Crown accounts show $12.2b of land value increases, including $5.8b from state houses; Housing boom drives massive turnaround in operating balance to $16.2b; Borrowing $10b less than forecast
Thanks Erica. Yet there is no real political reaction that I can see. None of the parties in or close to power either want to change it, or are able to.
I have a question: How is it bad for the children of the homeowners? My thinking is if you have your own place and one rental and three kids, you can either use your equities for your children or you can actually sell your rental and split the capital gain among your kids.
That’s true for home owners. The problem is for renters. Also, you have to be sure your kids are partnering up with reliable characters and will never break up…
Thanks Bernard. So I believe this is not going to change as 60 percent is benefiting from the situation. It is a democracy so if 60% is voting for more of the status quo, who cares what the remaining 40% want? In other words, even if all of the renters (old and young) vote, they are still 40% and they cannot bring in any change. What do you think?
Short answer is you’re right. It’s just not stated so baldly and the 40% haven’t called out the other 60% is such direct terms. Easier for the 60% to accuse the 40% of being lazy or unlucky.
One thing I've always wondered - I know there's no appetite to do so, but if the Government wanted to change or outright repeal the PFA could they just do it? It seems to be treated almost like a religious text, does it require bipartisan support or a supermajority or anything like that?
Thanks Colin. Labour could change it in this term. It has the majority. But no intention of doing that. Labour campaigned before the 2017 election to entrench the PFA framework by committing to 20% net debt and govt staying around 30% of GDP. As did the Greens, in their join pre election adoption of Fiscal Responsibility Rules. The Greens have since backed away from that, but with little conviction or meaning. Labour still committed to it.
Brilliant as usual Bernard. NZ inc just consists of us selling grossly overvalued houses to each other because the older white voters refuse to have their unearned wealth taxed for the good of the next generations. I am a boomer and would be happy to have a wealth tax, oh well, come the revolution.
Thanks Patrick. Sadly, most don’t see the problem. Their first thought is to ensure their kids can ‘get on the ladder’ as well, or to maintain the fiction it is possible for others without familial wealth to ‘just work and save a bit harder’, with the implication that the people locked out are their by choice. And worth remembering that about 90% of older property owners vote in general elections, whereas only around 60% of young renters do. The divergence is even wider for council elections.
Any chance you can publish a publically accessible article outlining your argument about the public finance act? Seems like a good conversation to attempt to push more widely :).
Basically yes. She really dropped the idea four days before the 2017 election by pledging not to introduce it in the first term. It basically died then. Giving the issue to Sir Michael Cullen, who also would never introduce it in power and was an instigator of the PFA, to workshop was the end of the matter.
From what I've read here, the pfa looks like a sure way to control the populace and prevent prosperity for all, and that's easy to do given the indoctrinated misconceptions about money and finance. For example, the notion that a government surplus is a good thing is a bit ridiculous since it means the gov has pulled that money out of circulation, money that is desperately needed by the people since we are constantly subjected to crushing piles of debt from the debt-mongering banking system. We don't need a surplus under these conditions, but withholding money and piling on debt is of course how we are controlled.
And the other entrenched misconception is that government needs revenue in order to operate. This is preposterous when a sovereign government has its own sovereign money. There is no shortage of money for any sovereign government. No, no one is suggesting "infinite" or "endless" money printing, but prudent, intelligent, democratic money printing in the public interest, and we've seen plenty of that in response to the pandemic and it could just as easily be done to solve the housing catastrophe. Government is not a business, it is not a household, it can and should fund whatever needs to be funded via its own RBNZ and not through the debt producing private banks. If NZ was a democracy, the pfa would be very different.
Your comments about the NZ Economy being a housing market with a few other things tacked on are so right.
I felt ill when I saw the Government was revaluing housing assets in its balance sheet much like Goodman Property or the listed Retirement Villages. To account for the increase in the Balance Sheet when Kiwi's rate housing affordability as a bigger worry than Covid seems disingenuous.
Question Bernard. Is there any real evidence or studies that show House Price inflation has a meaningful "Wealth Effect" in terms of spending?
Yep on wealth effect. Latest RBNZ research suggests $1 extra of housing wealth increased consumer spending 2.7% in recent years, albeit less than in previous years, partly because of the LVR limits. Here’s the RBNZ paper: “ Household consumption is an important channel by which the Reserve Bank can influence real economic activity and inflation via monetary policy. The wealth effect is one mechanism for this to occur and is the focus of this Analytical Note. The wealth effect occurs, for example, when stimulatory interest rates increase asset prices that then contribute to higher household spending. A greater understanding of the effect of wealth changes on consumption enables the Reserve Bank to better evaluate the strength of aggregate demand in the economy, and the likely effects of monetary policy changes.” https://www.rbnz.govt.nz/-/media/reservebank/files/publications/analytical%20notes/2017/an2017-03.pdf
Hi Bernard, I was eagerly awaiting your response this morning and it didn't disappoint. Once again I cannot fathom how the supposedly best forecasters and economists we have (Treasury and RBNZ) ALWAYS get their forecasts so wrong. The budget statement was issued in May but somehow by June 30 "the Government’s deficit of $4.6b or 1.3% of GDP, was less than a third of that forecast in the May Budget" Forgive me but could I have done better on the back of the proverbial "fag packet".
Robertson should be absolutely cringing at that variance and the fact that the government are the biggest winners from the house price increases. But instead is almost gleeful that somehow the handling of the Covid response by his government is responsible for this windfall.
Another fine piece, thanks Bernard. I think the lack of infrastructure investment is the greater crime rather than pure private housing supply. The debt fixation has impoverished the public sector and does need to be reconsidered. NZ debt to GDP - all in NZD - remains insanely low compared to other fiat currency issuers and simply means the governments role has gone from ‘think big’ to ‘too small’ - especially where the public expects government presence (transport, health, education, public/emergency housing).
Inflation is always a wealth transfer, between debtor and creditor, and with house price inflation, between generations. The "magical" gains of one are always paid for by the costs to the other. And now we've seen an even more startling trick, massive asset inflation that primarily benefits the governments coffers must, by this logic, be a transfer from elsewhere. We have here not one generation, but the actual government, expropriating wealth from those without assets. This is tax by stealth on a vast scale. The crime is that they won't spend it (by serious lending) on public/social programs to redress the damage.
The RBNZ could deliberately ‘crash’ the housing market with much stricter lending controls and it would be perfectly safe because home owners have so much equity, banks have so much capital and interest rates are so low. But it’s not politically possible, and also a problem for monetary policy, given banks now lend so little to businesses and it’s difficult to lower non-mortgage rates when the OCR is near zero. Government would have to use fiscal policy to stimulate or slow the economy. Less effective and controllable. So ‘deliberate crashing’ by RBNZ politically difficult and difficult from a monetary policy point of view. It would be much easier for the Government to ‘crash’ the market with changes in tax policy and housing supply. But also politically difficult. Politics is the main problem. Median voters like the current situation just fine.
Feedback is that the CCCFA is going to make it harder to borrow as will the DTI restrictions coming in (when? Not sure…) So we could see a change in credit over the next few months as the banks settle into their stride.
I recall that some time last year Sam Stubbs who established the Simplicity a not for profit Kiwi Saver Scheme said that because the Labour Party had been elected so comprehensively this was a golden opportunity for the Government to invest in infrastructure projects not only would it provide employment opportunities but also reduce the costs to future generations.
Boomers have had the benefits created by the past generations so it’s now our time to invest in people now and in the future. Repealing or amending the Public Finance Act would be a start.
Its nice to see other commenters who have studied MMT. The PFA needs to be rewritten based on an understanding of the elucidations from that academy. If the current government makes changes, they wont do it properly, and they will set in stone for another decade or so, the current orthodoxy. What a waste that will be.
The Reserve Bank has used the wealth effect to stabilise the economy and it worked very well. For the 60% or so that own property.
Margaret Thatcher once said: "There's no such thing as society. There are individual men and women and there are families."
Thanks Erica. Yet there is no real political reaction that I can see. None of the parties in or close to power either want to change it, or are able to.
I have a question: How is it bad for the children of the homeowners? My thinking is if you have your own place and one rental and three kids, you can either use your equities for your children or you can actually sell your rental and split the capital gain among your kids.
Am I wrong?
That’s true for home owners. The problem is for renters. Also, you have to be sure your kids are partnering up with reliable characters and will never break up…
Thanks Bernard. So I believe this is not going to change as 60 percent is benefiting from the situation. It is a democracy so if 60% is voting for more of the status quo, who cares what the remaining 40% want? In other words, even if all of the renters (old and young) vote, they are still 40% and they cannot bring in any change. What do you think?
Short answer is you’re right. It’s just not stated so baldly and the 40% haven’t called out the other 60% is such direct terms. Easier for the 60% to accuse the 40% of being lazy or unlucky.
How depressing.
One thing I've always wondered - I know there's no appetite to do so, but if the Government wanted to change or outright repeal the PFA could they just do it? It seems to be treated almost like a religious text, does it require bipartisan support or a supermajority or anything like that?
Thanks Colin. Labour could change it in this term. It has the majority. But no intention of doing that. Labour campaigned before the 2017 election to entrench the PFA framework by committing to 20% net debt and govt staying around 30% of GDP. As did the Greens, in their join pre election adoption of Fiscal Responsibility Rules. The Greens have since backed away from that, but with little conviction or meaning. Labour still committed to it.
Brilliant as usual Bernard. NZ inc just consists of us selling grossly overvalued houses to each other because the older white voters refuse to have their unearned wealth taxed for the good of the next generations. I am a boomer and would be happy to have a wealth tax, oh well, come the revolution.
Patrick Medlicott
Thanks Patrick. Sadly, most don’t see the problem. Their first thought is to ensure their kids can ‘get on the ladder’ as well, or to maintain the fiction it is possible for others without familial wealth to ‘just work and save a bit harder’, with the implication that the people locked out are their by choice. And worth remembering that about 90% of older property owners vote in general elections, whereas only around 60% of young renters do. The divergence is even wider for council elections.
Any chance you can publish a publically accessible article outlining your argument about the public finance act? Seems like a good conversation to attempt to push more widely :).
Oh you did open it up, cool!
Wonders if this is tied in with the PM's instant and eternal dismissal of a CGT within 5min of taking power?
Basically yes. She really dropped the idea four days before the 2017 election by pledging not to introduce it in the first term. It basically died then. Giving the issue to Sir Michael Cullen, who also would never introduce it in power and was an instigator of the PFA, to workshop was the end of the matter.
From what I've read here, the pfa looks like a sure way to control the populace and prevent prosperity for all, and that's easy to do given the indoctrinated misconceptions about money and finance. For example, the notion that a government surplus is a good thing is a bit ridiculous since it means the gov has pulled that money out of circulation, money that is desperately needed by the people since we are constantly subjected to crushing piles of debt from the debt-mongering banking system. We don't need a surplus under these conditions, but withholding money and piling on debt is of course how we are controlled.
And the other entrenched misconception is that government needs revenue in order to operate. This is preposterous when a sovereign government has its own sovereign money. There is no shortage of money for any sovereign government. No, no one is suggesting "infinite" or "endless" money printing, but prudent, intelligent, democratic money printing in the public interest, and we've seen plenty of that in response to the pandemic and it could just as easily be done to solve the housing catastrophe. Government is not a business, it is not a household, it can and should fund whatever needs to be funded via its own RBNZ and not through the debt producing private banks. If NZ was a democracy, the pfa would be very different.
I do so agree Marc. Government talks to us as if is running a household. That is disinformation at its worst.
Your comments about the NZ Economy being a housing market with a few other things tacked on are so right.
I felt ill when I saw the Government was revaluing housing assets in its balance sheet much like Goodman Property or the listed Retirement Villages. To account for the increase in the Balance Sheet when Kiwi's rate housing affordability as a bigger worry than Covid seems disingenuous.
Question Bernard. Is there any real evidence or studies that show House Price inflation has a meaningful "Wealth Effect" in terms of spending?
Agree get rid of the PFA.
Yep on wealth effect. Latest RBNZ research suggests $1 extra of housing wealth increased consumer spending 2.7% in recent years, albeit less than in previous years, partly because of the LVR limits. Here’s the RBNZ paper: “ Household consumption is an important channel by which the Reserve Bank can influence real economic activity and inflation via monetary policy. The wealth effect is one mechanism for this to occur and is the focus of this Analytical Note. The wealth effect occurs, for example, when stimulatory interest rates increase asset prices that then contribute to higher household spending. A greater understanding of the effect of wealth changes on consumption enables the Reserve Bank to better evaluate the strength of aggregate demand in the economy, and the likely effects of monetary policy changes.” https://www.rbnz.govt.nz/-/media/reservebank/files/publications/analytical%20notes/2017/an2017-03.pdf
Hi Bernard, I was eagerly awaiting your response this morning and it didn't disappoint. Once again I cannot fathom how the supposedly best forecasters and economists we have (Treasury and RBNZ) ALWAYS get their forecasts so wrong. The budget statement was issued in May but somehow by June 30 "the Government’s deficit of $4.6b or 1.3% of GDP, was less than a third of that forecast in the May Budget" Forgive me but could I have done better on the back of the proverbial "fag packet".
Robertson should be absolutely cringing at that variance and the fact that the government are the biggest winners from the house price increases. But instead is almost gleeful that somehow the handling of the Covid response by his government is responsible for this windfall.
Yep. Essentially, the Govt’s books are very sensitive to changes in economic growth via a really effective tax system and the land revaluation effect.
Another fine piece, thanks Bernard. I think the lack of infrastructure investment is the greater crime rather than pure private housing supply. The debt fixation has impoverished the public sector and does need to be reconsidered. NZ debt to GDP - all in NZD - remains insanely low compared to other fiat currency issuers and simply means the governments role has gone from ‘think big’ to ‘too small’ - especially where the public expects government presence (transport, health, education, public/emergency housing).
Inflation is always a wealth transfer, between debtor and creditor, and with house price inflation, between generations. The "magical" gains of one are always paid for by the costs to the other. And now we've seen an even more startling trick, massive asset inflation that primarily benefits the governments coffers must, by this logic, be a transfer from elsewhere. We have here not one generation, but the actual government, expropriating wealth from those without assets. This is tax by stealth on a vast scale. The crime is that they won't spend it (by serious lending) on public/social programs to redress the damage.
Very good analogy John. @Bernard - a quote for the The Kaka tomorrow morning I wonder?
Absolutely! Thanks Grant.,
Thanks John. Great point. A regressive tax on the poorest now, and the future poor.
What about this Bernard? https://www.interest.co.nz/news/112634/dipping-our-toes-podcasting-world-interestconz-probes-whether-it-would-be-possible-and?fbclid=IwAR0ncqolzneWj3qH5SY8cwx7DMo2hNDgRALYt9mOb-yzgFl0aVKTbX9Ip_Q
The RBNZ could deliberately ‘crash’ the housing market with much stricter lending controls and it would be perfectly safe because home owners have so much equity, banks have so much capital and interest rates are so low. But it’s not politically possible, and also a problem for monetary policy, given banks now lend so little to businesses and it’s difficult to lower non-mortgage rates when the OCR is near zero. Government would have to use fiscal policy to stimulate or slow the economy. Less effective and controllable. So ‘deliberate crashing’ by RBNZ politically difficult and difficult from a monetary policy point of view. It would be much easier for the Government to ‘crash’ the market with changes in tax policy and housing supply. But also politically difficult. Politics is the main problem. Median voters like the current situation just fine.
Feedback is that the CCCFA is going to make it harder to borrow as will the DTI restrictions coming in (when? Not sure…) So we could see a change in credit over the next few months as the banks settle into their stride.
And on the legality of Employer vaccine mandates https://www.odt.co.nz/business/legal-opinion-employers-can-require-shot
Gary
I recall that some time last year Sam Stubbs who established the Simplicity a not for profit Kiwi Saver Scheme said that because the Labour Party had been elected so comprehensively this was a golden opportunity for the Government to invest in infrastructure projects not only would it provide employment opportunities but also reduce the costs to future generations.
Boomers have had the benefits created by the past generations so it’s now our time to invest in people now and in the future. Repealing or amending the Public Finance Act would be a start.
Its nice to see other commenters who have studied MMT. The PFA needs to be rewritten based on an understanding of the elucidations from that academy. If the current government makes changes, they wont do it properly, and they will set in stone for another decade or so, the current orthodoxy. What a waste that will be.