The Kākā by Bernard Hickey

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TLDR: Another business confidence survey shows the Reserve Bank’s ‘cool your jets’ warning in late November that it wanted to engineer a recession did indeed shut down the ‘jets’ of businesses and investors.

But initial signs over ‘summer’ from the tills of retailers and bar owners show consumers are yet to really cool their spending jets dramatically. That may come later this year as those with fixed mortgages reset their rates, although the hit won’t be as dramatic as painted in the headlines.

Free subscribers can hear more from a key business confidence survey and a research note on the mortgage hit in the podcast above, which includes interviews I did yesterday with NZIER’s Christina Leung and Westpac’s Satish Ranchod. Full paying subscribers can see and hear more detail and analysis on yesterday’s NZIER QSBO survey results and Westpac’s housing bulletin this morning below the fold and in an extended podcast above.

Briefly elsewhere in the news this morning:

* China’s population fell last year for the first time in more than 60 years, which was a factor that slowed its GDP growth to just 3.0% for the year and below Beijing’s 5.5% target, although growth was stronger than most expected in the December quarter despite covid dramas;

* the Bank of Japan is expected to pivot away from money printing later this afternoon and end two decades of near-zero interest rates because it finally has some inflation it needs to address;

* Wellington’s bus operator, NZ Bus says it will soon resume more scheduled services as it has employed 100 new bus drivers, many from overseas; and,

* Garage Project says one of its breweries has run out of CO2.

Boardrooms heard Orr’s ‘cool your jets’, but not most consumers…yet

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TLDR: Any relaxation of Loan to Value Ratio (LVRs) restrictions next year in conjuction with the introduction of Debt to Income (DTIs) would further heighten tensions between an Adrian Orr-led Reserve Bank and any new National Government.

That’s because DTI limits hit landlords harder than first home buyers and would potentially offset any of the benefits of house price appreciation from National’s removal of interest deductibility and the reversal of the extension of the bright line capital gains tax for landlords.

In some ways, any Reserve Bank push to formally introduce DTIs could be a deliberate attempt to quash any housing market surge after a change of Government.

I talked about the potential softening of LVRs and any DTI introduction in 2024 in an interview with Core Logic’s Chief Property Economist Kelvin Davidson, which I’ve included above in full for both free and fully paid subscribers, although I’ve included my commentary and more detail in a longer version of the podcast above for full subscribers and below the paywall fold.

Elsewhere in the news

* Construction cost inflation here in Aotearoa eased again in December (see more below the fold);

* Watch out later today for local retail sales data and the NZIER’s QSBO results for the December quarter; and,

* Exporters and CO2 wholesalers are looking to build a second CO2 plant after the unscheduled shutdown of the Kapuni plant has quintupled prices and is restricting fresh food exports.

DTIs loom as flash point next year for any National Govt

TLDR: Aotearoa’s peak union body, the CTU, has proposed an Inflation and Incomes Act that takes a new approach to reducing inflation of rent, food and energy while also increasing disposable incomes of workers.

Inspired by US President Joe Biden’s Inflation Reduction Act, which is based on clean energy and infrastructure investments to reduce energy costs and emissions, the Inflation and Incomes Act would force any Government to demonstrate how it would lower core inflation of rent, food and energy prices over the long run, while also increasing real disposable incomes.

The Act, which could easily be retitled the Inflation Reduction and Disposable Income Expansion Act, is designed to work alongside an amended Reserve Bank Act in a way that turned the tables so Te Pūtea Matua (The Reserve Bank) would have to regularly judge the Government’s performance in improving core inflation and disposable incomes through supply side reforms and investment.

The Reserve Bank would still be required to target and achieve more generalised inflation targets, but would be much freer to call out the Government for not delivering on the long-run supply side reforms to reduce core inflation, including through restricting infrastructure and other public investment in a way that increased housing costs and reduced productivity growth, and by continuing to provide tax incentives for residential land investment over business investment.

The CTU proposed the Act:

* require the Government to target and stabilise core inflation over the next 10 years, with core inflation defined as the inflation basket of the poorest 20% of households, as measured by Statistics NZ’s household living costs price index;

* require the Reserve Bank to assess in a letter with its half-yearly Financial Stability Report how the Government was delivering on that core inflation target and what the consequences of failure would be;

* require the Government to ensure the median rent was no more than 30% of disposable income, which would be assessed at Council level;

* require the Government to report on how many households lived in energy poverty;

* require the Government to target increases in disposable income, including through lower housing costs, cheaper access to essential services such as health and education, and a more equitable tax system; and,

* require the Government to demonstrate how it would achieve these goals within a 10-year period.

I spoke with CTU Policy Director and Economist Craig Renney about the proposal in an interview included in full in the podcast above, which is available for all.

He said the current short-term response to inflation had become too obsessed with reducing inflation quickly, with too little consideration for the consequences for individuals and communities and not enough focus on the long-run supply side response.

“We should care about tackling both the corrosive effects of inflation today and preventing it from reoccurring in the future. This means investing to lift our productivity, not short-run tax cuts. It means delivering economic wellbeing, not just economic growth.

“We might tackle inflation now, but if we fail to address inflation and cost of living pressures properly, it will emerge again in the future.” Craig Renney in the CTU’s paper on an Inflation and Incomes Act.

He pointed to figures showing how wages had fallen behind productivity, how rents had outpaced wages and how those on lower incomes had been hit harder by inflation than those on higher incomes.

How a Government could cut inflation and lift incomes

Renney detailed a range of policies that could be included or referred to in the Act, which would reduce housing, food and energy cost inflation while increasing disposable real incomes, including:

* replacing petrol and diesel vehicles with cheaper-to-run electric vehicles through subsidies and a hard end date for imports of petrol and diesel vehicles;

* electrifying public transport and making it free for school children on weekdays;

* shutting the Huntly power station to stop importing and burning millions of tonnes a coal each year;

* progressively buying back into state ownership the 51% state-owned gentailers and former state-owned power companies using dividends paid by the gentailers to the Crown, in order to ensure stable prices and 100% renewable electricity generation;

* opening up Crown land for new supermarket developments so as to increase competition;

* introducing a windfall tax on excess profits made by energy, petrol and supermarket companies;

* introducing a levy on larger banks;

* creating a tax-free threshold for those on lower incomes, paid for by higher marginal tax rates on those on higher incomes and alternative taxes, including a comprehensive capital gains tax (excluding the family home);

* making the student loans repayment system more progressive to ensure newly graduated workers are not hit immediately with a 45% marginal tax rate;

* introducing a Government-provided first home buyer mortgage with a fixed interest rate for 25% to buy Government-built homes built through a Ministry of Green Works;

* lowering fees for GPs, prescriptions and dental care;

* extending free school meals more widely;

* expanding tax credits for public and private research and development;

* using more Government debt to fund investment in a way that has sustainable funding costs, rather than an arbitrary target on net debt to GDP ratios; and,

* creating a new ‘value for money’ test for analysing new spending and investment by Government that assesses the opportunity costs over the long run of not making the investment.

“Value for money should highlight the cost of non- investment — the true opportunity cost. It would produce an estimate of the ‘liability’ the Crown faces for future expenditure set alongside the debt and operating balance consequences of an investment.” Renney

So would it work and could it happen? Yes and no.

My view - The approach outlined above would break the current fiscal ‘rules’ set by the current Labour Government and implicitly agreed to by National, which include:

* keeping long-run taxation at or below 30% of GDP;

* having a net debt ceiling of 30% of GDP;

* requiring the Government to run surpluses except during and shortly after natural and financial crises; and,

* ruling out a capital gains tax or wealth tax while PM Jacinda Ardern is in politics.

The approach outlined is anathema to the bi-partisan consensus of the last 30 years around protecting and embedding the economic reforms of the late 1980s and early 1990s, including:

* cutting and repressing public investment to allow tax cuts,

* continuing to not tax capital gains on residential land while also not subsidising pension savings; and,

* running fiscal and monetary policy to keep overall inflation low and interest rates low, even at the expense of higher unemployment and lower wage growth.

The Labour Party is showing no signs of adopting this with its current leadership. The Green Party advocates many of the policies above, but can be safely ignored by Labour in any Government-forming negotiations because the Green Party has pledged never to support a National-led Government. Only Te Pāti Māori and The Opportunities Party (TOP) are sympathetic to some or most of the policies outlined above and could leverage them into any Government of the centre-left or centre-right. New Zealand First blocked a capital gains tax and various public transport projects in its term in coalition with Labour from 2017 to 2020.

The only realistic pathway to these policies being enacted would be a change of leadership at Labour and a rise in political support for either (or both) Te Pāti Māori and TOP, given both have not ruled out using their leverage to force either Labour or National to adopt some or all of these policies.

However, the policies make sense for any Government wanting to address the longer-term covid-era and war-era supply shocks with longer-term supply responses. I’ve talked more about that mismatch between our current monetary policy response to inflation and the reasons for that inflation in this piece earlier today.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: 2022 was the year two global supply shocks — covid-driven worker shortages and the Ukraine war’s hit to gas and oil supplies — put a blowtorch under inflation already simmering because of plenty of Government spending and monetary stimulus to combat covid in 2020 and 2021.

That led to an aggressive response from independent inflation-targeting central banks trying to win back their inflation-fighting credibility and jump down hard on consumers, workers and employers who might be starting to raise their inflation expectations. Those central banks, including our own, were forced to use a short-term demand management tool, higher interest rates, to respond the effects of what now appear to be two long-term supply shocks.

But what other choices do we have? One way to respond to supply shocks is to shock supply right back up again with increases in productive capacity, which could include:

* more investment in public infrastructure to increase the productive capacity (output per hours worked) of workers, businesses and the arms of Government;

* investment in public health and education to improve both the number and quality of the hours those workers dedicate to work;

* increasing research and development from both the private sector and public sector;

* encouraging deeper integration with the global economy by increasing the share of the economy competing overseas firms and increasing the amount of overseas investment in local businesses; and,

* changing tax rules and public incentives to invest more in businesses and infrastructure that increase the productive capacity of the economy per hour worked.

The Government’s main adviser on improving the productive capacity of the economy and society overall is the Productivity Commission. Just as the short-term policy makers, the Treasury and the Reserve Bank, have had a big year, so has the Productivity Commission.

I talked with Commission Chair Ganesh Nana just before the summer break about this issue of productive capacity, including the Commission’s work this year on;

* starting a new inquiry into the resilience of Aotearoa’s supply chains;

* following up its 2020/21 inquiry into ‘Frontier Firms’ that compete internationally with a review of the Government policy response to that inquiry;

* delivering its draft report on its ‘Fair Chance for All’ Inquiry into persistent disadvantage; and,

* delivering its final report and recommendations into our long-term immigration settings.

Where’s the long-run supply response?

We got to talking about the big inflation dramas this year and the response from the holders of the levers of short-term fiscal and monetary policy. Nana said he’d like to see the inflation shocks seen within a longer-term context of constrained productive capacity and the brittleness now evident in parts of society and the economy, which worsen those long-run supply issues.

“If we’re serious about productivity, we should be looking for long-term solutions and framing it in the long-term context.

“For example, in our frontier firms inquiry, in terms of our immigration inquiry, the recommendations are very much in terms of long-term. That whatever immigration policy we might choose, it has to be framed along with the long term infrastructure investment needs.

“And where is the plan for that alongside the plan for immigration? Similarly, frontier firms, if we're serious about productivity, where is the investment in science and R & D, in workforce development and investment in our social infrastructure, in terms of social cohesion.

“Covid reinforced just how important our social cohesion is.” Ganesh Nana.

He pointed in particular to Aotearoa’s long-running history of under-investment in infrastructure and R&D, leading to a stagnation in output per hour worked relative to our OECD peers from 20-30 years ago.

The exception that proves the rule

I raised the one recent example where the Government used its balance sheet to invest public funds in infrastructure that improved productivity. The previous National Government invested almost $2 billion in public funds to roll out Ultra Fast Broadband optic fibre and wireless networks to 1.8 million homes and businesses in 412 cities and towns covering 87% of the population.

The Productivity Commission has just completed research that found the roll out of UFB boosted the ability and willingness of businesses to export, which previous research has shown improves the competitiveness, scale and international connections that boost productivity.

The subsidised UFB rollout means the proportion of high-speed internet connections in Aotearoa is nearer the top half of the OECD, rather than the bottom half, where Australia and the United States reside, as this OECD chart in the research shows.

“This paper finds that early adoption of high-speed fibre internet is a predictor of future export entry by New Zealand firms. Controlling for other observable characteristics and looking across export industries as a whole, firms which took up fibre broadband connections in the early stages of the UFB rollout were between 5 and 12 percentage points more likely to enter exporting over the following two years than other (non-fibre) broadband users.” Productivity Commission paper.

Both bricks and mortar and R&D needed to lift productive capacity

This year’s major report by the Infrastructure Commission in May illustrated the scale of our infrastructure deficit ($109 billion) and the likely requirement for another $100 billion of investment over the next 30 years to keep up with even half the population growth we’ve seen in the last decade. Currently, the Government has plans for just over $50 billion of public investment in ‘bricks and mortar’ for housing, water, roads, rail, schools and hospitals over the next five years. The Commission said the Government would have to double its infrastructure investment from 5% of GDP annually to 10% to be able to ‘build its way’ out of the hole.

In May this year, Finance Minister Grant Robertson rejected the Commission’s suggestion $200 billion would have to be raised and invested, saying taxpayers could not afford and did not want the higher taxes and public debt it implied. He suggested the gap could be filled by more congestion charging and other demand management measures, along with restricting population growth through migration by limiting worker migration to higher skilled and higher paid migrants. The Government has yet to respond to the Productivity Commission’s separate recommendation it develop a cross-party and cross-election-cycle migration plan that first worked out what the capacity of existing infrastructure was to absorb more population growth. The Government has since shied away from any discussion of planning migration levels. It abandoned its residency planning range in October.

Since then, the Government has shied away from committing to congestion charges, which most Mayors also reject, and it has announced three loosenings of migration settings to allow more and more migrant workers to come and be paid at relatively lower wages than under the original settings in May.

Invest more and consume less to cut inflation, in the short and long run

Nana said the long-run record of under-investment was a factor in the pressures on supply. Increasing investment would both take pressure off inflation through relatively lower consumer spending and increasing supply,

“Whether you talk about our investment in R&D or whether you talk about investment in the bricks and mortar, as per the Infrastructure Commission, it does signal that we need to scale that effort up a lot more, and that goes very consistently with the argument about fighting inflation.

“If you're serious about fighting inflation, we need to take the heat out of the consumption basket and put it in the investment basket. We haven't got the tools. Monetary policy doesn't do that well because monetary policy just slams down on investment across the board.

“It hurts investment and exporters a lot more than it hurts consumers. So we need another lever or another tool to actually shift that demand. But I'm not overly keen on taking demand out of the system. I'd like to to shift that demand away from consumers, away from me going out there and buying the best and brightest and more towards businesses to invest in innovation and develop exports that will see us through, not just to the next supply shock, but see us through the next couple of generations.

“That’s the shift that we need within if we’re serious about responding to the lessons from covid.” Ganesh Nana in the interview above.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This year the long effects of covid and Russia’s invasion of Ukraine generated global labour and energy supply shocks that fired up already-hot demand-led inflation from 2020 and 2021. That forced central banks to slam on the interest rate brakes, which is forecast to create recessions next year, just as inflation comes off the boil.

In Aotearoa, the Labour Government’s popularity cratered and house prices slumped at the same time as covid finally raced through a mostly-vaccinated population in a couple of waves. Covid, vaccination mandates and winter flu outbreaks stressed an under-invested and under-staffed health system to near breaking point and tore holes in our already-weak social cohesion, especially during protests at Parliament in February and March. The National/ACT Opposition is now in pole position to win the general election late next year just as unemployment starts rising and most homeowners with mortgages re-fix at rates closer to 7% than 3%.

The podcast above includes the final hoon of the year with co-hosts Bernard Hickey and Peter Bale, along with special guests Robert Patman, Josie Pagani and Rod Oram on 2022’s big events in the geo-political economy.

A deeper dive into the big events of 2022 and beyond

It has been a bigger year than most so I thought it would be worth looking at both the context into which it fell, and what that might mean for the future.

In the longer term, Aotearoa-NZ’s political economy of our ‘housing market with bits tacked on’ remains stuck in a rut of two fiscal rules that both major parties believe median voters want because they protect their tax-free gains in land values. Labour believes and National is reinforcing the fiscal framework that taxes should be not much more than 30% of GDP and net Government debt should never go over 30% of GDP. Those rules are stopping the Government from repairing a $100 billion infrastructure deficit built up over 30 years. They also stop the creation of the productive capacity for more high population growth that both parties want, but won’t talk about, plan for, or fund for.

In my view, we remain in an age of magical thinking where most politicians, politicians and voters believe we can still have low taxes and low investment with high population growth and high wages. Until we break out of this ‘unholy trinity’ or ‘impossible trilemma’ of low taxes and low investment, high migration-led population and nominal GDP growth and free movements of people, capital and goods and services, our society and economy will be stuck with:

* low productivity and real wage growth from an economy based on that housing market and extractive export industries such as dairying, pine forestry, tourism and international education;

* tax and investment settings that only make sense for land owners able to capture the leveraged, unearned and untaxed gains from residential land value inflation for themselves and their families; and,

* the growing risk of an exodus to Australia from the half of our young people who were born and/or grew up in Aotearoa, but are from renting families and see little real future for themselves to build their own families here because our housing costs, both to rent and buy, are still the highest in the world relative to incomes.

Essentially, we cannot have it all without ending up ‘chasing our tails’ trying to fill the country with new migrant workers faster than our renting residents leave. In this scenario, we keep our low-tax and low investment settings and end up with the mulitple home-owning voters constantly lobbying for ever-looser migration settings, lower taxes, lower public investment and lower Government debt to keep generating the tax-free capital gains on land values that support their own financial futures.

That would leave us with a hollowed, brittle deeply uneven and unfair society, prone to destabilising exoduses of people and capital, along with the ongoing destruction of our water, soil, climate and overall wellbeing.

In 2023, I’d like to spend more time profiling and examining the various policy options for reform that might be possible in the current version of our political economy, especially in the leadup to elections. I welcome the guidance of paying subscribers in the poll below on how to focus my time working through The Kākā in the year ahead.

The three things that mattered most in 2022

In my view, the three events that changed our political economy and spotlighted the problems we have around housing, climate and child poverty were:

* the Parliamentary protests in February and March that demonstrated how vulnerable our social cohesion and national security was to disinformation and disruption sourced from overseas, largely because of the widening gaps over the last 30 years between our rich and poor, the governed and governing, and between the big cities and provinces;

* the Russian invasion of Ukraine in late February accelerated a drift away from globalisation that began in earnest after the Global Financial Crisis, along with forcing a panicked shift to both use more coal instead of gas globally in the short term, and ramp up moves to shift from fossil fuels to renewable energy in the long run; and,

* the concerted and rapid tightening of monetary policy by developed world central banks, including our own, which hammered asset prices and may be a panicked over-reaction to the ongoing inflationary effects of supply shocks to labour, energy and food supplies from the long-term effects of covid and the Ukraine war.

Three things to watch for in 2023

As direct and indirect consequences of those events, these are the three big things I’ll watching most closely for in 2023:

* Australia’s increasing willingness to grant full residency and fast pathways to citizenship for New Zealanders from Anzac Day 2023, given Australia’s labour shortages are massively larger than ours and new Labor PM Anthony Albanese is keen to suck Kiwis over the Tasman to fill those gaps, using the promise of easy and fast ‘first class’ residency as bait on top of the usual 30-40% pay increases after housing costs;

* A likely outright National/ACT victory in general elections due in September, October or November, which would lead to an immediate bounce in the housing market in anticipation of looser migration settings, a freeze in housing and transport investment needed to increase housing supply, along with Government spending cuts to engineer a faster return to surplus, less public debt and lower interest rates (which would also accelerate the housing bounce); and,

* A likely pivot lower in official, wholesale and fixed mortgage interest rates by the final quarter of next year because of a sagging in global economic growth and inflationary pressures through early 2023 that force central banks to drag their expected rate tracks lower.

In short, I expect home-owning voters to be wealthier and happier by the end of 2023, but with young renters eyeing their exit options to Australia and employers pushing a new National/ACT Government even harder to loosen migration settings to fill the gaps. By the end of 2023, the big city rail and housing projects started by Labour will be frozen and councils will suspend their transport mode shift and medium density housing drives.

Floating the idea of The Kākā Project for 2023

However, through 2023 I’d like to build and stress-test a cohesive and politically possible set of policy ideas to help voters understand the issues and options through an election year.

I’d like to call this The Kākā Project and run it from late January until the election. It would culminate in a full document (a book?) and/or set of publicly shareable presentations, podcasts and articles to stimulate and inform debate. It would be based around:

* the idea of a new annual broad-based and low-rate land value tax being paid by the owners of all occupied and unoccupied residential-zoned land;

* that those land taxes pay for hundreds of billions of new housing, transport and water infrastructure investments over the next 50 years;

* that those investments dramatically improve housing affordability, eliminate climate emissions, eliminate child poverty, keep net public debt below 60% of GDP and reverse $1 trillion worth of intergenerational wealth transfers that were engineered accidentally on purpose by most land-owning voters, politicians and policy-makers over the last 30 years;

* how these types of policies might be politically viable in the current climate; and,

* how they’d be designed around an agreed population plan for 15 million residents of a rich, stable, vastly-more-equal and growing carbon-zero economy by 2100.

I’d welcome your feedback below. It is conditional on the clear backing and support of paying subscribers, given it is likely to see me do less of the pure news summarising I have often done in the Dawn Choruses. I’d love paying subscribers to vote and/or comment below to give me more direction.

Tell me what you’d like me to work on next year

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: A Labour Government behind in the polls and facing complaints from businesses and landowners about high inflation and rising interest rates has just done what both flavours of politicians have done for 20 years when the pressure goes on: pulled the migration lever hard to juice growth in a low-inflationary way without building the infrastructure first.

It’s our version of Groundhog Day in Aotearoa’s political economy, and it’s exactly what most business owners, employers, landowners, Treasury officials and median voter want: a surge of population-fed nominal GDP growth that:

* lowers wage inflation and boosts profits;

* increases tax revenues and lowers budget deficits and borrowing;

* lowers interest rates more than would otherwise be the case; and,

* puts a springy floor under land prices.

From a political point of view, it’s ‘job done’ by the Government before everyone clocks off for the year and has the barbecue conversations about who to vote for next year. But it only deals with our structural problem in the shortest of short-terms, and only in the most politically and economically myopic way. This third easing of migration settings in five months shows again how neither Labour nor National want nor are able to to address the core flaw in our political economy.

Labour’s determination to address the infrastructure shortage through tighter migration settings, rather than higher taxes, debt and investment, lasted just a few months.

Aotearoa Inc hasn’t invested nearly enough in housing, water and transport infrastructure to cope with past population growth, let alone future growth. Yet politicians, residential land owners and median voters can’t seem to envisage a different way of getting ahead than staying addicted to tax-free gains from land ownership enabled by low taxes, low investment, extractive low-wage industries and a constant flow of mostly cheap migrant labour. Renters can go jump, which they have started to do in rising numbers: across the Tasman.

Plus ça change, plus c'est la même chose.

I detail and analyse last night’s major loosening of migration settings in the podcast above and below the paywall fold for paying subscribers, including audio of my exchanges in the news conference with PM Jacinda Ardern and Immigration Minister Michael Wood. Paying subscribers voted to opened this up for public reading, listening and sharing later. It is now open for public reading and sharing. Many thanks to subscribers for supporting my public interest journalism on housing, climate and poverty in Aotearoa.

Right back to flushing out locals & sucking in new workers

On Monday night the Labour Government loosened migration settings for the third time in five months in an attempt to juice population and economic growth at the same time as taking wage pressure off employers, inflation and interest rates more generally.

The changes detailed in this announcement include:

* expanding the 'Green List' for work-to-residency visas to include nurses, construction workers, gasfitters, drainlayers, crane operators, halal slaughterers, mechanics, telecommunications technicians and teachers;

* expanding the juicier straight-to-residency visa Green List to include midwives, a wider variety of doctors, and auditors;

* offering bus and truck drivers a "time-limited residence pathway" through a sector agreement;

* automatically extending employer accreditation by 12 months if their first accreditation is applied for by 4 July 202;

* introducing a streamlined Specific Purpose work visa to help keep the approximate 2,500 long-term critical workers already in the country to continue to work in their current role for up to three years; and,

* providing a 12-month Open Work Visa for approximately 1,800 previous holders of Post Study Work Visas who missed out because of the border closure in 2020-21 during the COVID-19 pandemic.

PM Jacinda Ardern used her last post-Cabinet news conference of the year to announce the changes alongside Immigration Minister Michael Wood and faced repeated questioning about why the Government had delayed the inclusion of nurses on the Green List after almost a year of calls for a relaxation. 

Ardern said she wanted to make New Zealand the most attractive place in the world to live. She did not mention housing costs or other costs of living.

"We need to attract skilled workers to our shores with our pay, with our conditions and with certainty. So in discussions with business in sector groups, we're expanding on our plan to make New Zealand the most attractive place in the world to live.

“That's why today we're announcing the expansion of the Green List, which provides two fast tracks to residency to help attract people to New Zealand and fill labor shortages." Jacinda Ardern in post-Cabinet news conference (transcript)

Ardern and Wood said they did not have advice on the potential number of new migrants the changes would create, or the likely economic impacts on inflation, unemployment, rents or house prices. 

They pointed to recently low-to-negative net migration to justify the loosening of the settings, although overall inward net migration has picked up in recent months, particularly of non-New Zealand citizens offsetting the number of New Zealanders leaving to live permanently in Australia because of wages 30% to 40% higher there. The gap is even larger after housing costs, where rents and housing costs are a lower share of disposable income in Australia than New Zealand.

Rebalance? More like a see-saw.

The latest changes are the third set of loosenings in five months, including a reopening of the skilled migrant category for residency visas in October (see story here) and a loosening in August (see story here) to cut the wage rules for years for the aged care, construction, meat processing, seafood and adventure tourism sectors, and to double the cap for working holidaymakers, who can work for anything above the minimum wage.

That first loosening came just 100 days after the Government launched an immigration ‘rebalance’ designed to limit the number of migrants, given the Government has said it is not prepared to invest in the $200 billion of infrastructure the Infrastructure Commission has recommended, if population growth continued at recent rates. That determination to address the infrastructure shortage through tighter migration settings, rather than higher taxes, debt and investment, lasted just a few months.

Wood said the whole world was experiencing labour shortages right now and the Government had listened to business requests for more opportunities to recruit internationally.

“We have approved over 94,000 job positions for international recruitment, granted over 40,000 working holiday visas, reopened the Pacific Access Category and Samoa Quota, delivered the largest increase in a decade to the RSE scheme, and resumed the Skilled Migrant Category and Parent Category so as to strengthen our international offering – but there is more we can do to support businesses to attract the workers they need.

“New Zealand’s strong economic position during a time of global downturn presents a unique opportunity to attract more high skilled migrant workers to our shores, as we prepare for a challenging year ahead. We understand that labour shortages are the biggest issue facing New Zealand businesses, and are contributing to cost of living pressures too.

"These measures are about addressing those shortages and providing greater certainty to businesses as they recover from the pandemic." Michael Wood in a statement.

334,000 work and residence visas approved, and RSE expanded

Wood said the Green List would be reviewed again in mid-2023.

The 134,000 migrants approved to come in over the next year adds to the 200,000 migrant workers granted residency because they stayed here during Covid 19. In September, Wood also increased the annual quota for temporary Registered Seasonal Employee (RSE) scheme workers from Vanuatu, Fiji, Samoa, Tonga, the Solomon Islands and Tuvalu by 3,000 to 19,000, which was the largest increase in over a decade.

This latest loosening came on the same day the Equal Employment Opportunities Commissioner, Saunoamaali’i Karanina Sumeo, published a scathing report on the RSE scheme that called for a proper review and removing the tying of a worker to an employer through the visa, which is the common practice for other temporary work visas as well.

“It has been absolutely distressing to witness the living conditions, exploitative practices and the apparent disrespect on the mana, collective and cultural identity of the workers that are coming from the Pacific to work in our industries here.

“We know there are systemic human rights issues that need to be addressed under the RSE scheme.

“Our engagements with RSE workers have revealed serious gaps in the scheme, which may enable a systemic pattern of human rights abuses throughout the country.”

“What’s become quite clear is that due to a lack of oversight, regulation, enforcement, and human rights protections within the RSE scheme, employers are able to exploit workers with few consequences if they wish.” Equal Employment Opportunities Commissioner, Saunoamaali’i Karanina Sumeo in a report on the scheme.

So why can’t we kick the addiction?

Aotearoa Inc hasn’t invested nearly enough in housing, water and transport infrastructure to cope with past population growth, let alone future growth. Collectively, we still won’t or can’t invest enough in infrastructure, business assets and training to deliver the productivity boost needed to create real wage growth after housing costs are taken into account.

We also haven’t touched the hairy bits of the biggest of elephant in the room of our political economy. We haven’t collectively debated or decided how ‘big’ we want our population to be, and whether we want to actually invest for that ‘big’ (or little) Aotearoa.

Our Unholy Trinity

It’s easier to think magically that we can have it all (high GDP and land value growth growth, low taxes, low interest rates and low investment), and hope someone else takes the hard decisions some time in the politically distant future to either lift taxes and investment to lower housing costs relative to incomes, or to limit population growth by restricting migration.

This ends with: ‘Will the last tenant to leave the country tell the one landlord left to turn off the lights?”

This is our own version of the classic Impossible Trilemma or Unholy Trinity, which refers to the impossibility of having a fixed exchange rate, independent monetary policy and free movements of capital all at once.

Ours goes something like this: we can’t have fast migration-led population and GDP growth without significantly higher taxes and debt for investment in infrastructure, and we can’t have it while keeping gains on land values tax-free and allowing free movements of workers across borders. In the end, something has to give. Either the congestion and land value inflation drive renters out of the country and makes attracting migrant labour difficult, or the constant under-investment drags down real after-housing-cost wages to levels that make attracting migrant or local labour difficult.

This ends with: ‘Will the last tenant to leave the country tell the one landlord left to turn off the lights?”

At the moment, residential land owners think they can have it all, thanks to the encouragement of politicians from both main parties who are loathe to propose higher taxes (especially land or capital gains taxes) or congestion charges for infrastructure, or higher public debt levels that would push up interest rates and push down land values. Like any addict reluctant to take some short term pain for long term gain, median voters think just one more hit of migration will solve it all.

Flushing young renters out and replacing them with residency hunters

Meanwhile, the young renters who grew up here without land-owning parents are left wondering if anything will ever be done to lower the highest housing costs in the world in a way that allows them to save for their own homes and put their roots down here. The option to simply leave for much, much higher disposable incomes after housing costs in Australia looks ever more attractive at a time the Australians actually want to welcome Kiwis in with open arms to be permanent Australians.

Those young people who grew up here are then replaced by migrants, skilled or otherwise, who either are moving here because either our lifestyles are better than the polluted, dangerous and corrupt big cities of India, the Philippines, South Africa and beyond, or they haven’t worked out just how brutal our housing costs are. The third rarely-spoken-of option is that they see New Zealand as a residency mill to give them the ultimate holy grail: residency in Australia. Ironically, that option becomes much more viable and valuable if, as now seems likely, Australia follows through on its promise from earlier in the year to treat New Zealanders there as first class residents for the first time in two decades. See more on that here in yesterday’s podcast/article.

Our young are voting with their boarding passes

The outflow of locals is on in earnest, and not just from ‘catch-up’ OEs. There have been 12 consecutive months of net migration losses of New Zealand citizens to October 2022, amounting to 15,100 over the year, Statistics NZ reported yesterday. This follows 27 months of mainly net migration gains of New Zealand citizens, amounting to 32,100. Effectively, half of those that came home have already left again.

Australia is the main destination. There was a provisional net migration loss of 7,500 people to Australia in the year ended March 2022. This was made up of 15,300 migrant arrivals from Australia to New Zealand, and 22,800 migrant departures from New Zealand to Australia.

Traditionally, there has been a net migration loss from New Zealand to Australia. This averaged nearly 30,000 a year during 2004–2013, and about 3,000 a year during 2014–2019. That means net migration as of the end of March is already running at twice the ‘normal’ rate seen in the six years before covid. Provisional figures to the end of of October suggest we’re already headed back to those dark old days from 2003 to 2013.

Remember John Key’s comments in the 2008 election campaign about the 36,000 New Zealanders, a full Wellington Stadium’s worth, who had left to live in Australia? Or then Labour Leader David Shearer’s comments in 2012 that Key had turned New Zealand into a “finishing school for future Australians” when 50,000 New Zealanders migrated in a year. This chart shows net migration of New Zealand citizens to Australia up to the end of March this year.

As this series of charts show, this is not new and is a result of more than 30 years of under-investment, which has seen a constant outflow of our most educated and skilled to live permanently overseas. By 2019 we had the third biggest diaspora in the OECD relative to our population, along with the highest share of temporary workers in the OECD. The charts below are from papers from the OECD, Productivity Commission and World Bank.

It’s all because we invest less than most

This series of charts from papers by Sense Partners for the Infrastructure Commission and Infometrics show how Aotearoa has underinvested since the mid-1970s and especially from the 1990s onwards as Governments pivoted towards lower taxes (and no tax on capital gains), lower investment and reinvesting less than depreciation levels.

So surely the Government thought about this? Seems not.

I asked Ardern and Wood at the news conference why they were going ahead with another loosening of migration settings when they had no advice about the likely effects on inflation, rents, employment or infrastructure shortages. You can hear the exchanges in the podcast above.

Essentially, as with National, which is promising a migration surge and also has no plans to ramp up infrastructure investment, they have both chosen not to address the population vs growth vs infrastructure Impossible Trilemma.

Magical thinking rules. Ok?

I’ve written in depth on this today, if only to reinforce my questions about the magical thinking about the Impossible Trilemma. Would paying subscribers like it opened up? Please vote and/or comment below.

News elsewhere here and overseas last night and today:

Who knew what when - Local Government Minister Nanaia Mahuta knew about a Green plan to entrench state ownership of Three Waters assets a month before she had previously said she did, Thomas Coughlan reported this morning; NZ Herald

Onslow decision delayed - Energy Minister Megan Woods has confirmed Cabinet has delayed a decision on progressing with the $4 billion-plus hydro battery scheme in central Otago from before-Christmas until after the New Year; Stuff

‘Not available for comment’ - Russia’s President Vladimir Putin cancelled his usually-huge annual news conference in Moscow at late notice, suggesting intense pressure within the Kremlin over his Ukraine war debacles; and,

Fusion power breakthrough - The FT-$$$ reported yesterday US government scientists had made a breakthrough in the pursuit of limitless, zero-carbon power by achieving a net energy gain in a fusion reaction for the first time.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week in Aotearoa’s political economy and in geopolitics:

* the first tranche of Three Waters legislation was finally passed into law amid a welter of controversy and confusion over a clause to entrench public ownership;

* two new opinion polls showed National and ACT are in pole position to win next year’s election outright;

* PM Jacinda Ardern confirmed she would reshuffle her Cabinet early next year and said the Government was reprioritising its reforms ahead of next year’s election;

* China confirmed a major relaxation of its ‘dynamic zero’ covid policies after widespread protests against harsh lockdowns earlier in the month; and,

* oil prices fell to pre-war levels on fears of recessions in Europe and America, complicating an already awkward decision here on extending fuel levy cuts.

Just a reminder to paying subscribers that Lynn and I are still on holiday and on a reduced work flow, which means there is no Ask Me Anything at midday today and no ‘Hoon’ at 5pm. We return next Friday for the last AMA and hoon of the year. I’ve included a shorter ‘solo’ summary of the week in the podcast above.

Five things we learned this week

Three Waters dribbled through

The Labour Government was forced to shunt Three Waters legislation into law on its own after the Greens and Te Pāti Māori pulled their support at the final third reading. It was also forced to strip the bill of an entrenchment provision designed to stop future privatisation.

PM Jacinda Ardern described the provision as a mistake and the Opposition said it warranted the sacking of Local Government Minister Nanaia Mahuta for defying a Cabinet decision not to include the provision. Ardern said Mahuta had not defied Cabinet and was only responding to a Green amendment paper. Mahuta also said she would stand again at next year’s election.

National-ACT are in pole position to govern alone

Two new opinion polls showed National and ACT are in pole position to win next year’s election outright, with Labour and the Greens lagging a collective seven percentage points in a 1News/Kantar poll and 12.5 points behind National and ACT in the latest monthly Roy Morgan poll.

Look out for a reshuffle and refocus early next year

PM Jacinda Ardern said in year-end interviews she would reshuffle her ministry early next year and look over the summer break to ditch or sideline policies that were not the Government’s top priorities as it strives to a win a third term from behind in the polls.

“(The summer is a chance) to just pause, stand back and say, in the next 12 months what are the things we really need to prioritise, and by prioritising does it mean there are things that you then just say ‘we don’t have the capacity within government to pursue those issues, and they’re just not the most important things for us’.” Jacinda Ardern in an interview with Newsroom’s Jo Moir.

China pivots away from covid zero

China pivoted clearly way from its ‘dynamic zero’ covid policies that had locked down entire cities, neighbourhoods and apartment blocks for weeks on end and forced nearly daily tests for nearly everyone. Widespread and unprecedented public protests last week after the locked-residents of an apartment building in Xinxiang burned to death forced the changes this week.

Case numbers spikes to record highs, but remain tiny relative to the size of China’s population and not much more in absolute numbers than New Zealand. The charts below shows total numbers and case numbers per million.

Petrol prices falling as levy cut looms

Crude oil prices to an 11-month low under US$80/barrel and lower than pre-war levels on fears recessions in China, Europe and America early next year will weaken demand, adding to the depressing effect on our petrol prices from a 16% rise in the NZ dollar to a five-month high this week.

I wrote in Thursday’s email about what that means for the Government’s big decision due shortly about whether or not to extend the ‘temporary’ 25c/litre cut in fuel levies and charges announced shortly after Russia invaded Ukraine.

Useful longer reads and listens for the weekend

A final personal note this week to mark the tragic passing of Hamish Kilgour of The Clean and much more.

This song is one of my favourites of a long list from The Clean.

Here’s a couple of great tribute pieces.

Ka kite ano.

Have great weekends.

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Councils wanting to encourage the funding of affordable new housing should adopt the approach of the Queenstown Lakes District Council, which has been quietly requiring suburb developers to hand over some of their rezoning profits in the form of land or money to the district’s Community Housing trust to fund over 200 new homes.

The use of this system, called inclusionary zoning or inclusionary housing, is commonplace overseas and looks to be one of the few remaining avenues for central and local Government to tax and redistribute the unearned gains on residential land values from rezoning rural land for housing. Queenstown decision to formally embed the practice in its new District and the upcoming rewrite of all of Aotearoa’s district plans creates a tantalising opportunity for tax reform from the ground up.

I detail at length below the paywall how it has worked in Queenstown and why an imminent decision by the Council there to embed the practice in its District Plan is being watched so closely by other councils. I also look at how it became a topic for a heated and dangerous debate in the local elections in October, and how the Council and Trust are likely to remove its pricklier aspects to preserve the practice. I’m happy to open it up for public consumption later if paying subscribers vote below to do that.

Finally, a way to redistribute unearned land wealth windfalls

Aotearoa’s debates around redistributing the massive and unearned gains in wealth on residential-zoned land in the last 20 years to help solve our housing affordability, poverty and climate crises appear frozen in time for now.

PM Jacinda Ardern’s ‘never in my political lifetime’ stance on wealth and capital gains taxes, the Greens’ lack of leverage over Labour and National/ACT’s long-held opposition to capital or land taxes have closed down the ‘Overton Window’ of debate on this area. Any suggestions that it could be reopened depend on whether The Opportunities Party (TOP) and Te Pāti Māori (TPM) get any or enough power in any Government-forming negotiation to force the window back open. Even that remains impossible while Ardern remains Labour leader and sticks to ruling out taxes on wealth and capital gains, as she did at the 2020 election.

Given the current polls currently show voters want a National/ACT Government in its own right, the chances are fading for any sort of centralised or national attempt to begin wealth redistribution and solve the funding blockages at local Government level.

land owners understand deeply how threatening this idea is to the ‘New Zealand middle-class pakeha way of life’

But there is a glimmer of hope emerging at the local level, led by the Queenstown Lakes Community Housing Trust and its founder, the Queenstown Lakes District Council, which have been quietly operating an inclusionary zoning system since 2003. Inclusionary zoning is a non-threatening phrase to describe the Council requiring landowners benefiting from a zoning change to to hand over a certain percentage of the sub-divided land or a monetary equivalent to a community housing provider to build affordably priced homes for rent or sale. It is a common practice in the United States, the UK and Australia.

It was started by a young American town planner working for the Queenstown Lakes District Council in 2003 called Scott Figenshow, who has since gone on to be a long-serving CEO of Community Housing Aotearoa. Figenshow had seen how effective the practice was in the United States and ensured that the Jack’s Point development was required to put aside around 5% of the rezoned land value for a Community Housing Trust developed specifically for the purpose by the Council.

This practice has been kept going since then, helping to fund the building of homes for 244 families. The inclusionary zoning, or inclusionary housing as the Trust now calls it, has already built 109 homes from the 5% contributions of land or money by developers, with a further 215 in planning or building stages across the district.

The Council decided to formalise the practice in its new District Plan and put a proposal out for consultation earlier this year. However, the proposal as it stands, would actually expand the practice to include ‘Mum and Dad’ redevelopments of large sections into two or three plots for infill housing. Contributions would range from 1% to 5% and also include the triggering of a new contribution when an empty plot is built on.

There’s something in that process of taxing a lottery win that seems to trigger a particular level of outrage.

‘Don’t tax my land. Tax someone else, and something else’

That’s when the trouble started. The issue was picked up in the local election campaign, with some calling the practice a new tax. Here’s an example of the reaction from Kinloch Wilderness Retreat owner John Glover:

“Using the RMA to deliver inclusionary zoning, which is basically a tax, is really quite perverse, and it's actually probably stretching the scope of the RMA...the revenue raising path in the RMA is about cost recovery.

“How does that help with affordability of housing?

“You're not proposing to tax the businesses and the tourism operators...whose rapid growth in the district has been a significant factor underlying the housing shortage.” John Glover via Crux.

Essentially, land owners fearing some of their unearned gains were about to be taken away, said other people and other activities should be taxed, rather than their capital gains on land values generated by rezoning decisions.

They could also see the potential for the practice to spread. One councillor, Nikki Gladding, even opposed the plan on the grounds it would cost a lot of money to defend in the courts once developers challenged it.

“It’s going to go through the courts and we won't get any money out of this, if we ever do, for five, six years...and it's going to take all that time and money to get there.” Nikki Gladding via Crux.

Understanding the sensitivity, the housing trust has suggested paring the Inclusionary Housing contributions back to brand-new and full scale developments to avoid stirring up the hornets nest of outrage from landowners seeing their unearned and unearned gains finally being taxed.

The Trust made a submission last month to the Council asking for the contributions to be wound back to just the big developers.

“We believe the subdivision of an existing single lot into two or three new lots should be encouraged to promote greater land use and infill development in those Urban Zones

“We believe any lot that is existing and serviced at the time the plan change becomes operative should not be required to pay a financial contribution upon the construction of a single residential dwelling, and have suggested an exemption to the rule.

“Although the Trust supports the key principles around large land developers making contributions, it does not support the rules around landowners being subject to a contribution where they have purchased a serviced allotment to build a single residential dwelling, or the proposed “top-up” rule.

“We consider these provisions have gone beyond the original intentions of the policy that landowners undertaking larger subdivisions and developments would be required to make a contribution. As such, we would like to see the policy more aligned with the Stakeholder Deeds and agreements provided since 2003.” Queenstown Lakes Community Housing Trust submission.

The Council is now in the final stages of considering the submissions and are expected to vote on the final form of inclusionary housing/zoning in its District Plan within weeks, or at least early next year.

Why is everyone being so sensitive about a practice commonly used overseas? Because it feels like the thin end of a wedge that might touch the biggest wedge of wealth of all: unearned gains on private land values driven by re-zonings and public infrastructure investment.

We are the only developed economy in the world that does not tax this wealth. No wonder the owners of that wealth feel a little nervous.

Deep down, owners know they don’t deserve it and that if justice was done, that unearned wealth would be redistributed to those who owned the land to begin with and to those that have to rent the land and service the landlord/rentier class.

Why including it in District Plans feels so dangerous (and hopeful)

Being taxed on earnings is painful. But being taxed on a lottery win feels like more like theft, given the ‘Government’ is benefiting from the good fortune for an individual. There’s something in that process of taxing a lottery win that seems to trigger a particular level of outrage.

I actually think land owners understand deeply how threatening this idea is to the ‘New Zealand middle-class pakeha way of life’, which is built around the wealth created out of ‘nowhere’ through land values rising because of land use restrictions, infrastructure underspending and falling interest rates. Then there is the original provenance of the land and how it came to owned by settler families and farmers. Deep down, owners know they don’t deserve it and that if justice was done, that unearned wealth would be redistributed to those who owned the land to begin with and to those that have to rent the land and service the landlord/rentier class.

Why shouldn’t every district plan include inclusionary zoning?

Why the Queenstown situation matters so much

The reason the Queenstown example and situation is so important is that the current RMA reforms could be the vehicle for wider adoption of the Queenstown way. The reforms would see every district plan rewritten to include inclusionary zoning, effectively bypassing the frozen debate at the central Government level.

Why shouldn’t every district plan include inclusionary zoning? Lots of councils are watching Queenstown closely and the RMA rewrites look to be perfect opportunities to adopt the practice more widely.

Two podcasts about inclusionary zoning

I spoke to the Queenstown District Housing Trust CEO Julie Scott about this for my Spinoff podcast, When the Facts Change, a couple of weeks ago.

Also, here’s Community Housing Aotearoa CEO Vic Crockford talking with former CEO Scott Figenshow, and co-founder and managing director of New Ground Capital, Roy Thompson, about the use of inclusionary zoning.

Elsewhere in the news overnight and this morning in our political economy:

Rebates dropped - Fletcher Building announced yesterday it was pulling the tiered retroactive rebates it pays to merchants buying its Gib plasterboard. This came as the Commerce Commission published its final report from its market study of the building materials sector, including a finding the sector was not as competitive as it should be and launching an investigation into the Gib rebates.

Governing alone - Roy Morgan’s monthly political opinion poll for November was published last night, showing combined support for National/ACT up 5.5 percentage points to 50% and support for Labour/Green down seven percentage points from 44.5% in October to 37.5% in November. Labour fell 3.5 points to a record low 25.5%. If those support levels were replicated in next year’s election, National/ACT could govern alone.

A bad batch - Just months after the closure of the Marsden Point refinery, Z Energy warned airlines last night that a bad batch of imported jet fuel meant there may be delays supplying fuel for planes flying out of Aotearoa over the peak Christmas and summer tourism season. RNZ

Substacks of the day

Other useful longer reads and listens

Other places I’ve appeared

I spoke with Jesse Mulligan on RNZ’s Afternoon programme yesterday about the golf course issue. Here it is and below in recorded audio form.

Some fun things

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: My article and podcast yesterday suggesting Auckland Council sell its 13 golf courses for housing redevelopment instead of selling its Auckland International Airport stake generated quite a response and discussion. I opened it up to all and promoted it on Twitter after requests from paying subscribers. I’m opening this one up from the start.

One common rebuttal was that turning golf courses into housing developments would only create “more slums” and rob the public and the city’s biosphere of open, green spaces to “breathe, play and relax.”

I’m sympathetic to those concerns, but have seen golf course redevelopments done well, including one Lynn and I stayed in last week in Melbourne. I detail below the fold how it was done and look at which publicly-owned golf courses in Wellington and Auckland would benefit first. I also suggest a model to do it without selling the land and without simply building more empty mansions.

Elsewhere in the news overnight and this morning in our political economy:

Good news = bad news - A US services sector survey was stronger than expected, sparking a sell-off in shares and bonds as investors and traders worried signs of stronger economic growth and inflation pressures might trigger higher interest rates next week when the US Federal Reserve makes its final rates decision for the year; Reuters

Governing alone - TVNZ’s 1News published a fresh Kantar opinion poll overnight, which showed support for National up one percentage point to 38%, Labour down one to 33%, ACT up two to 11%, Green steady on 9% and NZ First up one to 4%. The poll of 1,011 eligible voters done online and via mobile phone from Nov 26-30 also found support for Jacinda Ardern as preferred PM fell one point to 29%, while Christopher Luxon rose two points to 23%. If replicated in Parliament, these support levels would allow National and ACT to govern alone, which I still think is the most likely scenario given what we know now; 1News

Independent inquiry? - PM Jacinda Ardern announced a Royal Commission into Aotearoa’s covid response would be started in February next year and report back by June 26, 2024. The terms of reference specify it must consider the Goverment’s fiscal and monetary policy responses, including the wage subsidies and money printing, although Ardern muddied the waters somewhat in comments last night that it would not be able to look inside specific Monetary Policy Committee decisions for independence reasons Newshub

Cheap money ends - Te Pūtea Matua’s (The Reserve Bank) Funding for Lending Programme (FLP) of cut-price lending to banks at the Official Cash Rate finally ends today as scheduled, with banks having borrowed $19 billion of the $28 billion they could borrowed. The end of the scheme will help boost term deposit rates and may see banks pass on more of the higher wholesale ‘swaps’ rates seen in recent months and which the RBNZ said on Nov 23 it wanted to see the banks pass on more of those rises. NZ Herald

Here’s how to redevelop a golf course for housing

My suggestion that Auckland Council sell its 13 golf courses for new housing developments triggered a lot of complaints about “more slums” and about the paving over of the green spaces that should be available for the public and be the “lungs of the city.”

You can see a sample of the reactions to these two tweets I sent out.

Here’s some of the pithiest responses:

You get the picture. Interestingly, Wayne Brown’s key adviser Matthew Hooton, didn’t think there was a housing shortage to solve any more.

So how could any move like this solve the problem of cutting down trees and building ‘slums’?

Mirvac’s development of Eastern Golf Course in Melbourne

Last week Lynn and I stayed at a friend’s apartment built by Mirvac as part of a massive planned development on the former Eastern Golf Course about 13 kms from Melbourne’s CBD. They kept all the trees and built a wide range of up-and-down-market townhouses with apartment blocks on the margins, with large green spaces/ walking trails chock full of public playgrounds and adjacent barbecue areas. It’s a real living space and a lovely place to walk around.

About 30% of the course was retained as open space for the public. We went for walks and took a few pictures…

Mirvac paid about A$100m for the 47ha site in 2011, buying from the privately-owned Eastern Golf Club (which relocated to the edge of the city). Mirvac plans to sell 913 homes for A$886m with prices ranging from A$415,000 to A$2.75 million each. It has already built most of them.

Here’s a video showing more detail and drone shots.

The scale requires big balance sheets

One reason Mirvac, a listed company, could take on something on this scale without having to carve the course up into lots to sell on is that it has a big balance sheet, thanks to Australians compulsory pension scheme. These schemes now have A$3.3 trillion because they are forced and include an effective subsidy. They also have a more level playing field against the ever-more savings being pumped into Aotearoa’s owner-occupied residential property with augmented rentals leveraging off the owner’s own home. Australia has a capital gains tax.

That means savers are happy to put more money into shares and companies like Mirvac don’t have to compete against those with a tax advantage.

So which golf courses should be redeveloped?

As many respondents to the article pointed out, simply selling all 13 courses would not be easy or fast, given some are remote and some are subject to cast-iron leases blocking easy sale.

The most obvious candidates in Auckland and Wellington would be the courses at

* Takapuna, with both the Waitemata and Takapuna courses and a driving range;

* Waitakere, which is in a high growth area;

* Chamberlain Park, which is next to the motorway and on the way to the Airport; and,

* the Miramar and Berhampore courses in Wellington.

One obvious candidate that is much harder is the prime Remuera course in Auckland, which was locked down in 2016 after the course negotiated a lease with the local board out to 2091.

Here’s the Newshub article documenting how it was done:

"They extended their lease with their local board out to 2091 - that constrains our options, I don't think that was an appropriate thing to do," Mayor Phil Goff told Newshub Nation.

Desley Simpson was chair of the Orakei Local Board in 2016, when Remuera's lease was renewed.

"It was the tool I had to give them the longest possible lease so that it couldn't possibly be up for review and then potentially be turned into housing, which is something I am absolutely,  vehemently opposed to," she told Newshub Nation.

We’ve just had a debate about entrenchment of public assets at the national level. Golfers are well ahead of the curve.

Ways to keep them open and build affordable housing

I suggested selling the land outright, but other options include selling 99-year leases to build-to-rent developers, which, by the way, Mirvac has done plenty of in Australia.

There are plenty of ways to skin cats.

Here’s some other useful replies

Substacks of the day

Have a great day

cheers

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Auckland Mayor Wayne Brown wants to sell the council’s $2 billion stake in Auckland International Airport to cut interest costs by $88 million per year and try to fill a $295 million budget ‘black hole’.

But he is ignoring the annual losses of over $160m a year to run the council’s 13 golf courses, which have a combined value of well over $2.9b. He also has made no case for emergency asset sales to deal with some sort of fiscal ‘crisis’, given Auckland Council’s blue-chip-level AA credit rating is stable and its interest costs are forecast by Standard and Poor’s to be around 10% of revenues for the next three years.

Brown’s case for selling the shares in Auckland Airport cannot be justified by:

* the current financial outlook, given the council itself sees its main debt to revenue forecast falling well below its self-imposed limit over the next five years; its borrowing requirements are scheduled to fall over the next five years; and it has ample resources to roll over its existing debt;

* the alternative investment case for asset sales, given selling the council’s golf courses would reduce the ongoing losses from running the courses of over $160 million per year and raise north of $4 billion in an asset sales process, which would lift the combination of avoided losses and interest savings to over $320m a year;

* the alternative long-term investment case for keeping the council’s 18% share in the Airport is compelling, given airport traffic is rising fast back towards pre-covid levels and the shares generated returns of 22.6% per year in the five years to 2019, which is dwarfs the cost of debt at around 4-5%; and,

* the alternative investment case for using the sale proceeds to invest in public transport would generate much higher returns to Auckland’s ratepayer than 4-5% per annum through reduced congestion and lower carbon credit costs in future.

So why is the Mayor talking as if there is a fiscal crisis that ‘demands’ asset sales? And if there is such a crisis, why isn’t the Mayor proposing selling the golf courses to residential property developers to build tens of thousands of new homes and open up the courses’ green spaces to the public? Or investing any share sale proceeds in public transport rather than debt reduction?

the main aim is to preserve and accelerate leveraged and tax-free gains on residential land values for land owners

The logical conclusion would be that Brown’s arguments obscure an ideological view that the public shouldn’t own shares in publicly listed companies or commercial operations and should wherever possible reduce public debt. The plan to sell shares and cut debt is also part of a long-running ideological view that the role of Government providing services and investing in infrastructure could be limited and progressively reduced over time to allow more tax cuts and to increase the privately-owned share of activity and resources in the economy.

However, I think it’s simpler than that. Wayne Brown is actually simply expressing a view held by most asset owners and investors in Aotearoa-NZ’s economy, or as I call it, a housing market with bits tacked on. That deeply held and and so-far-extremely-profitable investment strategy is that owning shares or investing in businesses in Aotearoa is vastly inferior to owning land, especially leveraged residential land, and even better if it is residential-zoned land that remains banked and undeveloped. The comparative after-tax returns on equity over the last 30 years are spectacularly higher for land bankers and residential land owners and occupiers than for investments in shares or even privately-held businesses. There’s no contest. It’s not even close and that has been by design and omission through Government policies endorsed repeatedly in local and central elections since 1984.

Wayne Brown is being exactly what he is: a property developer who has actually made most of his personal money from land price appreciation on land made valuable through rezoning and paying for water connections at a lower-than-full cost. Here’s more detail on that in the Auditor General’s report on Brown’s development project near Kerikeri. Brown was eventually forced to pay the council he was Mayor of $75,000 in unpaid development contributions.

Ultimately, the role of Government in this scenario where the main aim is to preserve and accelerate leveraged and tax-free gains on residential land values for land owners is to ensure more demand for housing from migration and lower interest rates, and less supply of housing through restricting land supply and the ability of others to rezone land for housing.

Auckland Council’s 600,000 ratepayers are paying the equivalent of $500 for each round played by just over 1% of the ratepayers who are members of the 13 clubs

There are a few ways to do this through Government policy, including:

* restricting central and local Government investment in infrastructure that would open up new land supply for residential housing, thus limiting the total supply;

* reducing council and Government debt to lower interest rates by more than would otherwise be the case, which in turn automatically lifts asset values and has a double-whammy benefit of stopping new investment in infrastructure for housing and pressing down on council appetites to rezone other land for housing;

* reducing public spending on public transport infrastructure that would allow more brownfields housing development closer to CBDs and therefore reduce the relative value of residential-zoned land banked on the edges of cities;

* ensuring no introduction of capital-gains or new land value taxes to ensure the tax advantages of holding land relative to shares; and,

* encouraging strong population growth through migration of lower-wage labour that both expands demand for housing and lowers wage inflation, which creates the double-whammy benefit of lower inflation and interest rates than would otherwise be the case.

Wayne Brown’s proposal to sell shares and cut council debt is completely in tune with this strategy above, which has been the dominant one in central and local Government governance for 30 years. Politicians and many of the officials running both councils and the big ministries actively see their role as containing and reducing the scale of Government services, debt and involvement in the economy, which creates the low supply/high demand conditions for further tax-free, leveraged and spectacular gains in residential land values. Charitably, it is because they don’t trust politicians to do the fiscally responsible thing over the long run and believe these cultural and unapproved (but very real) constraints on public debt and the size of Government. Actually, the playbook of fiscal conservatism, debt reduction and limits on tax/gdp and net debt ratios serves the purpose of starving the public sector and those voters without resources who would benefit, while further enriching landowners.

Wayne Brown’s plan to ‘sell the shares and keep the land’ is a perfectly natural instinct for a land banker and is broadly popular with the 60% of households (and more like 80% of local election voters) who own residential land. This policy embeds the settings in our housing market with bits tacked and creates a future where only those with parents able to help with deposits can hope to join or stay in the land-owning class and be able to raise their own families in the land they were born in. The rest can look forward to either a future as permanently poor renters who both pay and serve the land-owning class.

The rest who have a few personal resources, such as education, can only aim to emigrate to join the other one million compatriots who work, live and build their families overseas. It also embeds a population growth machine that sucks in ever-larger numbers of overseas and often temporary workers to replace and augment the locals leaving. That is possible because there are at least 100 million richer people in India, the Philippines, China, the Middle East and Southern Africa who want to move to a relatively (and literally) cooler, ‘cleaner’ and more stable country.

There is no emergency

Brown’s plans are not about some sort of fiscal crisis that requires emergency action. There is no emergency. I detailed below the paywall fold (now opened up)

* there is no emergency for council finances;

* what the alternative options would be if council decided to create such an emergency; and,

* how the ‘just sell shares and bank the land’ strategy works in the current version of our political economy dominated by low public investment in housing infrastructure, brutally high housing costs, no capital gain or land value tax and low public debt.

So what did Wayne Brown just propose?

Auckland Mayor Wayne Brown announced on Friday the Council would consider this week his proposal to sell the Council’s 18% stake in Auckland International Airport for around $2 billion, which would in turn save $88 million per year.

“Over the last three years, ratepayers have paid $240m in debt servicing costs to hold a bunch of shares that haven’t paid a cent in dividends. The cost of holding these shares exceeds any return, and forecasts suggest this situation will not be reversed for Auckland Council as a shareholder in the foreseeable future. There are better uses for ratepayer capital.

“If the airport needs additional capital for new projects, Auckland ratepayers could be asked to stump up extra cash or see our ownership stake fall even lower.

“Every cent we raise from the sale of the 18 per cent minority stake would be used to lower net debt. The money we save from debt servicing in 2023/24 will be used to reduce rate rises by about a third from levels feared and, in 2024/25, and priority will be given to help support new initiatives for local boards.” Wayne Brown in a statement.

The previous day Brown announced the council had found $130 million of cost savings for the 2022/23 year to “help bridge a forecast budget hole of $295 million.”

“These savings are just one part of my budget proposal, which will help keep rates affordable for Auckland households amidst this cost-of-living crisis and rising mortgage rates.” Brown in a statement.

The week before that he had warmed up the public for the cuts with this statement talking about a blowout in the Council’s budget deficit to $295 million. (Bolding mine)

“Left unaddressed, a $295 million budget hole would require rates rises of over 13 per cent, followed by further substantial increases in future years,” Mayor Brown said.

“It is by far the biggest fiscal hole in Auckland Council’s history, except for the once-in-a-hundred emergency budget when our city was put into lockdown.

“Double-digit rates rises are totally unacceptable and will not happen under my leadership.

“We aim to keep rates rises below inflation to reduce the pressure on Aucklanders now being hit by the economic and fiscal storm I warned about through the campaign and since becoming Mayor. It could still get worse.” Brown in a statement

But is the Council’s financial situation really that bad?

Warnings about “fiscal holes” and “economic and fiscal storms” are things politicians should be careful about. Former UK PM Liz Truss adopted similar ‘crisis’ language just that a few months ago, triggering a collapse in Government bond prices, which increased UK bond yields and increased British mortgage rates.

It was seen as a real crisis and the Bank of England had to bail out the British financial markets with tens of billions of pounds of money printing. Within weeks Truss had been kicked out by her own MPs, although in her case Britain is actually heavily in debt and in danger of a blowout in interest costs relative to taxes, in large part because Truss promised to cut taxes.

So what is the Council’s actual financial position? And how dangerous is it, at least in the minds and projections of the ratings agencies and bond investors who are paid to analyse the Auckland Council’s finances.

Luckily for us, the Council itself published a financial update just two months ago for the holders of the $11b worth of debt it owes to bond holders and banks here and overseas. That showed the council’s debt levels and servicing ratios well under its self-imposed ceilings and trending lower of the coming years. Here’s a few samples from the presentation.

The first chart shows the main metric councils focus on because there is a formal limit using that metric imposed on them by the Treasury-dominated Local Government Funding Agency. It is the measure of gross debt to council revenues, which is limited to 270% and is currently around 250%. It is headed for 220% over the next decade.

That measure also underestimates the strength of council balance sheets and ability to pay interest. For example, Auckland Council’s gross debt of $11.4 billion is currently worth less than 10% of Auckland’s GDP and less than 16% of the council’s assets. That compares with the central Government’s gross debt of 35.9% of GDP currently and British Government’s 102% of GDP. The borrowing costs are still just 12% of revenues and projected to fall under 10% within three years.

10% debt/gdp & 12% borrowing/revenue ratios not a crisis

Would you be worried if you mortgage was costing you less than 10% of your disposable income to service and your Loan to Value Ratio (LVR) was 16%? No. And neither should the council. Wayne Brown is talking “fiscal crisis” for a situation that is one tenth as dangerous as an actual fiscal crisis.

The Council itself appeared far from worried in April when it updated investors through the NZX in this statement:

“While there are challenges in terms of operating budgets, the Council’s projected debt to revenue ratio remains well within prudential limits. This means there is sufficient debt headroom to respond to future financial shocks.” Auckland Council in April 13 statement.

Standard & Poor’s, which is the rating agency paid to judge fiscal crises, was also very relaxed in the September 20, 2022 report that reaffirmed the Auckland Council’s AA rating with a stable outlook.

Here’s S&P’s commentary, which I’ve included at length just to reinforce the expert view on the Council’s situation:

“Auckland's budgetary performance is improving. We forecast the council's after-capital account deficits average has lowered, to about 9% of total revenues between 2021 and 2025, from 12% between 2020-2024. However, an immediate squeeze on the council budget persists.

“COVID-19-related impacts on council revenues, including slower reopening of services, reduction in fees and charges, and lower dividends are persisting longer than the council anticipated. Likewise, current economic conditions, including rising interest rates, inflation, and labor market tightness are driving up costs. 

“The council's immediate response to short-term budgetary pressures leaves it well-placed for a swift recovery. The council is deferring NZ$230 million of small-scale capital expenditure over the next three years and reducing lower-priority service offerings from fiscal 2023. The introduction of a new climate action targeted rate will raise an additional NZ$57 million per year on top of planned rates increases of 3.5% per year. 

“Auckland's operating balance will remain strong, averaging 22.1% of operating revenues across 2021-2025. Immediate financial outcomes are further supported by the first tranche of the Crown's "Better Off Support Package." The council will receive NZ$127 million in one-off grants to support the transition to the "three waters" model. This grant is fully captured in our forecasts for fiscal 2023. 

“Our forecasts incorporate a 10% underspend in the council's capital expenditure compared with its own budget. The Crown remains supportive of Auckland and continues to fund half of the City Rail Link project, including cost overruns. We have not included provisions for cost overruns in our financial forecasts yet because of the uncertainty involved; nevertheless, costs are likely to rise. 

“Our estimate of Auckland's tax-supported debt burden (including non-cancellable operating leases) will move to about 243% of adjusted operating revenues by fiscal 2025. This is down from about 266% in fiscal 2022. While capital spend remains at high levels, the council's debt trajectory is likely to decline as it receives Crown funding via initiatives in the form of grants.

“Interest expenses as a proportion of operating revenues will average about 10.2% between fiscal years 2022 and 2024, and will remain above 10% going forward, in our view, reflecting the higher interest rate environment.

“We estimate the council's debt-service coverage ratio at 141% of debt maturities and interest payments over the next 12 months. The ratio includes internal sources of cash and liquid assets after budget needs, and NZ$1.4 billion of undrawn standby facilities.” S&P in September 2020 report.

But if it is a crisis, what would be best to sell?

Assuming there is the crisis Brown talks about, what would be the financially most sensible thing to do to rectify it, either to reduce ongoing losses and/or to repay debt?

The Council could easily sell its 13 golf courses, which MartinJenkins estimated in a 2018 report were then valued at $2.9b and were costing over $160 million in effective losses and subsidies from the Council to the clubs’ 6,415 members. That’s the equivalent of $500 of public subsidy for each of the 321,000 rounds played each year.

Let that sink in. Auckland Council’s 600,000 ratepayers are paying the equivalent of $500 for each round played by 6,415 of the courses’ members, or just over 1% of ratepayers. That subsidy doesn’t also take into account the tens of thousands of houses that could be built on that 535ha of land, which would in turn generate rates revenues for the Government. This MartinJenkins table shows the costs of holding the courses, while the Auckland Council map below shows where the courses are.

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Given the surge in land values since 2014, when the courses were valued in the report, the Council would comfortably receive over $4 billion, which would reduce interest costs by over $160 million per year and reduce ongoing losses by over 162 million per year.

So why doesn’t Wayne Brown want to sell the golf courses?

Selling the courses for residential property develop would increase the effective supply of land for housing in Auckland, which would devalue the value of land already held by landowners who vote in council elections. Those 6,415 golf club members will no doubt also be influential beyond the sheer number of votes, which was less than 1% of the 405,149 people who voted in the 2022 local elections.

It’s also anathema for a land banker to sell land all in one hit in a way that would both devalue the rest of the holdings and increase housing supply. It’s simpler and more lucrative just to hold and wait to drip-feed the plots out onto the market.

Elsewhere in the news in our political economy since Friday:

* US jobs and wages growth data was hotter-than-expected, but investors and traders still believe the Federal Reserve will pivot to slower rate increases next month and will have to cut rates late next year to revive an economy in recession by then;

* European and other G7 leaders agreed to a US$60/barrel price cap on Russian oil exports carried on ships insured and financed by European Union, US and British financiers, although Russia has already bought a ‘shadow fleet’ of oil tankers to carry the oil to its main new customers, China and India; Reuters

* China relaxed more covid controls in Beijing and Shenzhen as authorities fine-tuned their policies in the wake of the widespread wave of protests a week ago; Reuters

* Over two years after it was passed, the Infrastructure Funding and Financing (IFF) Act designed to replace Government grants for local infrastructure was finally used for the first time to provide $175 million of funds for 13 transport projects in Tauranga; Beehive

* Although the Government also announced $350 million worth of grants to 46 councils for transport projects; and, Beehive

* The Government backed down on plans to entrench Three Waters entities in public ownership through a clause that would require a 60% Parliamentary vote to change the ownership rules; Beehive

Substacks of the day

I subscribe to Claudia Sahm who writes Stay-At-Home Macro for a closer look at the US economy and US interest rate policy. She was particularly encouraged about the prospects for a safe landing this week.

I also follow Matthew C. Klein over at The Overshoot

Thread of the day

Ka kite ano

Bernard

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