NZ Money Supply and House Prices
“House prices double every ten years”, the old adage goes.
So why is this?
Well, we reckon the following chart pretty much answers the question.
New Zealand Money Supply M3
The chart is taken from a very interesting website called tradingeconomics.com. They have all sorts of data from just about any country on the planet. Inflation, GDP, Debt. You name it, they have it.
Anyway this chart is constructed using Reserve Bank of New Zealand (RBNZ) data and shows New Zealand’s money supply over the past 19 years. Take a closer look at the start and end points.
You’ll see the money supply doubled from around 75 Billion as of January 2000 to just over 150 Billion in December 2009. Then over the next 10 years the money supply roughly doubled again to about 325 billion in December 2019.
Now depending on which branch of Austrian Economics you follow (if any!), it will affect how you view the “quantity theory of money”.
It may be an oversimplification saying that the amount of currency in circulation has a direct and proportional relationship to the prices of goods and services. But nonetheless more digital currency units chasing about the same amount of goods is going to mean paying higher fiat dollar prices for said goods. (See this video interview with Professor Fekete for his take on the quantity theory of money).
And this may be an oversimplification too. But isn’t it a handy “co-incidence” that the money supply has roughly doubled over each of the last 2 decades? While this is the same period often cited over which house prices will double?
Could it be that rising house prices are actually just a reflection of an increasing pool of money chasing the relatively fixed housing stock?
Sidenote: NZ Money Supplies Spikes Due to RBNZ Response to COVID-19
It’s also worth pointing out how sharply the M3 money supply has jumped as a result of the RBNZ quantitative easing in response to the COVID-19 crisis. After rising at a fairly steady rate since 2015, M3 is now just under $350 billion in April 2020. Up from around $325 billion at the start of 2020.
Perhaps we will see this sharp increase in money supply reflected in house prices and CPI in future months/years?
NZ House Prices Over the Past 2 Decades – How’s This for Spooky?
Here’s a chart from the REINZ Monthly House Price Index (HPI) Report from April 2020.
We can see that house prices have pretty much doubled and then doubled again since 2000. In fact they’re actually up around 3.75 times, from around 775 in 2000, up to 2915 on the index in December 2019. (Or up 276%).
So that fits in pretty well with our old adage of house prices doubling every 10 years. It also nicely ties in with the growth in the New Zealand money supply.
How Does Money Supply Compare to the NZ Government Inflation (CPI) Calculations?
Let’s crank up the trusty RBNZ inflation calculator. (Perhaps trusty is not the best term to use in the same phrase as a central bank. Although we guess they can be trusted to reduce your purchasing power in the long run!).
So we plug in $75,000 at the end of 1999 – to correspond to the $75 billion starting value in the money supply chart.
20 years later, a basket of goods and services would “only” have cost $114,698.54. So a percentage change of 52.9% inflation.
This is significantly less than the doubling and doubling again of the M3 money supply. It’s also significantly less than the 3.5 times increase in the house price index over the same period.
So the government CPI is much less than the increase in house prices.
Now Let’s Look at Bank Interest Rate Returns
Again we turn to the data of Tradingeconomics.com, showing bank deposit rates since 2000. It’s clear how these dropped during the financial crisis from above 8% to under 3%. Then over the last few years deposit rates have moved closer to zero.
We don’t have access to the raw data to calculate the average deposit rate since 2000. But from the chart it looks like it might be around 4%. For the last decade it would be under 3%.
But a reasonable assumption to say bank deposit rates have averaged around 4% since 2000.
We’ll ignore the fact that withholding tax is payable on the interest to keep it simple too. Using the RBNZ CPI numbers above for inflation (52.9% since 2000), we get 2.65% inflation rate per year.
Therefore over the 19 year period you’ll get a return of just 1.35% a year. Or 27% in total. And remember this is also before tax!
Withholding tax would reduce the 4% down to around 3%. So your return would then be only 0.35% per year! And that’s based upon the government statistics. Which you’ll see most likely understate the true inflation rate of staple everyday goods and services.
How Do Property and Bank Deposits Compare to Gold in NZ Dollars?
As noted in our 2019 year in review, gold at 1 January 2000 was priced at NZ$551. At the end of December last year it was NZ$2254.11. (And it’s over $500 per ounce more than this as we type at NZ$2775. But today we’ll stick to comparing the same periods as money supply, housing, and bank deposit returns).
So gold in NZ dollars has “risen” by 309% or gained just over 4 times its value when measured in dollars since January 2000.
Of course as always, we remind you that the correct way to frame this, is that paper money is losing value, rather than gold “going up”.
So What Can We Learn From All These Inflation, Housing, Bank Deposit and Gold Numbers?
1. Don’t trust government inflation and CPI figures or the current talk of how inflation is so very low.
We have mentioned this many times in the past. The various statistical adjustments and substituting of one good for another when it gets too expensive, seriously underscores the rising cost of everyday goods.
As does the fact that the likes of flat screen TV’s and computers, which are constantly falling in price, are also included in CPI inflation calculations. But we don’t buy these types of goods everyday!
The table below clearly shows the difference in consumer price inflation between “staple” items and “discretionary” items.
Staple items are up 28% over 10 years, whereas discretionary items have fallen 10%.
As Roger Kerr points out:
Lower socio-economic groups in our community who do not have the discretionary spending cash to buy the latest whizz-bang electronic stuff are not experiencing any benefits of the so-called low inflation. Their household staple expenses have been increasing at 2.8% per annum on average.
The dangers of continually slashing interest rates in response to the very low inflation is that speculative asset bubbles are created in property and equity markets as it is very cheap to borrow.
Under this scenario the gap between rich and poor will continue to widen.
Other losers are elderly investors who are now receiving less than 3.00% return in bank deposits and are being forced into dividend stocks (with attached equity market risks) to earn enough money to live on.
Running a super-loose monetary policy, due to the low inflation the technology revolution has created, is producing a few risks and adverse consequences that do not seem to be well understood.Source.
The situation has gotten worse since this waa written too. With bank deposit rates even lower now at almost zero in many cases.
2. Don’t leave your money in the bank long term.
The bank deposit numbers above show you’ll be getting a return of close to zero. And after you take the real inflation rate off this (i.e. a CPI without all the discretionary items), you’ll be getting a negative real return.
So money in the bank long term is losing purchasing power.
3. Real assets such as property, gold and silver are the way to go during the slow but steady death of money, rather than bank deposits.
The returns of gold and property show that hard assets are the way to go to preserve and even grow your purchasing power in the long run.
4. Interestingly the above numbers show gold was actually slightly ahead of property over the past 20 years in New Zealand.
Property went up almost 276% compared to gold rising 309%. And the gold numbers included a correction of over 35% in the past decade too.
But property gets all the headlines and gold is ignored.
As noted already gold is also up even further this year. While it’s likely that house prices could take a dip as a result of the COVID-19 lock down.
So right now buying gold looks to have more upside than property in New Zealand.
Editors Note: This article was first published 12 March 2013. Originally just including numbers for the previous decade. Last updated 2 June 2020 to include data from 2000 to 2020 and further explanation of what we can learn from the data.
What do you think? Is it just a coincidence that the NZ house prices have risen roughly in proportion to money supply growth over the past 20 years? Show us you’re alive and leave a comment below!…