The Taxi Companies Still Don't Get It

I walked past a taxi this evening and noticed a sign on their car that said "Free Booking App". Thats great, but everyone knows that nothing in life is free, someone has to pay. In almost in every case the consumer picks up the tab. So, slightly amused that maybe they had fooled some of the people some of the time, I let it slip. But I could not help draw the comparisons with Uber. I don't use Uber because the App is free (I have never paid for an App on the Google Play Store yet). I use Uber for their entire range of features. This includes the ability to pay with credit card, tracking your Uber's location and the ratings feature.  It puzzles me as to why you would build an App whos main feature is 'free' when this is not the reason why the Taxi industry is so afraid of the Uber business model. I understand the need to be different, but simply offering a 'free booking app' will not cut it. They are making the necessarily steps, but they are still at least five moves behind their competition.

Open Letter to the Hon Simon Bridges on the iPredict Decision

Dear Hon Simon Bridges,

I am writing to you to urge you to reconsider your decision to not allow iPredict an exemption to the anti-money law requirements. 

The funds that are permitted to be deposited into iPredict to trade with, are such a small amount that one would have to have hundreds of accounts to move any meaningful amount of currency. This would not only be time consuming, but also very inefficient to establish this number of accounts to move any meaningful amount.

Instead of taking the easy way and forcing iPredict to close down, why not attempt to work with the Non-Profit, University run organsation and its members to come to a solution? The members are very passionate about iPredict and would be willing to make comprises in order to see the site continue.

Here are two simple steps suggested by a user of iPredict that could be implemented:

1) Each current / new member pays a one-off membership fee of (say) $20 to join. Users who opened multiple accounts would have to pay $20 for each account, which should discourage the practice. There would be a further fee of $5 per annum, deducted from each user's account at the start of each year. This money raised would allow iPredict to staff a "verification" service to oversee member details. 

2) Only traders with a NZ-domiciled bank account are permitted to be members. NZ banks require new account-holders to provide full ID details. This would effectively eliminate the risk of money-laundering as the banks the account is with would have already done their due diligence.

I urge you to reconsider your decision as a heavy handed blanket approach never works and will only stifle innovation in the finance industry - an industry that is already extremely saddled with regulation, which as seen little to no innovation in the last 50 years. This strangle hold is now flowing over to a hobby industry that this regulation was never intended for.

Best Regards,

Robert Davey

Mt Maunganui

Concerned citizen who see the governments power is ever increasing to the detriment of our liberty.

Supply v Demand in the NZ Housing Market

The media, politicians, real estate agents and banks will all have you believe that there is a shortage of housing (for sale and rent) in Auckland. They sight the shortage as the reason for prices posting continuous double digit increases. However if this were actually the case we would be seeing motels, hotels and hostels being booked out, with people in need of somewhere to sleep being forced to pay by the night. Campgrounds would be turning people away and we would have tent cities pop up in any available ‘green’ spaces. If you could not afford or find vacancy in any of the above options, you would have to turn to sleeping on the streets. We are seeing none of these symptoms.

There are reports that apartments are difficult to sell, which tells me that there is no shortage of places people could call home. Instead, prices for houses with large sections are leading the march higher in price. This is due to the perceived further increase in the price of land – otherwise apartments would also be rising. Would-be speculators are hoping to flick the land later down the track at a profit, hopefully with no additional improvement required.

Price is a signal. In the property market, high prices are a signal that we need more homes. We are seeing an increase in supply with new buildings under construction, but yet house prices continue to climb.

So if it’s not a lack of supply, what is the cause?

House prices are a function of two factors: interest rates and banks willingness to lend. Without both or either of these two factors being favorable to buyers – no one would be able to pay the current prices by solely drawing down their savings. There are very few buyers who have the required cash to buy outright, let alone pay the messily 10% deposit now required under the LVR rules.

Housing has been a very good investment for not only the owners but also the banks. If a borrower was to default on their interest payments, the bank can repossess the house and sell without incurring a loss on their lending misjudgment. This creates a feedback loop and encourages more bank lending into the housing sector, with banks generally falling over themselves to lend against property. From the banks point of view what can go wrong? Borrowers are willing to pay the required interest rate, saddling themselves with what would traditionally be considered a mountain of debt. All because renting is seen as throwing ones money away? And interest payments are not when renting can actually be cheaper? This is due to the misguided conception that house prices can never go down. Where have I heard that before?

Combine this with the interest rate spread banks are currently making due to the OCR only recently increasing from historic lows and the housing market considered low risk, the banks are generating huge profits. They are acting in their best interests. But in doing so, creating one final bubble that will leave a very sour taste in all property investors’ mouths for a generation.

Ultra low interest rates places banks at risk when rates eventually rise (as they now are). This is because banks typically borrow short to lend long. There is a mismatch between their funding and lending duration. This is not a problem when rates are stable or falling, but as they rise banks profits will shrink, along with banks margins. Combine this with the increase costs of interest payments now required of the borrower; the housing market is all of a sudden in a very fragile state. The only positive (if prolonging the bubble is the ideal situation) is that interest rates are still positive, that is the cost of money is higher than the CPI price inflation. This give the Reserve Bank of New Zealand (RBNZ) room to move, with interest rate cuts, if the wheels look as though they are going to fall off the property market. This will merely delay the inevitable.  The underlying problem is not fixed.

One cause of high house prices is commonly blamed on foreigners investing into the property market. If the RBNZ was not obsessed with the “high” exchange rate, this would not be a problem. All foreign central banks that are engaging in reckless monetary policy would see their currency drop in value against the Kiwi Dollar. This would increase property prices for foreign buyers, damping demand automatically.

So how did we get into the position that banks look at property as a favorable assets to lend against and investors / home owners are willing to commit to purchasing an item that will tie them down for years to come? What has been building in the property market over the last ten years is a feedback loop that has signaled to both banks and buyers that property is a safe investment. As prices rise, banks feel comfortable lending against property, allocating more scarce capital to the property market. As prices continue to rise investors / potential home owners worry they will miss the boat and jump in, borrowing too much money, but hoping further down the track their home would have increased in price to make the sacrifice now worth it.

We need to step back further to see why prices first increased, what ignited the initial spark? Interest rates can only be below their natural market level with an artificial supply of the currency. This is initially done by the RBNZ (through the OCR) and compounded when banks engage in fractional reserve banking. As this money flows through the economy, it will not do so evenly and will be looking for a safe home. Ever hear the term ‘Safe as Houses’? That is where it ends up – in New Zealand’s case. There is simply too much money, chasing too few goods. In this case everyone is chasing property. Simply building more homes will not fix the over valued market. The 2000’s tech bubble was a prime example of this. Increasing supply results in a larger misallocation of capital and will make the bursting of the bubble that much more painful as mistakes are finally realised. Price inflation in consumer goods always follows asset inflation, causing the RBNZ to further raise interest rates, compounding the problem I touched on above.

How do we tell the air may finally be escaping from the bubble? Watch the stock market. This is the best gage of inflation and readily available bank credit we have at our fingertips. While the NZX is rising, we can be reasonably confident property prices will remain elevated. As I like to say ‘Enjoy the party, but dance close to the door’.

The solution is easy, but not politically acceptable (what real solution ever is?). We need to stop the expansion of the money supply, stop fractional reserve banking (both assist to keep interest rates low), and reduce the amount banks are able to lend against property. The last point will most likely automatically be rectified with the change in policy of credit expansion to be not actively allowed by banks. Make no mistake about it, this will be a very painful process, but it will put our economy on a more fundamentally sound footing. Unfortunately I do not see the necessarily changes any time soon – either by the RBNZ or either major party who could form a Government.

The bubble will burst, history shows this happening. What policy actions will the Reserve Bank and Government use to respond to an economy entering recession due to a fall of (or failing to rise) house prices? I think 2007 / 2008 gives us the answer. It will not be pretty. As Patrick Barron says: “Fear the boom, not the bust.”

This was written in April 2014, so far prices show no sign of falling.