Love this article: https://i.stuff.co.nz/dominion-post/business/residential-property/122735434/new-block-of-townhouses-snapped-up-hours-as-prices-soar-in-the-hutt-valley
At the moment the government is pumping as much money into the economy as it can. They’re pumping the paper stuff – not the legally binding contracts to deliver work stuff (which is called “fiscal policy”) – into the economy.
They’re hoping that, with negative interest rates, banks are going to take a punt and lend to even the most pedestrian of investment opportunities. Something to get the economy running, even if it’s spinning up a lemonade stand on the side of the road.
However, there’s this thing called a risk-return trade off which says higher interest rates are needed to reward riskier investments. That’s because risk erodes return: if the risk is high enough, banks will not lend to a project that might have 10% return, even if they can borrow that money at 1% or less.
Worse still, risk tends to increase with return: those potentially really high speculative investment projects are way higher risk than the low investment return projects.
Investors just now think, in today’s Covid-19/Trump/whatever climate, even those low return projects are risker than what they used to be. Amazon has now eroded the chance that even a lemonade stand is going to bang out a basic living, let alone banks recovering their lending costs.
Ipso facto, very very low (even negative) interest rates don’t stimulate investment even in the traditional low return / low risk type of investment opportunities.
So nowadays, no bank is lending. Despite there being lots of cash for investment. Most banks perceive EVERYTHING to be at the moment very risky. Despite money being cheap.
So the “financial intermediation” process, which should connect the cheap cash coming from the government with the investment opportunities in the “real economy” isn’t happening.
The investment opportunities today are so “risky” that no low borrowing cost could compensate for their risk component.
But when approximately $10 million of new housing investment gets snapped up in a day, the risk component associated with the investment return component becomes effectively nil. The profit component on that $10 million becomes effectively guaranteed.
And that makes markets work.
And that makes financial intermediation happen.
And that makes banks lend as much as they can on new housing investment.
And that gives people a chance to buy their own home.
And I couldn’t be happier. Long may excessive housing demand generate opportunities like this.
… I hoped the now flushed-up developers can find enough land for new housing development.
Ahhhhhh… If only land availability and urban planning didn’t suffer from market rigidity.