Unaffordable Housing Markets

July 27, 2014 Leave a comment

House PricesHere is a graphic from The Economist showing the least affordable houses globally.The Survey from Demographia ranks urban housing markets into four categories based on their Median Multiple, from “Affordable” (3.0 or less) to “Severely Unaffordable” (5.1 & Over)

Severely unaffordable markets are also more attractive to buyers seeking extraordinary returns on investment and short term profits. This further raises prices in markets where urban fringe development is largely prohibited by urban containment’s land rationing policies. Substantial international investor activity has been reported in London, Vancouver, the US West Coast markets of Vancouver, Seattle, the San Francisco Bay Area, Los Angeles and San Diego and others. These price increases make such metropolitan areas less livable for average and lower income households.

The key to preserving housing affordability is a “competitive land supply,” which appears to be incompatible with urban containment policy both in economic theory and practice. Further, out-of-control house price escalation destabilizes economies, retarding metropolitan area economic growth and job creation.

Categories: Inflation Tags:

The New Zealand economy cannot live on debt forever

July 26, 2014 Leave a comment

Brian Gaynor in the NZ Herald wrote a piece on the amount of debt in the New Zealand economy and the fact that the Reserve Bank needs some fresh ideas to stem the increasing trend. With the OCR increasing this week to 3.5% the disposable income of the floating mortgage holder will reduce and ultimately impact on their ability to spend – floating mortgages represent 33% of all mortgages in dollar terms. Although higher rates help those that have money in the bank however a lot of this is from overseas investors so interest payments leave the economy. Furthermore the elderly tend to have savings in banks but they are not seen as significant spenders. The higher interest rates also attract ‘hot money’ as NZ’s rates are higher than most other industrialised countries.

The amount of debt in the economy is a major concern especially when you consider how much is mortgage debt – see below. Also the fact that debt as % GDP is now 88.5% and 145% of disposable income – this is putting pressure on inflation not forgetting that people are living very much beyond their means.

NZ debt 2014

The RBNZ is concerned with this debt and introduced restrictions on high loan-to-value residential mortgage lending. They see that there is too much emphasis on housing which is being fuelled by greater access to debt. One only has to look at the Irish property to see how things can wrong – house prices dropped 50% between 2007 and 2012.

NZ Debt % GDP

Nudging – How to encourage people to pay tax.

July 25, 2014 Leave a comment

Tax FormsThe Economist recently had an article focusing on how behavioural economics can boost tax compliance. Research from Imperial College London and University of Chicago documents some experiments with interesting results.

The experiment involved 100,000 tax payers with overdue bills. They were split into two groups:

One group was sent a standard request
The other group was split into 3 sub groups and sent a standard request with additional information.

Group 1 was told what share Britons pay their tax on time – approx 90%. This raised payments by approximately 1.3-2.1%
Group 2 was told the same as Group 1 but also informed that those who didn’t pay were in the minority. This raised payments by 5.1%
Group 3 was told that tax is vital for funding services like health, education and infrastructure. This raised payments by approximately 1.3-2.1%

Researchers also calculated that additional writing in the letter wold raise as much as £15.4m. Ultimately the research showed that the more taxpayers were informed about where the tax was being spent the more they were inclined to pay tax.

Categories: Behavioural Economics Tags:

Global Oil Production and Price Levels

July 24, 2014 Leave a comment

Here is a useful image from The Economist and some comments that accompanied it:

Last 3 years has seen the lowest levels of price volatility in oil markets since the supply shocks of 1973 – (400% increase – 1979 – 200% increase. Partly due to stable production.
The reductions in oil supply with the sanctions against Iran and unrest in the Arab world have been offset by the increases in output from the shale boom in the USA.
Even with the take over off the largest oil refinery in Iraq by Islamist militants the price went to $114 a barrel compared to $147 during the financial crisis.
Oil Prod

Categories: Inflation, Supply & Demand Tags:

Triple whammy for New Zealand Dairy Farmers?

July 22, 2014 Leave a comment

New Zealand Dairy farmers are bracing themselves for some tough times ahead with 3 pieces of bad news. There are as follows:

1. Last week saw a 8.9% drop in the Global Dairy Trade (see graph below) which has meant that prices have dropped 35% since February – their lowest level since December 2012. Farmers can expect revised payout forecasts of less than $6 a kilogram of milksolids to follow the 35% fall.To give you an idea of how the lower payout will influence the rural economy – a forecast of a $6.25/kilogram of milksolids would take $3 billion out of dairy incomes – Con Williams ANZ Bank.

2. The high NZ$ is still hindering farmers revenue. With the latest drop in the GDT you would expect some sort of relief to farmers with a fall in the value of the NZ$. However the NZ$ only fell from US$0.88 to US$0.87

3. On Thursday RBNZ Governor is making an announcement on the OCR (Official Cash Rate) and famers are hoping that Graeme Wheeler will not hike interest rates as originally indicated in the June Monetary Policy Statement. Inflation has been somewhat benign but interest rates seem to be influenced more by Auckland house prices and the Christchurch rebuild.

GDT - 2014

Why have prices dropped?

There has been a world supply shock especially in Europe. It is estimated that if Europe’s 27 milk-producing countries maintained their current volume increase this could knock New Zealand off the perch of top dairy exporter. Below are some supply figures which show that approximately 16bn litres will be added to the market:

New Zealand – 2013 production up 2bn litres
Europe - with the removal of milk quotas, European milk production is forecast to be 7.5bn litres more
China – Milk production is said to have recovered and could be up 15% this year which adds 4.5bn litres to the market
USA – higher milk prices and lower feeds costs are said to add another 2bn litres this year.

Therefore big surpluses accompanied by weaker demand would hit NZ dairy export earning considerably.
Source: The NZ Farmers Weekly July 21, 2014

Is the Renminbi ready to become the Global Currency?

July 20, 2014 Leave a comment

renminbiThere has been much talk of the Chinese currency the Renminbi becoming the reserve currency of the world. If you were to look at the trading volumes you would think that they are not far off the mark. However the growth has been so large in the last few years mainly because it has come from such a low base. But the following points put it in perspective:

* The Renminbi is the 7th most used currency according to SWIFT a global transfer system
* The Renminbi accounts for only 1.4% of global payments – US dollar is 42.5%
* When you look at assets open to international buyers there are just $0.3 trillion of Chinese assets available compared to $56 trillion of American – this is one reason why the US dollar is liked as a global currency.

For the Renminbi to become a more dominant it has to become global. An easy way for this to happen is for China to run trade deficits as this will add to the global holdings of Renminbi on a daily basis. However China has traditional run surpluses which means that more foreign currency is coming into the economy. On the other hand the USA has run trade deficits which in effect adds to the global holdings of US$. However even if China did run deficits what could the holders of Renminbi do with it? China could open the Capital Account of the Balance of Payments which would encourage investment. There is still a long way to go before the Renminbi becomes the reserve currency.

Sunday Bazaar in Karachi

July 18, 2014 Leave a comment

BazaarMany thanks to past student Shelalé Mazari for an article in The Express Tribune on the Sunday Bazaar – one of the largest thrift markets in Karachi. Essentially a flea market there is a section know as Lunda which is home to some of the most convincing new, used and defected designer items from across the world – Louis Vuitton, Prada, Coach, Gucci, Michael Kors etc. There are four main sections: new and used bags, new and used shoes, cheat perfumes and cosmetics, and hair appliances. To give you an idea of prices: LV bag is between $1,200 – $4,000 normally but in the market it sold for Rs1,200($20).

The bags are from China but they appear authentic: some inner pockets even carry the brand envelopes and cards found in originals. Stall holders said that they get these bags from containers that come into port from America, China, and France. Some private dealers do the initial sorting and take the best of the lot before others are allowed to even look at it.

Categories: Supply & Demand Tags:
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