UNIVERSITY OF PRETORIA Presentation to the Board of Directors International Studies 25 February 2019 INVESTIGATING PROPERTY PURCHASE POWER PARITY TO EXPLAIN ECONOMIC BEHAVIOR Douw Boshoff 4 July 2013

Introduction: Land as commodity Property Investment vs. Property Consumption Buy vs. Build Local vs. Non-local factors Property Finance Property Multiplier PPPP index

Land as commodity: Amount of land is fixed With population growth, number of people that have a claim to land increase (per capita land share) Land already owned, due to fixed size, increase in value relative to per capita land share (land inflation) All improvements to land is fixed, forming part of land, therefore also subject to land inflation Improvements are durable with long economic life, but does depreciate over time (consumption)

Year Population Land (m2) Rural land Urban land Urban owners 1995 39 000 000 1 223 201 000 000 1 006 657 920 000 216 543 080 000 17 160 000 1996 39 682 500 999 078 912 200 224 122 087 800 17 760 600 1997 40 376 944 991 234 639 127 231 966 360 873 18 382 221 1998 41 083 540 983 115 816 496 240 085 183 504 19 025 599 1999 41 802 502 974 712 835 074 248 488 164 926 19 691 495 2000 42 534 046 966 015 749 301 257 185 250 699 20 380 697 2001 43 278 392 957 014 265 527 266 186 734 473 21 094 021 2002 44 035 764 947 697 729 820 275 503 270 180 21 832 312 2003 44 806 390 938 055 115 364 285 145 884 636 22 596 443 2004 45 590 501 928 075 009 402 295 125 990 598 23 387 319 2005 46 388 335 917 745 599 731 305 455 400 269 24 205 875 2006 47 200 131 907 054 660 722 316 146 339 278 25 053 080 2007 48 026 133 895 989 538 847 327 211 461 153 25 929 938 2008 48 866 591 884 537 137 706 338 663 862 294 26 837 486 2009 49 721 756 872 683 902 526 350 517 097 474 27 776 798 2010 50 591 887 860 415 804 115 362 785 195 885 28 748 986 2011 51 477 245 847 718 322 259 375 482 677 741 29 755 200 2012 52 378 096 834 576 428 538 388 624 571 462 30 796 632 2013 53 294 713 820 974 568 536 402 226 431 464 31 874 515

Land as commodity (cont.): Land inflation is influenced by geographical factors: Geographical boundaries, i.e. fixed land in specific area Population growth of specific area, including migration Specific use of land Causes land inflation to vary in different geographical areas (property exchange rate)

Housing Costs as % of Net Income Land as commodity (cont.): Area Housing Costs as % of Net Income Above 25% Above 30% Above 40% Regional Councils Northland Region 20.4 13.5 Auckland Region 41.4 32.2 22.8 Waikato Region 32.0 23.2 11.0 Bay of Plenty Region 24.5 19.6 11.8 Gisborne Region 21.4 17.2 13.7 Hawke's Bay Region 31.9 26.3 Taranaki Region 30.2 24.1 15.1 Manawatu-Wanganui Region 33.0 23.7 11.9 Wellington Region 31.4 24.0 12.0 Tasman Region 26.4 22.5 Nelson Region 34.2 18.4 Marlborough Region 33.5 West Coast Region 22.3 Canterbury Region 32.4 14.4 Otago Region 25.5 21.6 12.3 Southland Region 12.8 9.5 Total, New Zealand  32.7 24.9 14.8 7 7

Housing Costs as % of Net Income Land as commodity (cont.): Area Housing Costs as % of Net Income Above 25% Above 30% Above 40% Regional Councils Northland Region 20.4 13.5 Auckland Region 41.4 32.2 22.8 Waikato Region 32.0 23.2 11.0 Bay of Plenty Region 24.5 19.6 11.8 Gisborne Region 21.4 17.2 13.7 Hawke's Bay Region 31.9 26.3 Taranaki Region 30.2 24.1 15.1 Manawatu-Wanganui Region 33.0 23.7 11.9 Wellington Region 31.4 24.0 12.0 Tasman Region 26.4 22.5 Nelson Region 34.2 18.4 Marlborough Region 33.5 West Coast Region 22.3 Canterbury Region 32.4 14.4 Otago Region 25.5 21.6 12.3 Southland Region 12.8 9.5 Total, New Zealand  32.7 24.9 14.8 Auckland Region 41.4 32.2 22.8 8 8

Housing Costs as % of Net Income Land as commodity (cont.): Area Housing Costs as % of Net Income Above 25% Above 30% Above 40% Regional Councils Northland Region 20.4 13.5 Auckland Region 41.4 32.2 22.8 Waikato Region 32.0 23.2 11.0 Bay of Plenty Region 24.5 19.6 11.8 Gisborne Region 21.4 17.2 13.7 Hawke's Bay Region 31.9 26.3 Taranaki Region 30.2 24.1 15.1 Manawatu-Wanganui Region 33.0 23.7 11.9 Wellington Region 31.4 24.0 12.0 Tasman Region 26.4 22.5 Nelson Region 34.2 18.4 Marlborough Region 33.5 West Coast Region 22.3 Canterbury Region 32.4 14.4 Otago Region 25.5 21.6 12.3 Southland Region 12.8 9.5 Total, New Zealand  32.7 24.9 14.8 Auckland Region 41.4 32.2 22.8 Southland Region 12.8 9.5 9 9

Property Investment vs. Property Consumption: Land plus construction of buildings (property) Resold from time to time, influenced by land inflation Property is subject to depreciation (natural and use) Commodity price of property is influenced by potential use Cost of use is the present value of all future depreciation

Property Investment vs Property Consumption (cont.): Total property consumption equals total depreciation Depreciation increase with use, i.e. vacant property will have lower depreciation

Buy vs. Build: Investor has the option to buy land and build according to own design and style; or Buy existing already built property Would pay a premium for not having to wait for construction to complete Would require a discount for not having own design to individual requirements, as well as depreciation already taken place Investor pricing decision originates from land plus construction cost, adjusted for premiums and discounts

Demand for property: FDW Model Buy vs. Build: (cont.) Demand for property: FDW Model Figure 17:

Local vs. Non-local factors: Cost of construction is a combination of: Local factors (labour and local produced material) Non-local factors (imported material) Maximum cost = 100% local factor of highest labour (Refer Marxist theory) High cost of labour - high cost of local factors, with possible move to cheaper imports or mechanised methods with imported machinery (focus on efficiency) Low cost of labour - reduced local cost, but higher disparity due to necessary imported factors on higher priced properties, i.e. tiles, lifts, curtain walls, etc.

Property Finance: Property acts as security for possible loans Maximum finance equals total value (refer land inflation) less depreciation Finance depends on availability of money Availability of money depends on total deposits (MMT) Deposits (savings) are dependent on total income (Keynes)

Property Finance (cont.): TNF = L + NC – D Where: TNF = Total Nominal Financing L = Land (including Land Inflation) NC = New Construction D = Depreciation (leakage from economy)

Property Multiplier: All households needs property All economic activity takes place on land or in buildings New construction requires extensive labour All labour attracts income resulting in deposits (not necessarily for property) Increase available money (endogenous money) New construction increase Fixed Assets (exogenous money) Wealth effects due to increased property prices

Conclusion: PPPP index Property prices are indicative of total economic behaviour based on property supply-side economics Puts more emphasis on horizontal activity in the economy, with vertical interference by way of social housing and other infrastructure Compares differences in land availability to economic welfare Measures the different levels of the property multiplier Measures property as exogenous (Keynes) and endogenous (MMT) money in different economies

Conclusion: PPPP index 22 22

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