The Kākā by Bernard Hickey

TLDR: A research paper from the Te Waihanga (The Infrastructure Commission) has estimated house prices rose 69% more than they would have done if councils had not down-zoned both close to city centres and on the fringes over the 1970s and 1980s to allow fewer houses to built.

Insufficient investment in transport infrastructure over the last 30 years also slowed traffic and commuting speeds from the 1990s onwards, which increased demand for homes closer to the city centre just as the number of new homes close to the centre was broadly frozen.

This is an updated and expanded version of an article that was published for full paid subscribers on Tuesday. It includes an interview I did with Peter yesterday in podcast form above. The Kākā’s fully paid up subscribers support the analytical and accountability journalism I do on analysing housing, climate and poverty, including ensuring it gets out to a wider audience, as is being done with this email sent to free subscribers. It is free and shareable for the public.

Te Waihanga’s Economics Director Peter Nunns published a compelling and detailed 51 page analysis this week showing how decisions by Governments and councils from the 1970s onwards reduced the responsiveness of our housing market to build new houses by a quarter to a third. That slashing of ‘elasticity’ of supply meant a rebound in population growth and low interest rates pushed up house prices by 69% more than would otherwise have been the case.

Nunn’s analysis focuses on decisions by councils in the 1970s, 1980s and 1990s under the Town and Country Planning Act 1973 and the Resource Management Act 1991 to focus on protecting existing houses and land, rather making properly zoned and infrastructured land available for new houses, as they had down in the 1930s, 1940s and 1950s.

"Between 2010 and 2018, we built new homes at a slower rate than population growth, and prices accelerated. The research suggests that now, when housing demand increases, we build a quarter to a third less homes than we used to. Changes to urban planning and transport that started in the 1970s have raised barriers to housing development.

"Until the 1970s, city councils actively encouraged population growth both at the fringe of the cities and in established suburbs. Cars became more affordable and urban roads were paved and improved, allowing people to travel further, faster and boosting development of new suburbs.

"Council plans facilitated infill housing prior to the 1970s but started to limit it after that point. Planning began to focus less on facilitating growth and planning infrastructure, and more on maintaining the character of existing neighbourhoods by stopping the construction of blocks of flats and apartments." Peter Nunns.

What the down-zoning looked like

Nunns analysis looked in detail at how in-infill housing and fringe housing were both restricted in major urban centres over the last 50 years, and how slowing commuting times because of a lack of transport infrastructure investment had helped propel house prices higher closer to city centres.

This chart shows how capacity was squeezed relative to the population in Auckland, up until the 2016 Unitary Plan.

This chart shows how the growth in dwelling stock in particular (because of the rise in the size of each home until recently) was restricted after the 1970s.

This helped lead to an increase in the sensitivity of house prices to rises in demand through higher incomes and higher population.

Nunns analysis also looked at how declining travel speeds because transport infrastructure failed to keep up with population growth had been a factor.

‘If only we had built up and along’

Nunns wrote that changes to urban planning policies and urban transport network performance could explain most, if not all, of the acceleration in house prices and decline in housing supply responsiveness in recent decades.

“If we had not downzoned central Auckland in the 1970s, or if we had chosen to adopt successful congestion-mitigation policies, then housing would now be more abundant and house prices would be lower.” Peter Nunns

Nunns then used the widely used urban economics model known as the Alonso-Muth-Mills (AMM) model to analyse what would have happened without the land use restrictions or declining commuting speeds.

Here’s his explanation of how it works:

“In the model, people choose where in the city to live to minimise their combined housing and transport costs. In equilibrium, nobody stands to gain from moving to a different location. This means that differences in house prices between locations are proportional to differences in the cost, in time and money, to commute from those locations. Places that are further away from the city centre have higher transport costs and hence lower house prices, lower population density, and lowerlandprices.” Peter Nunns.

Nunns then used this model to analyse three counter-factual scenarios and what they would have done to house prices, relative to what actually happened.

“The first counterfactual scenario examines what would have occurred if we had not downzoned central Auckland in the 1970 and 1981 District Schemes. The second examines what would have happened if travel speeds had been maintained at their peak levels, rather than declining in the 1990s and 2000s. The third considers the cumulative effect of avoiding both downzoning and declining travel speeds.

“Table 3 compares these counterfactual scenarios against model predictions based on observed data. The first and second scenario both result in predicted house price growth of roughly 150% over the 1979-2018 period. This represents a 40% reduction in price inflation relative to what actually happened. In the first scenario, this is mainly due to increased housing supply in existing suburbs, but in the second, this is mainly due to increased subdivision on the fringe of the city.

This analysis shows that accelerating house prices were not inevitable – they could have been avoided if we had chosen to adopt different policies. If we had not downzoned central Auckland in the 1970s, or if we had avoided declining urban travel speeds, then urban housing would now be more abundant and house prices would be lower.

“The third scenario results in predicted house price growth of roughly 80% over the 1979-2018 period. This represents a 70% reduction in price inflation relative to what actually happened.” Peter Nunns.

Here’s the ‘money shot’ table illustrating the ‘what if’ scenario

I have a full transcript of the interview above. Please email me if you’d like me to send it to you.

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 & TLDL: This week I talked in the podcast above with Interest.co.nz’s Jenee Tibshraeny and the NZ Herald’s Thomas Coughlan about the week’s events in the political economy around the Parliamentary Press Gallery, including:

* the debates over National’s ‘squeezed middle’ tax cut proposal;

* the Government’s April 1 benefit increases, why they’re inadequate and why PM Jacinda Ardern is not using the Crown’s balance sheet;

* the opening of Transmission Gully and whether it will be our last motorway;

* China’s deal to station troops and ships in the Solomon Islands;

* whether Globalisation is ending and what it might mean for Aotearoa-NZ; and,

* Ardern’s latest one-on-one interviews.

This is a weekly feature where I talk with the other ‘wonks’ in the Parliamentary Press Gallery interested in the political economy, including Stuff Political Editor Luke Malpass, along with Thomas and Jenee.

I welcome questions from subscribers in the comments below over the episode, and for next week’s version. This was recorded on the afternoon of Friday, April 1.

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 & TLDL: This week on the weekly ‘hoon’ webinar for subscribers to The Kākā, we bought in renowned expert on Russian and Soviet history, David Satter, to talk about the rise of Vladimir Putin and the war in Ukraine.

David is a fellow of the Foreign Policy Institute at the Johns Hopkins University School of Advanced International Studies (SAIS) and a senior fellow of the Hudson Institute in Washington, D.C. He wrote the definitive book on the circumstances around Putin’s surprising rise to power, The Less You Know, The Better You Sleep: Russia's Road to Terror and Dictatorship under Yeltsin and Putin, and his most recent book is Never Speak to Strangers and Other Writing from Russia and the Soviet Union.

Our conversation with David was a fascinating deep dive into how Putin operates and the awful circumstances around his rise to power. David gives many insights into the war in Ukraine and the mistakes the West made in dealing with Putin in recent years.

In the second half of this week’s podcast, Peter and I talked about the events of the week in geo-politics as seen from here in Aotearoa-NZ, including chats on:

* Three Waters, He Puapua and David Seymour’s interventions on these issues;

* the opening of Transmission Gully and the economics of land-banking that force the costs of the motorway onto the public and privatise the benefits for landowners; and,

* the strange new plants growing in the gardens of Parliament.

Now here’s my summary of the main news events of the week and how I covered it for paid subscribers on the The Kākā, including links to the podcasts and articles emailed to subscribers.

Five things of note this week

The wholly inadequate benefit and WFF increases on April 1

Auckland Council unveiled its (no) parking strategy

This story didn’t make a huge national splash, but the launch of this strategy to remove parking from the curbs of over 240km of roads in Auckland will form the basis for almighty and sadly culture-warish clashes between motorists band public transport/climate activists in this year’s local elections.

Wayne Brown made his opposition to the strategy the centrepiece of his announcement of his Auckland Mayoral campaign.

Transmission Gully opened after 103 years of waiting

China’s unsettling deal to park its military on Guadalcanal

The Bank of Japan’s started a whole new round of money printing

Charts of the week

Inflation appears headed for 9%

Residential construction sector confidence collapsed in March

Consumer confidence also collapsed in March

My weekend reading on substack

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 & TLDL: Incomes for 100,000 low income families rise by around $60/week from today, but child poverty activists are calling for further inflation adjustments and tax credit extensions to further narrow a cost-of-living gap that has blown out to over $300/week for some families over the last year.

See more analysis below this morning’s news and in the podcast above. Normally this is just for paid subscribers, but I’m opening it up to both paid and free subscribers given the public interest. Paid subscribers support this work and I’d love you to join The Kākā community.

Elsewhere in the news this morning:

* China widened and extended its Covid lockdowns overnight in the key financial, manufacturing and shipping hub of Shanghai for as much as another 10 days, which worsened fears of a consumption and production slowdown in the world’s second largest economy; (Reuters)

* Russian President Vladimir Putin demanded overnight that foreign buyers pay for Russian gas in roubles from Friday or else have their supplies cut, which has already forced Germany, Austria and Spain to prepare for gas rationing that may shut factories; and, (Reuters)

* President Joe Biden announced the United States would release a further 1m barrels a day from its strategic oil reserve for the next six months to take pressure off global oil prices, which triggered a 5% fall in Brent Crude prices to US$108/barrel this morning (USA Today).

Coming up today for paid subscribers, look out for my Ask Me Anything invite email comment thread just before midday, where I’ll discuss the week’s event for an hour until 1pm. Then at 4pm, I’ll send out the invite email with the zoom link for the weekly ‘hoon’ live webinar with Peter Bale and guests to chew over the week that was.

Benefits go up, but remain painfully inadequate

The Government has again trumpeted benefit and Working For Families (WFF) changes from today that will increase average weekly incomes for 100,000 families by about $60/week. Here’s Child Poverty Reduction Minister Jacinda Ardern re-announcing today’s increases and Social Development Minister Carmel Sepuloni also re-announcing the changes.

But anti-poverty activists as as Fairer Future, the Child Poverty Action Group (CPAG) and the Auckland City Mission have called today for further improvements across both benefits and WFF to fully respond to the recommendations of the 2019 Welfare Experts Advisory Group (WEAG). Fairer Future estimated earlier this week that some families would still be over $309/week short of the income recommended by WEAG to live with dignity, even after today’s increases.

CPAG and the City Mission recommended today:

* that the WFF’s $82.50/week In-Work Tax Credit (IWTC)be extended to all families with children and not just those whose parents are working;

* that the IWTC be indexed to wage inflation as other benefits and NZ Super are now; and,

* that the abatement rate increase from 25% to 27% from today to claw back income earned over $42,500, and that the threshold also be adjusted for wage inflation.

CPAG Spokeswoman Susan St John described how Aotearoa-NZ’s welfare system for the children of the unemployed was even meaner than Australia’s.

"The Government can significantly reduce the burden of the deepest income poverty by first, ensuring the full Working for Families reaches the 150,000 children living in the severest income poverty who currently miss out

“Let’s catch up to Australia where there is no such discrimination in their tax credits against the poorest children." Susan St John.

Auckland City Missioner Helen Robinson also called for the IWTC to be extended to the families with parents out of work.

"WFF is designed to limit assistance to the worst-off families and that lifting these worst-off up requires making the full package (ie the IWTC) available to all on benefits. It can be done simply and would recognise that parenting is work." Helen Robinson.

They also pointed out the inflation adjustment included in today’s benefit and WFF increases were only for price increases up to the end of September 2021, when much of the inflation in fuel, food and rent prices has happened after then. Economists are forecasting that prices for beneficiaries will have risen by a further 5.8% between the end of September last year and the end of June this year.

Susan St John wrote an excellent piece for Newsroom last week on the scale of the need and the relative ease of the fix for a Government that gave $20b in cash to business owners over the last two years.

“What can be done immediately? First the IRD could flip the switch overnight and pay the full WFF to all low-income families. It won’t cure child poverty on its own, but it is an obvious start, targeted at only those with greatest need. It would commit the government to spending around an extra $650 million per annum and be an excellent stimulus as it would be spent immediately, saving parents precious time and anguish in queuing for food parcels and hardship relief. It requires letting go of a failed neoliberal ideology that withholds a poverty-reducing payment for the poorest children in the name of a work incentive.

“All aspects of WFF should also be annually indexed like NZ Super and the tough tax rates on low-income families in low-paid work must be reduced. The clawback should be reduced from its April 1 new rate of 27 percent to its former rate of 20 percent. Other bold steps such as for housing are of course also urgently needed to avert social crisis of hunger and despair brewing in Aotearoa and provide the promised transformation.” Susan St John

Inflation much more painful for the poorest

Inflation for beneficiaries, Maori, the lowest earning quintile and superannuitants has been significantly higher over the last 13 years than for the highest earning quintile and home owners in particular because rents have exploded relative to mortgage costs and fuel and food costs have risen faster than other costs. Those on lower incomes spend a bigger portion of their income on fuel, food and rent than those on higher incomes, who typically own their homes and save bigger chunks of income.

Here’s the Stats NZ chart showing inflation since 2008 for those lower earning groups was 32.9%, 28.6%, 34.8% and 34.9% respectively, while inflation for the highest earning group was 20.3%.

and

The very definition of an unjust transition

In my view, the true tragedy of the Labour-Green Government’s response to both Covid and now the energy-and-food-related inflation crises is that its is worsening the income and wealth inequalities present before Covid and storing up huge and uncosted liabilities on the Crown’s future balance sheet in the form of higher health, justice, education and welfare costs, along with opportunity costs of lost productivity and health benefits from a much fairer response.

The only reason Labour has given for not responding is that it would cost too much at a time when the Government should be tightening its fiscal stance to reduce net core crown debt back to the 20-30% of GDP north star that both Labour and National Governents have targeted since the early 1990s under the tutelage of Treasury.

The extension of the IWTC to all 150,000 children in poverty is not only a no-brainer. That’s the bare minimum that should be done, along with:

* the necessary wage inflation adjustments for benefits and WFF’s tax credits and abatement thresholds up to April (not September 30)

* the reversal of the effective tax increase in the increase in the abatement rate in recent years from 20% to 27% at the $42,700 income threshold; and,

* a repeat of the doubling of the winter energy payment that was done in 2020.

Are you proud of your work?

Another generation of children are being sacrificed on the altar of keeping core crown debt at less than half the level of our AAA-rated OECD peer countries, and because Treasury has failed utterly to properly estimate the true long-term liabilities of our climate inaction, ongoing housing unaffordability and gruelling child poverty.

Just quietly, I’d like to ask every one of the Treasury, DPMC, MSD and MBIE advisers and executives who subscribe to this email whether they are proud of their advice to ministers, and whether that advice is truly free and frank.

And to those Labour and Green and National MPs who also get this email: is this the Aotearoa-NZ you really want to hand over to your and our tamariki when you finish your time in Parliament?

Here’s more useful coverage on the benefit and WFF changes today from Amelia Wade at Newshub, Glenn McConnell at Stuff and reporters at RNZ.

For the record yesterday

Anti-hospitalisation cavalry in a pill - Andrew Little announced 60,000 doses of Pfizer’s Paxlovid, a pill that prevents sick Covid patients from being hospitalised, arrived this week and will start being distributed next week. He said Pharmac had also gotten access to AstraZeneca’s Evusheld, which can prevent people who can’t have vaccines from getting Covid, although it is yet to be approved by Medsafe.

“Access to Paxlovid will be tight to make sure it gets to the people who need it most. It will be prescribed by doctors, with factors such as age, disability and being immuno-compromised taken into account.” Andrew Little.

Useful longer reads

Just BTFD and HODL dude…

The FT has a (free to read) good deep dive here on why financial markets are so chilled about the war in Ukraine. Global stocks are now above their pre-war levels. (Yep. Go figure…) In my view, this is all about the BTFD and HODL crowd betting on yet more money printing and eventual rescues. They don’t want to miss out on the almighty rebound…

This chunk of foreboding resonated with me.

“Financial markets are what scientists call a complex adaptive system, like our planet’s climate, an ant colony or the human body, where a multitude of independent components can interact in unexpected ways. That can lead to collective behaviour that is hard to predict from observing each factor individually. Complex adaptive systems are inherently hard to understand. They can also be both impressively resilient and cataclysmically fragile, often dynamically adapting to setbacks but occasionally succumbing to a toxic combination of seemingly minor independent failures.” Robin Wigglesworth in Oslo, Philip Stafford and Tommy Stubbington in London for the FT (free to read.)

The end of globalisation? Really?

This free-to-read thinkpiece via the FT and Chartbook from Adam Tooze is an excellent challenge to the Larry Fink letter to BlackRock shareholders last week about the Russian invasion of Ukraine putting an end to the last 30 years of globalisation.

Tooze calls b******t on Fink, who talks about deglobalisation, but remains heavily invested in China.

“There is a lot of talk about reshoring and rebuilding supply chains, but far less action on the substance. Apple, to cite the most prominent example, actually increased its reliance on China last year. For now at least, feverish talk about Russia’s attack on Ukraine ending globalisation as we know it should be taken with a pinch of salt. Imagine Fink championing an economic war against China! When that no longer seems “non-planetary”, we will know that we are really in a new world.” Adam Tooze

Chart of the day

This is a real oil shock, as BlackRock’s latest chart pack shows.

Quotes of the day

They sound pretty friendly still

Russian Foreign Minister Sergei Lavrov and Chinese Foreign Minister Wang Yi met in Beijing yesterday and said lovely things to each other.

"We, together with you, and with our sympathizers will move towards a multipolar, just, democratic world order." Sergei Lavrov

The ‘multi-polar’ line is reminiscent of the thinking of Aleksandr Dugin. Remember him? FYI a repeat of the link to the explanation via Kim Hill on RNZ last weekend.

And there’s still no limits…

"China-Russia relations have withstood the new test of the changing international situation, maintained the correct direction of progress and shown tenacious development momentum…. China-Russia cooperation has no limits." Wang Yi

Comment of the day on The Kaka community

The PPP Kool Aid is on tap at the Infrastructure Commission

“Do you really think there won't be another PPP? The Infrastructure Commission, which has establishing PPPs firmly embedded in its DNA, appears to be focused on ways to improve PPP establishment and operation rather than questioning the choice of using a PPP in the first place. Looks like the 'no true Scotsman' fallacy in operation. And, as you've pointed out, with the low debt level targets still in place there is a strong incentive to move projects off balance sheet with PPPs or SPVs (at least there is a chance of value capture in the SPV levy setting). I would not be surprised that in a few years there will be another PPP that will be prepared to fight the last war, and will find a whole new method to privatise the profits and socialise the losses.” Andrew in yesterday’s piece on Transmission Gully.

Thread of the day

Stepping back in time

Spookies, profundities, curiosities and feel-goods

The Craic

A fun thing

Ka kite ano

Bernard

PS: Here’s the zoom link for the 4pm ‘hoon’ with Peter Bale until 5pm.

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 & TLDL: Built at a cost to the public of at least $1.25b, Wellington’s four-lane Transmission Gully highway finally opened to motorists today, locking in place $7.8b worth of tax-free capital gains for land owners in the Kapiti Coast and Horowhenua District Council areas in the last five years of its construction.

It is the biggest example in Aotearoa-NZ’s history of the financial cost of a public infrastructure project being borne by the public at large, but the collective financial benefits accruing to landowners without those benefits being taxed. In effect, renters will pay at least $180m worth of GST and income tax for each of the next 25 years to build and run the motorway, while economic benefits worth billions have already accrued to land owners.

Transmission Gully was the main reason for land prices escalating on the Kapiti Coast and Horowhenua by $2b over the last three years. Renters and land owners will pay taxes of at least $1.25b over the next 25 years. In return, land owners have already banked the $2b in land price escalation benefits. Without paying a cent in taxes on these unearned capital gains.

(Paid subscribers can see more of my financial analysis of the wider costs and benefits of Transmission Gully below the paywall fold and in the podcast above, including my questions to Jacinda Ardern and Grant Robertson at the opening. Please hit ‘like’ on the article if you think it should be opened to the public.)

Update: I have now opened it to the public after requests from paid subscribers.

Elsewhere in the news today:

The Labour Government and the Auckland Council are disappointed the privately-owned Team New Zealand decided to take their America’s Cup defence to Barcelona, despite over $250m worth of public money being invested in the last defence and $99m more promised for the next one, and despite team boss Grant Dalton ordering a $3.7m leisure boat with a $5,200 wine fridge in the last year;

* The Government is stumping up another $1.6b in shares and loans to keep Air NZ alive through a capital issue of equity and debt worth $2.2b in total, including a rights issue of new shares issued at a 60% discount to yesterday’s market price; and,

* Germany and Austria announced overnight they were preparing to start rationing gas to favour households over factories in case Russia stops gas supplies;

* Germany’s council of economic advisers warned a halt in Russian energy supplies would create a “substantial” risk of a recession and unleash double-digit inflation in Germany; and,

* Spain’s annual inflation rate hit a 40-year high of 9.8% in March, well above expectations for a 8.4% rise.

The true costs and benefits of Transmission Gully

Lynn and I drove out to Paekakariki yesterday at 6.30 am for the formal opening and ribbon-cutting ceremony for the 27-km-long Transmission Gully, which opened today to Wellington’s motorists. I asked PM Jacinda Ardern, Finance Minister Grant Robertson and Transport Minister Michael Wood questions at the standup just after the ribbon was cut in front of a couple of hundred dignitaries, which included local iwi leaders and former MPs. My questions and answers are in the podcast above, including on who really paid for the road and who really benefited.

You may wonder why so many have been so intensely focused on this one project.

If you’ve not lived in Wellington, you may be surprised with the apparent obsession with what seems like just another road, albeit a particularly big and expensive one.

This is not just another road to Wellingtonians. It has been a dream for 103 years, we were told by the PM yesterday, who referenced a 1919 call by a local MP for a new faster road from Paekakariki to the capital. There’s even a much-believed myth (but not proven) that the US Marines offered to build the motorway in 1942 to get their troops to and from Wellington Harbour and their training camps on the Kapiti Coast. Over 15,000 practiced their Pacific Island landings there during World War Two.

For many Wellingtonians, it has appeared to be a pathway to a much brighter future for at least a couple of decades. It has become the region’s proxy for ‘progress,’ a type of cipher to identify who you were and what you wanted. Wellingtonians mired in cold winds and overcast days dream of driving ‘up the coast’ to calmer and sunnier and flatter climes. Owning a ‘bach’ on the Kapiti Coast or the Horowhenua or moving your parents into a retirement unit there is an indicator of wealth and progress and a ‘better life.’

If only you could drive there faster and safer, and then get back without being stuck in a Sunday night queue for hours as you drive back into the gloom of Wellington. If only you could live on the coast and commute to the city for work.

If only…

Transmission Gully was the project Wellingtonians have been dreaming of and scheming about for as long as I can remember. One of the first conversations I had when I started as the Dominions Post’s Business Editor in 2003 was with then-Editor Tim Pankhurst, who told me it was one of the paper’s main campaigns.

So much hoping and planning and spending and working for an 11 minute time saving. It was a political-life-long ambition for Ohariu MP Peter Dunne, who included it in his 2002 and 2005 supply and confidence agreements with the-then Labour-led Government, and his 2008 agreement with the then-new National Government.

Days before the announcement of the date for the 2014 election, then Transport Minister Gerry Brownlee trumpeted the NZTA’s signing of the Public Private Partnership deal with Wellington Gateway Partnership, a consortium of CPB-HEB Consruction and Ventia, who are controlled by Spain’s CIMIC, to build the motorway and then operate it for 25 years. The private funders included ACC and the global InfraRed Capital Partners.

11 minutes costing $1.25b in today’s money

The deal was designed so the Government, which was trying to get its post-quake and post-GFC debt down, didn’t have to borrow money from 2014-2020 to pay to build the road.

When first agreed in July 2014, the net present value of the 25 years worth of $125m payments each year was estimated at $850m. NZTA said at the time this was $25m less than using the usual procurement and maintenance costs.

Here’s then-NZTA CEO Geoff Dangerfield saying in July 2014 that the Transmission Gully PPP would provide the best value for money and the most certainty of delivery.

“Not only do we have certainty that the project will be built to a strict deadline that will see it opening in 2020, but the PPP contract also requires that the project is designed, constructed, operated and maintained to achieve a high standard of performance in the areas of safety, journey times, reliability, and customer satisfaction.” Geoff Dangerfield in a July 2014 statement.

Since then though, disputes and cost overruns linked to earthquakes, bad weather, covid and various design and construction problems and delays have seen the cost rise to an NPV of $1.25b. That means annual payments of at least $180m, although the exact final cost or annual amounts haven’t been disclosed yet.

Over $200m has already been paid to the consortium to compensate for the extra costs and ensure the delays were ‘only’ two years. An initial review of the PPP process for Transmission Gully done last year found it was consented on a non-PPP basis and therefore was also going to see cost overruns, and the original budget set for it was too skimpy. The Infrastructure Commission is doing a bigger formal review, now that the road is finished and open.

11 minutes worth billions in today’s wealth

The road will save motorists an average of 11 minutes for the trip between the CBD and the Kapiti Coast, and in theory reduce each driver’s petrol usage by even more because of more efficient engine performance at higher speeds and straighter roads. However, carbon emissions may be substantially more in net terms because the motorway is expected to encourage more people to drive the route because it will be faster and safer, and because fewer people are expected to use public transport.

The PM talked yesterday about the productivity benefits from the road with (in theory) more people spending less time travelling and instead working or relaxing. It certainly will make trucks and their drivers more productive were hour worked and litre of diesel burnt. Those benefits will accrue to the trucking companies in higher profits, and/or lower transport prices than would otherwise be the case.

But the biggest crystallisation of the societal benefits is in land values.

Boom time on the Coast

Real estate agents and land owners on the Kapiti Coast and Horowhenua have been the most aware of how these benefits are pumped into land values.

House and land prices have risen substantially more at the northern end of the motorway over the last five years than even in Wellington, which has been among the best-performing regions in New Zealand over the last five years. Construction started in earnest after 2017, especially once it was clear the new Labour Government would honour the contract signed just before the 2014 election. This Infometrics chart shows landowners at each end of the motorway have done versus the rest of the country.

That’s evident in the latest ratings valuation changes noted by area in the Kapiti Coast district. The ‘LV’ refers to the Land Value change between council valuations over the three years to mid-2020, while the CV refers to the Capital Value change.

Tommy’s Real Estate Sales Director Nicki Cruickshank said in July last year there had been “terrific growth with the anticipation of Transmission Gully making the area almost more accessible to the city than many parts of the eastern suburbs in terms of time to get into the city.”

“The appeal of slightly better weather, the anticipation of the ease of travel and good public transport into the city have made the Kapiti Coast more appealing across all age groups whereas previously it was known for being more of a retirement destination.

“But now it is definitely harder for retirees to buy up the coast with competition from all age groups at the moment, in particular first home-buyers.

“A lot of young people are happy to make their lives up the coast, and because of the more affordable prices, compared to the city, we have seen large numbers of first-home buyers looking to establish themselves.” Nicki Cruickshank

A $1.25b road that made the land worth $2b more

That time saving and the increased possibility of commuting saw prices double on the Kapiti coast over the last five years, while residential property prices rose 155% in the Horowhenua District. Both were faster than the 72.7% seen in Wellington City.

House and land values rose by a combined $10.3b for Kapiti and Horowhenua to $30.6b in their last three-year ratings valuation cycles to 2020 and 2019 respectively (the black line in the QV chart above is the point of the last council ratings valuation). Their land values rose over those three year periods by $7.8b or 80.4% to $17.5b, including rises of $5.4b for Kapiti and $2.4b for Horowhenua.

If land values in these two districts had risen at the same rate as values for the rest of the country (ie as if there was no motorway) over the last three years, then land values would have risen by 51.4% or $5.8b. In effect, Transmission Gully was the major reason for the $2b outperformance of Kapiti and Horowhenua land values over that period. This chart below shows Kapiti’s house price index with the dark line being the 2020 ratings valuation snapshot.

Why aren’t the beneficiaries paying?

These unearned capital gains over the last three to five years are of course yet to be taxed, and then only partially and lightly through the 10 year brightline tax on rental property owners. Owner occupiers and landlords who hold on for enough years won’t have to pay tax.

However, in other countries with capital gains taxes, at least some of those gains are captured. Many cities also use the capital gains more directly to pay for the projects through special land value capture uplift rates. This tax would be imposed by a council on the landowner benefiting from the publicly funded infrastructure such as a road or railway to pay for that infrastructure. It is one of the ways the current Government wants to pay for the Auckland Light Rail line.

National opposes the use of value capture uplift rates and a capital gains tax, while Labour has ruled out a capital gains tax for the political lifetime of the current Prime Minister.

Inflation ‘moon bound’

ANZ published its Business Outlook survey of business confidence in March yesterday. It found a slight improvement from very poor levels in February for confidence about the wider economy and respondents’ own businesses. Here’s the main chart to show that.

But the real action was in the second-tier questions about prices, wages and investment confidence. The survey found firms’ pricing intentions were currently in line with CPI inflation of over 9%, which no economist is forecasting, but still…

ANZ Chief Economist Sharon Zollner pointed out inflation expectations over the next year rose another 0.3% to 5.5%, while pricing intentions rose to find a net 81% expecting to raise their prices.

“Indeed, the latter suggests CPI inflation is moon-bound. A remarkable net 96% of firms report that they expect higher costs. Can’t get much more broad based inflation pressure than that.” Sharon Zollner in the Business Outlook note.

Also, ominously for a Government dependent on increasing housing supply to both grow the economy and take pressure off house prices and rents, there was a slump in residential investment confidence over March as the housing market cooled.

The survey also showed that wage growth has yet to take off in response to the recent inflation.

“There’s little evidence of a wage price spiral here, insofar as most firms are anticipating similar wage lifts next year as those delivered in the past 12 months, with the biggest anticipated increase in wage settlements being in the services sector (around 1% higher than in the last 12 months). The retail sector is alone in intending to give smaller wage increases.” Sharon Zollner

Parliamentary exchange of the day

This exchange yesterday (Question 1 via Hansard) between the two deputy leaders and finance spokespeople, Nicola Willis and Grant Robertson, is a vivid illustration of the attack and defence right now in the political economy. National is focused laser-like on cost-of-living issues, but not for the ‘bottom feeders’. It’s much more interested in middle income earners and dangling the prospect of a threshold indexation tax cut. Labour is hitting back by saying National’s tax cuts wouldn’t help the people who need it most, and would have to be paid for with cuts to health and education.

ANZ’s ‘Moon bound’ Business Outlook survey commentary gets a mention too, and David Seymour chips in for good measure.

I’d also recommend their two general debate speeches (Robertson and Willis) for a bit more oomph and two ovations from their MPs behind them.

Ka kite ano

Bernard

PS: Apologies for the length and time. I wanted to do a deep dive. It turned into more of a splashy bomb from a height. It still stings.

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 & TLDL: First home buyers and their real estate agent and mortgage broker proxies are arguing more borrowing and bigger deposit subsidies can help solve the housing crisis. Unfortunately, it may help a year or two’s worth of first home buyers, but then sentence the generation coming up behind them to even higher prices.

Borrowers and brokers just had their prayers answered by the Government when it relaxed CCCFA rules for mortgages. However, I argue below the paywall fold and in the podcast above for paid subscribers that calls for higher price caps for government-subsidised loans and grants and looser LVR rules don’t solve any long term problems.

Elsewhere in the news this morning:

* oil prices bounced almost 7% overnight on growing talk in the European Union of a full oil embargo on Russian oil and fading hopes of an imminent peace deal to end Russia’s invasion of Ukraine;

* Maori voters surveyed by Horizon Research for last night’s episode of The Hui say the cost of living is their main concern and 17% are looking to move their votes away from Labour;

* an audit of SkyCity Casino Auckland by the Department of Internal Affairs found a litany of failures, Michael Morrah reported last night for Newshub, including the case of a banned gambler allowed to play on pokie machines for 28 hours straight.

Coming up today, I’m researching this week’s When the Facts Change podcast on whether renewable hydrogen production makes any sense here in Aotearoa-NZ. Last week I looked at petrol prices and our lizard brains.

Stuck in the bargaining stage of grief

The social and economic shock of the 40% jump in house prices during the first two years of Covid is still only just starting to register. We’ve had the denial and phases of grief over the last year. Now we’re well into the bargaining phase, where those currently in their own household formation moment do everything they can to leap onto that ladder.

It’s understandable because these moments can pass, especially when the scale of the leap now feels (and is) just so enormous, yet it appears close enough to touch because the debt servicing costs often remain less than renting. First home buyers may also think their pleading is finally succeeding, thanks to the Government’s decision to relax tougher new CCCFA rules for assessing loan affordability earlier this month.

Here’s a good example of that bargaining and the dangers inherent in this excellent article last week on Newsroom by my former colleague Nikki Mandow. She quotes a range of real estate agents, mortgage brokers and apartment developers seeing the frustration and pain of first home buyers in front of them and pleading for the Government to relax the caps on first home buyer subsidies and for the Reserve Bank to wind back its tightening of the LVR rules late last year.

They also suggest banks and/or the Government find ways to encourage banks to lend to buyers of new apartments in the same way they do for standalone homes. This is a much more legitimate and important call, which needs addressing.

But first the pleadings to increase the price caps on the Kainga Ora loans and grants schemes, which guarantee 95% home loans and allow buyers to use gifts for their 5% deposits, as well give up to $10,000 of Government grants to go with $10,000 worth of withdrawals from first home buyers’ KiwiSaver scheme. They caps in the table below were last set in March 2021.

‘Please sir. Just one more tiny, wafer thin mint’

Here’s the quotes from Nikki’s article, firstly from an apartment salesman.

“There are no homes you can get in Auckland for $625,000. The loans and grants are irrelevant.” Andrew Murray, chief executive of Auckland real estate company Apartment Specialists.

She then quotes mortgage broker Jeff Kerwin from Nest, who says plenty of first home buyers were using the schemes five years ago, but now it’s rare.

“The first home product is exempt from the banks’ rules around 10 percent LVR, so technically the banks could write as many of those mortgages as they like and not affect their books, but the Kāinga Ora criteria mean effectively they don’t write any.”

“When supply is fixed, the government will no longer need to tinker with demand by cutting first home buyers out of the market completely. But I realise we can't build 50,000 houses overnight, so an interim solution would be to change the eligibility criteria for the First Home Loan, so that it becomes more accessible and relevant to the marketplace.” Jeff Kerwin

CitySales broker Scott Dunn would also love to see first home buyers get easier credit, especially given auction clearance rates have dropped from 2/3rds in October to less than a 1/4 now.

“Stuff is difficult to sell at the moment. Sometimes we are getting just one potential buyer turning up at an open home; sometimes no one at all.

“Covid has hit us like a freight train; people are too scared to go and look at units. Then there are the interest rate rises and the banks with the LVRs. We are saying, ‘if you are a first home buyer with a deposit, don’t wait.”

“Sometimes it feels like they go one step forward [in terms of the conditions improving for first home buyers to be able to get a property], and then they tumble back to the bottom of the hill. A lot of people we’ve been working with have been told ‘No’ so many times they have just given up.”

Surely raising the caps can’t hurt?

The temptation for politicians to agree to just one more ‘wafer thin’ mint of subsidy for first home buyers is extreme and they have repeatedly given in over the years, starting with the creation of the grants and loan schemes under National, and expanded under Labour.

But those schemes weaponised with bank debt, lower interest rates and relaxed LVR rules were responsible for a good chunk (about 30%) of the buying that pushed up prices, especially since Covid, as this chart shows. Landlords are blamed for the surge, but first home buyers were responsible too. Their share rose last year before sliding just at the end of the year.

Various studies and Treasury advice has shown these subsidies simply pump up prices.

The bigger issue to solve is increasing supply, which can partly be achieved by switching buying demand from buying existing homes to new homes. That’s where the pleading has more relevance, and where bank lending policies on apartments are the main constraint right now, and threaten to scupper the record-high consents of the last two years.

I welcome comments and suggestions from subscribers below. Do you want this opened up for midday so you and I can share it?

Other scoops and news of note

Useful longer reads and listens

Chart of the day

Thread of the day

Spookies, profundities, curiosities and feel-goods

The Craic

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 & TLDL: Here’s my weekly ‘hoon’ podcast with a Parliamentary Press Gallery colleague about the events of the last week or so. This week I spoke with Stuff Political Editor Luke Malpass about the petrol tax cuts, Simon Bridges’ departure, Nicola Willis’ elevation and long and deep look at Aotearoa-NZ’s future relations with China. It was recorded on Friday afternoon in the Press Gallery.

This is a weekly sampler email for all free and paid subscribers. We welcome new paid subscribers, who can join our community to comment and be part of the conversation via the ‘hoon’ webinars and my weekly Ask Me Anything comment thread. Paid subscribers get full access to all the daily emails and podcasts, and support the sort of explanatory, accountability and solutions journalism we do about housing unaffordability, climate change inaction and child poverty reduction.

Also, a message from my friends at The Spinoff: 

We here at The Spinoff are major fans of Bernard and the work he does at The Kākā, along with his podcast on The Spinoff Podcast Network, When the Facts Change. If you haven’t had a listen, check it out here!

We have our own daily newsletter too, and think it works perfectly as a complement to The Kākā. The Bulletin is written from parliament by The Spinoff’s political editor Justin Giovannetti. It’s a free digest of the key stories from across New Zealand’s media, and is designed to be read at 7am with your morning coffee, priming you for the day in just five minutes. 

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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 & TLDL: This week, the Government cut petrol tax and bus and train fares in response to sharply higher fuel costs and a bad poll. The US Federal Reserve finally hiked interest rates and the United States threatened to sanction China if it helped Russia in Ukraine. Simon Bridges retired and was replaced by Nicola Willis as National’s Finance spokesperson. Wellington discovered its water wasn’t being fluoridated because its councils hadn’t invested to replace ageing treatment plants.

The podcast of our weekly ‘hoon’ webinar above included myself, Peter Bale and special guests Professor Robert Patman and Professor Natalia Chaban talking last night about these events of the week, in particular the tragedy and implications from Russia’s invasion of Ukraine, the risks of China choosing to help Russia, the fuel tax cuts and Nicola Willis’ elevation.

This is the freely available weekly sampler email newsletter and podcast I send to both free and paid subscribers. The explanatory and accountability journalism I do on housing unaffordability, climate change inaction and child poverty reduction is only possible with the support of paid subscribers. I thank them and welcome more. Paid subscribers get all the daily emails and podcasts I produce, along with the ability to comment on articles. They also get exclusive invites to attend the weekly hoon via zoom webinar at 4pm on Fridays and my weekly Ask Me Anything session at midday on Fridays.

Five facts that changed this week

Fuel taxes were cut and bus and train fares will be halved

The Government surprised everyone by deciding on Monday to cut fuel excise duties and road user charges by 25 cents a litre overnight for at least three months to help motorists deal with the rise in petrol prices to well over $3/litre. Grant Robertson said it would cost $350m for the three months, but this money was available and unspent in the Covid Response fund, which meant the Government wouldn’t need to borrow more to pay for it.

It also announced bus and train fares would be halved from April 1 at a cost of $25m to $40m per three months, which was welcomed by public transport campaigners and climate activists, who argued the total annual extra cost of making bus and train fares totally free of around $320m made the move do-able.

Here’s the piece I wrote with a podcast on Monday morning arguing cutting fuel taxes to deal with the immediate pain of higher oil prices would be a political issue in dealing with climate change.

Then I put out a special news email as the news conference was finishing.

The next morning I put out an analysis and podcast on the announcement, and in particular what was missing from the point of view of renters with children, and from a climate change point of view.

Why Aotearoa-NZ needs to diversify away from China

This week US officials said they had discovered China had agreed to Russian requests to send drones and missiles to Russia in Ukraine. They said there would be ‘consequences’ for China if this was confirmed, suggesting the United States is on the verge of pushing for secondary sanctions against China for its support of Russia, or at least its failure to condemn Russia.

I put out an analysis and podcast on why Aotearoa-NZ should accelate moves to diversify our exports and imports away from China to avoid the fallout from any de-globalisation that ends with China and Russia together alone behind a new iron curtain.

The Fed hiked and forecast six more

This week the US Federal Reserve finally hiked it’s official cash rate for the first time since December 2018 and forecast six more hikes this year.

I put out an analysis and podcast on Thursday morning that looked at whether this was the end of the Powell Put, and why that mattered to us.

Christopher Luxon replaced a retiring Simon Bridges with Nicola Willis

Simon Bridges surprised us all by announcing his retirement from politics at the age of 45 to start a new career in commerce. Christopher Luxon chose his deputy Nicola Willis to replace Bridges as Finance spokesperson.

I talked about that in the podcast above and in the comments of yesterday’s Ask Me Anything, which had over 80 comments. I’ve opened it up for all to read. Only paid subscribers can comment and get the invites to the weekly hoon and Ask Me Anything events. That’s a hint…

Wellington discovered its water wasn’t being fluoridated

This is an extraordinary local story that speaks to the systematic underinvestment in public infrastructure and services over the last 30 years, which is hurting our physical, social and economic health day in and day out.

I put out an analysis and podcast on Friday on how this came about and what effect it is having. I’ve included a few of the latest scoops from others below.

Weekend reading and listening

Some fun things

Click through to see the short video. It’s glorious.

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 & TLDL: Three decades of bipartisan skimping on Government spending on public infrastructure and services such as health, education and transport was always going come home to roost, and now it is at the worst possible time, in the middle of a joint public health, cost-of-living and climate crises.

For 30 years, both National and Labour have pursued low-tax and capital-lite forms of Government dedicated to restraining spending on infrastructure and staffing in hospitals, schools and in public transport in order to keep taxes low on income, non-existent on capital gains and wealth, and to keep interest rates low.

It worked in the short run to keep taxpayers happy and to inflate the value of their own assets, but is now hurting the country deeply at a time when these public infrastructures and safety nets are needed most. There is never a free lunch in the long run, especially when we under-invest in each other and our common assets.

Paid subscribers can see more on the latest examples of this under-funding coming home to roost below the paywall fold and in the podcast above. Commenters should say below if they want this opened up for the public.

Elsewhere in the news this morning:

* Russia downplayed talk of a peace deal with Ukraine, while US President Joe Biden is set to talk virtually with China’s President Xi Jinping tomorrow night about Russia’s invasion later;

* Russia’s Finance Minister Anton Siluanov has asked the People’s Bank of China if Russia could convert its $90b worth of foreign reserves that are in yuan into dollars and euros, but Beijing has yet to respond on a potentially explosive issue in its relations with Washington, Brussels and Tokyo;

* oil prices rebounded 7-8% to back over US$100/barrel overnight on an IEA prediction that Russia’s removal from global oil trade would reduce supplies by 3m barrels a day, while the economic shock of the war in Ukraine would only reduce demand by around 1m barrels a day;

* the OECD warned overnight the war in Ukraine and higher oil and food prices would reduce global GDP growth by one percentage point to 2.5% this year; and,

* Deputy PM Grant Robertson has declined to criticise China’s stance on Russia, saying it was not clear what our largest trading partner’s position was yet (Newshub).

Coming up later today, paid subscribers should watch out for the invite email to my one-hour Ask Me Anything comment thread just before midday, and the invite email to our weekly hoon webinar starting at 4pm for an hour (the link is also below the fun things below).

The collective bill for under-investment just arrived

At least two items of news this morning emphasise there is always a moment when skimping on investment comes home to roost. Under-investment in public infrastructure (or more correctly a failure to reinvest surpluses and depreciation charges) always creates a liability. Eventually that long-term liability crops up in the here and now, and often in a way that is the most painful.

This is that moment.

Firstly and shockingly, last night, Wellington Water revealed that it had not been fluoridating Wellington’s water for almost a year because its fluoride treatment facilities were old and councils in the region had chosen not to invest.

1News reported last night that Wellington Water chairperson Lynda Carroll had said the Te Marua treatment plant had actually ceased treatment in May 2021, followed by the Gear Island plant in November 2021.

As RNZ reported yesterday:

Greater Wellington Regional Council Chief Executive Nigel Corry said it was an opportunity to invest in an upgraded system.

Ya think…

What skimping looks like

An Auditor General’s report into council spending in 2019 found all councils, excluding Christchurch’s quake-related rebuild spending, invested 63-65% of their depreciation charges for most of the previous decade, the report found.

Councils also under-invested relative to their own planned spending, which was itself much less than depreciation charges, as the Auditor General documented in this chart.

It is not all the fault of councillors and Mayors pandering to ratepayers associations revolting against rates increases and campaigning to reduce council debt.

The Government itself has spent the last 30 years planning everything it does to reduce public debt to 20-30% of GDP in order to have a ‘rainy day fund’ for a crisis. The Crown’s balance sheet has been used twice in the last 15 years (GFC and pandemic) to cushion the blows, but has Government always looked to return the budget to surpluses and cut net core crown debt to that low ‘north star’ of 20-30% as fast as possible. That led to the ‘zero’ budgets from 2012-2016 and led Labour to skimp on spending on both capital and operational spending in its first two years after 2017.

That 20-30% net debt target is the reason Treasury set up the Local Government Funding Agency to ensure Councils never borrowed so much that it would push up collective local and central Government debt so much that New Zealand’s sovereign credit rating was reduced, and therefore increased interest rates.

That, along with the dominant votes of anti-rates-campaigning ratepayers, meant councils avoided spending on infrastructure to avoid taking on debt. The Government also avoided borrowing, preferring instead to try to create complicated and expensive public-private borrowing schemes, including the likes of Transmission Gully and a trial Millbank debt issue. That was then used as the model for the Infrastructure Funding and Financing Act — a two-year-old piece of legislation that has never been used — but is always pointed to as the solution to the problem of needing to borrow, but not on the core crown’s balance sheet.

Combined with the fastest population growth in the developed world over the last decade to bolster budget surpluses (and reduce debt), central and local government has woefully under-invested in water, roading and health infrastructure. That has played out in the latest crisis through higher house and land prices as councils strangled new land releases to avoid infrastructure costs (and debt).

This is all coming to a head

Secondly, Waka Kotahi reached the end of its tether on the catastrophic PPP building Transmission Gully motorway yesterday. After a near-doubling of the estimated cost and two years of delays, the PPP contractors were refusing to allow the road to open because it wanted to pass tests that would ensure it receives its payments for a ‘perfect’ delivery.

Waka Kotahi yesterday ordered the PPP to open it by the end of the month, even though not all the compliance testing was finished.

Bizarrely, the Infrastructure Commission also spoke yesterday about the benefits of PPPs in a briefing with MPs. The Commission run by former Treasury Secretary and Reserve Bank Governor Alan Bollard is also captured by the three-decade-long mantra of Treasury officials that the Government should not be increasing its debt, and that it can somehow be laid off to the private sector. No wonder there is little progress.

Transmission Gully’s woes were all about the taxpayer driving down the price of acquiring infrastructure as low as possible and offloading the risk of delivery failure and maintenance problems to the private sector. But in the process, it created a future liability that was not accounted for, and is now landing on the heads of taxpayers, both financially and through the project being two years late. It was a false economy.

The problems in health too

This unaccounted for liabilities in the Government’s books is evident in our health system. Decades of under-funding on capital and operational spending has led to staff shortages, poor morale and insufficient capacity to deal with a crisis. Yet Treasury has never tried to estimate this liability in the Crown accounts…

Emma Russell reports this morning for NZ Herald that Waikato Hospital ER doctor John Bonning says some patients are being left in hospital corridors for up to 24 hours amid a wide staffing crisis caused by quitting and Covid stresses.

"Covid is an added complication but it's not the cause of the problem and this has been predictable, so it's a manifestation of an underfunded health system. Nurses going to Australia is really, really common because they get paid a lot more.” John Bonning

The Association of Salaried Medical Specialists also saw a crisis hitting the hospital system.

"Covid hospitalisations are escalating, routine patient care is being postponed or cancelled, clerical and managerial staff are being asked to help out on the wards, and some staff are being offered special allowances to work extra shifts." ASMS executive director Sarah Dalton.

In water infrastructure, transport infrastructure and health infrastructure, Aotearoa-NZ’s unfunded and unidentified liability from three decades of under-funding just came home to roost.

Our collective focus on debt reduction and low interest rates to get re-elected and inflate asset prices created a false sense of security because the health and productivity liabilities hiding and unaccounted for in the Government’s balance sheet have just been called.

Yet still, both Labour and National are obsessed with skimping on spending, debt reduction and lowering interest rates to win elections. When are they and the public going to realise it is simply storing up huge future costs and crises for themselves and their children?

Scoops and news of note this morning

Adam Jacobson reports for Stuff that Fletcher Building has started making staff use their own sick leave for Covid absences, rather than take Government support.

Ged Cann reports for Stuff that processing times by LINZ for subdivisions, changes to ownership records, and boundary changes have almost doubled, which is adding costs to new builds.

Corazon Miller reports for 1News on rising numbers of children forced to live on the streets in Auckland.

“One of the major barriers is the lack of supply of specific housing for young people…we often have young people crying out for help and we just don’t have the housing.” Lifewise youth worker Aaron Hendry in the 1News report.

For the record yesterday

Stats NZ reported GDP rose 3.0% in the December quarter from the September quarter, which was less than the 3.5% consensus estimate and less than the 3.6% fall during the delta-lockdown-affected September quarter. But it was more than the 2.2% forecast by the Reserve Bank in late February. GDP in the quarter was up 3.1% from the same quarter a year ago.

It’s not altogether healthy

“Even looking beyond the near-term wobbles associated with the Omicron outbreak, a rather potent combo of high inflation and rising interest rates (to hopefully contain inflation) is set to erode household incomes from both ends. To prevent a hard landing, a lot depends on the revival of international tourism and education, and the labour market holding it together.” ANZ Economist Sharon Zollner in this note.

A passing - Sir Wira Gardiner, the founding director of the Waitangi Tribunal, died at the age of 78 after a long illness.

Quote of the day

Every day he puts out a video to his region’s half a million inhabitants

“What can I say, the 17th day of war, all is well, the mood is excellent. We have freedom and we’re fighting for it. And all they have is slavery. We want all of our dreams to come true and we’re moving in that direction. Together to victory.” Vitaliy Kim, the governor of the Mykolaiv region in Ukraine in a Telegram message.

Charts of the day

This ANZ chart gives a useful perspective on how different parts of the economy have fared over the pandemic.

Comment of the day in The Kaka community

“There are many reasons why NZ shouldn't send too many exports to China and you've given another one Unfortunately that's where it will end for now, as most of the companies doing the exporting are privately owned, but if China offers you x dollars for a product, but you can only get x- 1 dollars elsewhere, most companies would choose China. And should the government try to direct exports elsewhere, I can already see the headlines ("This communistic labour government"!). So until some sort of adverse event occurs, we'll keep on with the Chinese exports.

“Let's hope that all these companies are at the very least keeping alternative exporting channels open. John P in Wednesday’s article on diversifying away from China.

Useful longer reads and listens

The IEA has published a 10 point plan to reduce the European Union’s reliance on Russian gas, including buying more LNG, fixing methane leaks, buying lots more heat pumps and asking households to turn down their heaters by one degree.

Spookies, profundities, curiosities and feel-goods

A fun thing

Ka kite ano

Bernard

PS: Here’s the link to join the hoon at 4pm, although I’ll also repeat it in an invite via email just before 4pm today.

PPS: I’m a regular reader of Rabobank’s daily market commentary email because it’s written by a human sceptic. This summary nails it on the Fed’s rate hikes, and how bond yield curves are flattening, meaning bond investors see a recession coming because the Fed will tighten too much. The bolding is mine.

“We are now pricing for a policy error and the inevitable rate cuts and new QE that will have to follow. In other words, just as the Fed drives things off a cliff, Mr Market is already pricing in the trampoline at the bottom of it that will take us to even higher market-y highs.

“Are markets right about the policy error? Yes. But are they right to ignore all the pain to come and to presume the Fed will do what it always does, and provide them with so much free stuff they look like Smaug the dragon, sleeping under a pile of treasure? Here is where fingers are being crossed, because if an angry, unequal, polarised society finds out it has turned into Japan without any of its former social contract, don’t think politics, and the politics of central banking, can’t change. Then even dragons get toasted.” Rabobank in this daily email yesterday.

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 & TLDL: Aotearoa-NZ Inc needs to urgently consider diversifying its export and import reliance away from China, which is threatening to join Russia on the other side of a new Iron Curtain.

Last night the United States leaked intelligence it believes shows China has already agreed to send military supplies to Russia to help its ‘no limits’ partner in Ukraine, including drones, missiles and ready-to-eat military ration packs. US officials threatened China with a response that is thought to include secondary sanctions, while China accused the United States of spreading misinformation and threatened its own retaliatory sanctions.

This dispute may be resolved if China steps back or proves the US intelligence wrong, but the risks are growing that China is lumped into the same camp as Russia in a world bifurcated between the autocratic east and the democratic west. I argue below the paywall fold and in the podcast above for paid subscribers why Aotearoa-NZ Inc must now openly, quickly and aggressively to shift its dependence on trade with China.

Elsewhere in the news today:

* worries about depressing effects on global economic growth of covid lockdowns in China and talk of a nuclear deal to allow Iran to export more oil drove oil prices down more than six percent and under US$100/barrel last night;

* Covid lockdowns in China’s manufacturing and shipping hubs of Guangdong and Shanghai has forced the closure of scores of factories this week, forcing logistics experts to worry about fresh global supply chain disruptions as big as the Evergreen’s blockage of the Suze Canal a year ago; (Reuters)

* investors are the least confident they’ve been about economic growth since early 2020 as inflation and higher interest rates destroy consumer demand, even before the US Federal Reserve’s first rate hike expected tomorrow at 7am NZT; and,

* Jacinda Ardern is expected to announce this morning that tourists from Australia and other visa-waiver countries such as Britain, the US and the EU will all be able to enter without having to go through MIQ or self-isolation from April 12, rather than initial plans for a July start. (Stuff, NZ Herald)

* FYI for paid subscribers to suggest questions and lines of inquiry in the comments below, I’ll be at the Beehive news conference later this morning on the earlier border reopening. I’m also doing my Spinoff podcast ‘When the facts change’ for this week on whether this week’s petrol tax cuts was a big missed opportunity for engineering a faster and more just transition to carbon zero. I’d love you to subscribe to the free podcast here via Apple and Spotify.

A moment to choose ‘sides’ is much nearer

Aotearoa-NZ Inc again faces a massive strategic choice about our future as a trading nation and about the values we prioritise. Until now, we have been able to ‘have our cake’ of trading with China and been able to ‘eat it too’ by staying allied to our security partners Britain, Australia, Canada and the United States. We’ve done it with lots of fancy diplomatic and trade footwork, along with some artful ‘strategic ambiguity’ on issues such as Taiwan and Hong Kong.

It helped for a long time that our trading partners also saw their futures and China’s futures as allied in a pathway towards liberal economies and democracies. We enthusiastically joined with Bill Clinton and Paul Keating from the early 1990s in embracing Chinese trade and investment, and even got ourselves ahead of the curve with our 2008 Free Trade Agreement with China. It was the first such deal China did with a developed nation and came thanks to our championing of China’s entry into the World Trade Organisation and our recognition of China as a ‘market economy’.

Such giddy and innocent and hopeful times…

The times they are a changin’

It’s all different now, and it all seemed to change in an awful hurry.

But in truth, that confidence that China would truly open up began dying in the final years of the Barack Obama administration from 2012 to 2016 as it dawned on the west that President Xi Jinping was much more of an autocrat and isolationist than his predecessors. From 2014 onwards, business and political leaders could also see and feel that China’s Communist Party was more interested in building its own technological, economic and military strength than truly opening itself up to western ideals on trade, the rule of law, investment and democracy. Many began to feel used by China, and that China had been ‘taking the piss,’ but persisted in trading with the world’s second-largest economy to at least to keep the doors open and profit from the supply chains and inherent value-creating benefits of trade.

Now even those open doors and supply chains are in danger.

That era of openness and engagement since end of the first Cold War in 1991 was coming to an end anyway, but the events of the last three weeks are threatening to put it out of its misery completely. In years to come, I suspect we’ll look back on this era of globalisation from 1991 to 2022 as a second period of globalisation ended by a European war, just as the first era in the late 1800s was ended by the First World War.

Trust in central bank reserves shattered

The shockingly deep and fast excision of Russia from the global economy after its invasion of Ukraine and China’s profoundly unsettling decisions (so far) to stand beside Russia have shaken the faith in globalisation to its core. The era of true globalisation and deep engagement between the democratic west and China’s version of capitalism with communist Chinese characteristics had been grinding and stuttering to a halt anyway, but the extraordinary use of economic sanctions as a weapon of war and the decision to freeze Russia’s foreign currency reserves is threatening to stop the process of globalisation in its tracks and reverse it.

This is a moment for us akin to the moment in July 1961 when Britain, humbled in the wake of the Suez Crisis of 1956 and realising two world wars had wrecked its dominance of the global economy, started the process to join the European Union and dump its preferential treatment of the ‘Dominions’ exports. See more on that here in a piece I did for RNZ and Newsroom in 2019 during the Brexit mess.

After an initial period of shock, New Zealand’s political and diplomatic elite mapped out a long-term strategy to, firstly, salvage as much access to Europe as possible, and then, secondly, to seek new markets and deals, especially through the multilateral GATT and WTO systems. Amazingly, it worked.

Ugly choices, potentially quite soon

Up until then, our cultural, political, military and historical roots had allied with our trade roots so our decisions to enter World Wars One and Two on the same sides as Britain, Australia and the United States weren’t even decisions. They were more like reflexes than decisions.

But what would we do now if:

* China went to war with Australia and the United States over Taiwan?

* if Australia, the UK, Canada and United States chose to use Russian-style sanctions to stop China’s oppression of the Uighur peoples in Xinxiang, or to stop China’s oppression of local democracy activists in Hong Kong?

* if Australia, the UK, Canada and the United States launched sanctions to stop China sending lethal weapons to Russia in Ukraine?

That last poser is now far from hypothetical. We could be in that position within weeks after the ominous early signs emerged last night that President Xi Jinping has chosen to send weapons to help Russia destroy Ukraine.

US and Chinese officials met for seven hours of tense talks in Rome yesterday. They emerged and immediately started making accusations and threats in public. The United States had even ‘warmed up’ the meeting by saying it had intelligence that Russia had asked China for equipment and rations to help it in Ukraine.

Here’s the FT’s Demetri Sevastopulo in Washington early yesterday on what the United States was telling its allies:

“Two officials familiar with the content of the cables said Washington had told allies that Russia had asked China for five types of equipment, including the surface-to-air missiles. The other categories were drones, intelligence-related equipment, armoured vehicles, and vehicles used for logistics and support. The cables, which were sent by the US state department to allies in Europe and Asia, were not specific about the level or timing of any assistance that may be provided to Moscow by Beijing.” FT-$$$

The report led to a savage sell-off in China’s stock market. The detail was particularly concerning.

“Eric Sayers, an Asia security expert at the American Enterprise Institute, said the list of equipment requested by Russia was “shocking” and “speaks to Moscow’s desperation”. “If Beijing transfer anything on the list, I would expect a strong bipartisan push for sanctions and export controls focused on [China’s People’s Liberation Army], but that would only be the start,” Sayers added.

“Evan Medeiros, a China expert at Georgetown University and former top White House Asia adviser, said it would be “deeply worrisome” if China transferred weapons to Russia. “It would be a game-changer for global geopolitics,” Medeiros added. “We risk going back to the days of the Sino-Soviet alliance of the 1950s. Ukraine may become the first proxy conflict in a new cold war.” FT-$$$

China accused the United States of spreading misinformation after the report and repeated its allegation that the United States had pushed Russia into its ‘special military operation’.

During the meeting, State Department spokesperson Ned Price warned China that the United States would not tolerate China helping Russia.

“We have communicated very clearly to Beijing that . . . we will not allow any country to compensate Russia for its losses,” said Ned Price, state department spokesperson.

Earlier Price had been even more specific.

“We are watching very closely to the extent to which the [People’s Republic of China] or any country in the world provides support, material, economic, financial, rhetorical or otherwise, to this war of choice that President [Vladimir] Putin is waging.

“We have been very clear, both privately with Beijing, publicly with Beijing, that there would be consequences for any such support.” Ned Price

China hit straight back, threatening its own actions if the United States was to sanction China. The decision to freeze the Russian central bank’s foreign reserves in US dollars, euros and yen has been described by Vladimir Putin as an economic act of war, which he said had forced him to put Russia’s nuclear forces on high alert.

The freezing of central bank assets could in theory be used on China, completely destroying its ability to manage its currency or to manage payments and investment flows between China and the rest of the world. It has completely upended any security China may have felt in having built up US$3.2t worth of foreign reserves, much of which is held as US Treasuries.

China’s Foreign Minister Wang Yi told Spain’s foreign minister in remarks put out by China’s Foreign Ministry that China would defend itself.

“China is not a party to the crisis, nor does it want sanctions to affect China. China has a right to safeguard its legitimate rights and interests.” Wang Yi

Scoops and news of note

This is good to see. Climate activist coalition All Aboard, which includes Lawyers for Climate Action, have applied to the High Court to declare the Auckland Council’s Regional Long Term Plan illegal because it doesn’t get anywhere near achieving the 64% reduction in emissions by 2030, which the Council has also agreed to. Todd Niall has the details via Stuff yesterday.

Threads of the day

Chart of the day

Useful longer reads and listens

Max Rashbrooke does a great job of explaining why recent statistics seem to show no increase in wealth inequality. (RNZ)

“The high-level wealth inequality figures also conceal some disturbing trends. The wealthiest 1 percent's share has been unaffected by rampant house price inflation because housing is not, relatively speaking, very important to people who own such valuable businesses, shares and other financial investments.

What that inflation has done is lift the (apparent) wealth of the next set down, the property-owning middle classes - and thus widen the already alarming gulf between them and the property-less families immediately below. This is, of course, due partly to the government's 'easy money' policy of making borrowing incredibly cheap during the pandemic.” Max Rashbrooke via RNZ

Gideon Rachman has done a sensational job in this FT-$$$ piece framing China’s position in the Ukraine war.

“China is now having to digest the news that, as a result of western sanctions, Russia has lost access to most of its foreign reserves. As the economist Barry Eichengreen points out, one of the main reasons that countries hold foreign reserves is “as a war chest to be tapped in a geopolitical conflict”. But China, which has the world’s largest foreign reserves, has just discovered that it could lose access to its war chest overnight.

“China is not nearly self-sufficient in either energy or food. It has worried for decades about the “Malacca Dilemma” — the threat that the US navy could blockade China by cutting off key shipping routes. China’s huge investments in its navy are partly aimed at averting that possibility. Now, however, Beijing has to consider the possibility that a freezing of the country’s foreign reserves, allied to other financial sanctions, could be just as threatening as a naval blockade.” Gideon Rachman via the FT-$$$

Fintan O’Toole is in magisterial form in this New York Review of Books review of a biography about Angela Merkel. HT Donald Lawrie in yesterday’s Dawn Chorus comments.

‘Merkel always knew that Germany, above all, must not be great. She visibly winced in 2011 when, during the eurozone debt crisis, the leader of her party’s parliamentary bloc, Volker Kauder, boasted, “Now, all of a sudden, Europe is speaking German.” Merkel’s desire was to make Germany not great, but ordinary. Her relentless personal modesty—she continued as chancellor to live in an unpretentious flat in a pre-war building in east Berlin and to push her shopping cart around the local supermarket—was her intimate and miniature version of how she thought her country should be.’ Fintan O’Toole via New York Review of Books

My reading on Substack today

Spookies, profundities, curiosities and feel-goods

The Craic

Ka kite ano

Bernard

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