Many thanks to subscribers for your patience and support while I’ve been off work. My mum died in Melbourne last Sunday, and her funeral was held there on Friday. I appreciated being able to spend time with my mum before she died, and with my family and Lynn over the last couple of weeks.

Kia ora. Long stories short, here’s my top six things to note in Aotearoa’s political economy around housing, climate and poverty on Monday, October 21.

* The Government’s economic strategy is dependent on lower interest rates fueling higher household borrowing and a resurgence in the housing market, but the Reserve Bank’s new Debt to Income multiple controls may prove a stumbling block over the next couple of years.

* In the scoop of the day, it turns out reports of imminent Government intervention in Wellington City Council were based on briefings by unnnamed sources, rather than more substantial sourcing, Colin Peacock reported yesterday for RNZ’s MediaWatch.

* In the deep-dive of the day, Farah Hancock has written an excellent deep-dive piece via RNZ about the changes to the Resource Management Act being shunted through by the Government.

* In solutions news, the Victorian Government announced plans for 50 new higher-density housing zones around train and tram stations that could drastically change the look of Melbourne's suburbs. ABC.

* In number of the day, AAP reported 36,721 New Zealanders had acquired Australian citizenship in the 15 months since ANZAC Day last year when Anthony Albanese's government allowed Kiwis access to an Australian passport after four years of residency.

* The chart of the day shows the number of New Zealanders on a main jobseeker, disability or sickness benefit hit a record high last week.

(There is more detail, analysis and links to documents below the paywall fold and in the podcast above for paying subscribers. If we get over 100 likes we’ll open it up for public reading, listening and sharing.)

Relying on higher household debt to fill the fiscal hole

Big Govt spending cuts need replacing to return to GDP growth

Treasury has warned that the Government is embarking on its biggest fiscal tightening ever over the next three years to return the Budget to surplus and start repaying debt. The Government has also said it wants to fire up economic growth again. But how will that happen if the Government is spending less? Which sector of the economy will pick up where the Government left off? And how will that sector pay for it?

Finance Minister Nicola Willis told me a couple of weeks ago that interest rate cuts would do their magic and stimulate the economy again. The Government no doubt hopes that spending will come from business investment and household spending and investment, which is possible if they borrow.

But the recent history of business investment and borrowing is that it’s mostly to buy property, both residential and commercial, and it’s relatively small vs household ‘investment’ in new and existing homes, and the spending that is triggered by that on furnishings, renovations and all of the spending around a property transaction.

In an economy that is a housing market with bits tacked on, the way to engineer economic growth from the private sector to offset less Government spending is to engineer a surge in house sales and prices. That’s because business borrowing and investment on anything other than farm land and commercial and residential property is much less than it used to be.

At various points over the last 20 years, the Government has tightened fiscal policy and repaid debt, in both nominal terms and as a percentage of GDP. But it was only able to do it with economic growth when there was a surge in household debt, house prices and the population through migration.

Collectively, the Government is planning to pull around four percentage points of GDP worth spending out of the economy in the next four years. That’s about $20 billion worth of spending and debt that needs to be stacked up somewhere else by the fourth year, or around $50 billion over the four years. In the past, that was mostly done by households gearing up to buy each others’ houses, and by foreign investors buying assets here or investing in new assets — mostly Government and bank bonds.

The Clark/Cullen Government ran tight fiscal policy and repaid public debt from 1999 to 2007 just as the housing market really took off, thanks to increased bank lending. The Key/English Government tightened policy from 2012 to 2017, and Labour carried that on through to 2020. Over the last 25 years, household debt has sextupled from $60 billion to $360 billion, while business debt has only quadruped from $35 billion to $135 billion. Housing debt growth outpaced business debt growth by a rate of three to one. The fiscal tightenings of 1999 to 2007 and 2012 to 2020 were only possibly with sharp increases in bank lending against existing homes. The issue became so acute in 2013 that the Reserve Bank introduced Loan to Value ratio restrictions to slow the growth.

That difference in business and household borrowing is even starker since 2020. Household debt has risen $82 billion since January 2020, while business debt rose $14 billion. As these charts below show, the periods of fiscal tightening (pink above the line) were associated with asset sales to foreign investors and extra borrowing by households.

The guard rail stopping another huge housing borrowing binge

The problem for the Government is that it will be harder to engineer another housing boom through household debt growth due to lower interest rates because high Debt to Income multiple lending is limited now by the Reserve Bank.

From July 1 this year, the Reserve Bank has limited banks to 20% of owner-occupier lending to borrowers with a DTI ratio greater than 6 and 20% of investor loans to investors with a DTI ratio greater than 7. That hasn’t reduced lending much since July 1 because the limit was broadly set at current levels.

But to get an idea of how important high DTI lending is in creating any housing boom, here’s the chart showing that between 60% and 80% of the lending growth driving the 2020 and 2021 surges in house prices came of high DTI lending to existing owner-occupiers and investors. It means that rises in house prices can’t turbo-charge lending by increasing equity and therefore enabling high LVR lending. Incomes aren’t connected to house prices, especially when you don’t have to declare income from capital gains anymore.

This restriction is the guard rail making it difficult for the Government to find economic growth from another spectacular rise in house prices and household lending. That leaves foreign investors pumping money in to buy existing assets such as land and bonds (mostly) and to create new assets through business investment. That’s why David Seymour has been pushing so hard to relax foreign investment restrictions, and why NZ First is under such pressure to relax its opposition to sales of residential and farm land to foreign investors.

Meanwhile, Nicola Willis will struggle to find an alternative source of growth. Her preference would be for business investment in plant and equipment and private investment in infrastructure. Both are unlikely to deliver much, in part becase companies don’t have big enough balance sheets and they face the same unequal playing field as households: leveraged investments in residential land far outperform business investments after tax and relative to the risk involved.

Charts of the day: more beneficiaries than ever

Headed for worst share since GFC

The Kākā’s Journal of Record for Monday October 21

* Environment: The Environment Committee's draft report on the Fast-track Approvals Bill recommended that expert panels, rather than Ministers, be given final approval on projects. The Environmental Defence Society praised the recommendation, but called the Bill’s expert panel process a "rubber-stamping exercise". Parliamentary Commissioner for the Environment Simon Upton said the Bill's “objective” is to override environmental protections. RNZ

* Inequality: Following backlash from lobby group Hobson's Pledge, the Solicitor-General took down new prosecution guidelines encouraging judges to use restorative justice approaches more frequently and to "think carefully" about how different demographics are disproportionately affected by the criminal justice system both as victims and offenders. Solicitor-General Una Jagose KC said her wording in the Introduction "missed the mark", and that she'll republish the guidelines before they come into effect from January 2025. RNZ

* Migration: RNZ reported that migrants working via the six-month Migrant Exploitation Protection Work Visa will be unable to apply for an extension to the visa under changes coming into effect on October 31. Immigration Minister Erica Stanford also announced that a team is working on reducing wait times for accredited employer work visas.

* Electricity: A survey by Curia for Octopus Energy found 68% of NZers think power company profits are "unreasonably high", with 45% expressing support for separating the generation and retail arms of large power companies. Octopus Energy Chief Operating Officer Margaret Cooney said high prices had forced some employers out of NZ, and that breaking up gentailers as had happened in the UK would increase competition.

* Infrastructure: Land Information Minister Chris Penk announced the Government would change the Public Works Act in order to simplify the process by which the Government acquires land for public infrastructure. Penk said the Act's requirement that projects be of national significance is holding back regional infrastructure.

* Economy: A CPTPP panel of arbitrators ruled last year that Canada breached its Partnership obligations by blocking NZ exporter access to its dairy market; Trade and Agriculture Minister Todd McClay announced NZ has now triggered mandatory negotiations over the matter. McClay said if Canada owes NZ compensation if it refuses to meet its CPTPP obligations; the Labour Party supports the move. RNZ

Cartoon of the day

Nature pic of the day

Ka kite ano

Bernard

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