Little Boxes

The proposal to streamline the building industry consents etc process is gathering steam. Not PC has easily the best summary of my views - planners, who needs 'em? They don't have anything to say about boats or cars. So why houses?

Black-Scholes = Black Hole

My math is far too weak to follow Black-Scholes, but it's been the standard paradigm for pricing of exotic financial instruments for a quarter of a century.

No longer.

Ever since I read Nassim Nicholas Taleb's 'Black Swan', and bought/read his 'Fooled by Randomness' I've had this intuition that there was a big soft spot right underneath the main pillar of the financial establishment. The article notes that, in supplying a plausible mechanism for pricing exotica, Black-Scholes also prompted a massive surge in their supply. Now, we know it was all based on a mirage.....

The fool's bandag-ed finger goes wabbling back to the fire.

That good old stuff

Stewart Brand should need no introduction: Whole Earth Catalog, and a personal favourite: How Buildings Learn.

Edge mag invited a whole bunch of folks to say what they changed their mind about in 2007. Guess what our Stewart came out with? Good Old Stuff Sucks. The obligatory quote:

"The Precautionary Principle tells me I should worry about everything new because it might have hidden dangers. The handwringers should worry more about the old stuff. It's mostly crap."

Standard and Poor's Moment of Truth

The headline really says it all, no? And, dear reader, it's not from a lone blooger in his attic. It's from Dow Jones.

All of us who have wondered, for three years now, just how it is that credit can be freely given for crap furniture ("Buy now! No repayments until your 3-year-old kid graduates Medicine school!"), let alone actual Houses, are receiving an answer from the financial universe.

It's all Smoke and Mirrors. It is financial junk. And it is tanking. Sinking, Flushed, Round der Bend.

Already there is a domino effect in the US:

- Home Depot (fond memories: I bought two Bostitch nail guns there for amazing low prices, and despite some TSA headscratching, got them back to NZ in checked baggage) has announced an earnings downgrade

- Builder D R Horton has orders down 40% and inventory piling up. (Although just how new houses can 'pile up' does make one stop and think. Maybe they just stack them with big forklifts, like containers?)

- Re-rating of sub-prime debt instruments (the now infamous CDO's) is rampant, and guess what they will find - more junk and crap, everywhere they look. As Dr Housing Bubble notes, there's over a trillion US in mortgage re-sets a-comin round the bend.

So the question for NZ is - how soon before the US mortgage train wreck grows wings and flies the Pacific to land here? Oh wait, Bridgecorp was evidently into non-prime-mortgages too. As I seem to have voiced before, it would be schadenfreude if it weren't My country, too.

If I was working for one of the crop of recently opened appliance stores, I'd be polishing my CV. Because it's just amazing what you can do without when you put your mind to it. And vanity spending is the first to, er, vanish.

Boy, am I glad I downsized mid last year.

Update: 20 Jul 2007.

A good summary of the mechanisms behind CDO's and the other financial instruments which are presently in trouble. The obligatory quote:

'Bundling mortgages into asset-backed bonds and then agglutinating those bonds into collateralized debt obligations sliced into different flavors of risk always smacked of a sophisticated pyramid scheme.'

That's right folks - a pyramid scheme.....

Housing Bubble

A useful post here from another bubbular location: Southern California (SoCal, for short).

What can happen there can happen here, too. The post is quite good on the accelerated effects of information flow about housing, and the relationship between credit card debt and higher mortgage payments as fixed-rate or sweetheart deals reset to mrket levels.

In the '80's, Muldoon borrowed and hoped. We have lived through what it took to get us out of that hole: the best part of 20 years of work and better productivity.

And now, two aspects of the zeitgeist are putting us back in a similar hole:

1 - a Gummint hell-bent on buying enough votes for the next election, via various income redistribution schemes. Personal Tax cuts? Nah, Nanny knows best, you lot will simply add demand to the economy if we let you actually keep your own money. Speak for yourself, Michael bloody Cullen: I would pay down what minor debt I may have, and put the rest into Aussie shares and another super fund.

H L Mencken had it right in the '20's: an election is 'an advanced auction of stolen goods'.

And we are about to find out the hard way, yet again, that you cannot redistribute yourself rich.

2 - There is undoubtedly a local housing bubble. When it corrects, from a point where house price to income levels are around 5-7 i.e. unsustainable, to a level of say 4, look out below. 4/5 is $100,000 on a $500,000 home: a $100K loss. But 4/7 is $300,000 on a $700,000 home, and there's plenty of those just along my own street. So if you are one of the Feckless Many who have ratcheted up their debt anywhere north of 75% of current house valuation, you're gonna be hurting soon.

In effect, in the '80's, Muldoon borrowed and hoped at a public-sector level.
But in the aughties, borrowing and hoping is a private-sector pursuit.

And as the poster points out, in an environment where news and sentiment get around at the speed of light, that 'when', as in when the correction happens, might be a lot sooner than you would like.

SoCal catches the flu, we all cough.

Housing woes - oh, and they're in the UK

Dear old William Rees-Mogg has a typically pithy article in the Times. Change the context to NZ, and his comments are still apropos. Especially the ones about the four conditions for a cartel. From the article (my numbering added):

"1. license housebuilding, so that no one could build a new house without a licence, or even rebuild an old house or a redundant barn.
2. encourage developers to maintain large land banks in order to benefit from rising prices.
3. leak out new permissions only after long periods of delay.
4. combine this with an unlimited flow of mortgage credit and relatively low rates of interest.

If you restrict supply below the market clearing level and increase funding, you will inevitably create a bubble and you will lock people out of the market."

The wisdom of the old geezer: two of my go-back-to books by this guy are the rather apocalyptic "The Great Reckoning", published in 1992, which foresaw in rather exquisite detail the rise of terrorism among other things; and "The Sovereign Individual", published 1997, which foresaw the break-up of the world's larger and more unwieldy entities, and the privatisation of states, armies and other traditional nation-state apparatus, on smaller scales. Blackwater, anyone?

Prophetic stuff.

And wonderfully different to the asswipe smush (one square only, though) served up in the name of analysis in our own little deranged dominion.

Those darned House Prices

This analysis (which, funnily enough, blames investors, and this rather better one, which blames the stoopid Gummint, are both about the same research, by Dominick Stephens, of Westpac. Apart from the headline bias, the reserach confirms my own view of the casuses of the growing house price-to-earnings ratio (currently sitting at the 'severely unaffordable' in major NZ cities: at or over 6).

The article nails changes in top personal tax rates, versus company rates, as a key driver. This was pure politics-of-envy stuff, back in 2000. Westpac's analysis thinks this alone accounts for 17% of observed house price increases since 2000.

I can think of five major contributors to increases, apart from this:

1 - the dopey Govt efforts to get first-home buyers into the market, by guaranteeing the first $100k of mortgage irrespective of the purchaser's ability to pay. This had the instant effect, right here in l'il ol' Christchurch, of making every house price start at $100K, practically overnight. Properties, just before this fabulously ill-considered action, could be had in the poorer 'burbs for under $50K. After that action, prices went rapidly north of $120K, for the very same house. So much for the poor buyer.

2 - the creeping effects of regulation in building itself.

- Having every electrical tool certified, every year
- Fencing of sites
- Scaffolding erection, certifying, take-down, where in the past a long ladder used to do.
- certification of all trades

The aggregate effect is around 5-10% of pure build costs.

3 - Greedy councils and their contributions to infrastructure and reserves. The apartment saga in Auckland is indicative: up from $3-6K to $40K. Go figure.

4 - The extended consenting and RMA processes, add pure time (and as we all should know, Time=Money) to a development. This 'carry' (as the jargon has it) is probably around 5-10% of outright total costs, and in a protracted case, could easily be triple that.

5 - Good ol' supply and demand. Section prices alone in many areas are what a house price would have been in 2000. Add the build cost, at a conservative $2000/sq m, and the total starts to resemble that 6+ times multiplier. A constrained supply of land may not be by itself a major factor. But it may be the straw that breaks the camel's bank.

So there we have it. And notice the common factor.

It's not greedy developers, banks, or investors.

It's Gummint being its normal, stoopid self.

Housing Hi-jinks

Not pc has a good note about affordability and its inverse relationship to planning and land-use regulation. But when you look at the actual cost of new building , you start to see a significant Nanny State impost in quite a few areas.

• Fencing of sites. Never used to happen, and not too many gory tales of kiddies' hands being lost to Tools Left Lying Aboot.
• Certified scaffolding for jobs needing e.g. roof work. Ask a roofing contractor about how much per job this adds. On a say $20K job, this will be around 30%.
  
• Leaky Building levy, even though your design follows a thousands-of-years tradition, and so includes actual eaves, and has no internal gutters.

And let's not ferget what's down the track:

• Full certification needed for all tradies, on pretty much all work, maintenance, new or other. I've heard that only around 30% can possibly qualify within any reasonable grace period allowed. Think what that will do to rates, resource availability as education takes priority over chargeable time, general supply as tradies piss off to less stupid countries, and overall costs.
• Earthquake proofing of older multistorey buildings. Billions in cost, for how many lives saved, again?
• Other wonders yet to be dreamt up by our Glorious Leaders in their third go at the Great Socialist Hexperiment on us all.

So, a little prediction about the likely unintended consequences of all of this:

There will arise a thriving, and mainly underground (black economy) market segment which specialises in supplying honest maintenance and repair, made to look as though it's always been there. Some characteristics of the activity:

• performed indoors, to shut out unwanted eyes. It's quite possible to do even major structural stuff without disturbing visible outer shells of buildings.
  
• If outer shell, visible from the street has to be touched, expect the street frontage to be minimal, screened off or trompe l'oeil'ed in some fashion to ward off casual drive-by glances, and inspectors of any breed.
• use of second-hand covering materials to disguise the new bones underneath. Demolition yards will be quite busy supplying this market.
• use of antiquing, aging and patination on visible surfaces. Distressed paint finishes, coatings of old kitchen grease, scratches, nicks and obvious signs of long use will be de rigeur. See, I've watched far too many 'Antiques Roadshows', already.
  
• payoffs to neighbours and certifiers (assuming the latter are even invited in) to guarantee silence (after all, they will need to return the favour at some point in their futures)
  
• cash is king

As Stewart Brand notes, in his sublime book 'How Buildings Learn', people just never stop fiddling with the spaces they live in. And if they cannot be arsed doing it legally, then done it will be, anyway.

But, predictions aside, the unaffordability of housing is due at least in part to the cost impacts of layers of petty and mostly un-necessary (to a traditional designer) specification, levies, requirements and inspections. My bet is, around 10-15% of pure house costs are eaten up in all of this. Add that to land costs (which is what the linked article is really about) and the sum isn't pretty.

And the solution?

Wind back some of the Nanny State requirements.

And educate yourself about what to look for in building design. It's not hard, and it's fun.