The Kākā by Bernard Hickey

TLDR: The Government has unveiled plans for a Grocery Commissioner within the Commerce Commission and with a similar role and powers to the Telecommunications Commissioner, who successfully orchestrated the break-up of Telecom and the birth of the ‘2 Degrees Effect’ repressing inflation.

Many consumer advocates and suppliers are hopeful these moves will curb the power of the duopoly to engineer super-profits and suppress food price inflation, but I detail below and in the podcast above for paid subscribers why repeating the telecommunications sector’s success will be much harder, and why no one should count on less price gouging of consumers and suppliers any time soon.

Elsewhere in the news this morning here and overseas:

* Forty-two of Boris Johnson’s Cabinet and parliamentary colleagues had resigned by 9am NZ time and a delegation from Cabinet has asked him to resign as PM, but Johnson is still refusing to go, saying the last thing Britain needs is another election; BBC

* Oil prices kept falling overnight as fears grow of recessions in the United States, Europe and (potentially) China, with Brent Crude prices falling below US$100/barrel for the first time since late April; YahooFinance

* Crypto brokerage Voyager Digital filed for Chapter 11 bankruptcy protection overnight, saying it had US$1.3b of crypto-currencies on its platform and was holding US$350m of cash for customers; CNBC

* The European Union’s Parliament voted overnight to label investments in gas and nuclear power electricity plans as ‘sustainable’ and climate friendly, showing how Russia’s invasion of Ukraine and rampant energy inflation has corroded the consensus over pushing for renewables to replace fossil fuels; Reuters

* Shanghai started mass testing for Covid in nine of its districts late yesterday and Beijing announced China’s first vaccine mandates for crowded venues as fears grew again that President Xi Jinping’s elimination policy will force new GDP-sapping shutdowns, particularly now BA5 has arrived on the mainland; SCMP

* Massey University’s Environmental Health Intelligence unit published its landmark Health and Air Pollution in New Zealand (HAPINZ) study yesterday, which estimated human-caused air pollution caused 1,175 premature deaths and social costs of $4.3b per year;

* The Climate Commission recommended yesterday the Government move ahead urgently to price agricultural emissions at the farm level and outside the current Emissions Trading Scheme by the end of 2024, including excluding farm shelter belts from the ETS and pricing nitrogen at the farm level; and,

* Westpac and BNZ followed ANZ yesterday in lowering their two-year mortgage rates by around 30 basis points to around ANZ’s new benchmark of 5.45%, with BNZ actually going a little further to 5.39% as the banks look to fire up tepid demand for loans and pass on some of the 50-80 basis point of falls in wholesale interest rates in recent weeks due to weakening global inflation pressures. Interest

FYI, later today I’m chairing a publicly-accessible online panel discussion on climate change and financial stability that is hosted by CoreLogic and can be registered for here. It starts at 12.30 and goes for an hour.

Don’t hope too much for a grocery market ‘2 Degrees Effect’

It became known as the ‘2 Degrees Effect’ within the Reserve Bank in the years after 2 Degrees launched against Telecom/Spark and Vodafone and helped power a substantial reduction in mobile phone charges. Along with the carving off of Telecom’s copper lines and the new UFB fibre network into a closely regulated wholesale provider in Chorus, this period helped suppress domestic inflation in a significant part of the economy.

It effectively broke up a duopoly of two companies with strong ‘network effects’ making it hard for competitors to set up, and it drove through much more intense competition that ultimately benefited both consumers and shareholders. Our mobile and internet costs were transformed from being among the most expensive and poor quality in the OECD to among the best.

But it wasn’t easy or cheap, and it depended on some uniquely easier-to-regulate features of the telecommunications market that aren’t easily replicated in groceries.

A full-court-press set of interventions started by the Helen Clark-led Labour Government from 1999 to 2008 and continued by the John Key-led National Government from 2008 to 2017 included:

* The creation of a regulated wholesale access regime for the copper network and the new (Government-subsidised to the tune of over $1.4b) optic fibre cable network owned by Chorus, which led to a flourishing of competition between retail fixed line operators such as Orcon, Voyager, Now and Slingshot, along with Vodafone, Spark and 2 Degrees offering both mobile and fixed line services;

* the regulation of mobile number portability and mobile termination fees made it much easier for consumers to move to other mobile networks and not lose their numbers or family and friend group discounts; and,

* the Government granted access to spectrum to iwi, which in turn was used in partnership with 2 Degrees to foster competition.

Yesterday, Commerce Minister David Clark announced more detailed proposals for a single Grocery Commissioner to regulate the supermarkets duopoly of Foodstuffs (Pak’n’Save, New World and Four Square) and Countdown (Woolworths) from within the Commerce Commission, similar to the way the Telecommunications Commissioner operated.

Clark announced the moves in a joint news conference with Consumer NZ CEO Jon Duffy. I attended and asked about the parallels with the telecoms sector. Clark was hopeful some of that success could be repeated.

“This will ensure that longer term we have someone one person who is responsible for overseeing the whole sector. And we've seen that work with the Telecommunications Commissioner with is an identified person that both the sector knows it has to answer to, but also consumers know they can go to for help.” David Clark

I challenged Clark on whether that telecoms success could be repeated in groceries, given the massively larger web of relationships, products, supply terms, logistics chains, rebates, discounts, promotional tools and local markets than in the relatively vanilla and more easily broken up telco market. He acknowledged the differences, but said there were still ways to achieve similar results.

“There are different complexities in the in the supermarket sector than they were in the telecommunication sector when Telecom was split. Absolutely, except that it's not necessarily completely off the cards and there are different forms that that could take.” Clark

Thousands of product lines, opaque pricing and conflicted players

There are massive differences between telecommunications and groceries that will make achieving a 2 Degrees Effect much more difficult, including:

* Foodstuffs is actually two store-owned buying cooperatives, rather than a single corporate like Woolworths NZ Ltd, where prices and terms between suppliers, the cooperatives and the stores vary widely and are opaque, often including or excluding profits disguised as rebates, discounts disguised as promotions and a wide variety of agreements about where labour, promotional and transport costs are borne in the supply chain;

* the products in groceries range variously from chilled to frozen and boxed, each with its own supply chains, pricing complexities and sources of supply;

* Foodstuffs has a variety of wholesaling methods, with some bigger store owners having their own arrangements with suppliers independent of the buying cooperatives, which can include exclusive deals and rebates;

* Woolworths operates a more conventionally-run centrally planned, priced and sourced retailing operation with a single corporate owner; and,

* the variety of retailing outlets and locations mean terms and conditions for the same product line can be vastly different for good reasons, depending on the length and quality of the supply chain, along with the nature of the store.

That multiplicity of product lines, ownership types, physical supply chains, retail outlets and brands (ie Pak’n’Save vs New World vs Countdown vs Four Square vs Night and Day vs countless dairies vs major service station chains) contrasts with the single ownership of a single product (Telecom’s copper wires giving landline phone service) and two owners of two products (Telecom and Vodafone owning mobile towers with voice calls and texts).

When the Government was looking to break up the Telecom and Vodafone duopoly, there were only two points of access for most services. The copper network was clearly able to be split in a vanilla wholesale/retail way and there were only two sets of mobile termination charges to be regulated.

Clark wants to create the backstop of a mandatory wholesale access regime within Foodstuffs and Woolworths, but he and the regulator will have to contend with Foodstuffs’ stores and cooperatives having literally millions of different terms, conditions, prices, rebates and contractual arrangements with suppliers and stores, while Woolworths can also rely on its own transfer-pricing arrangements with its Australian parent to create opacity in the space between wholesale and retail.

The regulator’s job will be to create a clear membrane between wholesalers and retailers for a process of commercial osmosis can occur. That was much, much easier to do in telecommunications than in groceries.

Spitballing on what mandatory access could look like

Both Foodstuffs and Woolworths have made nice noises about opening up their wholesale platforms to competitors, but suppliers and competitors such as Night and Day and dairies are wary. Some can already use Foodstuffs’ wholesale operation Gilmours, but somewhat surprisingly, prices are actually cheaper for many in simple terms at Pak’n’Save. That’s why you often see dairy owners trundling around Pak’n’Save with trolleys filled to the brim with dozens of packs of Coke and chips.

For example, let’s say Foodstuffs’ wholesale operation offers the same price to Pak’n’Save store owners as to Night and Day, then those store owners will ask for separate rebates, which are the mechanism they get as the return on their investments in the wholesale operations. A regulator would have to work out, line by line, location by location, what is a fair cost of capital and what is price gouging.

The Government is holding out the threat of actual breakups in reserve to force Foodstuffs and Woolworths to the table, but even breakups are fiendishly complicated and much more difficult than the split of Telecom into Chorus and Spark. Firstly, there was one set of Telecom shareholders able to receive fair sets of shares in two companies. Foodstuffs would have to somehow restructure the relationships between stores and the cooperative in a way that separates ownership from supply lines. It would be like forcing Fonterra to break up and realising that the Fonterra company’s equity is actually buried in various ways among 10,000 individually-owned farm structures that include owner-operators, trusts, corporates and sharemilking arrangements. My head hurts just thinking about what fair and simple separation might mean.

For example, the Government could choose to ‘force’ Foodstuffs to break out New World or Four Square into chains with new owners. That would actually mean store-by-store negotiations with owners with different capital structures, different supply arrangements with Foodstuffs ‘central’, and decades worth of equity, assets and value buried in a myriad of contractual arrangements, many of which may not be on paper.

So what now?

Replicating the 2 Degrees Effect will be a monumental task that will barely be scratched upon in the next year to 18 months before the next election. The duopoly can happily offer to cooperate in a leisurely manner while the legislation is passed and the Grocery Regulator appointed (not likely before late 2023), and then wait for nothing much to happen when the regulator and the MBIE contractors spending $11m realise how complicated such a wholesale access regime would be. Meanwhile, they will make dozens of PR announcements about price freezes and donations to food banks and the fundamentally high profit margins will stay, often buried in transfer pricing up and down supply chains and across the Tasman.

This isn’t our first rodeo

Anyone looking for a preview of how this might play out should look to the Electricity Price Review from 2018. The Government talked a good game about elbowing the gentailers into line and helping consumers. MBIE also managed that review and the response. Only now, five years later, has a chair been appointed to the Consumer Advocacy Council designed to push gentailers hard. The Energy Hardship Panel created out of the review gave this report in June.

Here’s what the Chair, Keri Brown, wrote last month after a year’s work:

“I’m looking forward to collaborating with others through workshops and other means over the next few months. These discussions, along with further research and analysis, will help us mature and develop our understanding of the problem and consider possible solutions, and feed into our discussion paper that will go out for public consultation later this year. We will draw on this consultation to develop final recommendations for Minister of Energy and Resources Megan Woods and her Ministerial colleagues around mid-2023.” Energy Hardship Panel Chair Keri Brown in a June report via MBIE.

So five years after the review was started, a panel created out of the review will be making recommendation to the minister, who would then have to start industry consultation and a legislative process. Something might happen by 2025, if Labour remained in Government. That’s longer than the it took to start and end World War Two.

Yeah….nah.

My fear is a similarly easy-to-game and stall process has now started in groceries in the same way it did in electricity. My fear is the creation of the regulator, the threats of a mandatory wholesale access regime and the even-more-remote threats of forced asset sales will dribble away into the sand after the $11m worth of reports have been invoiced and the Government has changed, possibly as soon as November next year.

Meanwhile, the best option for consumers is to support truly independent and non-duopoly competitors (The Warehouse and Costco), particularly the ones starting to operate mostly online and starting to receive tentative investments (ie Supie). For suppliers, they would be best served blowing the whistle as often and loudly as possible on the duopoly’s practices and margins.

The task for us in the media is to hold the Government and the duopoly to their words, where it can be done while fighting the State Sector PR-industrial complex wielding the Official Information Act to deflect, deny, delay and obfuscate.

How could it have been (or be) different?

Monopolies and duopolies are much easier to create than unravel. Progressive’s (now Woolworths NZ Ltd) purchase of 83 Woolworths-branded stores from Hong Kong-based Dairy International in 2002 should never have been permitted. The Government should not have stood by in 2006 while the Warehouse was bullied out of the market when it tried to launch a competing chain of grocery stores.

But now that the original sins have been committed, the best any Government or regulator can do is to expose, harass and niggle away at the duopoly to keep them as honest as possible.

In my view, the Grocery Commissioner will be doing a good job by simply obtaining clean, comparable and transparent sets of accounts from Woolworths and Foodstuffs that show the true levels of gross profit margins, and how they compare to truly competitive grocery markets in similar sized countries such as Denmark or Ireland. That would be success in its own right.

Meanwhile, the recently-passed ban on oppressive shopping centre lease clauses and land covenants is a useful thing that might (and only might) allow a smidgen of competition to nudge its way into the least-unattractive bits of the country.

There is some hope, albeit of small and slow change

As we’ve seen in the retail fuel market, eventually the drip-drip-drip of harassment, exposure and regulatory tweaks can make a difference, particularly if new technology and types of products can be launched in oblique attacks on the giants. For example, it has taken more than a decade, but the likes of Waitomo, Gull, NPD and Challenge have finally managed to get hold of a few sites to put their unmanned pumps in to provide some competition to the Z Energy, BP/Mobil duopoly. But it has been trench warfare and has taken new technology with the use of card payments and automated stations to get there.

The great hope is actually in the recent Section 36 reforms to the Commerce Act that may give the Commerce Commission some extra legal muscle when it comes to stopping new mergers. There is also chance a new Commerce Commission chair will approach the task with a much more sceptical and aggressive approach to the creation and use of market power.

For 30 years, the Commerce Commission and MBIE saw their roles as enabling the creation of scale businesses and believing regulation was always bad for market freedom, rather than acknowledging capitalists are actually interested in creating super-profit-generating market power, rather than competing fairly in open markets. Changing that culture will not be fast or easy, and this latest move to create a new Commissioner is just another skirmish in a multi-decade conflict that has really only just started.

The 2 Degrees Effect was more of a remarkable exception, than the rule or the example that can followed.

Chart of the day

The power behind the Trans-Tasman brain drain

Number of the day

$430m - The Commerce Commission’s estimate of the possible excess profit being made by the supermarket duopoly.

Quotes of the day

Parliamentary democracy at its best

“Now this week again, we have reason to question the truth and integrity of what we’ve all been told. And at some point, we have to conclude that enough is enough. I believe that point is now.

“I do fear that the reset button can only work so many times. There’s only so many times you can turn that machine on or off before you realise that something is fundamentally wrong.” Resigning Health Secretary Sajid Javid in his ‘enough is enough’ speech (video below) in the British House of Commons last night, in front of his peers, in public and to Boris Johnson’s face.

Yet he refuses to go

“It’s a bit like the death of Rasputin. He’s been poisoned, stabbed, he’s been shot, his body’s been dumped in a freezing river and still he lives.” Former Conservative Chief Whip and now backbench MP Andrew Mitchell on BBC’s Newsnight.

Comment of the the day on The Kaka

On the loss of hope among young renters

“Not surprising. This was a common topic of conversation even before the recent house price jump - do we put off starting a family for 10 years until we're in our mid-30's, so we can save for a deposit and secure a mortgage, or do we rent indefinitely and try to start a family while living with flatmates? Or do we rent a place for ourselves and forgo saving as much for retirement? Or do we not have kids at all, so we can have a house and hopefully have it paid off by retirement age? Thought we were being a bit dramatic 10 years ago - we were just out of uni, what do we know about economics, really. But now we're another 50% further away from affordability.” Nick on yesterday’s Dawn Chorus

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: A new survey of views about housing affordability has found 77% think home ownership is unaffordable and 61% think it will get worse over the next decade. It also found 55% were anxious day-to-day about ever buying their first home and 46% believed their chances of ever owning were hopeless.

Paid subscribers can see more on this and ANZ’s surprise mortgage rate cut below the paywall and in the podcast above.

Elsewhere in the news this morning here and overseas:

* Oil prices slumped US$10/barrel overnight to just under US$100/barrel for West Texas Intermediate and just over US$100/barrel for Brent Crude on growing fears of recession in the United States and Europe reducing demand for oil, along with fresh signs of Covid lockdowns in China, which has only just contracted the more infectious, slippery and deadly BA.5 variant; Reuters, SCMP

* UK PM Boris Johnson’s leadership is in fresh peril this morning after the resignations and damning criticism in resignation letters (see more in quotes of the day below) of his Health Secretary Sajid Javid and his Chancellor of the Exchequer (Finance Minister) Rishi Sunak; BBC

* European gas prices jumped to four-month highs overnight after Norwegian gas and oil field workers threatened to go on strike, which would see Europe’s second largest gas supplier (after Russia) potentially cut 60% of its supplies to Britain, which in turn would have to cut its supplies via pipeline to Belgium and Holland, both of whom are trying to stock up on gas ahead of a Northern winter without Russian gas; CNN

* The euro fell to a 20-year low of US$1.02 overnight and is headed for parity with the US dollar as growing fears of recessions in both the US and Europe send investors scrambling for ‘safe haven’ assets in US and German bonds, with the US 10 year Treasury yield falling another 12 basis points to 2.78% and the German 10 year bund falling 16 basis points to 1.18%. European stocks fell 2.1% and the FTSE 100 fell 2.9%, while US stocks were mostly down; CNBC

* As previewed in yesterday’s Dawn Chorus, ANZ cut its key two-year mortgage rate here by 35 basis points yesterday to a market-low 5.45%, passing on some of an 85 basis point fall in wholesale ‘swap’ rates; Interest, Stuff; and,

* The Infrastructure Commission warned the preferred Lets Get Wellington Moving (LGWM) option of two new tunnels to help move cars faster was “fundamentally counter-productive” to achieving carbon reduction targets, Georgina Campbell reported this morning for NZ Herald.

First home buyers giving up the dream

A new survey of views about housing affordability has found what many suspected. Young people still renting, many for up to 10 years, are giving up on the dream of home ownership and starting families here in Aotearoa-NZ because of the latest 45% surge in house prices during Covid, when the Reserve Bank printed money and relaxed lending rules to use the wealth effect of higher prices to support the economy.

The survey found found 77% think home ownership is now unaffordable and 61% think it will get worse over the next decade. It also found 55% were anxious day-to-day about ever buying their first home and 46% believed their chances of ever owning were hopeless.

The OneChoice Housing Trends survey of 1,128 New Zealanders aged 18 and over was conducted in mid-April via quantitative online survey. It also found:

* 25% said they were delaying having a family because of housing unaffordability;

* 24% were taking on a second job, asking parents/family for money or asking family to act as guarantors.

* 89% were worried about their ability to afford a home;

* 51% said the idea of the ‘kiwi dream’ was no longer attainable; and,

* 61% of those still renting now say that 10 years ago they thought they would own their own home by now.

Almost as worried as in the first lockdown

Business confidence slumped to near its Covid lockdown lows of March 2020 in the June quarter, crunched between intense cost pressures and sliding demand in some areas. The NZIER’s QSBO survey found firms’ confidence about their own situations over the next three months fell to a seasonally-adjusted minus 11% expecting better times in the next quarter, vs a positive 5% expecting better times ahead in the March quarter. This was its lowest level since the effects of the first lockdowns were felt in the June quarter of 2020.

Confidence about the general business situation dropped to a seasonally-adjusted minus 62% expecting better times ahead, down from minus 34% in the March quarter.

Businesses reported higher cost pressures and a record-high 76% said they were able to increase prices. The last time the price-hiking activity this high was in 1985, when inflation was running at 15%.

NZIER Chief Economist Christina Leung said there was nothing in the survey to "dissuade the Reserve Bank from its aggressive pace of tightening."

I spoke to Christina after attending a briefing on the survey. Here’s the interview in full:

Real estate agents decidedly downbeat

Tony Alexander published his monthly survey of real estate agents, finding a record-high net 72% saying prices were falling in their region, although agents said finding finance and interest rates were becoming less of a concern to buyers.

Mental wellbeing poorer, but we’re still mostly happy

Statistics NZ published the results of its 2021 General Social Survey, including that measures of mental wellbeing had worsened substantially since the previous survey in 2021. The decline was worst among Māori, disabled people, low income, women, the very old and the very young. Older men living in Taranaki without children were found to have the best wellbeing.

However, the survey asked about the happiness of respondents. It found 78% rated their happiness the previous day at at least seven out of 10 in a rating of one (totally unhappy and 10 is completely happy, with over a third of people in Aotearoa-NZ reported being happy to the extent of 9-10.

The survey found the media was the least trusted institution in Aotearoa-NZ, and trusted even less than Parliament.

Also, the survey found the proportion of people able to speak more than a few words or phrases of te reo Māori rose from 24% percent to 30%.

Just briefly here yesterday

Treasury banned the Wall St Journal and its reporter from nine Budget lockups until Budget 2025 after the Budget 2022 embargo was broken by an hour. Treasury

New Associate Local Government Minister Kieran McAnulty announced he would visit all 55 rural and provincial councils across the motu by council elections in July.

New Police Minister Chris Hipkins announced he would visit every Police district in the motu over the next few months.

Quotes of the day

Throwing a hand grenade over the shoulder on the way out

“It is with enormous regret that I must tell you that I can no longer, in good conscience, continue serving in this government. I am instinctively a team player but the British people also rightly expect integrity from their government.

“The tone you set as a leader, and the values you represent, reflect on your colleagues, your party and ultimately the country. Conservatives at their best are seen as hard-headed decision-makers, guided by strong values. We may not have always been popular, but we have been competent in acting in the national interest.

“Sadly, in the current circumstances, the public are concluding that we are now neither. The vote of confidence last month showed that a large number of our colleagues agree. It was a moment for humility, grip and new direction.

“I regret to say, however, that it is clear to me that this situation will not change under your leadership - and you have therefore lost my confidence too.It was a moment for humility, grip and new direction. I regret to say, however, that it is clear to me that this situation will not change under your leadership.” UK Health Secretary Sajid Javid’s resignation letter to PM Boris Johnson overnight, via full text at Sky News UK

ANZ NZ’s CEO calls for easing of migration rules

“The businesses I’m talking to this morning are crying out for staff. We’ve got this period where we need to balance the needs of the economy to be more productive.” ANZ NZ CEO Antonia Watson speaking to reporters after a speech to Australian business leaders in Melbourne by PM Jacinda Ardern. Stuff

Number of the day

Better than expected budget deficit

$5.5b - The size of the improvement in the Government’s OBEGAL (Operating Balance before Gains and Losses) deficit in the 11 months to the end of May, relative to the last forecast in the May 19 Budget 2022. The deficit was $7.53b, which was less than the $13.0b forecast in May as tax revenues were $2.9b better than expected and spending was $1.4b less than expected, Treasury reported.

Chart of the day

Firms report profitability worries, but the IRD is collecting plenty

A fun thing

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: Auckland’s housing market sunk further into its winter deep freeze in June, but some banks are beginning to try to stimulate new mortgage lending again and may even soon be able to start cutting longer term interest rates, thanks to cooling expectations of inflation in the global economy dragging down wholesale interest rates.

Paid subscribers can see more detail and analysis below the paywall fold and in the podcast above.

Elsewhere in the news overnight and this morning here and overseas:

* China’s latest Covid lockdowns and mass testing restrictions in some eastern provinces escalated further overnight, with further cases found in the partially locked-down industrial centre of Anhui and an outbreak building in the gambling hub of Macau; Bloomberg

* The Peter Thiel-backed crypto-lending operation Vauld suspended withdrawals overnight after seeing nearly US$200m worth of deposits withdrawn in the three weeks since the crashes of the Luna crypto-currency and the collapses of fellow crypto-lender Celcius and crypto-hedge fund Three Arrows Capital; CNBC

* Kellogg lost a High Court challenge overnight to new British regulations that will stop more sugarey breakfast cereals such as Cocopops and Frosties from being displayed prominently in supermarkets (Aotearoa-NZ has no such regulations, despite some of the highest type-II diabetes rates in the world); BBC

* Kāinga Ora is considering importing plasterboard in bulk after a survey found half of its 98 house-building projects were now stalled or disrupted because of supply chain issues, including GIB shortages, Katie Bradford reported for 1News last night; and,

* MBIE announced late yesterday most seismically vulnerable buildings are not imminently dangerous and can remain occupied while seismic remediation work is planned, funded and undertaken, which will take some pressure off landlords in tenants in Wellington and many other provincial towns and cities hit hard by quake-prone notices.

A cash-back blowtorch to Auckland’s deep freeze?

Banks can handle weak new lending growth for only so long before they have to stimulate demand and volumes with special deals, and potentially mortgage rate cuts. Watch out for the potential for one and two year mortgage rate cuts in the coming weeks, even though the Reserve Bank is forecast to put up its Official Cash Rate next Wednesday by another 50 basis points.

The banks may have room to cut if they want because one and two year wholesale ‘swap’ rates, which are a cumulative market expectation of where traders and investors expect the Reserve Bank to move interest rates and its rate forecasts, have fallen 50 and 75 basis points respectively over the last three weeks. That’s because of growing fears globally of recessions in the United States and Europe, along with the chilling effect on inflation from falling food and metals commodity prices.

The two-year swap rate, which is the basis for two-year fixed mortgage rates, has fallen a peak of 4.56% on June 16 to 3.80% yesterday as markets wind back their expectations of how high the Reserve Bank lift its OCR to over the next couple of years. The Reserve Bank itself forecast in May it saw the OCR rising to a peak of 3.95% over the next two years. Economists actually see the Reserve Bank only being able to lift it to 3.5% before the combined effects of slowing local and global economies force the Reserve Bank to take its foot off the brake. Now markets are starting to shift their expectations lower too.

There are plenty of signs of waning demand for credit, which some banks want to turn around with special deals.

Sales at a 12 year low

Auckland’s largest real estate agency group, Barfoot and Thompson, reported yesterday it handled 684 sales in June, down 12.5% from May and down 45% from June a year ago to a 12-year low. It also said its total listings had fallen 0.5% to 4,676 by the end of the month, despite listing more than 1,255 new properties. That means almost 600 properties were pulled unsold from Barfoot’s listings in June.

A feature of this housing downturn is many vendors are not under pressure to sell because they have jobs and most of them face debt servicing costs that are well down on the worst periods of 2007/08 when the last big housing downturn happened.

The cash-backs are coming

Some banks are even applying their marketing techniques to get some heat back into the market.

BNZ announced yesterday it would offer up to $10,000 of ‘cash-back’ to new home loan customers, joining Kiwibank, who announced a similar offer of up to 1% of the home loan or a maximum of $10,000 three weeks ago.

The fall in swaps rates from peaks in mid-June will give some room for lower mortgage rates too, especially if next week’s Reserve Bank decision (which does not include new forecasts) suggests the inflation heat is coming off the boil and it may not have to hike rates quite so much.

Chart of the day

Commodity prices down to March levels

Number of the day

What if Russia lashed back at oil caps?

US$380/barrel - JP Morgan has warned that an attempt to cap Russian oil prices at US$50-60/bbl could trigger Russian production cuts of up to 5m barrels per day, which it forecast would increase oil prices to US$380/bbl. A 3m cut would lift prices to US$190/barrel. Reuters That would lift petrol prices in Aotearoa-NZ towards the NZ$6/litre mark.

Quotes of the day

‘Just imagine what could have happened’

“New Zealand has just experienced one of its most intense house price booms in history – prices rose almost 50% between mid-2020 and the end of 2021 – at a time when net migration slowed sharply, homebuilding was running at multi-decade highs, and tax settings were made less favourable for property investors.” Westpac NZ acting chief economist Michael Gordon in a weekly note.

Also, on the housing supply constraints (bolding mine):

“The National Policy Statement on Urban Development (NPS-UD) directs local councils to remove overly-restrictive planning rules and enable higher housing density. But the need for the NPS itself points to deeper-rooted issues: why are councils not incentivised to provide more housing in the first place? This may be a question around who bears the costs of development; it may be concerns around liability for shoddily-built homes. Again, these are not new insights – if there’s been little progress on dealing with these problems, it has not been from a lack of people pointing them out.” Gordon.

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: Various economic and market signals are flashing red for a US recession, possibly even as quickly as the just-ended June quarter. Automatic stabilisers in markets are kicking in to ensure interest rates aren’t rising much more and the inflation shock is destroying demand to steady prices.

Paid subscribers can hear more on how the global economy is adjusting to the inflation surge without the need for sky-high short-term interest rates in the podcast above.

Elsewhere in the news this morning:

* Australia’s new Labor Government has announced it is launching an emissions trading scheme, just as a forecast emerges of record oil, gas and coal export revenues A$419b in the current year to June 30, 2023 and Sydney is deluged in another extreme weather event; Reuters, Reuters

* China has put several cities on its eastern coast into lockdown because of fresh Covid outbreaks, including the manufacturing hub on the Yangtze delta of Wuxi Reuters

* Auckland mayoral candidate Viv Beck has pledged to abandon the Auckland light rail project in favour of faster bus routes; Stuff

* There are calls for former Wellington Mayor Kerry Prendergast to resign as chair of the Film Commission because a conflict of interest inquiry related to suspended Commission CEO David Strong is continuing to drag on; Dominion Post

* 1News’ Yvonne Tahana reported last night that the Government had not properly checked the CV of the new Director of the Suicide Prevention Office, Matthew Tukaki.

Chart of the day

Back to emissions growth

The IMF reports with this chart that global greenhouse gas emissions rebounded 6.4% last year to a new record, eclipsing the pre-pandemic peak as global economic activity resumed.

Number of the day

An automatic stabiliser

2.88% - The US 10 year Treasury bond yield dropped substantially below the key 3.0% in trading on Friday night as global bond investors increasingly see a high chance of a recession in the United States later this year that sucks inflationary pressures out of the economy and helps the US Federal Reserve avoid significant interest rate hikes.

Quote of the day

A policy mistake?

“We’re seeing demand coming back for bonds as a haven asset. There are concerns that central banks globally, in order to try and tame inflation, are now engineering not just a soft landing but pushing economies into recession.” Aneeka Gupta, research director at ETF provider WisdomTree via FT-$$$

Some fun things

Ka kite ano

Bernard

PS: I’m keeping these shorter to get them out earlier.

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 PM Jacinda Ardern signed a trade deal with the European Union and gave an historic speech to NATO’s summit in Madrid, which edged Aotearoa-NZ ever closer to the US-led alliance lining up against Russia and China. In response, our largest trading partner called the speech wrong and unhelpful.

Also, business and consumer confidence here slumped again and the Reserve Bank’s new Chief Economist said he was hopeful the tide was finally turning against the housing market’s one-way bet. House prices have fallen 7% from their peak in November and the central bank sees a 15% fall from peak to trough over the next year.

In Friday evening’s live hoon webinar for paid subscribers, which is in recorded form above for all subscribers, I took a lap around these issues and more in geopolitics and the global economy with co-host Peter Bale.

This is my weekly summary and sampler of the big news of the week we’ve covered on The Kākā for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Join our community by subscribing in full.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and anyone on a benefit. We also have a new special $65 a year deal for over 65s who are renting and reliant on NZ Superannuation.

The Five Things that changed this week

The PM called out China in her NATO speech

Prime Minister Jacinda Ardern called in a speech at a NATO summit for the alliance to stand firm against China’s newly assertive approach in the Pacific and again pointed to China’s human rights abuses. This followed Aotearoa-NZ joining a new aid and cooperation grouping formed by Australia, the United States and Japan called the Partners in the Blue Pacific (PBP).

In turn, NATO named China as a significant challenge in its new statement of strategic intent and lumped China in with Russia.

“The deepening strategic partnership between the People’s Republic of China and the Russian Federation and their mutually reinforcing attempts to undercut the rules-based international order run counter to our values and interests.” NATO in its new strategic statement agreed at a summit in Madrid.

China called Ardern’s comments ‘wrong and regrettable’

In response to all of this, China’s Embassy in Wellington stated Ardern’s speech was ‘misguided, wrong and regrettable.’

“It is obvious that such comment is not helpful for deepening mutual trust between the two countries, or for the efforts made by the two countries to keep our bilateral relations on the right track.” China Embassy statement

Aotearoa NZ signed a trade deal with the European Union

Ardern announced a last-minute trade agreement with the EU that will dramatically improve access for our kiwifruit, fish and honey exports, but has disappointed meat and dairy exporters. Overall, the deal is expected to increase exports to Europe by $1.8b by 2035, with up to $600m extra in meat and dairy exports.

But meat and dairy exporters were unhappy the deal was accepted, but Ardern may have decided the winds were blowing against and improvement and some sort of deal was needed, just in case our largest trading partner decided to restrict access.

RBNZ said it hoped the housing obsession tide has turned

The Reserve Bank’s new Chief Economist Paul Conway talked hopefully about the chances the tide is turning on the ‘one-way bet’ for housing as an investment because interest rates are rising, houses are being built, tax rules have been tweaked and migration is low. I’m not so sure and made my case in Friday’s Chorus.

Councils prevaricated again on transport and housing

Auckland Council voted to protect 15,000 villas in central suburbs from intensification, Stuff’s Todd Niall and the NZ Herald’s Bernard Orsman reported this week. Meanwhile Wellington City Council voted this week to water down its intensification plans, The Spinoff’s Jacob Flanagan reported.

Earlier in the week, the Government and the Wellington Council announced a preference for $7b worth of road tunnels and (possibly) a light rail line to Island Bay some time in the next 20 years, although no money was allocated or final decisions taken.

These performative announcements and council set pieces all disguise the unwillingness of central and local Government to take on higher debt and use higher taxes to pay for the transport and water infrastructure needed to underpin new house building. The National and Labour parties have agreed over the last 30 years to keep net Government debt and tax at around 30% of GDP and to keep capital gains on owner-occupied residential land tax free. Significant infrastructure investment and a shift away from the ‘one way bet’ is not possible without a change in that consensus.

These performative announcements also disguise that central and local Governments don’t have social licenses to reconfigure roads for rail, walking and cycling, or intensify housing zoning in a way to enable housing supply growth.

Median-voting homeowners and voting ratepayers don’t want new development near them or the bills that come with that, but they do like the house price and low-wage benefits that come with high population growth that is not catered for.

Other places I’ve been this week

The agreement I have with paid subscribers is to spread my public interest journalism around onto as many publicly available platforms as possible after publishing it and including it on podcasts put out here via The Kākā. That means I often agree to go on television and radio to talk about these issues, in particular housing unaffordability, inequality and poverty.

This week I talked through my idea for a Matariki account using a new central bank digital currency with Wallace Chapman on RNZ on Tuesday.

On Friday, I put out this week’s episode of When The Facts Change with The Spinoff.

Last night I was interviewed for Newshub on TV3 about this tweet I sent out on why so many young renters are looking to move to Australia.

I referred in the tweet to this chart showing a surge in job advertisements in Australia.

Have a great weekend

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: The Reserve Bank has talked hopefully again about the chances the tide is turning on the ‘one-way bet’ for housing as an investment because interest rates are rising, houses are being built, tax rules have been tweaked and migration is low.

Should we believe the central bank this time? Paid subscribers can see more detail and my view that not that much has really changed to reverse the one-way bet below the paywall fold and in the podcast above.

Elsewhere in the news this morning here and overseas:

* PM Jacinda Ardern announced a last-minute trade agreement with the EU that will dramatically improve access for our kiwifruit, fish and honey exports, but has disappointed meat and dairy exporters;

* China’s Embassy here took the unusual step of issuing a statement directly criticising Ardern’s comments to NATO yesterday about China, calling them ‘unhelpful, wrong and thus regrettable’;

* BNZ’s economists warned that a mild recession later this year could turn into a deeper one after seeing another sharp drop in business confidence in ANZ’s survey for June;

* The US Supreme Court ruled overnight President Joe Biden couldn’t regulate to reduce carbon emissions from power plants Reuters;

* Data for the US inflation measure most closely watched by the US Federal Reserve was slower than expected in May, which encouraged bond investors to push the key 10 year US Treasury yield down nine basis points to 2.99%; and,

* Ukrainian artillery and missile strikes drove Russian troops off Snake Island, although Russia said it was a tactical withdrawal to allow for grain exports. The Guardian

Is this time really different? I doubt it.

‘This time is different’ are the four most dangerous words to string together when talking about economic trends and asset values in markets, and this time is no different.

Yesterday, new Reserve Bank Chief Economist Paul Conway gave a detailed and comprehensive speech about the housing market to the National Property Conference, in which he was hopeful the tide had turned on the ‘one-way bet’ thinking behind the obsession New Zealanders have with buying property as an investment above all else, which in turn has made our housing the most expensive in the world.

Here’s the core of his argument (bolding mine):

“Over the years, the demand side of the New Zealand housing market was boosted by strong population growth, steadily declining neutral interest rates and a favourable tax system. The supply side, however, has been held back by strict land use regulations, and a construction sector prone to boom-bust cycles, while carrying very high building costs. Excess demand led to New Zealand’s experience with some of the highest house prices relative to income in the world.

“A sense of ever-increasing house prices – along with a lack of other quality local investment alternatives – may have also distorted the investment options of New Zealanders. The share of housing on household balance sheets is very high and commercial banks hold a high share of mortgages on their balance sheets.

“Rapidly increasing land prices may have also led to a transfer of wealth to people who owned land as prices were rising from landless younger people and future generations, who have to spend more to buy land. This means that they save less, reducing the amount of alternative capital they own and possibly lowering lifetime consumption and incomes.

“Are these dynamics likely to continue in future? Since August 2021, the Reserve Bank has been tightening monetary policy, lifting the Official Cash Rate, to rein in inflation. This will likely see actual house prices move back towards sustainable levels that are more in line with market fundamentals. Indeed, in the May Monetary Policy Statement, we forecast a 15% decline in house prices from their peak, which would bring them roughly back to sustainable levels.

“Over a longer time frame, there are reasons to think that some of the core market fundamentals that determine sustainable house prices may also be changing. On the demand side, as the pandemic slowly recedes and international travel restrictions unwind, many New Zealanders are heading overseas seeking new experiences. On the other hand, immigration is unlikely to return quickly to pre-pandemic levels, contributing to slower population growth overall.

“In the tax space, the removal of interest deductibility and the introduction of a capital gains tax on sales of residential property owned for less than 10 years – the ‘bright lines test’ – will have closed some of the gap between the effective tax rate on housing and other asset classes.

“At the same time, urban planning rules are being freed up to unlock more housing supply. The Resource Management Act is being replaced and the National Policy Statement on Urban Development directs councils to remove overly-restrictive planning rules and to enable higher housing density, which is a critical part of the solution.

“In the construction sector, the Commerce Commission is carrying out a market study into competition for residential building supplies in New Zealand is working well and, if not, what can be done to improve it. These changes are consistent with more houses being built and currently high building consents translating into more actual houses. They also imply that housing market dynamics in future are unlikely to be the same as in the past. Given the importance of housing in our economy and national psyche, this will be a huge change.

“For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity. But the tide may well have turned against housing being a one-way bet for a generation of Kiwis. We need to keep building a new approach to housing and economic prosperity in Aotearoa-New Zealand.” Reserve Bank Chief Economist Paul Conway in his first major speech yesterday.

Let’s check those assumptions

I suspect the Reserve Bank is being premature and a little too hopeful in saying the tide is turning. Here’s why:

* longer term mortgage interest rates here may have already peaked and it’s not clear at all that the multi-decade fall in ‘neutral’ interest rates is about to be reversed;

* migration may have stalled for the last two years, but the political drivers to unleash 2%-plus per year increases in population through migration of temporary workers remain firmly in place;

* construction industry confidence has collapsed back to 2008/09 levels in recent months as house prices have started falling and bank lending has dried up, which means assumptions about supply becoming more flexible are premature, especially given industry structures, staffing and productivity remain predicated on such boom-bust cycles;

* infrastructure funding to allow councils to pay for the pipes, roads and other services for their newly-upscaled district plans remains unresolved and NIMBY-dominated councils continue to push back and water down the Government-ordered intensifications at every turn

* the Government’s insistence (both National and Labour) on keeping net debt and the size of the Government’s tax share at or below 30% of GDP has prevented the Crown from funding the transport and water infrastructure to enable the intensification, and will do so for the foreseeable future;

* the tax incentives powering the ‘over’ investment in housing remain in place, with both Labour and National seeing capital gains and wealth taxes as unacceptable to the median voters that decide elections; and,

* the assumption about the Commerce Commission (and ultimately any Government) actually acting to improve competition in building materials to reduce construction costs is optimistic at best, given its track record with supermarkets was to abandon an industry breakup proposal with its final report.

Haven’t we been here before?

The broader problem for the Reserve Bank in trying to reset expectations is that it has tried before and this latest warning risks being another ‘boy cried wolf’ moment.

As I’ve reported before, here’s the lineup of boys crying wolf:

* April 1998: Reserve Bank Governor Don Brash warned rental property investors expecting unending and high capital gains would be disappointed: “Far too many people still see getting heavily into debt to buy a second property as the best way they can save for their retirement, even though, in my view, they will be disappointed.” House prices have risen 330% since he said that.

* August 1998: Brash said house prices were likely to rise in line with other inflation of around 2 per cent: “Property investment is not a low risk activity in a low inflation environment, and urging people of limited means to borrow heavily to undertake it puts them at risk of serious loss in today's circumstances.” House prices have risen 328%.

* September 2003: Reserve Bank Governor Alan Bollard said after house prices rose 14 per cent in the previous year that rental property investors should soon expect real deflation: “I'm concerned that this could end in disappointment, especially for unsophisticated investors rushing to get on the housing investment bandwagon.” Prices have risen 218% since he said that.

* September 2004: Bollard said the success of housing as an investment depended on the prospects for capital gains in the coming years because yields from rents were so low: “A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions,” he said. Prices have risen 174% since he said that.

* June 2006: Bollard told central bankers in Switzerland that New Zealand house prices would start falling by the end of 2006 as higher interest rates took effect. House prices have risen a further 118%.

* February 2015: Reserve Bank Governor Graeme Wheeler warned there could be a sharp correction in house prices. Prime Minister Sir John Key supported that warning, saying: “We are building a lot of houses in Auckland now. People can get a bit carried away with the fervour of these things and believe it is all going in one direction. History shows you house prices go up and down.” Finance Minister Bill English said: “There's no asset price that can go up at over 10 per cent a year forever, so sometime it will stop. And in this case we are really starting to get more supply coming at speed into the market.” Prices have risen 58%.

* September 2015: English said the Auckland housing market was on fire and people needed to be careful not to get burned when prices fell. Wheeler also told MPs that month that Auckland house prices were not sustainable. “The house price to income ratio for Auckland is at nine. It's twice that for the rest of the country. A ratio of nine puts you, according to Demographia figures, in the top 10 most expensive cities in the world. This is just dangerous territory.” Auckland prices rose a further 38.6% since they said that and Auckland’s house price-to-income multiple is now almost 11.

* March 2017: Wheeler said Auckland house prices faced a heightened risk of a sharp correction because of the risk of higher interest rates and the number of homeowners with high debt-to-income ratios. Finance Minister Steven Joyce said the tide of rising house prices was turning because of rising supply and a likely rise in interest rates from 50-year lows. “People would be mistaken – while you can never pick the turn of the market – they'd be mistaken to think house prices will keep going up the way they have.” Prices have risen 25% since they said that.

* September 2017: English and then opposition leader Jacinda Ardern in an election debate were asked if they wanted house prices to fall, English said: “I want them to stay flat while incomes rise.” Ardern said: “We don't want them to lose their value, but we want more affordable housing in the market as well, and that is what is missing.” Prices rose 23.9%.

The too-big-to-fail problem

The other bigger problem unaddressed in Conway’s speech, but still in the back of everyone’s mind, is that even if the Reserve Bank thinks house prices are over-valued and therefore likely to fall, the housing market is different to other asset classes in three major ways:

* our banking system is now reliant on house prices remaining elevated to support its profits and asset base, with a serious slump (50%-plus) to properly affordable prices being unthinkable from a financial stability point of view;

* the Reserve Bank’s own research has shown that a collapse in net wealth because of a crash in the housing market would rebound into the real economy as home-owning consumers would be expected to reduce their spending by around five cents in every dollar of wealth destruction; and,

* a crash of 50%-plus would not be acceptable politically and would trigger a change of Government and or policies to stop such a fall.

I hope this time is different, but this isn’t my first rodeo. Assuming a hands-off approach to asset prices, I expected the Reserve Bank and the Government to allow house prices to fall 30% in 2008/09. They didn’t, and they repeated those actions in 2020 to stop a collapse. They would do so again, possibly even before the year is out.

Realistically, the housing market is not only too big to fail. It is too big to be allowed to fall too far. The Reserve Bank has already said a 15% fall from November’s record high is far enough to be ‘sustainable’. That would take prices back to where they were in early-2021 and mean home owners ‘keep’ at least half the 20% rise between the March 2020 interventions by the Government and the Reserve Bank and that peak in November 2021.

A Reserve Bank that believed house prices should and could return to affordable levels would expect and not intervene to stop a 40-50% fall to levels relative to incomes and rents last seen in 2003. The fact the bank and the Government baulked at the idea of including affordability (rather than ‘sustainability’) in its mandate tells you everything you need to know. Neither have even suggested which level of affordability they prefer to use or where it should be.

A Reserve Bank that was determined to reset expectations would use its tools to drive actual prices to those affordable levels, which it could do with interest rate and/or bank capital controls. The last time expectations about prices (CPI inflation) were out of control was in the 1970s and 1980s. The collective response then was to rewrite the Reserve Bank Act, give it independence and allow it to create a brutal recession to drive expectations lower. Neither the Government or the bank intervened to reverse or stop the political and economic pain. Those resetting of expectations then were a feature — not the bug.

More jawboning to try to convince homeowners they are wrong to keep seeing houses as the highest returning investments will fail unless it is backed by the political and regulatory changes to make it happen. Hoping it will happen is not enough. We’ve been here before. It didn’t work before and it won’t work again.

So how could it be done?

These are the things needed to actually return house prices to affordable levels:

* changing the tax incentives for residential land ownership by taxing either the capital gains for all homeowners, or taxing the value of land, especially unoccupied residential zoned and serviced land, as well as capturing the capital gains from rezoning or public infrastructure investment through ratings uplift capture rates;

* changing the collective political views about acceptable levels of public debt and the tax share of the economy from the current ‘consensus’ of at or below 30% of GDP for both net debt and the tax share of GDP so the Government and Councils can invest in housing and transport infrastructure; and,

* collectively deciding to target a housing affordability measure and giving independent Crown agencies the power to drive house prices and rents there, regardless of the effects on household wealth and inflation.

Median-voting homeowners can’t see any other way. Yet.

None of these things are politically viable in the current environment. So I wouldn’t expect much to change, and most median-voting homeowners know that in their bones. That’s why they effectively have accepted the National and Labour policy prescriptions over the last 30 years to keep net Government debt and tax at around 30% of GDP and to keep capital gains on owner-occupied residential land tax free.

The only way that might change is if those same median-voting households realise they are enabling and supporting the creation of an increasingly unequal two-tiered society split between home-owning families and renting families. The biggest pressure point for those home-owning median voters is the situations of their children, and whether they are prepared to keep donating equity to children for deposits, and/or having to watch their grand-kids grow up on skype or whats app, or on brief visits to Australia etc.

So far, none of the polls or policy prescriptions I’ve seen would suggest we’re anywhere near that sort of tipping point.

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: PM Jacinda Ardern nudged Aotearoa-NZ even closer to the western security alliance pushing back at China overnight. Ardern called in a speech at a NATO summit this morning for the alliance to stand firm against China’s newly assertive approach in the Pacific and again pointed to China’s human rights abuses. There’s more detail and analysis below the paywall fold and in the podcast above for paid subscribers.

Ardern’s comments at the summit early this morning came as the United States pledged to beef up its military forces in NATO and as NATO declared China’s “stated ambitions and coercive policies challenge our interests, security and values” in a new ‘Strategic Concept’ statement.

Elsewhere in the news here and overseas overnight and this morning:

* US data showed a softening of estimated GDP in the March quarter amid growing signs inventories are building in US warehouses and tech sector job cuts are widening;

* Xero’s small business data monitor out this morning shows another drop in Aotearoa-NZ’s small business activity in May as sales growth weakened and reported annual wage growth rose to 5.3% from 4.1% a year ago;

* King Salmon is up for sale and being shopped around by investment bank Cameron and Partners, with Sealord and Sanford seen as potential buyers, The Australian-$$$’s Bridget Carter reported this morning;

* Westpac has joined ANZ and ASB in suspending new high LVR mortgage lending Interest; and,

* Auckland Council’s planning committee will vote today on whether to confirm the protection on ‘heritage’ grounds of one in four villas and bungalows in zones the Government wants intensified with three-storey townhouses and more apartments, NZ Herald-$$$’s Bernard Orsman reports.

I’ll be covering the first major speech of the Reserve Bank’s new Chief Economist Paul Conway, which is due at 11.30 am today and is due to focus on housing.

PM’s China warning at NATO

PM Jacinda Ardern is pushing ahead with tough talk aimed at China and moved overnight to drag Aotearoa-NZ closer to the western alliance strengthening its defences against China. NATO, in particular, has warned about China'’s increasing assertiveness overseas and is focusing much more closely on China’s human rights abuses inside its borders. So did Ardern in her speech notes here (bolding mine):

“In our neighbourhood we see the mounting pressure on the international rules-based order. We see attempts to disrupt and destabilise – even New Zealand is targeted by Russian mis & dis information.

“Separately China has in recent times also become more assertive and more willing to challenge international rules and norms.

“Here, we must respond to the actions we see. We must stand firm on the rules-based order, call for diplomatic engagement and speak out against human rights abuses at all times when and where we see them.” Jacinda Ardern in her comments to 2022 NATO summit in Madrid.

NATO itself was equally robust in its new strategy document published overnight, including these comments (bolding mine):

“The People’s Republic of China’s (PRC) stated ambitions and coercive policies challenge our interests, security and values. The PRC employs a broad range of political, economic and military tools to increase its global footprint and project power, while remaining opaque about its strategy, intentions and military build-up.

“The PRC’s malicious hybrid and cyber operations and its confrontational rhetoric and disinformation target Allies and harm Alliance security. The PRC seeks to control key technological and industrial sectors, critical infrastructure, and strategic materials and supply chains. It uses its economic leverage to create strategic dependencies and enhance its influence. It strives to subvert the rules-based international order, including in the space, cyber and maritime domains.

“The deepening strategic partnership between the People’s Republic of China and the Russian Federation and their mutually reinforcing attempts to undercut the rules-based international order run counter to our values and interests.”

NATO’s new 16-page ‘Strategic Concept’ document published last night as its leader’s summit in Madrid ended.

So what? - Bit by bit, Aotearoa-NZ is shifting its strategic and security footings closer to the US and EU-led alliance of western nations pushing back at what they see as Russia and China’s combined attempts to undermine democracy.

The problem is our trade footprint is much closer to China. So far, China has not singled us out too much as a competitor or combatant, as it has done with Australia. But the more our PM talks about these issues in such direct terms while standing shoulder to shoulder with western leaders, the greater the risks of a backlash.

It’s also a potential backlash NZ Inc is not ready for. Unlike in the 1960s when there was a combined and concerted effort to prepare for Britain’s entry into the European Union and the resulting loss of assured markets for our commodity exports, little has been done to diversify. If anything, our reliance on commodity exports to China has grown post-Covid as our services export sectors (tourism and international education) have withered and our exports of meat, dairy, fish, logs and wine to China has increased.

The cognitive dissonance is growing louder by the day. Perhaps understandably, the public have yet to hear what the ‘establishment’ within MFAT, NZTE and the wider export community are saying to each other behind closed doors. Talking about it in public would antagonise China even more.

But this can’t be a behind-closed-doors thing for long, especially if it is to sink into the public consciousness and particularly if a new Government, possibly as soon as late next year, is put on the spot.

I welcome comments and suggested and suggested lines of inquiry from paid subscribers below.

Chart of the day

Small business wage growth is surging

Number of the day

News subscriptions working

100,000 - NZME, the owner of the NZ Herald, has reported it has reached its planned milestone of having 100,000 digital-only subscriptions within three years of its premium service launch, thanks in part to its recent acquisition of BusinessDesk, BusinessDesk reported this morning. Subscribers to the physical newspaper also get free access to the digital service, which lifts total digital subscriber numbers to 155,000.

Quote of the day

Sabres rattling in Madrid

“We’re sending an unmistakable message, in my view — and I think yours as well — that NATO is strong, united, and the steps we’re taking during this summit are going to further augment our collective strength.

“To that end, today I’m announcing the United States will enhance our force posture in Europe and respond to the changed security environment, as well as strengthening our collective security.” US President Joe Biden speaking with NATO Secretary General at a press briefing in Madrid overnight (White House transcript)

Some fun things

Ka kite ano

Bernard

PS: I’m trying to keep these a bit shorter to get them out nice and early. Early birds and worms. Fresh is best.

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: We don’t have an economy. We have a housing market with bits tacked on. That’s evident again in a fresh set of data and news below this morning that emphasises how the economy, our health system, our tax system, our infrastructure deficit and all levels of Government and politics are held hostage by a too-big-to-fail housing market in the grip of home-owning median voters who can’t see any other way.

Paid subscribers can hear more detail in the podcast above and in the text below.

In news from Aotearoa-NZ Real Estate Inc this morning:

* ANZ and ASB have announced they have suspended high LVR lending as they come up against Reserve Bank-imposed speed limits designed to stop the housing market becoming even more inflated by leverage Interest;

* KPMG has reported Aotearoa-NZ’s bank profits hit a record high $1.74b in the 90 days of the March quarter, which represents an annualised profit rate of almost 2% of GDP, and is a partial result of $12b worth of subsidised lending to them by the Reserve Bank over the last year;

* Dunedin hospital has suspended non-urgent operations, the ODT reports this morning, joining most other hospitals being overwhelmed by winter-related cases through A&Es, of which at least 20% of which are caused by poorly-heated and damp homes that are the most expensive relative to incomes and rents in the OECD Newshub;

* The Government’s spending on emergency housing since its election in late 2017 has now topped $1b, Jason Walls reports this morning via NewstalkZB;

* The Auditor General has reported costs on Auckland’s City Rail Link project have blown out to $5.53b as our largest and fastest-growing city tries to re-engineer its way to higher density and more affordable housing with a functional transport system;

* Wellington’s health system is also under intense stress this morning, with urgent care clinics overwhelmed and non-essential surgery also cancelled, the Dominion Post reports;

* The Government is set to announce a Let’s Get Wellington Moving capital spending programme later this morning that won’t keep up with population growth and the need for much, much more housing supply. This is largely because both sides of politics are determined to keep public debt and taxes at or below 30% of GDP and because Wellington’s older suburban home-owning voters, like those that control other major councils, don’t want to allow the necessary housing intensification and the higher council debt and rates increases that entails (and today’s announcement won’t even touch the $7.3b of rail investment necessary for an extra 200,000 people in the next 30 years, as the Dominion Post reports);

* PM Jacinda Ardern has announced a deal overnight with Spain’s President Pedro Sánchez Pérez-Castejón to allow an extra 1,800 Spanish backpackers to work in Aotearoa-NZ each year, as lower-wage temporary migration starts ramping up again to support the economy’s dependence on a low-wage-and-high-house-price model that benefits home-owning median voters who make more income tax-free from their homes than their jobs;

* the Reserve Bank’s new chief economist Paul Conway is due to deliver his first major speech at 11.30 am this tomorrow morning titled ‘Housing (still) matters- the big picture’, which is expected to detail and explain the bank’s view that the housing market is 10-30% (but not more) above its ‘sustainable’ (rather than ‘affordable’) level.

In the news elsewhere overseas overnight and this morning;

* Turkey has just agreed to allow Sweden and Finland to join NATO Reuters

* In good news for our biggest buyer of exports and the world’s second-largest economy, China moved overnight to ease its Covid restrictions on travellers, cutting its MIQ-style quarantine period to seven days from 14-21 days, depending on the origin and Covid status of arrivals CNBC

* G7 leaders failed overnight to agree a deal to cap prices on Russian oil exports to their countries, saying only they would ‘explore’ such a deal, with political pressure from skyrocketing prices of US ‘gas’ (petrol and diesel) and European gas (actual gas) threatening to fracture the US-led coalition against Russia’s invasion of Ukraine Politico

* European Central Bank President Christine Lagarde said overnight the ECB would fight inflation in a ‘determined and sustained’ manner, suggesting fast rate hikes, but she also confirmed plans for the ECB to buy ‘Club Med’ Government bonds (Italy, Spain and Greece) to keep their interest rates from blowing out; and,

* US stocks are down 1.9% in late trade this morning after US consumer confidence slumped to a 16-month low in June because of worries about living costs and a rise in inflationary expectations to their highest levels since 1987. Reuters

Chart of the day

New high LVR bank mortgage lending flat in May

Number of the day

The credit squeeze behind the fall in house prices

0.2% - The seasonally adjusted increase in new high LVR bank lending to $6.817b in May from April, although it was down from $8.921b in May 2020, Reserve Bank data released yesterday showed.

Quote of the day

How Britain’s top General sees the war in Ukraine

“This is our 1937 moment. We are not at war - but we must act rapidly so that we aren’t drawn into one through a failure to contain territorial expansion.” Chief of the UK General Staff General Sir Patrick Sanders in a speech overnight to the annual RUSI Land Warfare Conference in London.

Some fun things

Ka kite ano

Bernard

PS: I’ll be covering the Let’s Get Wellington Moving announcement and the Paul Conway speech later today. I welcome suggestions for questions and lines of inquiry in the comments below from paid subscribers.

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 new survey of over 3,000 households in March has found that around 115,000 homes have such bad mould that it’s making their kids sick, with about twice that number living in homes that had needed repairs to their walls, roofs and windows for more than three years.

Given the news below about both child poverty and housing affordability, we’ve opened this up to all immediately for sharing etc, including the full email and more detail in the podcast above. Thanks to paid subscribers for this.

Other news overnight and this morning here and overseas:

* NATO announced ahead of this week’s summit where PM Jacinda Ardern is due to speak that it would increase its number of troops on high alert by seven-fold to over 300,000 after Russia’s invasion of Ukraine; Reuters

* Russia defaulted overnight on its sovereign bonds for the first time since during the Bolshevik revolution of 1917/18; Reuters

* UK Prime Minister Boris Johnson is set to widen steel tariffs to protect British mills, it was reported overnight; The Guardian UK

* The Helen Clark Foundation and Health Coalition Aotearoa released EFTPOS data in a report last night showing areas with higher levels of deprivation have higher volumes of sales for takeaways and the most outlets for takeaways; and, Stuff

* A major fire broke out this morning in an unnamed industrial facility in Penrose, with multiple fire engines still on the scene and billows of smoke reported to be drifting over Onehunga and Favona. Residents were told to stay indoors. RNZ

Our inhumane habitats

Over 115,000 families are living in homes that are so mouldy and damp that its making their kids sick. Almost half that number of households are living in houses, mostly rentals, that have needed weather-tightness repairs for more than three years.

Those are two of the headlines of a new survey published this morning by its commissioners AMI Insurance and community housing provider Habitat for Humanity NZ. The survey by Camorra Research in March of 3,039 households found:

* 42% of households were worried about dampness in their home;

* about 180,000 say mould, dampness and condensation worsened the breathing of those living in the house;

* about 12% or 115,000 households said mould, dampness and condensation worsened the breathing of children living in the house;

* 38% of households need basic repairs done outside the home, with 35% of those saying they have been a problem for more than three years;

* 8% (145,000 households) all stay in one room and only heat that room to stay warm when it gets very cold in winter;

* A third (approx. 635,000 households) said their winter power bill was excessive;

* 37% were using as little heating as possible to manage their electricity bill;

* 16% (about 300,000 households) went to bed earlier than usual to stay warm when it gets very cold in winter; and,

* 38% of households (680,000) said they needed repairs done outside the home to walls, roofs, windows and surrounds, with 35% of those (240,000) saying these repairs have been unresolved for over three years.

“This research is a timely reminder that the rising cost of living is going to have a deeper impact on those households already struggling to make ends meet.

“This research has shown that while the majority of homes in New Zealand are habitable and decent, there are several hundred thousand Kiwi families that are experiencing less than optimum living conditions, and in severe cases, will lead to a range of issues – including ongoing poor health problems that may require hospitalisation such as asthma and rheumatic fever due to cold, damp and overcrowded living conditions.” Habitat for Humanity NZ CEO Alan Thorp.

Quotes of the day

Boris Johnson and Justin Trudeau sparring during a G7 photo shoot

“Jackets on? Jackets off? Shall we take our clothes off? We all have to show that we’re tougher than Putin” British Prime Minister Boris Johnson asked other leaders sitting around a table. 

“We’re going to get the bare-chested horseback riding display,” Canadian Prime Minister Justin Trudeau said in response, referring to a widely shared photo of Russian President Vladimir Putin. 

“There you go! There you go! We’ve got to show them our pecs!” Johnson replied. YahooFinance

Number of the day

58.2% - This was the average employee turnover rate in small to medium enterprises covered by MyHR in the year to the end of March from the 48.8% seen in the previous year and the 49.7% seen in the 2019/20 year. The table below from MyHR’s report shows turnover rates it has measured by sector in the year to the end of March vs a year earlier.

Chart of the day

The supply chain crisis is ending in the United States

Comment of the day on The Kākā

On the four day work week

“Really enjoyed listening to your latest when the facts change with my old professor Jarrod Haar over the weekend. He used to drive up to the North Shore in Auckland from the Waikato everyday for lectures, so not surprised to hear he’s enjoying working from home too! You should have asked him about four day work weeks as he was a part of the research back in ‘18/‘19 with perpetual guardian. Would love to know how the shift to remote working has affected sentiment to shorter weeks and the success or failure of a four day week.” Alex in yesterday’s Chorus.

Some fun things

Only 8 tabs open

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: The US-led western alliance is scrambling this morning to shore up its sanctions and solidarity against Russia as Vladimir Putin squeezes Germany’s gas supplies and the war in Ukraine drags on towards stalemate.

Meanwhile, Aotearoa-NZ has again risked angering China by joining a US-led ‘Partners in the Blue Pacific’ (PBP) aid and cooperation alliance to push back at China’s own cash-led diplomatic push into the region. (White House announcement)

Also, US President Joe Biden has flagged plans at ongoing G7 talks for US$200b worth of western infrastructure spending in a belated attempt to combat China’s own ‘Belt and Road’ initiative in the contest for the hearts, minds and alliances of struggling smaller states. (Biden statement)

I talk in more depth for paid subscribers in the podcast above about what these moves in the last 48 hours might mean for Aotearoa-NZ and how these geo-political moves are buffeting our own political economy.

Elsewhere in the news this morning:

* G7 leaders announced a ban on gold imports from Russia and talked overnight about trying to put a price cap on Russian oil; The Guardian

* The Sunday Times-$$$ reported overnight Prince Charles received €1m in cash three times from a controversial Qatari politicians, although nothing illegal is alleged and the Prince said the the money was immediately deposited in the accounts of his private foundation at the Queen’s bank, Coutts;

* The central bankers’ bank, the Bank for International Settlements (BIS), called in its annual report for central bankers to intervene in a timely and decisive way to restore low and stable inflation or risk a return to 1970s-style stagflation; NZ-Herald-$$$

* Andrew Little announced this morning a further 800,000 people would get free access to flu vaccines from this Friday and that older people and other vulnerable groups would be able to get a fourth shot from tomorrow; and,

* Labour MP Paul Eagle announced he would run for Wellington’s mayoralty, which would trigger a by-election later this year if he wins. NZ Herald, Stuff

Chart of the day

Grass-fed means even more than it used to

Most of the world’s grains are eaten by animals, with cows and beef cattle the worst culprits. That’s a huge marketing opportunity for Aotearoa-NZ’s grass-fed dairy and beef industries in a world short of grain and worried about wasteful climate emissions. This Economist-$$$ piece and chart is very useful on this.

Number of the day

Where copper goes, the global economy goes

11% - The price of copper, which is a bellwether commodity used across a range of industries, has fallen 11% to a 16-month low in the last two weeks, indicating the global economy is taking a turn towards recession. CNN

Quote of the day

Recession talk growing

US stocks rose 3% on Friday night as talk grew of recession, which would allow the US Federal Reserve to start cutting interest rates next year.

"Having enjoyed a mini-boom from consumers returning after the relaxation of pandemic restrictions, many services firms are now seeing households increasingly struggle with the rising cost of living, with producers of non-essential goods seeing a similar drop in orders," Chris Williamson, chief business economist at S&P Global Market Intelligence via S&P.

Comment of the day on The Kākā

The Matariki account idea

“Just saw the email title and exclaimed “Yes!” Haha. I found Yanis Varoufakis’ thoughts about the e-yuan interesting in this interview” Cain in my article about The Matariki Account idea.

Some fun things

Ka kite ano

Bernard

PS: I’m keeping these a bit shorter to get them out earlier. There’ll be a ‘pick of the links’ collection later in the day.

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