How to curb excessive house price rises

Today Michael Cullen revelaed an audacious plan to apply a mortgage levy to fixed rate mortgages. This predicatably went down like a lead balloon. It’s just another tax on property owners and likely to be very regressive in nature.

House prices are expensive especially when related back to wages and rents. The question to ask is why prices have risen so much in the last 5 years. One simple explanation is increased migration. This creates demand for new housing for the new population but it is also the nature of the new arrivals that is important. Many immigrants are skilled and wealth with 60% approved last year under the business or skilled categories. Added to this was a general weakness in the NZ$ back in 2001/2002 which made NZ property look very cheap. This in turn allowed higher prices to be paid for property mainly through the auction process here which created a general revaluation of property across the board.

That revaluation in 2002/2003 lifted prices and generated a whole new group of property investors and developers. Property was suddenly on the move and a great investment. With immigration picking up again it is hard to see how prices can fall from current levels.

By imposing a mortgage levy all the government would achieve is to make people less well off leading to higher wage demands. As the imposition of stamp duty in the UK showed it is hard to restrain a property market when demand is strong.

With so much overseas capital arriving, even with the NZ% so strong (though it should be noted not so strong against A$, Eur or Stg) it is very difficult to control the property market.

One alternative is to look at the actual supply of money otherwise known as credit. There has been mention of LoanToValue ratios and attempting to control them. It may be easier to actually limit or reduce the amount of credit banks can grant, in essence saying “hey there just isn’t any more money out there”.

I will explore the issue of changing the reserve asset ratio another time but it is clear that the mortgage levy is not the answer.

Do incentives work?

Research from the UK into people’s “green” behaviour demonstrates that people respond poorly to price signals and very rarely make the changes required without strong arm tactics. Recent fuel surcharges on air travel have made little difference to people’s travel plans. As our recent experiences with credit show us, people are always happy to go into debt to have what they want right now. Ecological credit is no different.

We must stop offering unlimited ecological credit if we really want to cap greenhouse gas emissions at any chosen level. Like our money supply it is currently in an acceleration phase upwards with little or no control.

Time to Limit Fossil Fuel Production

Climate Control: Managing Global Greenhouse Gas Emissions

It’s time to face the fact that climate change can only be dealt with at the global level in a similar manner to ozone depletion.

I issued the following press release today. Read the full paper at the above link.

Should we limit fossil fuel production
Monday, 5 February 2007, 11:56 am

Press Release: Sustento Should We Limit Fossil Fuel Production?NZ economist proposes global fossil fuel production quotas to stem greenhouse gas emissions.

Christchurch-based policy institute Sustento says governments must set up a global quota system urgently to control fossil fuel production.

Institute director, Raf Manji says the Sustento Framework is based on the reality that climate change is a global problem and needs to be dealt with at the global level.

“Currently efforts to reduce greenhouse gas emissions have been devolved to the national level where policy has been limited to improving energy efficiency and switching to renewable energy. This approach has not yielded major results and other policy proposals such as carbon based taxes have not found favour with either politicians or their voters.

“As the latest Intergovernmental Panel on Climate Change (IPCC) report demonstrates this policy impasse needs immediate attention,” he urges.

The Sustento Framework calls for action at the production rather than consumption level. The Framework combines a global carbon inventory with an agreed limit to global greenhouse gas emissions, and from that produces an annual production quota for fossil fuels.

“This guarantees that agreed targets will be met - unlike current consumption reduction approaches which simply hope that this will happen,” he says.

Mr Manji is aware that critics of this approach argue that producers will not like the idea of quotas but, he counters, this approach was very successful in dealing with ozone depletion via the Montreal Protocol where producers rather than consumers were targeted.

Quotas also currently operate within OPEC and informally within the IEA, which represents non-OPEC producers. In July 2006 the G8+5 met for the first time to consider climate change issues. This group alone controls 76% of global coal production, 57% of natural gas and 38% of crude oil production. G20, which is an enlarged version of the G8+5, controls 94% of coal, 73% of gas and 59% of crude oil.

“If the problem of climate change is to be taken seriously by the major nations of the world then it is likely that forums such as the G8+5 will be the place where concrete action will be possible,” he says.

In 1977 the Brandt Commission proposed an international strategy on energy.

“If we are to limit growth in greenhouse gas emissions now is the time to implement such a proposal,” concludes Mr Manji .

ENDS