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11-02-2014

Sir Robert Jones says "Proposed housing fund sure recipe for failure"

NZ Herald

It's certainly a sign of the times when something called the Dunn Housing Fund is being flogged to the public to "invest" in Auckland houses, he says.

The promoter is a real estate agent specialising in apartment sales and seeks $7.5 million to buy 10 Auckland houses, hold them for 11 years, then cash up. He promises a scarcely thrilling 1.2 per cent initial dividend but with a totally guessed at annual value growth plus rising rents, a return over 11 years averaging 8.4 per cent a year. This is so glaringly a bad deal it should be renamed Dumb Funds Ltd.

First it's essentially speculation assuming that as Auckland house prices have risen sharply in recent years, they will continue to do so over the next decade. That's highly unlikely.

If the past few years' growth rate continues then wages and salaries must rise dramatically to meet such ever-rising price levels. This seems unlikely.

Auckland house prices soared through the imbalance between supply and demand induced by a surge in immigration, including from within New Zealand, and particularly Christchurch.

But both the empirical evidence and logic tell us that in a self-correcting market economy, that imbalance will not last and also, that the correction process will overshoot, resulting in an over-supply; ergo price levels drop. That always happens and is characteristic of functioning market economies.

 Rest of article by Sir Robert Jones can be found at http://www.nzherald.co.nz/wanganui-chronicle/opinion/news/article.cfm?c_id=1503423&objectid=11199820

 

Tags: bob jones - dunn housing fund

Source: NZ Herald

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