only people who do not effectively pay Cap Gains Tax on investment property sales are the Mom & Pops who buy a property and then sell it in a short period at a profit and then repeating the excercise, this practice should alert the IRD to them being in the business of buying/selling property and liable for I/Tax on profits. The other isde of the coin to creating a new tax would in the short term be the relief of losses on same situation stuff sold at less than its cost, I suspect the actual loss of revenue is small and not economically worth collecting. A more important priority is to provide or incentivise other profitable investment/business vehicles, possibly with a lower rate or Nil tax rate to encourage innovation and investment in productive assets. An easy to do and quick to implementscheme would be to create tax free deposit accounts with say a $10,000 limit were the fund would be for a fixed term – 2-5 years and only be useable by the bank for NZ residential mortgage lending with a 20% equity content and the interest rate fixed at say 0.5% above the OCR. This would provide banks with a stable local source of mortgage funds and borrowers/lenders a medium term stability of costs, the over 65 investor should be allowed to take interest – quarterley? so they can utilise as disposeable income. If this worked the idea could be expanded/modified to encourage business expansion etc. Welcome comments on refinement in the hope that Bill English will read and hopefully at least consider as a possibility!

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  61. dime (9,442 comments) says:

    aardvark – there will always be unskilled people coming through the ranks.. or moving here… let them do low income jobs.. and the smart ones will upskill. otherwise, bad luck. try marrying someone with money?

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  62. PhilBest (5,117 comments) says:

    # s.russell (196) 1 0 Says:
    January 29th, 2009 at 12:58 pm

    “I fully agree about the misincentives that direct money toward housing instead of more productive investments. But I am not too optimistic about any Govt getting tough on this: too many people benefit (or think they will benefit) from rising house prices, and buying property.

    How ironic: the Govt’s tax regime encourages people to buy houses and create a housing price bubble. Inflated asset values encourage people to borrow and spend. So the RB puts up interest rates to restrain the housing market and business suffers because borrowing for expansion becomes less affordable.”

    You said it, S.Russell; the problem is, this is economic suicide; it can’t last forever. I think that Reserve Banks have already run out of ammunition, and that the economist Paul Kasriel was right when he warned in 2004 that when the housing bubble burst, it would “render monetary policy impotent”.

    I think that one thing that John Maynard Keynes was actually right about, was that the best way to stimulate an economy was by a housing construction boom. It is absurd to NOT have this, when there is a shortage of houses, houses are priced too high, and land shortages are entirely artificial and the result of politics; AND we have a construction industry that had virtually closed its doors and laid everybody off over the very period of time that these shortages were mounting and prices were going through the roof; let alone now.

    Trying to maintain the status quo of two years ago, is just absurd. Lending is just not going to happen anymore, even if the OCR is low, because everyone is once bitten, twice shy, about the obvious property bubble. It is all very well to say that a young couple buying their first home now CAN afford it, because the cost of servicing their mortgage will now be “only” 60% of their income instead of 75%; but the lending institution wants to know that the house is not going to go down in value and leave them short of security.

    It is counterintuitive, perhaps, but wouldn’t lending institutions be pretty OK with lending money on brand new $180,000 houses on the edge of the city – rather than $360,000 houses, the extra $180,000 being inflated land value? A house construction boom along these lines would be something that everyone could have confidence in, and it would provide needed jobs that are unlikely to be “created” out of thin air elsewhere, regardless of what politicians with Messianic complexes claim to be able to do.

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  63. dime (9,442 comments) says:

    Phil – i think you should go to that media workshop that newstalk zb are whoring every morning.. then start a PR campaign to get the govt to rezone land. be a hero to the people :)

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  64. PhilBest (5,117 comments) says:

    GD, I was saying at 12.09pm, no-one can honestly say that central banks have got their rates “too high” or “too low”; the strange thing is that NZ-ers still lapped up the investment money flooding in from Japan, to take out mortgages on houses; in spite of the fact that the interest rate was so “high” as to attract that Japanese investment in the first place. And in spite of the fact that the imbalance between Kiwis incomes, and the prices they had to pay for houses and the cost of servicing the mortgage, was much worse than in the USA; which apparently has had a “crisis” because credit was even easier to get.

    But NZ-ers themselves did not take advantage of the same “high” interest rates, to “save” seriously. I think we have dug ourselves into a serious hole as the result of a toxic combination of government policies, combined with Kiwi “she’ll be right” attitude on the part of the most, and greed on the part of many. What we have got, is a whole lot of foreign money that has flooded in to NZ and that could flood out again; and all it has done is inflate a property price bubble and encourage stupid mortgage-based consumption; meanwhile productivity has been headed the wrong way and the chances of it turning around are next to nil; all the political calls for action seem to be along the lines that we want to see our (inflated) property values propped up…..!

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  65. BlueDevil (92 comments) says:

    PhilBest

    I have read the whole report.
    Of the 52 pages 22 are tables and references.
    Most of the report is repeating the statistics in the tables in words and stating that if the afforability is higher it must be because there isnt prescriptive planning and if is lower there must be prescriptive planning.

    There are no case studies
    The list of policies (table 6 pg 21) is not applied to specifically to any of the cities to show the causal effect between application of policies and affordability.

    In Fig 9 pg 23 of the first 14 red towns, at least 9 could be describe as have some form of physical restriction on their growth due to lack of flat vacant land on some or all sided.(LA, SF, SD, Sydney, Vancouver, Miami, NY, Boston, Seattle)

    Of the 18 green towns, 16 could be decribed as siting on big flat plains (exeptions Pittsburgh, Montreal).

    The assumptions of the report maybe correct but this report does not analytically prove it. Causal effects have to normalised for other factors. I have pointed out one factor that needs to looked at. Declining populations in places like Pittsburgh also need to be factored in.
    Another factor maybe that if flat land is limited, it becomes more valuable, so there are more demands on it than just housing. It has to be rationed between factories, feilds and housing in a way that is not needing when it effectively unlimited.

    You say it has been studied before. Please referrence a NZ study for me to read.

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  66. gd (2,286 comments) says:

    PhilBest yes agree as I said it amazes me that the current lot of economists tolerate an artifical interference into the price of money but wouled go ape shit is you or I suggested the same with any other commodity.

    Whats Bollard going to do when he gets to zero % and the problem aint fixed. Why doesnt he just set the price of houses or say that if you buy a house you cant sell it for more than a certain profit. We had that back in the 1970s with a super tax on houses if sold within a certain period. A so called speculators tax it failed It fact it made the problem worse.

    When oh when will pollies and civil servants get the F…. out of the market and let supply and demand determine the price and the self correcting forces of a free market work.

    We have a bunch of bozos all members of the wherethefuckarewe tribe rushing around like headless chooks creating mayhem.

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  67. slijmbal (1,213 comments) says:

    We seem to be forgetting

    - kiwis have been historically hammered by a wild west share market
    - investing in property works because it historically grows at 2% greater than the rate of inflation, debt used gets eroded by inflation, it’s the only access to leverage the average kiwi could get and it worked for their parents (kiwis understand it)
    - limiting property supply (zoning) and making property more expensive to build (councils and RMA) makes property more expensive.

    LAQCs are not the issue – the issue is one can depreciate the value of the actual building in a manner that is unreal. Having had a couple of rental properties that I later sold I received a large tax bill for the unreal depreciated value of the building as the building had actually gained in value.

    The idea that I can offset costs (including real depreciation) against an income producing asset is common across all business and fundamental to business taxation and should not be removed. Similarly, if one taxes both the income producing part of owning an asset and then the gain in that’s asset’s value then we need some level of inflation allowance built in.

    If we install capital gains taxes then they need to be very consistent or they cause distortions in the market. So this should also apply to shares, a business, a rental property etc, which brings me on to further concerns with capital gains taxes in that if they are pay as you go then it sucks cash out of a “business” (whether that business is a rental property or a farm or a …) and reduces its growth – remember businesses (growing ones) have cash flow issues. If the tax is applied at the time of ownership transference then it can result in a really big tax bill, which will cause its own strange behaviours.

    Consumption taxes look the best bet, frankly.

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  68. Hoolian (220 comments) says:

    Ah, Burt. I wish I had your market cunning. We should talk…enjoy your earnings!

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  69. GJ (329 comments) says:

    Anyone brought Gold or Silver over the last 12 months. You can normally recognise them as they laugh there way to the bank.

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  70. PhilBest (5,117 comments) says:

    Blue Devil:

    http://econpapers.repec.org/paper/mtuwpaper/07_5F09.htm

    Also, visit the page that paper is located on; there are more there that are also relevant.

    http://econpapers.repec.org/RAS/pgr60.htm

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  71. PhilBest (5,117 comments) says:

    Those are NZ reports, there are plenty of USA ones:

    http://www.heritage.org/Research/SmartGrowth/bg1999.cfm

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  72. PhilBest (5,117 comments) says:

    “Zoning’s Steep Price”; Glaeser and Gyourko

    http://www.cato.org/pubs/regulation/regv25n3/v25n3-7.pdf

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  73. PhilBest (5,117 comments) says:

    “Affordable Housing: How Smart Growth Dashes Minnesota Dream Homes”

    http://www.americanexperiment.org/uploaded/files/aeqv6n4robbins.pdf

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  74. PhilBest (5,117 comments) says:

    Glaeser: “The Economic Impact of Restricting Housing Supply”

    http://americandreamcoalition.org/housing/housing_final.pdf

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  75. PhilBest (5,117 comments) says:

    Tim Leunig: “In My Backyard: Unlocking The Planning System”

    (Lots of statistics about housing and regulations in the UK)

    http://www.centreforum.org/assets/pubs/in-my-back-yard.pdf

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  76. PhilBest (5,117 comments) says:

    There is actually a very good book regarding the UK situation:

    Oliver Marc Hartwich and Alan W. Evans: “Unaffordable Housing: Fables and Myths”

    http://www.amazon.co.uk/Unaffordable-Housing-Alan-W-Evans/dp/product-description/0954752767

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  77. PhilBest (5,117 comments) says:

    Here is the original shorter paper that that book was based on:

    http://www.policyexchange.org.uk/images/libimages/143.pdf

    From the abstract:

    “……Britain’s Soviet-style planning system means that we live in some of the smallest, oldest and costliest homes in the developed world. But is this the housing we want? Unaffordable Housing: Fables and Myths is the first of a three-part series of pamphlets investigating the causes of, and solutions to, Britain’s housing shortage. Alan W. Evans and Oliver Marc Hartwich ask how Britain’s housing has become the laughing stock of Western Europe. The key finding of Unaffordable Housing is clear. The British culture of centrally-planned development – a system established by the 1947 Town and Country Planning Act and embraced to this day by politicians of all parties – has resulted in a woeful shortage of affordable, desirable, high-quality housing. It also tackles myths that have protected the current system of central government planning for too long….”

    By the way, this is one of the best analyses you can read on this subject.

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  78. PhilBest (5,117 comments) says:

    As I was saying, Hartwich and Evans have some of the best analysis you can read; UK based.

    THIS page lists all four of their papers on the housing affordability subject:

    http://www.policyexchange.org.uk/Issues/Housing.aspx

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  79. BlueDevil (92 comments) says:

    PhilBest (4165) Vote: 0 0 Says:

    January 29th, 2009 at 4:41 pm
    “Affordable Housing: How Smart Growth Dashes Minnesota Dream Homes”

    http://www.americanexperiment.org/uploaded/files/aeqv6n4robbins.pdf

    Sorry to be picky but Minneapolis-St.Paul is the one red town in fig 9 in the green ones.
    an index of 3.4 hardly seems a ‘dashing of Minnesota Dreams’
    It appears that siting on a plain with lots of flat land can out weigh zoning restrictions and keep housing more affordable.

    I agree zoning restrictions can cause price increases but this example (to me) proves that absolute availablility of flat land may have a bigger effect.

    (still reading the other articles, do these people get paid by the word!)

    By the way I looked up Thunder Bay, Canada in Wikipedia, Affordability 1.8.
    Sits on a plain, pop dropping 113,946 1991 – 109,140 2006

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  80. Ratbiter (1,265 comments) says:

    Philbest – RRM and I are the same in the real world. For some reason I posted a link once as RRM, and ever since the system appears to have blacklisted the RRM identity as a spammer.

    There’s no rigorous economic analysis in my scheme, I just looked at Wellington’s history of spawning dormitory towns on nearby flat areas, and looked at the map, and thought how much greater the harbour mouth would be as an arrival point for south islanders on the ferries if there was a cable-stayed bridge or a suspension bridge across there!

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  81. georgebolwing (611 comments) says:

    dg

    You asked for a debate on the use of the OCR, saying that it was a price control and suggesting that it should be removed, just like there are few other price controls in New Zealand. OK, you actually said it was the OCR is a crock of shit.

    The OCR is the device the Reserve Bank uses to control inflation.

    To quote from the Bank’s website

    The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. An OCR is a fairly conventional tool by international standards. In the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. Such mechanisms were more indirect, more difficult to understand, and less conventional.

    (http://www.rbnz.govt.nz/monpol/about/0072140.html)

    I would argue that (a) inflation is bad, (b) monetary policy is required to stop inflation; (c) the OCR is a good way of conducting monetary policy.

    As I have noted previously today, I think that monetary should only be used to achieve price stability.

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  82. slijmbal (1,213 comments) says:

    GJ (98) Vote: 0 0 Says:

    January 29th, 2009 at 4:22 pm
    Anyone brought Gold or Silver over the last 12 months. You can normally recognise them as they laugh there way to the bank.

    Here is my big smile :) :) – not quite doubled my money (yet)

    Also got a lot of my money out of equities, moved $ into US$ denominated investments (still ahead even with the crash) and got a bunch of bonds at the 10% rate that have gained about 10% capital value on top of paying a good rate. This investing is really hard!

    Maybe they should me give the stupid Cullen fund?

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  83. Fred (176 comments) says:

    The OCR is a failed mechanism. Raising the OCR did the opposite of what was intended – stimulated the money supply and increased credit, and now when lowering to zero fails to fix the problem what happens next? It hasn’t worked here at hasn’t worked anywhere else.

    There’s another problem with an “OCR”. Why should the safest possible deposit of all pay any interest at all, and why should banks have a monopoly on access to such a deposit. The idea that there should be a “prevailing interest rate” and that the central bank should be manipulating it somehow is also wrong. The interest rate for an investment should be whatever the buyer and seller agree with the risk fairly priced.

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  84. Viking2 (11,138 comments) says:

    georgebowling. The ocr has always been and will always be totally ineffective in meeting its supposed aims. Why is simple.
    The persons most directly affected by the OCR are businesses and home owners. We all know businessesare treated like shit by the banks unless the own mortgageable property so without property as security they are taxed by the bank at higher rates. With property business owners borrow against the property for their business. Rates go up then those businesses pay higher rates, conversely for lower.
    Looking at households, 30% of New Zealanders own a property without a mortgage. So when rates go up to curb inflation it makes not a jot of difference to them, the spend as usual and may spend more because the product is cheaper today than it will be tomorrow. Self defeating mechanism for the OCR
    40% of Kiwi’s rent houses. Rates go up and again that makes not a jot of difference to their spend. Again a self defeating process.
    The major burden of higher interest rates falls on the 30% of Kiwi’s who own their own homes or homes for others. Now the greatest majority of that 30% are families, so the result is that families who own their own home and have a mortgage are the ones carrying the can and paying the higher interest rates.
    Don’t know about you but I can’t comprehend the logic in distressing families like that. So its would be fair to say that people with home mortgages are carrying the can for inflation. Inflation inflicted by consumerism.
    Consumerism that is driven by those without a mortgage i.e. those with high incomes relative to their housing costs. Two income no mortgage families, young single with money to burn(look at the boy racers. No married man with kids and a mortgage could afford to waste that sort of money).
    Consumerism is responsible for our overspending which is the cause of our problems in the last few years. I mean it was only a few months ago the RB was ranting at us all about just that.

    If we are serious about keeping equilibrium in our economy we should look seriously at a floating tax on petrol and other fuels. (and not a carbon tax as that’s rubbish.) Dr Brash suggested last year that we should have a variable tax on fuel as it is the most used commodity in NZ. Every person is affected by it thus any burden would be shared by all.
    The idea was dismissed immediately by anyone in govt.(labour of course.) but it makes much more sense.
    Interest rate changes take a long time to work and have all sorts of loopholes etc.
    We all have to purchase fuel. The effect is immediate. Has to be a plus.
    Govt. gets the benefit instead of overseas banks. Better still.
    The brief argument was that it was mixing RB and Govt. but its all NZ and the RB should be set up to call the shots.
    It was well researched last year and found that the pain threshold for petrol was $1.50, go over that and people cut back as they are right now. good way to restrain spending.

    I should add that as the ocr went up so did our exchange rate thus making our imports cheaper thus fueling the spending. It also sent our exports down thus reducing our earnings. One minus two equals minus one or exchange rate deficit which is our major problem.

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  85. GJ (329 comments) says:

    slijmbal (51)

    Well done. Notice how few recognise the benefits. Amazing really most stay on the same old tread mill and don’t recognise real opportunities when they stare them right in the face! No one else picked up on the Gold or the Silver, amazing really.

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  86. Murray M (455 comments) says:

    I have about $20,000 invested with Rabo, on call. Now getting 5.4% (net 3.3%). I am thinking of buying Bonus Bonds. Advice please?

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  87. Gooner (995 comments) says:

    Murray, your net 3.3% is still 3.3% above real inflation which is practically zero right now. A margin of 3.3% over inflation is still not too bad. If you got out buy short term government bonds or Gold stocks – Australia has some good ones which pay dividends too. Some physical Gold might be a decent option, but diversify.

    Otherwise get your money offshore before that $20K+ is worthless which it will be when the $NZD is 20c against the $USD, and based on today’s Treasury figures this might be the case sooner rather than later. And if people think our dollar won’t drop 30c against the $USD, well it has dropped 30c against it in about the last 18 months. Remember when it was over 80c against the $USD and Bollard was panicking? Well it’s now 51c and going South.

    Disclaimer: I could be totally wrong and cannot be relied on.

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  88. slijmbal (1,213 comments) says:

    GJ – thanks but (assuming you’re not being ironic) ….

    the rationale around everything I did was very simple and known to most professional investors – not that the advisors tell their customers this (many of whom are not professional investors but sales people).

    We were obviously heading for a BIG bubble as equities had been too good for too long eg all the indicators, historical PE etc said equities were too expensive. Returns on commercial properties were at historical highs, debt at historical highs, you name it – it was too expensive. So reducing exposure to equities and/or commercial property was a given.

    The NZ$ was completely overvalued against the US$.

    With fear lots of people move in to gold so it does well in times of uncertainty.

    Moving in to gold also takes advantage of strong NZ$ as gold is set against the US$

    The Reserve bank pretty much tells the entire world what it’s going to do with interest rates as it has a large hammer to hit in the nail of interest rates to attempt to steer a 747. With inflation going up it was obvious that interest rates would go through the roof so fixing rates via high quality bonds and then taking some capital gain later is also childs play.

    Don’t get me wrong I still have a bunch of investments that have been hammered over the last 15 months but overall I’m well beating the Cullen fund for instance.

    Murray – don’t take advice from strangers :) – look it up and understand what you are doing.

    But a personal opinion – bonus bonds average return is 3.4% but it’s not guaranteed so there is some risk ie you have to have average luck – risk should give greater returns ie you get paid for your risk. So bonus bonds look worse than the Rabo on call – unless call drops – is it a PIE? I would rather eat my leg than invest in bonus bonds – however, it’s still better than investments that lose money like finance companies without an S&P rating. You might want to look at term investments to fix some rates. The right bonds or capital notes might not be bad either but include any brokerage costs in your analysis. If you lose money doing any of the above then don’t blame me please – blame yourself for not finding out ;)

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  89. Murray M (455 comments) says:

    Cheers Gooner. I’m maybe now thinking of buying US or Aussie dollars. What do you think?

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  90. slijmbal (1,213 comments) says:

    Hi Murray

    Gooner and I prove the point about you need to understand yourself – for instance, a different analysis on what he says

    NZ vs OZ & vs US$’s are around the 15 year average. So you need a bit of a crystal ball to pick that NZ$ will keep going down against either/both. Though like Gooner I reckon the NZ$ will go down against the US$ further but how much further?

    Investment in gold stocks is complicated – for instance – have they hedged their gold price already and as such will only gain in value if the price of gold drops compared to other gold stocks?

    So, I wouldn’t do what Gooner is suggesting but he may be right ;)

    If you don’t know then keep it simple would be advice. But don’t listen to me find out.

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  91. expat (4,048 comments) says:

    As someone said to me last week “the problem is there’s nowhere good to put your money at the moment but thats not a real option”

    Safety first, cash is king, protect your asset base.

    So its cash, gold or a bunker full of baked beans, .270 shells and army surplus goods.

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  92. Patrick Starr (3,675 comments) says:

    According to the latest Big Mac Index the Yuan or the AUD look good
    http://www.economist.com/markets/indicators/displaystory.cfm?story_id=12991434

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  93. Bullitt (137 comments) says:

    To my mind speculating on the NZ AUS or US dollar atm is a pretty risky investment. For various reasons all of them should drop significantly but its not possible for them all to drop against each other (only against everyone else at most). If the NZ$ drops alot but the US$ drops even more suddenly the NZ$ has appreciated and youve lost money.

    The “experts” are predicting the NZ$ is going to drop against the US$ but I wouldnt be so sure except in the relatively short term. The american government balance sheet isnt looking so healthy atm.

    Im actually in a similar situation or I will be in the end of March when a 8.1% term deposit comes up. As a short term solution I might just move it into an online call account, sure it probably wont even beat inflation but its not going to be much better in a term deposit and for all the interest Im gonna earn I might as well have the flexibility.

    Return of capital is more important than return on capital…

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  94. PhilBest (5,117 comments) says:

    Viking2, that is a pretty good analysis, but you have omitted the point that as property prices have increased in value, roughly HALF the new mortgage finance taken out in NZ has been people who already own a house, taking out MORE borrowing against the increased value; and spending that money. This has amounted to tens of billions of dollars per year for the last few years.

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