Round the corner from us, here on Auckland's North Shore, there's a 5-bedroom, 3-bathroom, 2-car garage, cedar board family home (I've previously mentioned the neighbouring property, which has been bowled and the site redeveloped). It's got a large section (close to 900 square metres) and good views of the sea across to Rangitoto Island. It's not the most modern looking house you'll ever find, but it's a good, solid, family home.
The local grapevine tells us it has just sold, for - $1.89 million.
The jury's still out on the potential explanations for rocketing prices: whether we're seeing an asset bubble, or whether we're seeing intense demand meeting cramped supply, or something a bit of both, and what role monetary policy may have in creating or defusing it.
The analysis had better get to some definitive answer fairly quickly, because this market is just getting hotter and hotter.
Monday, 12 August 2013
The price of your broadband (3)
In previous posts (here and here) I've explained how the Commerce Commission sets regulated telecommunications prices. It's not the sexiest of subjects, but I've done it because you need to get a feel for the status quo if you want to be able to take a view on the government's recent proposals on how existing (copper based) broadband products are priced and what the new Ultra Fast (fibre) Broadband network will cost you.
Here's the benchmarked international data that formed the basis of the decision (it's on p30).
The median of these overseas costs, as a starting point for setting the price, was 0.66 cents a minute, but in the event the decision was made to take the 75th percentile of this range, and to set the price at 1.13 cents a minute. The rationale (as discussed on pp36-39) was that any adverse effect of setting the price too low (by deterring people from building infrastructure of their own, since they could free-ride on the too-cheap equipment of others) would be higher than the adverse effect of setting the price too high, so the Commission opted for the relative safety of a somewhat higher price.
It also meant that the price come out around the same as the prices in the UK and Australia, which for a variety of reasons might have been expected to have been pretty good sighting shots for what the equivalent costs were likely to be in New Zealand.
The result, in short, looked rather reasonable, even if the outcome was a lot lower than the 2.65 cents a minute Telecom was arguing for back then.
You might feel that this benchmarking approach is too rough and ready a route to follow, and others certainly did at the time. There were submissions that the raw overseas costs ought to have been adjusted for the fact that things like labour costs and the cost of capital varied a lot from one country to the next. But when the Commission looked at making those sorts of adjustments, they didn't make much net difference. In aggregate, they tended to cancel out (as noted in p33 of the decision).
The Commission investigated one adjustment in particular that looked like it might be material, namely the impact of network density. In fairly densely populated countries, the argument went, you can run out compact, shorter networks more cheaply than you can in lighter density countries (like New Zealand), where you might have to run out your network, at high expense, for miles and miles into the wop-wops. But when you went through the data, you didn't in fact find that there was any systematic relationship between cost and density (pp33-34). Again, you end up back at square one, the original unadjusted benchmark costs.
So there's the process - you get the overseas prices (when they're cost based), you pick a point within the range of prices that you think is fair for New Zealand conditions, and you're done. It may have its rough edges, but it produces numbers that look broadly reasonable. And (a) because they're reasonable and (b) any other way is highly expensive (and arguably no more accurate), these prices are the ones that have been used to set regulated prices.
Until now.
Next post - the government's proposed changes.
Here's the benchmarked international data that formed the basis of the decision (it's on p30).
The median of these overseas costs, as a starting point for setting the price, was 0.66 cents a minute, but in the event the decision was made to take the 75th percentile of this range, and to set the price at 1.13 cents a minute. The rationale (as discussed on pp36-39) was that any adverse effect of setting the price too low (by deterring people from building infrastructure of their own, since they could free-ride on the too-cheap equipment of others) would be higher than the adverse effect of setting the price too high, so the Commission opted for the relative safety of a somewhat higher price.
It also meant that the price come out around the same as the prices in the UK and Australia, which for a variety of reasons might have been expected to have been pretty good sighting shots for what the equivalent costs were likely to be in New Zealand.
The result, in short, looked rather reasonable, even if the outcome was a lot lower than the 2.65 cents a minute Telecom was arguing for back then.
You might feel that this benchmarking approach is too rough and ready a route to follow, and others certainly did at the time. There were submissions that the raw overseas costs ought to have been adjusted for the fact that things like labour costs and the cost of capital varied a lot from one country to the next. But when the Commission looked at making those sorts of adjustments, they didn't make much net difference. In aggregate, they tended to cancel out (as noted in p33 of the decision).
The Commission investigated one adjustment in particular that looked like it might be material, namely the impact of network density. In fairly densely populated countries, the argument went, you can run out compact, shorter networks more cheaply than you can in lighter density countries (like New Zealand), where you might have to run out your network, at high expense, for miles and miles into the wop-wops. But when you went through the data, you didn't in fact find that there was any systematic relationship between cost and density (pp33-34). Again, you end up back at square one, the original unadjusted benchmark costs.
So there's the process - you get the overseas prices (when they're cost based), you pick a point within the range of prices that you think is fair for New Zealand conditions, and you're done. It may have its rough edges, but it produces numbers that look broadly reasonable. And (a) because they're reasonable and (b) any other way is highly expensive (and arguably no more accurate), these prices are the ones that have been used to set regulated prices.
Until now.
Next post - the government's proposed changes.
Saturday, 10 August 2013
The price of your broadband (2)
As explained here I'm posting a series of background pieces about the current telecommunications policy review, which is looking in particular at the prices people will be paying both for their current copper-based broadband and the new fibre-based 'Ultra Fast Broadband'. It's an important issue, but to grasp it you need some building blocks.
Here's the next one - how the Commerce Commission currently sets the regulated prices for access to telecom infrastructure. If you are a new phone company that wants to provide broadband, for example, the Commission has set the price you will pay if you want to put your equipment into one of Chorus's exchanges, and have the copper lines running from a customer's home connected to your gear at that exchange. Or if you don't want to buy your own gear, you can save some money, and pick up the customer's traffic after it's reached the exchange and been handled by Chorus's equipment. This saves you the capital cost of having to install your own gear, but on the other hand, you have to pay a charge set by the Commission for renting Chorus's gear at the exchange.
And so on - the Commission ends up setting a lot of these wholesale prices charged by one telco to another. In turn, these prices form a substantial part of what the telcos will ultimately charge their retail customers (you and me), so they're of real, practical importance to the choices we are offered, as well as facilitating competition and choice in the first place by unblocking what would otherwise be crippling impediments to new telco businesses.
Now to the guts of it: how does the Commission set those prices?
In the first instance, by looking at the prices that other countries have set for a particular service, a process known as 'benchmarking'. The logic is that overseas prices will act as a relatively quick proxy for the likely New Zealand costs. It's a bit more complicated than that: only those countries that set prices on a particular basis are included in the comparison. Overseas regulators can (and have) set prices on all sorts of weird and wacky bases, some designed to favour incumbents, some designed to favour new entrants, some hit-and-miss, some very sophisticated. You wouldn't want prices set in New Zealand on such an arbitrary collection of overseas prices, so the countries selected are chosen on the basis of whether they use a reputable, sensible approach to setting their prices. Typically, this is a 'forward looking, cost based' approach - the price you'd pay for a new service today (as opposed to what you'd pay for something built in the 1980s), if that price was based on the actual costs genuinely involved, and not some arbitrary amount greater or smaller than the real cost.
There is provision for not using the benchmark price, and using a detailed modelling of the actual costs incurred in providing the service in New Zealand instead. If people were to go down that route, though, then they would be starting a complex, lengthy and expensive exercise. Typically people haven't, and have lived with the benchmark-based prices instead.
So there you have it. The typical price is based on overseas prices, as an approximate close-enough-is-good-enough stab at what it would likely cost here, and there's a back-up of calculating the actual New Zealand costs, if necessary.
I appreciate that this is all rather dry stuff, so the next post will be a practical example of how this benchmarking process has actually worked out.
Here's the next one - how the Commerce Commission currently sets the regulated prices for access to telecom infrastructure. If you are a new phone company that wants to provide broadband, for example, the Commission has set the price you will pay if you want to put your equipment into one of Chorus's exchanges, and have the copper lines running from a customer's home connected to your gear at that exchange. Or if you don't want to buy your own gear, you can save some money, and pick up the customer's traffic after it's reached the exchange and been handled by Chorus's equipment. This saves you the capital cost of having to install your own gear, but on the other hand, you have to pay a charge set by the Commission for renting Chorus's gear at the exchange.
And so on - the Commission ends up setting a lot of these wholesale prices charged by one telco to another. In turn, these prices form a substantial part of what the telcos will ultimately charge their retail customers (you and me), so they're of real, practical importance to the choices we are offered, as well as facilitating competition and choice in the first place by unblocking what would otherwise be crippling impediments to new telco businesses.
Now to the guts of it: how does the Commission set those prices?
In the first instance, by looking at the prices that other countries have set for a particular service, a process known as 'benchmarking'. The logic is that overseas prices will act as a relatively quick proxy for the likely New Zealand costs. It's a bit more complicated than that: only those countries that set prices on a particular basis are included in the comparison. Overseas regulators can (and have) set prices on all sorts of weird and wacky bases, some designed to favour incumbents, some designed to favour new entrants, some hit-and-miss, some very sophisticated. You wouldn't want prices set in New Zealand on such an arbitrary collection of overseas prices, so the countries selected are chosen on the basis of whether they use a reputable, sensible approach to setting their prices. Typically, this is a 'forward looking, cost based' approach - the price you'd pay for a new service today (as opposed to what you'd pay for something built in the 1980s), if that price was based on the actual costs genuinely involved, and not some arbitrary amount greater or smaller than the real cost.
There is provision for not using the benchmark price, and using a detailed modelling of the actual costs incurred in providing the service in New Zealand instead. If people were to go down that route, though, then they would be starting a complex, lengthy and expensive exercise. Typically people haven't, and have lived with the benchmark-based prices instead.
So there you have it. The typical price is based on overseas prices, as an approximate close-enough-is-good-enough stab at what it would likely cost here, and there's a back-up of calculating the actual New Zealand costs, if necessary.
I appreciate that this is all rather dry stuff, so the next post will be a practical example of how this benchmarking process has actually worked out.
Friday, 9 August 2013
Is this the world's stupidest economic policy?
I read in this morning's online Sydney Morning Herald, under the headline "Cathay wants more flights Down Under", that "Cathay Pacific wants to increase services to Australia but first needs the government to lift the cap on the number of flights it can operate here. The airline has hit its limit of 70 flights a week between Australia and Hong Kong, as allowed under bilateral air rights".
There are no good reasons for this "you'll only fly if we say so" policy, and many bad ones. It's protectionist, anti-consumer, anti-competition, anti-enterprise, anti-innovation, antediluvian - have I left anything out?
It's hard to believe that this sort of thing still persists. It's 35 years now since the US deregulated commercial aviation: when Alfred Kahn, the architect of the US move, looked back on the outcome of the deregulation, he said (and I'm quoting from his Wikipedia entry here) that "The industry in the last 30 years gave the public something it had not received before: high quality, space, and low cost. It catered to a variety of demands and abilities today so that we had an enormous spread of fares. It offered the people upgrades such as business class and frequent flyer miles".
Rather endearingly, Kahn also said (again cited in the Wikipedia piece), "I can't tell one plane from the other. To me, they're all just marginal costs with wings."
There are no good reasons for this "you'll only fly if we say so" policy, and many bad ones. It's protectionist, anti-consumer, anti-competition, anti-enterprise, anti-innovation, antediluvian - have I left anything out?
It's hard to believe that this sort of thing still persists. It's 35 years now since the US deregulated commercial aviation: when Alfred Kahn, the architect of the US move, looked back on the outcome of the deregulation, he said (and I'm quoting from his Wikipedia entry here) that "The industry in the last 30 years gave the public something it had not received before: high quality, space, and low cost. It catered to a variety of demands and abilities today so that we had an enormous spread of fares. It offered the people upgrades such as business class and frequent flyer miles".
Rather endearingly, Kahn also said (again cited in the Wikipedia piece), "I can't tell one plane from the other. To me, they're all just marginal costs with wings."
Thursday, 8 August 2013
The price of your broadband (1)
There is a review underway on how telecommunications are regulated in New Zealand. By coincidence, it's something I know a bit about, having been involved in all the key initial regulatory decisions under the first two Telecommunications Commissioners, Douglas Webb and Ross Patterson.
A regulatory review may sound like an arcane economic topic, but it's a big deal in practice. What you pay for your current broadband (if like many people you get an 'ADSL' service through a fixed line across the copper wires to your home) and what you might pay for the snazzy new fibre network ('Ultra Fast Broadband') that's being rolled out across the country, are both in play. So are issues like forcibly turning off the copper-based service you are currently using, whether you'd like to keep subscribing to it or not.
And there's a bunch of other issues, too. Who should set those prices, anyway, and why is the government involved? And should the government be involved at all, since it has a big commercial investment in this new fibre network, and could be conflicted between seeing a decent commercial return on its investment (higher broadband prices) and good outcomes for consumers (sustainably low prices)?
In the next few posts I'm going to be looking at these issues. But as it's pretty much impossible for people who haven't been steeped in this stuff to understand the issues at play here without some some background info, I'm going to ease into it by giving some context.
The first thing people need to appreciate is that, if you're looking for a good outcome for consumers, the very best option is to have a range of competing suppliers deploying their own infrastructure and jostling for your business. There can be second-best outcomes, but the first best is a telecoms market that's just like the music market or the corner vegetable shop - lots of suppliers willing and able to give you the choice you're looking for. In thinking about the issues in play here, one important yardstick or touchstone has to be, is my choice expanding or contracting?
You might think this is a free-market ideologue speaking, but you don't have to take my word for it. Let me show you exactly how this plays out.
If you've felt that your mobile bill isn't as expensive as it used to be (if you're on account) or you're getting more value when you top up (on prepay), you're right.
Here's what's been happening to mobile calling prices.
A regulatory review may sound like an arcane economic topic, but it's a big deal in practice. What you pay for your current broadband (if like many people you get an 'ADSL' service through a fixed line across the copper wires to your home) and what you might pay for the snazzy new fibre network ('Ultra Fast Broadband') that's being rolled out across the country, are both in play. So are issues like forcibly turning off the copper-based service you are currently using, whether you'd like to keep subscribing to it or not.
And there's a bunch of other issues, too. Who should set those prices, anyway, and why is the government involved? And should the government be involved at all, since it has a big commercial investment in this new fibre network, and could be conflicted between seeing a decent commercial return on its investment (higher broadband prices) and good outcomes for consumers (sustainably low prices)?
In the next few posts I'm going to be looking at these issues. But as it's pretty much impossible for people who haven't been steeped in this stuff to understand the issues at play here without some some background info, I'm going to ease into it by giving some context.
The first thing people need to appreciate is that, if you're looking for a good outcome for consumers, the very best option is to have a range of competing suppliers deploying their own infrastructure and jostling for your business. There can be second-best outcomes, but the first best is a telecoms market that's just like the music market or the corner vegetable shop - lots of suppliers willing and able to give you the choice you're looking for. In thinking about the issues in play here, one important yardstick or touchstone has to be, is my choice expanding or contracting?
You might think this is a free-market ideologue speaking, but you don't have to take my word for it. Let me show you exactly how this plays out.
If you've felt that your mobile bill isn't as expensive as it used to be (if you're on account) or you're getting more value when you top up (on prepay), you're right.
Here's what's been happening to mobile calling prices.
And the reason would be?
"The entry of a third participant [2degrees, in 2009-10] has helped to significantly reduce mobile pricing in New Zealand, particularly in the prepay market, which makes up about two thirds of the mobile users in New Zealand", which comes from p41 of the discussion document that was put out as part of this policy review, and which in turn quoted the Commerce Commission's review of the state of the telco markets in 2012.
It wasn't completely the effect of a new competitor: there was also some regulation which cut the price mobile companies could charge for delivering a call to a customer on their network, and in which (ahem) I played a modest part. But research shows that of the overall price fall, 78% was due to the arrival of a new competitor, 13% due to regulation, and 9% due to proactive price cuts by incumbents to avoid further regulation.
All right, I made that up. But there's no denying that by far the biggest influence was the actual deployment of new infrastructure, as opposed to the mere threat of it. 'Contestability' (the idea that if I push my luck with excessive prices, I'll invite new entrants) may not have cut much ice with the then incumbents, especially as 2degrees had spent years froo-frooing around, before finally getting on with it. When it actually rolled out its gear, the landscape changed, and much for the better from a consumer's point of view.
And in passing, since there are still far too many people who think competition benefits the better off rather than Joe and Joan Bloggs, notice that comment about the benefits being particularly felt in the prepay market - that's the lower-spending, less well off end of the market.
Now, you might be thinking, none of this hits home to me. If you don't make many voice calls, and increasingly people aren't (mobile voice call minutes have been going down both in New Zealand and elsewhere), you might feel, so what?
The 'so what' is that the benefits of choice from a new player taking the field are turning up in the alternatives to voice calls (data, texts) as well.
The discussion paper again (p42): "Mobile operators are continuing to try to encourage more voice use by providing larger buckets of ‘free’ minutes in competitively priced bundles, resulting in increased choice and value for money for end-users. For example, a new development in the prepay market in 2012 was the introduction of the $19 monthly prepay bundle by 2degrees, bundling a large amount of texts with a relatively generous amount of minutes and data".
First thought to bank - wherever we go next with the regulatory regime for telecoms, it ought to put significant weight on the incentives for new entry and effective competition.
Tuesday, 6 August 2013
Get your tuppence worth in...
Last month the Productivity Commission released its first Interim Report on 'Boosting productivity in the services sector' (background info, and links to the press release and the report itself are here). It's well worth a read: if you're interested in the performance of New Zealand's service sector, which these days accounts for some 70% of the overall economy, you'll find a great deal of conceptual, statistical and analytical coverage.
It's interesting to note, for example, that there's a bigger slice of services in our exports than you might have thought. The report has a nice illustration (below) of how this works.
If pretty pictures don't do it for you, here are the numbers. Rounding means the numbers that follow don't add exactly, but when you add the services embodied in goods exports ($22.1 billion) to the value of services exports ($10.5 billion), and subtract the goods component of services exports ($3.4 billion), you come up with a total value of services exported of $32.7 billion - just over half of the total value of goods and services exports combined.
It's a shame that the government's terms of reference for this project ruled out some important services: "Consideration of productivity in the services sector should be limited to market-provided services and therefore exclude study of services provided directly by the public sector. The Government has a wide programme underway to improve public sector productivity, detailed consideration of this sector is not possible within the time available to the Commission, and measurement issues in this sector also make analysis difficult".
The rationale for leaving them out has its own logic, fair enough, but I'm not the only one who felt that non-market services ought to have been included: various submitters to the Productivity Commission felt the same way (as noted on p14 of the report). For a start, the non-market provision of services is a very sizeable chunk of some important service sectors, notably education and health, as the table below shows.
You'd also expect that the services that are more sheltered from market competition are the ones that are most likely to have problems with efficiency and productivity, so there's a risk you're ruling out the very areas where you might have most wanted to fossick. And it also means that the project won't be looking at all the recent initiatives in other western economies to get the benefits of competition and choice flowing in areas, such as health, where rationing or other administrative devices have traditionally been used to commission and allocate services outputs.
In any event, this is still a very worthwhile project, and you can help out with it. The Productivity Commission in particular wants input (by August 23) on which two out of these three possible topics it should focus on in the next stage of the project.
I'll be voting for the first two.
The Commission has also got some detailed questions for each of these possible topics that it would like feedback on (see pp142-3 of the report), and it's also still open to submissions on anything else that you might find interesting in the report.
Get your say in - policymaking can be excessively Wellington-centric, so views from the rest of the country are all the more valuable.
It's interesting to note, for example, that there's a bigger slice of services in our exports than you might have thought. The report has a nice illustration (below) of how this works.
If pretty pictures don't do it for you, here are the numbers. Rounding means the numbers that follow don't add exactly, but when you add the services embodied in goods exports ($22.1 billion) to the value of services exports ($10.5 billion), and subtract the goods component of services exports ($3.4 billion), you come up with a total value of services exported of $32.7 billion - just over half of the total value of goods and services exports combined.
It's a shame that the government's terms of reference for this project ruled out some important services: "Consideration of productivity in the services sector should be limited to market-provided services and therefore exclude study of services provided directly by the public sector. The Government has a wide programme underway to improve public sector productivity, detailed consideration of this sector is not possible within the time available to the Commission, and measurement issues in this sector also make analysis difficult".
The rationale for leaving them out has its own logic, fair enough, but I'm not the only one who felt that non-market services ought to have been included: various submitters to the Productivity Commission felt the same way (as noted on p14 of the report). For a start, the non-market provision of services is a very sizeable chunk of some important service sectors, notably education and health, as the table below shows.
You'd also expect that the services that are more sheltered from market competition are the ones that are most likely to have problems with efficiency and productivity, so there's a risk you're ruling out the very areas where you might have most wanted to fossick. And it also means that the project won't be looking at all the recent initiatives in other western economies to get the benefits of competition and choice flowing in areas, such as health, where rationing or other administrative devices have traditionally been used to commission and allocate services outputs.
In any event, this is still a very worthwhile project, and you can help out with it. The Productivity Commission in particular wants input (by August 23) on which two out of these three possible topics it should focus on in the next stage of the project.
I'll be voting for the first two.
The Commission has also got some detailed questions for each of these possible topics that it would like feedback on (see pp142-3 of the report), and it's also still open to submissions on anything else that you might find interesting in the report.
Get your say in - policymaking can be excessively Wellington-centric, so views from the rest of the country are all the more valuable.
Monday, 5 August 2013
What happens when commodity prices relapse?
All the talk in Australia at the moment is of 'transition' - GDP growth had been sustained by a huge boom in investment to bring new resource projects on stream, but this has now peaked, and the transition challenge is that the drop in investment spending need to be made up by stronger growth in other components of GDP. There'll obviously be a pickup in export income as the new resource projects go into production, so that's a plus, but there's still an open question whether the increased resource export revenues, and a pickup in the currently rather downbeat domestic economy, will be enough to sustain overall GDP growth at the rates of recent years.
The Rudd government's recent pre-election Economic Statement reckons that any slowdown will be very modest - 2.75% in 2012-13, slowing very marginally to 2.5% in 2013-14, and picking up again to 3% in 2014-15 - but that may well be wishful thinking. It's not currently consistent with, for example, the very soggy July readings from the AIG Performance of Manufacturing and Performance of Services Indices.
The impact of the Australian resources boom on the Aussie economy thus far, and how it will play out next, is in sum a grunty issue, and not just for Australia - we've been partial beneficiaries of an important export market that has grown uninterruptedly since 1991. The issue has been tackled very thoroughly in a new report, 'The mining boom: impacts and prospects', from the independent Grattan Institute think tank.
The main points are: the boom had substantial positive benefits for Australia as a whole, and not just in the mining states (contrary to the Australian 'man in the street' wisdom); while Australia got the 'Dutch disease' symptom of a high currency, it's likely that tradable sectors squeezed by the high dollar (manufacturing, tourism) can bounce back as the dollar returns to more normal levels; much slower post-boom economic growth, or even recession, might happen, but it's equally plausible that Australia will have a soft landing; and, finally - and this was the surprise to me, as I had a mental image of Aussie governments by and large running a responsible fiscal ship - Aussie governments have let the mining largesse somewhat go to their heads, and need to do some fiscal repair work.
I'll mostly let you read the thing for yourself, but here are a couple of the more interesting findings.
Here's a chart showing how previous international episodes of commodity boom and bust have played out (New Zealand's there with an early-1970s cycle), suggesting that countries don't necessarily slump when commodity prices relapse, especially if they are running generally responsible macroeconomic policy.
More generally, we're currently relying on the Canterbury rebuild, and both us and Australia are relying on high commodity prices and the associated investment, to put good GDP numbers in the window. Those stimuli aren't going to last forever: as the Grattan Institute reminds us, what are we going to do for an encore?
The Rudd government's recent pre-election Economic Statement reckons that any slowdown will be very modest - 2.75% in 2012-13, slowing very marginally to 2.5% in 2013-14, and picking up again to 3% in 2014-15 - but that may well be wishful thinking. It's not currently consistent with, for example, the very soggy July readings from the AIG Performance of Manufacturing and Performance of Services Indices.
The impact of the Australian resources boom on the Aussie economy thus far, and how it will play out next, is in sum a grunty issue, and not just for Australia - we've been partial beneficiaries of an important export market that has grown uninterruptedly since 1991. The issue has been tackled very thoroughly in a new report, 'The mining boom: impacts and prospects', from the independent Grattan Institute think tank.
The main points are: the boom had substantial positive benefits for Australia as a whole, and not just in the mining states (contrary to the Australian 'man in the street' wisdom); while Australia got the 'Dutch disease' symptom of a high currency, it's likely that tradable sectors squeezed by the high dollar (manufacturing, tourism) can bounce back as the dollar returns to more normal levels; much slower post-boom economic growth, or even recession, might happen, but it's equally plausible that Australia will have a soft landing; and, finally - and this was the surprise to me, as I had a mental image of Aussie governments by and large running a responsible fiscal ship - Aussie governments have let the mining largesse somewhat go to their heads, and need to do some fiscal repair work.
I'll mostly let you read the thing for yourself, but here are a couple of the more interesting findings.
Here's a chart showing how previous international episodes of commodity boom and bust have played out (New Zealand's there with an early-1970s cycle), suggesting that countries don't necessarily slump when commodity prices relapse, especially if they are running generally responsible macroeconomic policy.
And here's the chart showing how a A$190 billion windfall to the Aussie fiscal books over the decade to 2012-13 financed a A$182 billion deterioration in the underlying structural balance. As the report says (p45), "Successive Commonwealth governments appear to have treated the terms of trade windfall largely as if it were recurrent income", and it advises (p47) that "The Commonwealth’s fiscal strategy should be amended to set spending targets so that a windfall from the terms of trade does not result in unsustainable spending increases or tax cuts".
There are obvious parallels for us. We all know that the Aussie have been shipping out their ores at very fancy prices to the booming industrial markets of North Asia, and we all know that we've been having a decent run with our own prices, too. I'm not sure, though, that it's generally appreciated that our price boom is at least as big as theirs. I didn't realise it till I did the calculations. Here's a chart comparing our commodity prices (from the ANZ's Commodity Price Index) with theirs (from the Reserve Bank of Australia's Index of Commodity Prices), both expressed in SDRs, and with the RBA series rebased to the ANZ's Jan 1986 = 100.
And our fiscal balance has also had an adventitious boost from high commodity prices. In Table 17 of the Budget Update 2013 - Additional Information, Treasury estimated that our underlying (cyclically adjusted) fiscal deficit was running at 1.8% of GDP in the year to June 2013: without the boost to the government tax take from unusually high commodity prices, the deficit would be more like 3.0% of GDP (the exact number depends on how high you think our commodity prices are, relative to their longer term trend).
Thursday, 1 August 2013
Our house prices as seen by the OECD
I must have missed it at the time - the OECD's latest Economic Outlook came out on May 29 and I've only just come across a reference to one of its findings in the UK's Telegraph - but the latest Outlook had an interesting analysis (Table 1.4, p24) of where real house prices (nominal house prices deflated by the private consumption deflator) have got to across the OECD.
The graph below shows how far away current real house prices are from two long-term (since 1980) trend perspectives - the price-to-rent ratio and the price-to-income ratio.
On either measure, New Zealand does not show to advantage.
I've been a bit sceptical in some previous posts about the necessity for reining in the banks' housing lending, mainly because the credit growth statistics aren't showing a blowout in the pace of lending and because high house prices in Auckland have felt, to me, more of a reflection of the local supply and demand dynamics rather than a symptom of over-lax monetary policy.
These figures, however, would give anyone second thoughts. They don't rule out my previous idea, that it's mostly strong demand in a strengthening economy hitting tight supply, but when you see us like this, well out on the left-hand edge of the developed world with unusually expensive house prices, you begin to have rather more sympathy for moves to curtail high loan-to-value-ratio lending.
The graph below shows how far away current real house prices are from two long-term (since 1980) trend perspectives - the price-to-rent ratio and the price-to-income ratio.
On either measure, New Zealand does not show to advantage.
I've been a bit sceptical in some previous posts about the necessity for reining in the banks' housing lending, mainly because the credit growth statistics aren't showing a blowout in the pace of lending and because high house prices in Auckland have felt, to me, more of a reflection of the local supply and demand dynamics rather than a symptom of over-lax monetary policy.
These figures, however, would give anyone second thoughts. They don't rule out my previous idea, that it's mostly strong demand in a strengthening economy hitting tight supply, but when you see us like this, well out on the left-hand edge of the developed world with unusually expensive house prices, you begin to have rather more sympathy for moves to curtail high loan-to-value-ratio lending.
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