Auckland City Council struggles with rail transport funding model

Originally published
November 15, 2014 Andrew Sheldon Civics, Economics, Finance, Governance, Markets, New Zealand, Politics 

It should come as no surprise that any decision by government is destined to be ‘political’. By ‘political’ we mean that decisions are destined to convey extorted influence rather than any commercial or analytical consideration of costs, benefits or impacts, with still less any real or effect accountability. What sustains political debates over city planning is ‘fear of environmental catastrophe’. What suspends or defers any debate on the issue is a ‘fear of exaggerated influence by vested interests’, and what inevitably gives a city constituents reason for cynicism is the realisation of the uncertain costs, or the open-endedness of those costs, which few people understandably don’t want to bare. The reality is that it does make sense for a city to have a rail network – but only in certain cases with conditions dictate that it is a prudent commercial decision. It likewise makes sense for a city to have a plan, to develop a rail system in a cost-effective manner so that costs of living can be contained, and that any such planning conveys ‘integrated interconnection of services in the best interests of all constituents, and not simply the indulgent hopes of vested interests, real or exaggerated.

Until now Auckland has been defined by a ‘city centre’, namely Auckland City CBD. The reality however is that such ‘city centres’ defined by zoning restrictions are very costly. It makes far more sense to have a multitude of city centres connected by efficient transport connections. The best evidence of such efficiency is the costs of pre-existing ‘connectors’, and the corresponding costs of not having them. It does not mean you don’t have central hubs ‘like a city centre’, it means that you expand the city so that it has multiple hubs which are well-integrated.

The appeal of course is that a ‘centralised city’ with a single core tends to compel everyone to live in a small area, which results in a number of problems:

1. Congestion – There is a need for a large portion of the city population to travel a long distance to reach a focal point, whilst a ‘satellite city model’ allows people to live in a broader range of places, and to consider rail transport as a ‘best option’. There is actually considerable opportunity for people to travel across city in previously impossible directions, ensuring a better balance in traffic flow, ensuring that there is less ‘entrenched polarity’ in traffic flows.
2. Uncompetitiveness – When a city is geared towards the pre-eminence of one location then compelling structural barriers arise preserving or embedding the ‘structural’ position of that centre. That allows some people to profit at the expense of others simply because they have political pull others don’t, or because they have been allowed to preserve the pull they historically had. An extortion-based political system is destined to do that, and the costs and burdens arising are the reason to break down not just the rules that permit it, but to radically reform the political system that makes such political patronage or privilege possible.
3. Cost disparities – It is far cheaper to rent city apartments or office space under a ‘distributed urban model’ and to commute to other offices for appointments. A centralised city model would likely require an expensive taxi trip compared to a ‘distributed city model’, which will likely see a commuter walk 5 minutes to a train station, wait 3-5 minutes for a train, and then take a further 5 minutes to reach a location. In contrast, getting a taxi can take 2-20 minutes, and you can wait in traffic queues delaying arrival at a destination for 20-30 minutes. This explains why few Japanese people get taxis, and why they are so expensive. Another way of looking at the problem is to consider comparative rents. Rent can be expected to be 30% cheaper for a satellite CBD (saving say $400 per month, or $12 a day). The differences in parking are less apparent if a city ‘enforces’ strong provisions for underground parking. Auckland has yet to do this I suspect, or perhaps this is merely a legacy of the old system. The cost of travel is relatively comparable under either model. The system captures more customers, but it requires more infrastructure.

This model of a ‘super-city’ is best illustrated by Tokyo City. Tokyo City comprises 23 inner wards. These inner wards are effectively integrated by a single ‘efficient’ rail loop line called the Yaminote Line. Trains on thin line come every 3 minutes, and they will take you to the most substantial satellite CBD’s in Tokyo (all 20 of them) in a matter of 25 minutes. This central line gives great connection to any number of ‘spoke’ lines that run off into the suburbs and outer satellite cities, to the various airports, port districts, inter-city rail connectors and so forth. These ‘spoke lines’ also provide access to the core of the city. There is often 1-2 ways to get to any place in the city, so you need to work out where to change to get there in the most optimal time. The trains are so frequent that you don’t really need to fuss over which is the best way.

In the spirit of this idea, I have roughly sketched out a possible system that outlines a staged rail development that would integrate rail & ferry terminals. The implication is that there could be opportunities for people to commute by ferries to work as well. Of course in future, more ‘ring or loop lines’ could be added, as has been the case with the extensive Sydney network. In comparison, the Japanese system does not function as ‘ring lines’, but rather as ‘spoke’ and ‘branch’ lines extending off the main ring line. The Yaminote ‘ring line’ serving the central core of Tokyo City is functionally the most important line in the system. It is also connected to several low-traffic loop lines servicing Hanada Airport and the port district.

This ‘mock network’ does not attempt to ‘build upon’ the existing Auckland rail network. It matters little how the network is shaped since the network itself will transform the way people live. What is important is:

1. The regulatory regime that shapes people’s decisions
2. The barriers to rail and commercial development which determine the cost structure and commercial returns possible, as well as determining the level of competition.

Political obstructions defer rail developments

In contrast to Japan, where rail development was made by quasi public-private corporations, which were comprehensively integrated with commercial developments from the start; in Auckland, the government decides. This means that there is a lot of ‘vested interests’ who are ‘legally enabled’ or ‘politically enabled’ to jump in and cause legal obstructions, as well as mobilising support bases to extort some concession, so that commercial efficiency is no longer ‘attainable’.

When the rail development model is directed by governments, it is destined to be a quagmire where sub-optimal decisions are made. Any vested interest is able to  elicit ‘self-serving’ standards (as a form of economic rent) upon expensive projects, even though these interest groups have no direct equity interest. Their arrogance arises from the fact that:

1. They have the decadent right to self-expression
2. They have the unreasonable right to impose their ideas on others under our political system

Notwithstanding their influence over others and their lack of direct involvement with the project, they are still able to influence or ‘scare’ others into submission, by using fear or misrepresentations (i.e. misuse of valid data or use of unsubstantiated data) to achieve a disproportionate influence over a state project. They achieve this influence because they are able to forge ‘special privileged relationships’ with political leaders, and because most of the people don’t have that influence, or because they are ambivalent about what their political leaders are doing under a sanction they bestowed upon them by voting for them. Voting is the ultimate threat since it represents the people giving power of attorney to a ‘stranger’ to do as they please. Notwithstanding their influence, these powerful partners also have some influence, and that is to impart their own threats upon decision-makers. The fact that these ‘decision-makers’ are pursuing ‘self-interested’ projects or are intimidated into submitting to powerful interests in the name of some  ‘public spirited’ endeavour really never comes under any scrutiny, because there will be no expectation or monitoring to ensure that these projects are even profitable.

This has proven the case with the Auckland rail system; except the paranoia has been instilled on both sides of the political divide because there are:

1. Liberals who want to build environmental projects
2. Conservatives who don’t want to spend on services they don’t personally use

For this reason, councillors have withdrawn their immediate support for a rail development. Auckland Mayor Len Brown has secured $2.2 billion of funding for rail in the latest 10-year budget. The first priority is a 3.5km underground rail link to commence construction in 2016 for completed in late 2020.[i] It remains to be seen whether he can bring all the councillors onside. The concerns of councillors are:

1. The cost to be borne by the toll payers – some want the national or City government to carry some of the burden
2. Against the possible impact of city government debt on future rates

For this reason it is possible the rail development will be deferred until 2020.

The libertarian perspective

The problem with the prospect of a government-driven rail project is that the project is destined to be poorly executed. The best solution is for the project to be funded by:

1. A private developer which is able to develop a funding model based upon:
   • Commercial development sub-contractor provisioning
   • Fixed price commitments for the rail services provided – at least until such a time that there is competition in the market place
2. A government that sets certain ‘reasonable’ parameters within the ‘rail corridor’ zones as well as development zones, so that prospective private sector developers can investigate the merits of those options. These parameters will include:
   • Provisions for open spaces and car spaces
   • Provisions for noise reduction and limits on route corridors
   • Provisions to facilitate transport system connectivity
3. Any prospective private operator can establish commercial commitments with owners of properties so that they are able to finance the development, whilst undertaking preliminary contingency studies at their own cost for engineering, commercial due diligence, etc.

“The $2.4 billion City Rail Link could be deferred until 2020 because of mounting concerns by councillors about its impact on rates, debt and big cuts to community services”.[ii]

There is actually no reason for the government to put in any money. There is no reason for city residents to put money into the project directly unless they are using the project. The best approach to the development of such rail corridors is for:

1. Objective standards of value to be established as fundamental criteria, i.e. noise levels, building heights, minimum public space requirements, tunnel design & safety (i.e. ventilation) requirements, car parking provisioning. These standards can be common law standards or standards established in the same manner.
2. Private rail system developers to determine best route, appropriate commercial terms with commuters and commercial sub-developers who will profit from land developments in the precinct of the rail stations.
3. Private rail system developers to determine quantify whether the project can proceed on the basis of objective standards of compensation. The private operator pays the cost of any ‘excess’ or ‘non-compliant noise’ or safety breaches.

There is a great opportunity for Auckland to have an efficient rail system without anyone paying for a government ‘white elephant’. The problem with government-sponsored projects is that there is no limit to the money that they can throw at them – without account or consequence – to give you the “experience you expect”, at whatever cost you will endure. In contrast, a commercial operator acting under a framework of objective law, is required to meet your “reasonable expectations” at a cost accepted by the ‘discretionary’ user of their services. Those costs would be borne through:

1. Direct payment of train fares
2. Indirect payment by paying for goods, where the merchant has paid for the opportunity to gain access to customers through such a ‘transport hub’. He passes some of his costs on to customers (who are in a competitive market place) so that he can make a profit.

In contrast, the reason why ‘big business’ often likes politicians like Len Brown is because the business community is ‘subsidised’ by allowing them to profit from the establishment of such hubs, and for you the taxpayer, to pay the cost of the hub, whilst they profit from:

1. Their good fortune to have ‘lobbied’ government to have a station established near their land holdings
2. Their ‘good fortune’ to have ‘lobbied’ the government to place the burden of transport systems placed upon the taxpayer, as if they should be the sole beneficiary of those services, because they create jobs (i.e. they lobby).

Working “village city” communities

There will be those people who will object to the development transformations to take place, but in fact ‘small cities’ make very liveable spaces, and again Japan shows the way. On a recent visit to Japan I took some pictures of how Japan has created very liveable communities with ‘modern commercial precincts’, ‘old-fashioned’ entertainment precincts with narrow roadways lined with restaurants, bars and craft shops in places like Hibarigaoka. There are roads with ample provision for bicycles in places like Iruma City. In fact, most Japanese people rely on rail and bicycles to meet their transport needs. Cars tend to be used by parents (with kids) and everyone on weekends. Even then it will be rare that Japanese people will go further than their local sporting grounds, restaurants or bars. Most shopping is done locally at these ‘city villages’. Of course many will use a car to go skiing or hiking. But again, many people will use public transport. It is probable however that most of the councillors in Auckland have not bothered to investigate the approaches that other nations have taken to meet their transport needs.

“[On the 5^th Nov 2014] all 20 councillors and the mayor will debate the budget and make decisions on the rail project for public consultation”. [iii]

Will they be well-informed or will their decisions simply be a reaction to the narrow expectations of mobilised ‘lobbyists’ who don’t really analyse the broader ramifications of public transport.

“The Government has agreed to fund half the project, but will not make a financial commitment until 2020, unless the council meets rail patronage and downtown employment targets”. [iv]

Observe that there is no requirement to meet any commercial criteria. The implication is that the government is not being terrible considerate of customer patronage, and that is evident enough from the fact that the government is prepared to force upon the community ‘another tax’.

Financing rail transport under government

The huge cost of the rail link would cause a $12 billion transport funding gap over the next 30 years unless alternate funding is secured – namely:

1. Motorway tolls and regional petrol taxes
2. Cut from community projects, parks and local works
3. Increases local government taxation

“The options are for an overall rates rise of 2.5% in 2015 and 3.5% for the next 9 years, or a 3.5% rate rise every year plus a $3000 charge upon new houses”.[v]

This is not the best approach to providing services to the poor, or users, or even achieving some level of ‘commercial discipline’ in our urban areas. Our cities are the most important economic systems in the country. If they are not based upon commercial discipline or ‘realities’ or price constraints, then taxpayers are destined to experience a blow-out in costs, on top of the costs that the mayor and councillors have previously imposed upon rate payers. There is actually no reason why residents of Auckland need to pay more. They should only pay more if they get benefits. The only motivation for government officials to embark on such policies is if:

1. They are so beholden to public pressure that they convey no personal integrity
2. They are positioning themselves for a litany of kickbacks from business who are destined to be subsidised by such developments, and who will be reliant upon government as ‘gatekeepers’ presiding over these developments.
3. They get the opportunity to act like Santa Claus, identified as the crusaders for development, without a corresponding requirement to be accountable for their flagrant spending.

This is an enormous spend for a city. It should not fall upon ill-disciplined councillors who have little experience to handle the affairs of such an immense project, and given a blank cheque to meet any indulgent expectation of lobbyists, who ultimately keep these councillors in power. Many councillors are sensitive to the ‘cost backlash’ of such policies. i.e. Labour councillor Ross Clow has called for the project to be deferred until 2020. These is however no reason to defer. The only necessity is for the project to be carried by those people who can afford the luxury of wanting it to risk investing in it. There will be a ready market of people who should pay, who will want to benefit, whether they are:

1. Residents who want to live in inner-city apartments close to transport and ‘village cities’. Another example is Chatswood in Northern Sydney.
2. Commercial businesses who want to profit, who are prepared to pay more for property and high rents in order to get access to that greater street traffic that arises from ‘denser living’.
3. Finally rail system developers who want to develop a long term ‘cash cow’ by offering prospective residents a ‘village community’ and cheaper and faster access to jobs than is currently offered by cars on tollways. Residents in these places will save on bus fares or car parking fares in the city, as well as securing more options and great accessibility to services in other communities.

Labour councillor Ross Clow argues that the budget was gutting suburban areas such as Avondale, which had been waiting 30 years for a new town centre, in favour of “pet projects” like the City Rail Link. [vi] There is really no reason for people to wait if a road upgrade makes sense, but it ought not to ‘make sense’ because it benefits a councillor to say so. There needs to be objective criteria.

Taking the transport funding burden off cities

There is really no reason why people have to wait for a centralised, inefficient, politicised ‘poorly skilled’ bureaucratic culture to act as ‘gatekeeper’ for the provision of basic services. It is a false economy that has proven not to work. In Tokyo, people on the fringes of Tokyo pay property rates as low as $300 a year because they only buy the land they need for a house. A 1-hour commute to the city centre costs just $4. There is no concession for a return trip like in Sydney. Most commuters going daily to the city will instead decide to rent in an inner city, low-rise 40m2 apartment complex for $700/month. They will pay just Y200 ($US2) each way. In most cases, workers commuting costs are borne by the company (up to a certain amount). The prospect of paying $2500/month in Auckland, a far smaller city, and an additional $200/month for parking because the city transport system is so bad, is simply ridiculous cost impositions arising because of political mismanagement of basic infrastructure. Communities won’t miss out on infrastructure if the government is not the centre for funding and decision-making. Autocratic regimes inevitably collapse. We are witnessing the collapse of Auckland City Council as a ‘decision-making hub’. It needs to become a far smaller centre for setting objective standards for universal & fundamental conduct, whether it be noise limits, or safety measures. They should not have the arbitrary capacity to impose any standard upon people, and they should not be a gatekeeper for decision-making. They are only arresting the development and prosperity of Auckland, and the same folly is being mirrored in other regions around NZ, as well as other countries. The council is responsible for the excesses in property prices. New Zealanders are paying as much for property – in a city with just 1.5 million residents – as they are in Tokyo – a city with 22 million residents. This is because NZ councils are able to restrict land development to artificially raise council rates.

It is precisely the spectre of huge planned budgeted costs like $20 million to widen Whangaparaoa Road, which is why these decisions need to be made in a broader context than the government can handle. There are simply too many long-range decisions to be made, and the risks of waste are enormous; which is why those risks and costs should be carried privately by developers, and not by the taxpayer who is oblivious to the real cost of what they are funding. Why can’t Aucklanders enjoy the same low rates as the Japanese – at least as an option. I’m sure the low-income earners of Auckland would love such consideration and discretion. You therefore have to wonder whether Len Brown and his colleagues are really the ‘liberals’ they profess to be, or whether they are serving their own interests.

References to quotes

[i] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

[ii] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

[iii] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

[iv] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

[v] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

[vi] “City Rail Link faces delay until 2020”, Bernard Orsman, NZ Herald, website, 3^rd Nov 2014.

The real cause of Western world high property prices

A documentary on Dateline in Australia highlights the perils of Chinese investment in Western property. The argument is brought to the forefront of people’s concerns because local people are purportedly being hurt by said ‘property speculators’. In this article I want to highlight the folly of those who would argue that the Chinese investor is to blame. Instead I will draw attention to the real cause and what ought to be done.

From the start, it is important to acknowledge that we are really talking about ‘two markets’ – the market for land and the market for ‘rental’ or ‘owner-occupied’ abodes. Of course these markets are linked, but seldom do people discern the difference. The reason why it’s important is that it raises issues of ‘rental supply & demand’ as well as ‘owner-occupied housing’ supply & demand. There is a dispensation for people to simply read ‘high prices’ as a signal of ‘excess demand’. This is the popular folly of economists who don’t understand, or didn’t study finance. It cannot be forgotten that all asset prices are trading at very low yields because global interest rates are at unprecedented ‘low levels’, and asset yields, in the pursuit of ‘any yield’, have seen money leave China in search of other markets. This doesn’t make Chinese money the problem – merely the ‘point of differentiation’. Chinese people simply are correlated with the problem because that’s the only ’cause’ discernible to observers. This should however highlight the limitations of correlation, pattern recognition and observation, and elevate the value of sound analytical argument, and the utility of ‘coherent’ world views. This however is not a cultural context that heeds sensibilities of integrity. The recent US political election only highlighted the extent to which the media is biased, and political interests bought.

The folly of many economists, and most of the media, who possess only a basic understanding of economics and finance, is their propensity to think only in terms of ‘the physical supply & demand’ for property. This is commonly called the ‘real economy’. They fail to consider what is happening in the ‘non-real’, ‘paper’ or speculative market for assets and liabilities, which is of course the plaything of investors. The size of the speculative market dwarfs the real economy for two reasons:

1. Over time people are able to accumulate assets far in excess of their income in any year, as well as the spending they perform, which is destined to be a fraction of their income, as they direct most of their surplus savings to repaying debt rather than conspicuous consumption.
2. Those investors, along with typical wage earners, are able to borrow at low rates to leverage themselves into property and other assets of far greater worth than their annual income. Now, that leverage becomes immense as interest rates fall to ‘record lows’, and their ‘equity’ tied up in assets becomes greater.

Add to this ‘bubble’ the fact that few people realise that prices are going to stay high, and you start to realise that ‘this is no ordinary bubble’, and that these Chinese investors are either lucky, or rather astute to seize the opportunity. The nature of their ‘luck’ is their good fortune to observe a trend, and then to buy into it, without the causal ‘analytical’ arguments that I am expressing here. You might wonder ‘how long the trend will continue’? The answer ultimately depends upon:

1. The sustainability of credit growth which depends upon the sustainability of low inflation, which depends upon the sustainability of global unskilled labour liberalisation, and the underlying ‘cultural values’ that decide if workers are ‘disciplined workers’ or obstructionists to low wages. It is fair to say that we have seen the ‘best conditions’ with Chinese, Vietnamese, Korean, Thai and other workers. It is fair to say that certain other cultures like the Philippines and Indonesia, are destined to learn slowly the requirements of ‘disciplined’ industrial relations. The pace of these adjustments will weigh on ‘inflation outcomes’ globally.
2. The extent to which governments persist with high debt levels in Western nations, by funding QE programs and now, infrastructure spending–> The extent to which these policies are embraced is the extent to which their underlying currencies are ultimately debased and ‘real assets’ like property and stocks adjust accordingly. For this reason, there is no telling how asset prices will go, though given the inflation outlook will eventually turn, and the real economy will eventually recover, there is no reason to expect interest rates to turn significantly negative. This concern is suspiciously a ‘non-issue’.
3. The extent to which ‘dogmatic’ policy makers don’t disrupt the economic cycle by attempting to impose context dropping policy proscriptions like higher interest rates. There is some scope actually for the US Federal Reserve to raise rates, however it would be silly to do it prematurely. The time to raise rates is when the real economy has resumed growth. Emerging markets are growing, and Western households have been paying down debt levels for the last 8 years since the GFC. For this reason, there is good reason to actually raise rates, however it is a policy which would be made more sustainable if it was deferred until emerging markets, which are really now the engine for global growth, could actually be allowed to grow a little more. That said, it wouldn’t make a lot of difference for the Fed to raise rates because there are other options:
• The US government, and other Western and emerging market governments could raise spending on infrastructure.
• The US and other governments could elevate productivity and lower the costs of living by cutting the size of their bureaucracies, and the extent of unnecessary and fruitless regulation. It isn’t enough to say ‘there is a benefit from spending’. The question is whether said spending could be better and more productively performed by a private party. The answer is of course ‘yes’.

‘Local’ Western people who are missing out on property are of course incensed by the fact that they are missing out on the opportunity to buy property. This raises several questions:

1. What is the cause of the problem?
2. How should the problem be addressed?

Do we prohibit Chinese buyers? Just Chinese buyers, or all foreigners, or all speculators? It would seem unfair to target just Chinese people, and yet people could canvas the ‘practical’ benefits of doing just that, with seemingly little impact on the Western economy. That is however not a ‘moral argument’, but a case of using the extortive powers of government to ‘attempt’ to solve a problem. This is of course what people look to government to do – extort influence over others who upset them. The irony is that, this was one of the reasons why Chinese people left China (with their money) in the first place, and also one of the reasons why the West has long been suspicious of Chinese investment, military build-up or simply their broader political proclivities. The spectre of arbitrary interference. So Western governments, backed by arguments from emotive ‘liberals’ and the left side of politics, is being drawn into ever-more fascist rhetoric and policy proscriptions.

The problem with placing a blackband upon Chinese investors is that they simply go somewhere else, and ‘white elitists’ buy up where the Chinese left off. It doesn’t solve the problem, it just reshuffles the deck chairs, or defers the inevitable result, which arise because of (i) low inflation and (ii) subsidised interest rates. Whilst Fed chair Yellen can do something about raising rates, she can only make a modest because any action by central banks interpreted as ‘harsh’ by the market will lead to a global collapse. The markets are of course expecting Trump to ‘back off’ as soon as he takes advice on the issue from people who know.

What people don’t realise is that you can’t treat ‘distorted markets’ with ‘market solutions’. People might argue that the market is always right. But the truth is that markets don’t care if they are right or wrong. Individual market participants do, and it’s pretty certain that they, acting with full awareness of the ramifications of central bank ‘harshness’, would not want central banks to collapse the banking system, even if they are not happy with the state of financial market regulation. That is another issue. Moreover, we need to accept that there is no prospect of ‘free markets’ as long as there are states organised to marshal resources to take over the world. The problem is one of responsibility. It has long been accepted that Western ‘egoism’ is the foundation for ‘bull-headed’ stubbornness, that precludes the West from thwarting a ‘united China’. The argument was accepted long ago that Westerners have to be subjugated to achieve collective outcomes that elevate the state. This ‘mercantilism’ is taken as ‘economic policy’, but it actually has an overt political imperative more important than making money. To be sure, the bankers want to make money, but they also want to ensure there is a ‘safe haven’ to stash it, and that means the US alliance and preserving it. The origin of this debate debates back to the late 1800s, when Western nations were determining the nature of their public eduation systems, as well as their military training regimes. The poignant lesson came from the Prussian military. Today, these strategic objectives seem to have taken an ideological direction of their own, however no one considers them in such terms. It is overtly an ‘amoral’ question of competing vested interests. Today it’s the Chinese investor vs poor/young families who have yet to secure a family home, or elderly pensions who are struggling to believe that contemporary interest rates will yield them an adequate return moving forward. The issue is serious if you consider that rates are destined to remain low, population rates are destined to decline, and real incomes destined to fall. You might wonder why this is the case. The answer is simply:

1. The West is overpriced and politicians won’t allow products and services in the market to find their ‘natural price’ level free of interference and unnecessary regulation. This is not to spurn all regulation; merely state regulation, and its arbitrary ‘extortion-based’ nature.
2. The West isn’t taking steps to make the imbalance less pervasive. Instead it is adding to the regulation, further undermining the inefficacy of public policy, and accentuating the disparities between vested interests. It elevates some interests whilst spurning others. You would think by observing political discourse that ‘women’ and ‘gays’ are the only vulnerable minority groups, whilst intellectuals or university graduates have no grievances, despite huge debts and the prospect of being forced to study for years an anachronistic education course, simply to please an employer they have no desire to work for, beyond the attainment of nominal skills.

Speaking of persecuted minorities. We spoke of the Chinese investors above, and how they were not to blame for the rising property prices in Western ‘coastal’ property markets. To reiterate ‘the reason why equities and property are at such high prices, is not because of the Chinese, but because investment yields are so low’. This is the ‘finance puzzle’ that people don’t get. Asset markets are an arena where both small and large investors alike search for greater returns. In tumultuous times, people (including the Chinese and larger institutional) investors will look abroad. So why focus on the Chinese? The reason is because, unlike the institutional investor that builds high rise ‘mass market’ properties, or commercial properties, lone high net worth Chinese investors are focused on the types of property that ‘we’ want – stand-alone housing. More importantly, their language any physical appearance makes them stand out in the marketplace, whether they are a buyer or not.

The notion that property prices are at the levels we would associate with being a ‘bubble’ is based on several misconceptions:

1. What goes up – must come down? The property with that argument is the hidden, and seldom understood, concept of asset inflation. People look to the debt levels in global markets and argue that the debt will be liquidated, and that will result in a financial collapse. It is wrong. The reason why it’s wrong is because there is no vested interest in causing that to happen, and therefore it can’t happen.
2. Market imperative for interest rates to rise. The reason why there is no reason for property prices to fall is because there is no reason for rates to rise. There is little ‘cost of living’ inflation to precipitate a rise in rates. The folly of central bankers and economists who take the Keynesian argument that deflationary pressures are due to ‘subdued demand’ – it’s not. The cause is an oversupply of labour.
3. Sound money. There is an expectation that asset prices can be accepted at ‘face value’. We know of course that inflation erodes the value of dollars. The problem is that people are not acquainted with the prevailing type of inflation – which is asset inflation. They are ‘gripped’ only by an awareness of ‘cost of living’ inflation, which has been low for decades. The reason why ‘asset inflation’ is so serious, is because it works inversely to cost-of-living inflation. i.e. Wage restraint in emerging markets is driving down wages, and this is resulting in savings going into investments in the knowledge that those ‘unskilled workers’, who comprise the majority of workers, will not be bidding up product prices in the real economy’. i.e. Resources are being ‘stolen’ from the real economy and directed into the speculative economy. This problem actually highlights another problem – and that is….
4. The constraints on capital flows. The emerging markets is the natural place for Western labour skills, capital and laws to migrate, except for the fact that, ‘nationalists’, collectivists, or embedded power brokers in these countries want to control the benefits of their markets as long as possible. It is fair to say, they will keep the West out as long as their wages are relatively cheap. That is a long time – from 10 to 30 years depending on the level of advancement made by said economies.

There are of course natural fluctuations in markets, whether it’s changes in government policy, interest rate adjustments, news reports, inter-regional price dynamics. Notwithstanding those factors, the outlook for property prices is ‘up’, even if those increases are justified or facilitated by:

1. The creation of more debt-funded by government bond buying programs or ‘real wealth creation’
2. The repayment of debt or the funding of government spending initiatives  through the printing of money

In either case, there is every reason to expect these policies to result in higher property prices, even if the value of the underlying currency falls in value. The people who will ultimately be hurt are:

1. Those people who defer buying ‘any assets’ because they are ‘over-priced’
2. Those people who buy ‘cheap property’ in no growth areas because they feel they have ‘missed out’
3. Those people who rely upon government to solve their plight, or they rely on government for welfare support.

So the perverse fact is that the left, who profess to help the poor, are actually bringing about public policy that is antithetical to the interests of the poor. i.e. With asset prices set to spiral, a number of Western governments like Australia and NZ have placated the media (serving their leftist cousins), by curtailing the ability of the poor and low-income earners to enter the property market by raising the equity they need to buy property. This is silly. These people, who have the most dire need for ‘effective investment’, are effectively being forced to buy ‘fixed income’ bonds or hold cash, and locked out of property, which would have to be considered the easiest type of property investment to understand. This perverted policy goes unchallenged. It goes to show that the media is serving as exponents of fear and greed, and that they are not objective interests, but rather part of a shady extortion racket, that has its origins in the nature of democracy itself – majority rule – which is the foundation for extortion. Yes – the noble value of democracy is misplaced. It’s a common law crime. And for vested interests who benefit from that racket – it’s very practical – and they don’t want to change it – lest ‘victims’ start to feel aggrieved.

This is not to say poor people or ‘cashed up’ people will not get support from government. It is merely to convey that they are vulnerable, as anyone who relies on others is ‘vulnerable’. Dependence is not a value proposition.

Aside from the ‘debasement of money’, there is another reason to hold assets, and that is the persistence of low inflation, and the strong economic growth outlook that assures investors. The globe might appear vulnerable, but the truth is that, conditions have never been better for investors, consumers and producers. It is true that incomes are not high, but produce prices are relatively low. This argument will appear ‘misplaced’ for some, and the reason is that it’s a ‘Western’ parochial story. The gains made by the West in the past are now being enjoyed by constituents in emerging markets. It’s their turn. Which is why we need to appreciate that whilst people talk of a ‘global economy’, the truth is that the West and Eastern (i.e. emerging markets) have never been more divided in terms of outcomes. Or more actually, outcomes have never been reversed like they are today. The ’emerging markets’ were yesterday’s ‘third world economies’, and before that they were impoverished, war-torn, tribal economics. So it’s good it’s their turn. Given they are often living on a few dollars a day, it would be unsettling to think a ‘parochial Westerner’ would be seeking wage claims to raise their income to $15+/hour, when it is not justified by productivity gains.

So for this reason, ‘cost of living’ inflation is low in the West, but high in emerging markets, to the extent that wages are rising quickly, and people are less price sensitive. This is not to say inflation is crippling people’s capacity to buy the things they need, before their wages are growing at rates as high as inflation, if not higher. Of course the emerging market experience is no less ‘unfair’ or ‘unequal’ than in the West. The government worker engages in corruption because they are so underpaid. The skilled worker employed by a Western company is paid twice as much as an employee at a local company. The sore point is that – asset inflation in the West, but it’s not in the emerging markets because interest rates are very high.

Now, the reason why low inflation (in the West) is destined to persist is because there is a over-arching ‘excess of unskilled labour’ in the world. You might think that there are rising wages in China, and that this will lead to higher wages, but consider several factors:

1. India, Bangladesh, Indonesia and the Philippines has a vast pool of unskilled labourers who are looking for work. There are of course a lot of unemployed around the world as well, say in Brazil and Argentina, who could also be ‘tapped’. Now, not all of these cultures are ‘hot beds’ of ‘disciplined’ or ‘skilled’ labour, but everyone is ‘trainable at a cost’.
2. Chinese workers are capable of higher productivity in order to preserve their economic relevance. They of course have debt obligations that demand that they ensure the continuity of their incomes.
3. Many workers are of course vulnerable to ‘automation’ and ‘consumer reproach’. i.e. A consumer can simply decide to defer spending if prices are not ‘fair’. If they are comforted by the deflationary impacts of technology/productivity, they can wait for the next model of the I-phone. S0, we can see that consumers enjoy a lot of power in the ‘high end’ of the market place. At the low end, in areas like food, they have less power, particularly if they are adamant that they must enjoy the convenience of ‘air conditioned’ super-malls. If you are more thrifty, you can of course buy cheaper from small grocery stores, who need to be ‘economically astute’.

Knowledge can be empowering for people who are ignorant. It can give them a path to follow. This brings us back to the Chinese investors. There is considerable fear because people in Australia, Canada and NZ remember the impact that Japanese investors made in the 1980s when they started buying foreign property. This time, the market dynamics are different because there is no imminent threat of rising interest rates to quash those investors, and the Chinese economy is going to surpass the Japanese in terms of its capacity to finance these investments moving forward. i.e. China’s population is 10x larger than Japan’s. Moreover, Chinese investors show a greater propensity to invest abroad than the conservative Japanese.

Interestingly, you have to ask:

1. Would it not serve China to curtail it so that investors reinvest outside of China?
2. Why Chinese are buying abroad?
3. Would it serve the West to limit such buying?

The answer to these questions is that:

1. Chinese investors can readily ‘loophole’ any laws to prevent investment in the West. The boundaries for speculation are very hard to prevent from their end because it is hard to know what the funds are buying, or what ‘assets bought’ are being used for, i.e. funding property purchases
2. Chinese investment is high because Chinese markets are themselves overpriced, and local interest rates even lower. That is part of the driving factor behind interest rates. The implication is that some Chinese investor interest will ‘dry up’ when the Chinese economy recovers, however there will always be those compelled by ‘lifestyle’ objectives, or ‘risk diversification’ motivations
3. I would argue that it does not serve the West to limit Chinese property speculation because – they ought not be discouraged from diversifying their risk. Their investing can lead to greater economic activity in recipient countries, though clearly investments in ‘existing stock’ does not result in direct spending beyond ‘agent fees’ and ‘government land taxes’.

The important fact to consider is that:

1. Western property prices might be rising faster than Westerners would like because of Chinese involvement in their local market, however this is not the ’cause’. The cause is ultra-low global interest rates. Local investors are equally active in the NZ, Australian and Canadian property markets. The appeal of these markets is that they are moving faster because they are smaller.
2. If we acknowledge that there is an oversupply of land and that the outlook for rates is good for borrowers, there is no concern about people being denied housing. There is no ‘physical shortage’ of housing. The media like to ‘show off’ the tragic plight of ‘homeless people’, but they are not homeless because of high housing prices. They are homeless because they don’t want government support, or they have betrayed the terms of said support by using alcohol, or because they have a mental illness, that has prompted them to live on the streets. There is of course people inconvenienced in the short term because they are ‘too proud’ to ask for help, or because governments adopt ‘arbitrary limits’ or because people don’t plan ahead.

The ‘housing crisis’ is really a ‘convenience crisis’, or otherwise stated, a crisis of expectations. Disappointed people are being polarised or incensed by liberals who like to elevate the apparent state of tragedy in the world, whether because they have an overarching sense of vulnerability, or because they are self-serving, and they want to profit from a narrative that offers more support to canny liberals, who are the first in line when there is support in the offering. Conservatives are not much different. It is hard to make a distinction, other than to conclude that conservatives are simply people who have not suffered the fate of their sanctioned arbitrary proscriptions, or those of like-minded people, whether their representatives, university professors, or parents. It’s free money and it comes from government. In the case of the media, it’s just a good ‘bullshit story’ that serves their ratings and commercial goals.

What is apparent however with these stories is the spectacle of the media becoming a ‘partisan political engine’ with its own agenda, to drive government policy. The media is in a powerful position, to not just report facts, but to give them a ‘spin’ in society that can drive public policy, community attitudes, and this is concerning. We will explore this aspect of this issue in PART 2 of this story.