Thursday, 4 August 2016

It's. Still. Too. Slow

Let's start with the positive: Stats told us that building consents in Auckland rose by 16% in the year to June, to 9,651 homes.

Right, having got that out of the way, another perspective is that the consents (when they eventually translate into construction) are still running some 4,000 to 5,000 a year below the level to keep pace with demand - the conventional wisdom is that something like 14,000 a year are needed - let alone eat into the existing shortfall of perhaps 20,000. We will need to keep growing at 16% a year for the next three years just to reach match-new-demand levels, by which time the shortfall will have risen to around the 25,000 mark.

I'm also rather concerned about this - it's the 'trend' estimate of what's happening to Auckland consents, after Stats has waved its magic smoothing wand over the (very erratic) monthly data. On this measure, Auckland consents peaked towards the end of last year, and have been falling steadily since.

I've wondered about this before. It could be, for example, that there's something strange in Stats' smoothing algorithm. Or - and I'm leaning more to this view after having a quick natter with someone who's been closely involved with Auckland's Unitary Plan - it could be that developers (and apartment block developers in particular, I'm  told) - have been holding off to see what the Plan allows. You would, too, if your Plan A had been a two-storey development but the Unitary Plan might allow a six-storey one.

So the upside is that if the Plan goes through, the developers will go ahead with their best options, and the previously deferred projects will eventually boost the numbers in the right direction (possibly by a lot if the Plan goes the right way on allowable heights). The downside is that if the Plan runs into NIMBY or other flak, and there's no near-term finality, some developers are going to leave their plans on the shelf. A protracted period of uncertainty would have very unwelcome consequences: in that case. and even though I'm a jafa these days, if Auckland Council can't get its act together then I wouldn't have the slightest problem with central government taking over the job.

All up, even on the 16% increase view,  it's pretty clear that supply is responding slowly, and part of the solution will involve figuring out why (capacity constraints? deadweight planning?), and fixing it.

At the same time we should realise that not all of what's going on is down to New Zealand specific issues. People have been pointing fingers at our land use and land availability planning restrictions, our current net immigration flows, our tax regime and hence or otherwise our love affair with rental property, and our easy access to bank credit. There's something in all of those. But they also miss a wider point: our booming housing markets are just one further symptom of globally ultra-easy monetary policy.

One of my other gigs involves talking to chief investment officers at some of the big fund managers, and from those conversations, it's become clear that just about every income-producing asset, including housing, has been bid up to expensive levels. Global government bonds, higher quality corporate bonds, physical and listed global property, dividend-paying equities (especially the more defensive sectors such as infrastructure) - every one of them has been bid up to historically expensive valuations by investors desperate for yield, at a time when central banks have effectively driven short-term interest rates to zero (or even below).

And we're not even at Peak Global Ease. The Aussies have just cut their policy rate; the Brits are likely to; Japan has upped its 'quantitative easing' programme; China might well want to support its economy a bit more. We're probably going to have to as well, especially after that Aussie cut. The only economy where policy might be tightened anytime soon is the US, and even there the current futures pricing is betting that there's a 60% chance that the Fed funds rate will still be at its current 0.25-0.5% level at the end of this year.

So by all means fix the things we can fix, and try to pull what demand and (especially) supply levers we can. But I wouldn't be too sanguine about dealing to historically high prices until global monetary policy starts to creep back to more normal levels.

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