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Dr Muriel Newman

Economy Under Pressure

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GWheelerThe slowing of the economy and the falling of business and consumer confidence, are of concern to all New Zealanders. So let’s look at what is driving these changes, and what can or should be done to restore confidence and growth.

Last week in his Official Cash Rate review, the Reserve Bank Governor Graeme Wheeler cut the OCR from 3 percent to 2.75 percent, signalling that more cuts are on the way. Two more reviews are scheduled before the end of the year, on October 29 and December 10.

The response of trading banks to the cut was immediate with mortgage lending rates declining to levels not seen since the 1960s.

The Reserve Bank’s lowering of interest rates was in response to the economic slowdown. The Bank estimates that growth will fall to 2 percent in this calendar year, down from their earlier estimate of 3 percent. They expect a gradual improvement to 2.5 percent growth next year, with 3 percent the year after.

As a result of the interest rate cut the value of the New Zealand dollar dropped by 1 cent. Overall the currency has fallen by around 13 percent since the beginning of the year, and while this puts upward pressure on the prices of imported goods, the lower dollar is providing a welcome boost to exporters and the tourism sector.In fact, the falling dollar is helping to buffer the economy against the full impact of the 25 percent downturn in export commodity prices over the last eighteen months.

Dairy sector is the main cause of the downturn, with prices falling 15 percent since the beginning of the year and 55 percent below their February 2014 level.

While industry experts calculate that the break even milk price for the average farmer is $5.70 per kilogramme of milk solids, Fonterra’s forecast payout to farmers for the current season is now $3.85 kg/ms.

The Reserve Bank predicts a rocky road ahead for dairy farmers: “We assume the recovery in world dairy prices, towards a more sustainable level, will be slow. The dairy price falls already seen will weigh on incomes both this season and next.”

In response, farmers are battening down the hatches.

The Bank says the typical response by farmers to the lower income levels is to cut spending and costs by reducing drawings, delaying capital expenditure, opting for cheaper feed, increasing cow culling, restricting fertiliser, reducing artificial insemination, milking once a day, and for farm owners, reducing labour costs by returning to on-farm work, holding existing worker pay rates, and starting new workers on lower wages.

Farmers have already increased their use of overdrafts, and some have sold their Fonterra shares. Many are expected to take up the Fonterra special loan announced last month whereby farmer shareholders can apply for an interest-free loan of 50 cents for every kilogram of share-backed milk solids produced from 1 June to 31 December 2015. No security is required over their shares or any other assets. The loan, which will remain interest-free until 31 May 2017, may be repaid at any time, but automatic repayments will occur when Total Advance Rate Payments exceed $6.00.

Total dairy sector debt has increased from $12 billion in 2013 to $35 billion today, with 10 percent of farmers accounting for a third of the debt and 20 percent accounting for half. However, according to the Reserve Bank, loans to the dairy sector represent only 10 percent of all bank lending, so while the dairy downturn is undoubtedly having a substantial impact on the economy as a whole, trading banks are not heavily exposed.

A number of other factors are contributing to the country’s lower growth. The Canterbury rebuild has now peaked, China’s economy continues to slow, and predictions of an extended El Nino are causing apprehension.

The softening economy is also raising concerns about rising unemployment.

The Reserve Bank attributes the strong growth in the labour force over the last two years, which has significantly expanded the economy’s supply capacity, to the increase in migration and the success of welfare reform. However, slower growth is now pushing unemployment up to around 6 percent, from a low of 5.5 percent a year ago. It is expected to rise to 6.5 percent by March.

In spite of the slowing growth and rising unemployment, the Reserve Bank is not predicting a recession.

The lower exchange rate is helping many exporters, with beef and wool prices strong, timber holding its own, and signs of recovery in the past two dairy auctions – albeit on the back of lower volumes being offered.

The low dollar is also helping tourism, which is at record levels, with more than 3 million people visiting the country – an increase of 7 percent over the previous year – boosted by increasing numbers from Australia and China. Overall, international visitors spent over $8 billion in New Zealand over the last 12 months.

On the construction front, while building activity in Christchurch is slowing, residential building permits have hit a 10-year high nationally, with 2,824 consented last month. Statistics New Zealand data shows that this was the highest number of new dwellings consented in a month since March 2005. The total value of consents for all buildings last month was $1.4 billion.

A great deal of the construction activity that is in the pipeline is for Auckland. In July, dwelling consents had risen 31 percent from a year ago, to 1,116, bringing it to the highest level since November 2004.

Much of the pressure on Auckland’s housing market is coming from the record rate of migration, with around half of the 55,000 annual arrivals moving there.

Since lending on housing makes up a half of all bank loans, the Reserve Bank has identified Auckland’s over-heated housing market as a potential threat to New Zealand’s financial stability.

Essentially, Auckland’s housing shortage is due to poor council planning. Obsessed with ‘urban containment’, insufficient land has been released for new housing to keep pace with demand.

The Productivity Commission has estimated the housing shortage to be in the region of 32,000 homes, with 13,000 new homes a year needed to accommodate the city’s growth. Consents are currently at around 8,700 a year.

To meet the increased need for houses, the government has established ‘special housing zones’ to fast-track the consent process. They are also freeing up Crown-owned property to help increase the supply of available land. But the problem is that building houses takes time, and with the current shortage and an increasing demand, Auckland house prices are on the rise.

According to the latest Real Estate Institute of New Zealand figures for July, Auckland house prices have risen 25 percent over the past year, compared to a 3 percent rise for the rest of the country. The volume of house sales is also picking up in other areas such as Waikato, Bay of Plenty and Northland.

Last month the Herald reported that an ‘economic migration’ is taking place, as increasing numbers of Aucklanders cash up and leave. From April to June, 873 Auckland home-owners sold up for the Waikato or Tauranga, up from 793 in the January to March quarter, and a significant increase from the last quarter of 2010, when just 300 Aucklanders left for those regions.

The economics stack up. Aucklanders moving to Tauranga are selling for an average $770,000 and buying for an average $533,000, leaving them with an average difference of $237,000. Those moving to the Waikato are selling for an average $642,000 and buying for an average $398,000, leaving a difference of $244,000.

Many are leaving for the lifestyle, swapping hours a week of commuting on congested roads for more time with the family. But who can question the appeal of life without a hefty mortgage – and with money in the bank!

The Reserve Bank is also concerned about the increasing presence of property investors in the Auckland housing market. They accounted for 41 percent of all Auckland market sales in June 2015, up from 33 percent in late 2013.

The point is that after the Global Financial Crisis, the Basel Committee on Banking Supervision recommended that central banks should treat property investors as a separate ‘asset class’ that, in the event of a market correction, has a higher risk of default than owner-occupiers.

Accordingly, the Reserve Bank now requires trading banks not only hold more capital against property investor loans, but from November, to apply new Loan-to-Value-Ratio (LVR) limits on lending that will require a minimum 30 percent deposit on residential property in the Auckland Council area. Investors who are cash buyers or have borrowed offshore will not be affected.

The Reserve Bank also considers borrowers with less than 20 percent deposit for the purchase of a residential property as being at high-risk, and requires banks to restrict lending to these high LVR borrowers to no more than 10 percent of the dollar value of all new residential mortgage lending (except for loans on new housing). The LVR restrictions outside of Auckland have now been relaxed to 15 percent.

To help dampen the Auckland property market, the government has tightened the ‘intention’ test, so that any gain from residential property sales – apart from a family home – within two years of purchase, will be taxable as income at the taxpayer’s marginal rate.

Further, new rules around foreign purchasers will apply from October 1, whereby all non-resident property investors will be required to open a New Zealand bank account, acquire an IRD number, and provide passport and home country tax details. Where international data-sharing arrangements apply, these changes are expected to expose investors to scrutiny by taxation authorities in their home countries. The changes will also force non-residents to comply with the requirements of the Anti-money Laundering and Countering Financing of Terrorism Act.

So, with Auckland’s over-heated housing market considered a threat to New Zealand’s financial stability, what can be done to mitigate such risks?

This week’s NZCPR Guest Commentator, Dr Phil McDermott, a consultant in development planning for over 30 years and a former Professor of Resource Planning at Massey University, has provided an outline of how he believes we can meet the challenge of future housing needs, without an over-reliance on urban intensification. But he admits that such fresh thinking will require a change in mind set:

“Changing minds is a challenge.  Recognising that the current housing affordability crisis and the associated equity issues flow in large part from 25 years of planning to contain Auckland would be a start.  Changing mind sets is unlikely though, without shaking up the planning regulations and the institutions responsible for them.

“We need to think about urban communities, not just buildings. We also need to accept that urbanisation is as much about connections among discrete centres as about uninterrupted development. It need not mean building houses to the horizon, or erecting walls of apartments.  Instead it can take the form of settled landscapes shaped by natural features, a patchwork of urban places linked by green transport corridors. A shift in mind set also means accepting that the best opportunities for sustainable or smart settlement lie in green fields.”

Auckland should serve as a warning to the rest of New Zealand. Are their local councils trying to restrict urban growth by forcing families to live in houses on cramped sections – or are they enabling green field development to serve their communities by providing the bigger lot sizes that many families want, with a few acres for a pony, an orchard, and a garden?

For too long, environmentalists have promoted urban intensification by scaremongering about the dangers of ‘urban sprawl’. What they have failed to divulge, is that with less than 1 percent of New Zealand’s total land area being built on (including roads), this is not an issue that planners, nor councillors, should allow to influence their decision-making. Instead, they should be making sure that enough new land is being released to meet the demand for lot sizes that new home owners want.


Do you believe enough being done to deal with the economic slowdown?

Vote x 120

 *Poll comments are posted below.


*All NZCPR poll results can be seen in the Archive.

Click to view x 120


Some mild to moderate action now may avert more measures six to twelve months away. Tony
The rockstar economy has gone into rehab. Monica
Abundant hydro electric power; geographical isolation and the security that offers; why not abundant server farms for the net/google…and yes a fast link to serve the rest of the world would be needed to implement that.. Zoran
More incentives are needed to pomote small businesses. Cyril
Regretfully the answer is No. Why due in the main, to an ever increasing bureaucratic dominance of our whole society. Our internal and compliance costs are so great that exporting and selling those exports has become a very chancy business. The emphasis should be on an export led economy, even if this means a two tier Tax system first and foremost, not one led by the idea that Companies are there to soaking up the unemployed. Over 100 years of socialism has played havoc with our business sense, as we are structured from an early age, that Government whatever its political hue, is there for the express purpose to satisfy the public’s every whim and desire and as a permanent safety blanket. Individual responsibility has been reduced to a minimum, as the State has assumed the role impressing socialism into our personality, which then affects our decision making. Consequently we allow Political Parties to dominate to a degree which our forefathers would have considered a betrayal of those conditions, won so hard since the implementation of Magna Carta in 1215. Our society has become dominated to a large degree buy the influence of humanitarian issues, most of which ignore the future consequences which will arise, the present demand from our liberal mobs that New Zealand take in vast numbers of Syrian illegal immigrants, most of whom seem to be middle class able to pay the people smugglers. Quite ignoring the subsequent costs involved, let alone the future social issues. Our internal costs need to be trimmed to suit our overall economy, by reducing the vast number of government and local government employees, a revision of the Charities Act; and the apartheid Act which gives Maori first refusal on Crown Land purchases. This was in essence, a Constitutional Act which deprives the majority to the benefit of a minority, made purely for political purposes. National has certainly done a much better job than a Greens/Labour coalition, but they still continue ignore the hard decisions that plague our economy. Brian
Think we should not over re-act to the Auckland housing problem. Options are available for Aucklanders, – you can buy LATTE south of the Bombay Hills. Many are already moving to Tauranga etc. Kevin
2 things would help the Auckland housing situation. 1. Make the “land-bankers” use the land they have purchased within a reasonable (5 years) period of time and 2. Make the people who own the 26,000 permanently empty homes in Auckland rent them! Ted
Let’s procrastinate some more John Key. Norm
Not bold enough to busy vote catching. Barry
No, you can never do enough, but this National government has, and is doing it all right, I shudder to think what NZ would be like now if stupid Labour and the idiot Greens were running the country. Athol
Council’s are in a cleft stick of being damned if they do and damned if they don’t!. My answer is really yes/no. Jim
Yes I think so, I sure don’t see to many suffering in this country. Nev
Really I don’t know the answer to this question!!! Neil
No real incentive to ensure a sound economy has been implemented since globalisation took place in the mid eighties. It was then recognized that, mainly due to the greed of unions, manufacturing industries in the western world, could not be competitive. So we imported all consumer goods that used to be manufactured here, & created useless jobs [we call them bureaucracies] to soak up the unemployed that would have once worked in our factories. This is of course totally unsustainable, as the few remaining productive industries [including agriculture] are slowly but surely being strangled to death by compliance demands, that pay the parasites [beaurocrats] wages. Dairy farmers alone, have paid out $2billion, in compliance costs, & received not one cent reward in financial return. Tourism is meant to be our salvation, but really, we have nothing that can not be seen elsewhere, & so we must, either find something unique that we can do or produce, or continue to borrow $1million per-day just to stay afloat. It would also help considerably if gutless governments ceased gifting Maori descendants many millions of falsely claimed $$$. The building industry does create jobs, but most forget that 90per-cent of the material & fittings used are now imported, & this soaks up even more of our over-seas earnings.. A.G.R.
We are left in the dark too much! Graeme
The Government should kerb immigration and be very selective with people they let in. Stop selling. NZ to overseas interests. Peter
If the Goverment interferes with the natural flow of things it ends up costing the country more.  Finance that the country doesn’t have. John
More help is needed in the primary industry sector. Kay
All tax payers in New Zealand should pay an equal tax. John
Everything the government has done so far, like over regulate and over tax has caused the slow down and if they do more it will only get worse. You cannot control an economy without wrecking it. Larry
Govt should back off – regulation after regulation is enough to deter anyone from going into business. Key gambled and won in NY and he is gambling with the economy and is ” comfortable” with everything. Govt should back off, and stop spending on useless stuff like flags. Carolyn
NZ has a useless and incompetent group, who merely play at being a govt. The NZ relies on dairy and tourism. Nobody is buying dairy products and the currency is still too high for most tourists, so the NZ govt. had better come up with something else so the country can earn it’s keep!. John
Already export prices are moving up – although only slowly, but this is a good sign. Brian
The Government is not brave enough to admit its policies have stuffed up the economy. Peter
Nothing is being done while we wait to see how many more jobs go to China under tpp. David
Hope so. David
Dairy prices are an issue but so are ever increasing Council and Government spending on nonsense and the consequent increased cost demands on NZ’rs via the mad projects be it environment hysteria or ill conceived projects. We need to demand spending reductions and reduction in the employees of these mostly ineffective Council and Government departments. Perhaps halve company tax in targeted towns outside of Auckland to encourage businesses to move out there and employ. The schools also need to wake up students to apply themselves a little better. Nobody is owed a living. Gregar
I wonder really what more can be done, with low interest rates, a higher dollar for exporters. Frank
For what it is worth I also think that the Government of NZ should also consider anyone immigrating into New Zealand should not be able to purchase an existing dwelling. They should be made to build a new house therefore at least keeping a few Trades people employed in the building industry and help keep housing affordable for the first home buyers. Wayne
Government keeps on say we are doing well. Big companies are doing well. The money men. Robert
To some degree only. Lance
Too much is being done by government. Speaking generally in both the short and long terms. Government intervention causes distortion in a free market economy which we are not. The effects of which, people rightly and justly complain about then erroneously demand more government intervention to fix the problems. THE EXACT OPPOSITE IS TRUE. GOVERNMENT – BACK OFF. There will always be inequality and with less government intervention there will be a diminishing inequality along with an expanding middle-class prosperity. Just leave people free to function in a private and rational manner. The rule of law will deal with the miscreants. Don
I take issue with the last comment in Muriel Newmans report – yes, only a small part of nz land is lived on the problem is that it is the land that could be the most productive land – market gardens etc. eg South Auckland, Hutt Valley – they used to be the food bowls and still should be. Alastair
Our economy is not under pressure it is totally out of control. The man in charge is a gambler – what else do you expect? John
Let the market self regulate, it always has in the past. Warren
The link between rural wealth creation and urban consumerism is widening and a lack of economic understanding leads to a lack of understanding by many policy makers. Willy
I believe the government is just cruising on this problem. However in compared to our neighbors we are still doing very well. Ian
Government is not in business & had they over the years keep out of fiddling with trade all would be fine. Ranald
NZ needs to encourage exporters, and esp agriculture. Stewart
I believe social & racial divisions have strong negative influences thanks to associated ‘rewards’ (now considered by many as “our right” could well eventually cripple our economy when the money tree dies! Encouragements (rewards) should be directed towards positive outcomes and not negative (our right) outcomes – like benefits for unmarried mums to have another baby! Stuart
The Government as always is far behind the front line reality preferring to wait for focus group polling to make decisions. Graham
Till we replace councils like the mr Brown club it will be very difficult to get the economy moving. Firstly we have to do away with those unelected chairwarmers who do nothing else but disagree and hold out their hands for more money. Johan
Auckland has to stop restricting urban growth and go further afield. Council need to stop being so narrow in their thinking. It’s affecting the whole country. Kerry
But with a total national debt of around 500 BILLION dollars and climbing, with no government principal debt being paid back, and most of our assets sold off, there is not a lot of room to manoeuvre. Peter
Where do I start? What happened to employing young Kiwi people in places like Chch? Why waste $ on “the Flag Debate”? Yawn. Andy
Yes, the pressure points in the economy appear to being well managed. Let’s hope the downturn does not last too long. Janice
The situation in Auckland is a shocker. Radical councillors and planners have run amok, forcing their environmental ideology onto the city. Shame on them. Murray
The economy will not improve until dairying picks up. Andrew
Planners have a lot to answer for – stuffing up our main city so badly. Patrick
The economy is definitely coming off the boil, but we are still doing better than many other countries. Brian
We are too reliant on dairying. The sooner the economy diversifies into higher valued manufactured goods, the better off we will be. Chris