The Kākā by Bernard Hickey

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 talk with NZ Herald senior reporter Thomas Coughlan about the polls, the omicron outbreak, Three Waters and the Commerce Commission’s final report from its grocery market study.

We recorded it on late on Friday and talked about the following:

* National Leader Christopher Luxon’s state of the nation address pledging to reverse Labour’s ‘six new taxes’, including a $1.7b set of adjustments to income tax thresholds;

* Luxon’s claim that these tax cuts will offset a cost of living crisis caused by rising food, fuel and housing costs, although the vast bulk of the money will go mostly to homeowners;

* The TVNZ-Kantar poll result putting National ahead of Labour;

* The latest Three Waters fudge that tried (and failed) to win back councillors and mayors; and,

* The Commerce Commission’s final report watering down initial proposals to break up the supermarkets duopoly.

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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, inflation worsened and is proving increasingly stressful for renters on the lowest incomes in Aotearoa-NZ. Labour fell behind National in another poll, in part because of these cost-of-living stresses and a Christopher Luxon promise to cut taxes, even though those tax cuts would go mostly to those facing the least cost-of-living stress.

In summary this week:

* the oil price spiked over US$130/barrel after the United States and Britain banned Russian oil imports to ramp up even more pressure on Vladimir Putin to call off his murderous invasion of Ukraine, forcing our petrol prices well over $3 a litre by the end of the week and adding to food price inflation;

* the Christopher Luxon-led National Party took the lead over the Labour-led Government in a second opinion poll for the first time since the 2020 election;

* the poll was taken as Luxon promised tax cuts of just over $100 a year for those on low incomes and over $1,000 a year for those on the highest incomes;

* A working group of councillors, mayors, iwi and bureaucrats proposed tweaking Nanaia Mahuta’s Three Waters plan to give councils shares in four new water entities to stop others privatising them, but the shares wouldn’t have other powers to stop water charges or block co-governance with iwi;

* food poverty and rental stress are intensifying, forcing a kindergarten to make its own food parcels for parents and forcing one single mum with a new baby to spend her last $240 on tents to live in a Hastings park during a storm; and,

* the Government agreed with bank suggestions to ease the blockages to mortgage lending caused by new consumer credit laws that force bankers to interrogate borrowers about their spending habits and plans for kids.

The podcast of our weekly ‘hoon’ webinar above included myself, Peter Bale and Robert Patman talking last night about these events of the week, in particular the tragedy and implications from Russia’s invasion of Ukraine, the mortgage lending changes and brief chats on Three Waters and the polls. The full text of the comments and questions from over 100 paid subscribers who attended the weekly webinar on zoom from 4pm to 5pm on Friday is below the paywall fold below.

Five things of note this week

Fuel and food inflation are running hot

Russia’s invasion of Ukraine just over two weeks ago is proving a tectonic shock for global trade, politics and economics, aside from the human tragedy unfolding in and around Ukraine itself. It is changing everything from the prices of petrol and bread, through to many countries’ plans to combat climate change and defend themselves.

It is that big and that’s why I’m spending so much time trying to understand it and bring as much useful information to subscribers here as often and soon as I can. I worked as a financial, economic and political journalist overseas for 10 years until 2003 so I can’t help it, but I also think these issues aren’t covered here in Aotearoa-NZ in the depth or with the understanding I think is needed.

Finally, I can truly justify the indulgences of my subscriptions to the FT, Bloomberg, Reuters, The Economist, The New Yorker, The Atlantic, the New York Times, the Wall St Journal, Wired, The Telegraph, The Australian, the Australian Financial Review and five Substacks. Your subscription is helping me pay for these too. ;) Thank you.

Lynn and I get up at 4am every morning to trawl through these feeds of news to make sense of it all from our perspective and point out the things that matter every day so we can all understand, for example:

* why the price of petrol just rose 30c/litre to $3.20/litre and may well rise to over $3.50/litre in the coming weeks because the US and Europe have finally had enough of Vladimir Putin’s bullying and want to destroy the Russian economy, even if it hurts their own consumers and corporates;

* why our mortgage rates need to rise, or why maybe they don’t need to rise, and what affect that all may have on our asset prices and rents;

* why the price of bread, grains and many proteins are likely to go up a bit because Russia and Ukraine export over 30% of the world’s wheat; and,

* why farmers here are going to feel both the price of diesel and fertiliser rise sharply, although their product prices are hitting record prices for the same reasons.

Every morning I try to include these sorts of chunks of news in my emails and podcasts. I’m including a lot more overseas news than usual and looking at what it might mean because I’m starting to think this is most significant shift in global affairs and the global economy in at least the last 30 years, both of which are affecting us here at the bottom of the world daily.

That means bigger than the Global Financial Crisis, bigger than 9-11 and at least as big as Covid, although it’s hard to unravel the effects of these two things because they’re happening at the same time.

The changes happening right now are on an epic scale. For example:

* over two million refugees have flooded into Poland, Slovakia, Hungary and Romania and many will then filter through to the rest of Western Europe in the coming months, making it the biggest exodus in Europe since World War Two;

* oil prices up more than 30% since the invasion because Russia used to produce 10% of the world’s oil and gas exports, and (so far) the rest of the world’s exporters haven’t increased their output much;

* wheat prices are up more than 30% since late February because Russia and Ukraine produce more than 30% of wheat exports and the ports for those exports are blocked, being bombarded, wrecked and/or uninsurable for container and bulk goods ships to visit; and,

* Ukraine’s farmers just missed a 10-day window to plant their spring crops of sunflower, barley and corn, which means sunflower oil prices are rising fast.

This S&P Global analysis published yesterday is a useful backgrounder on all of this, including this chart showing the Ukrainian and Russian shares of exports and production of these grains and oils.

National took a poll lead over Labour

National got 39% support to Labour’s 37% in TVNZ’s Kantar poll on Thursday night. It was the second poll after Roy Morgan’s poll to show National in front for the first time since the 2020 election.

The poll was taken last weekend when new National Leader Christopher Luxon was announcing plans for tax cuts, which I looked in more detail here.

Food poverty and rent stress are rising here too

I wrote on Thursday about an increasing number of signs of cost-of-living stress.

The real issues with Three Waters

This week a governance working group recommended the Government tweak Three Waters to ensure councils could stop the four new water entities being privatised. I wrote in more depth about the problems with Three Waters on Wednesday.

Putting a prop under the housing market

On Friday morning the Government announced tweaks to new credit laws to make it easier for banks to lend to home owners without having to interrogate them about their spending and investing habits and plans.

I wrote about it in the context of the effective Government Guarantee for home owners.

FYI below for hoon participants, there is a transcript of selected comments and questions in the webinar, including links we’ve included.

00:08:02 Peter Bale: https://mailchi.mp/a92baf6911fe/bulletin-world-weekly-a-weather-report-for-the-world-2459774?e=1d76093927

00:08:46 Bernard Hickey: Welcome questions here on the chat or in the formal Q&A function

00:12:05 Fiona: What exposure does Deutsche Bank have to Russian investments/customers/trade? Just how wobbly is our global banking system?

00:12:24 Jonathan Suckling: Fuel prices to rise 40-50cents tonight apparently?

00:12:43 Dave H: Have we still got those shrink wrapped sky hawks that we could lend them?

00:12:45 Mr Anderson: I think the problem is 'how to get them there' as soon as they fly out of a NATO base and land in the Ukriane, hey preto escelato

00:13:04 JA: Any prospect of the NZ estates owned by Oligarchs being seized?

00:14:54 Your Servant: Mr Luxon looks almost exactly like the CEO in Dilbert.

00:21:05 R: Question for Dr. Patman as well as Bernard and Peter.

1.) should Russia pull out of the Ukraine and retain the lugansk and donetsk regions, as well as the land bridge to thr Crimean peninsula, how long will the sanctions against Russia last?

2.) what is the economic future for Russia here?

3.) are they serious when they talk about nationalising businesses? This is economic suicide in thr medium term surely?

00:21:31 Garry Moore, Mairehau, Christchurch: How much was a weak report from the Commerce Commission a result of putting compliant people on these boards

00:23:23 Paul Kennedy: Hilarious that the duopoly is found to bully suppliers... but given THREE years to please stop that while the new oversight agency find a bus ticket to wet.

00:23:40 Brett Tamahori: Man, it's a pity we don't live in a country that produces a vast amount of food, that would be nice.

00:30:57 Ryan Stowers:

00:34:35 Bernard Hickey: https://www.ft.com/content/02095093-329b-4b66-9f80-13d07350014c?emailId=6229d4a323e92a00234cb104&segmentId=d16cd453-7bb5-45ba-728c-35ca5739b9f6

00:47:29 Peter Bale: https://www.theguardian.com/books/2015/feb/04/nothing-is-true-and-everything-is-permitted-peter-pomerantsev-review-russia-oil-boom

00:59:54 Peter Bale: Thomas Friedman on Putin having no way out: https://www.nytimes.com/2022/03/08/opinion/putin-ukraine-russia-war.html

01:01:29 Peter Bale: Here is an excellent story on the question of whether we should have stopped him in Georgia: https://edition.cnn.com/2022/03/01/opinions/georgia-former-soviet-putin-ukraine-antelava/index.html

01:04:40 Ryan Stowers: An alternative view point on Putin from John Mearsheimer on Ukraine Invasion, https://www.nytimes.com/2022/03/09/opinion/ukraine-russia-invasion-west.html

01:04:49 Paul Kennedy: The only country with more top 5 results at Eurovision in the 21st century than Ukraine - Sweden, and... Russia. Make of that what you will.

01:06:14 Pat Clark: John Mearsheimer works from a flawed theory, that being the Ukraine is a western proxy.

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: The Government has scrambled to arrest the slide in the housing market (and its poll ratings) by tweaking tough new lending rules in line with bank suggestions. The tweaks announced this morning will allow borrowers to get mortgages without having to be interrogated by their bankers about their spending and saving habits.

I wrote on February 16 that the Government was set to honour the implicit guarantee under the housing market by tweaking the CCCFA in line with bank suggestions, which is what has just happened. Here’s an earlier article I wrote about the supposed lending crunch through December and January after the CCCFA kicked in on December 1. Here’s the first article I wrote on November 23 noting the earliest signs of the crunch. (See more analysis and detail on these CCCFA tweaks below the fold.)

Elsewhere in the news this morning:

* National took the lead over Labour in TVNZ’s Kantar poll out last night, and Christopher Luxon is now neck and neck with Jacinda Ardern as preferred PM;

* The European Central Bank surprised investors, traders and economists with a hawkish decision overnight to wind back its money printing and bond buying faster than expected this year, which forced global bond yields up and European stocks down; and,

* peace talks broke down this morning between Russian and Ukrainian officials as Vlodomyr Zelenskyy accused Russia of genocide and Russian (and Chinese) media suggested a pregnant women being removed from a destroyed maternity hospital was a ‘crisis actor’.

Paid subscribers should watch out for my email invite to the weekly Ask Me Anything thread just before midday for an hour, and for the invite to our weekly ‘hoon’ webinar with Peter Bale, and Robert Patman again (because Ukraine is by far the biggest story in the world). The link to watch the webinar live for an hour from 4pm to 5pm today with a gin and tonic is below the fun things again, and I’ll also send it in an invite email shortly before 4pm.

Government to the rescue for home owners again

Right on cue, the Government has tweaked the new CCCFA rules to remove the blockage in the credit pump keeping the bubble in house prices nice and tight and high. That blockage had appeared to be stopping sufficient credit being pushed in to replace the air going out the top, although there were other limits to credit growth that may be just as much to blame.

Commerce and Consumer Affairs Minister David Clark began the statement by saying there would be “practical amendments to responsible lending rules to curb any unintended consequences being caused by the Credit Contracts and Consumer Finance Act.”

Here’s Clark explaining the sequence of events:

“Following my meetings with the banks at the end of last month to hear their concerns, I detected little enthusiasm for wholesale changes to the Act, but instead a preference for some practical amendments to be made to ensure the purposes of the legislation are best met.” David Clark.

The announcement came just hours after Labour’s worst poll result since the 2020 election and the worst result for PM Jacinda Ardern ever. It also came after the first fall in house prices in its four years in office.

House prices fell a total of 2.7% in December and January from a peak in November. The CCCFA rules that were blamed by banks and mortgage brokers for a hard stop in lending growth kicked in on December 1. Here’s the REINZ House Price Index showing a fall from 4,281 in November to 4,164 in January.

The CCCFA wasn’t the only factor

But the house price fall wasn’t all the fault of ‘unintended consequences’ from the December 1 introduction of the CCCFA.

The Reserve Bank chart below shows what happened to lending growth late last year, although you can see it had been falling well before December 1 and it was at least partly due to a tighter high LVR lending limit. That was announced in late September and kicked in from November 1.

A significant rise in interest rates has also been a factor, but it has been useful for banks and brokers to blame the CCCFA rules, rather than the Reserve Bank, which regulates the banks, or their higher mortgage rates.

Here was the first factor that dragged the lending growth lower: the Reserve Bank’s September 23 tightening of LVR restrictions.

Then came the December 1 introduction of the new CCCFA rules, which forced more prescriptive ‘anti-loan shark’ rules on bank lending officers that meant they took a much more conservative approach on assessing affordability, including interrogating buyers about their past spending habits and including future savings and investments as commitments that could not be changed.

ASB estimated in early February the changes had forced it to reject seven percent of applications from mortgage borrowers.

Credit reference checking firm Centrix reported approval rates for mortgages dropped from around 41% in September and October to 33% in January, before bouncing to 34% in February. That bounce before the changes were confirmed suggest more was afoot than just the CCCFA, or bankers had been reassured by the Minister’s comments in January that an easing was coming.

However, mortgage rate increases would have also had an effect. They started to rise sharply around July.

Clark was at pains to also say that the CCCFA was not the only factor at work in the slowdown in lending and the housing market, but it’s clear he was responsive to the banks’ concerns about ‘unintended consequences’.

Here’s Clark downplaying the CCCFA changes:

“Thus far investigations have thrown up no reasons to believe the CCCFA is the main driver in reduced lending. The Reserve Bank’s December figures highlight seasonal variation as a prominent contributor. In fact, December 2021 was still above trends from the same month in 2017, 2018 and 2019.

“It is also important to note that banks may be managing their lending more conservatively and this is likely due to global economic conditions. And that a number of factors affecting the market have occurred at the same time as the CCCFA changes, including increases to the OCR, LVR changes and an increase in house prices and local government rates.” Clark.

However, it’s inconvenient that since the December figures, there’s also been January figures issued by the Reserve Bank here, in which the bank said (bolding mine):

“There is typically a substantial seasonal fall in new mortgage commitments in January, but this is the largest percentage fall on record. In the current market, a variety of other factors could have influenced the fall, such as rising interest rates, LVR policy tightening, and changes to the Credit Contracts and Consumer Finance Act.” Reserve Bank commentary.

Most important to stop house prices falling

In theory, the Government could have ignored the banks’ call for tweaks and allowed the blockage to remain, thus allowing more air out of the bubble and making housing more affordable for first home buyers.

But the combination of unhappiness over the Covid response, problems with MIQ and catastrophic levels of consumer confidence all led the most important numbers of all for the Government.

Last night’s TVNZ-Kantar poll showed National ahead of Labour for the first time since the 2020 election and Jacinda Ardern’s lowest personal popularity figures ever.

As this chart of the party positions in the Kantar poll show, Labour has been falling since early 2021, but the trajectory steepened in January and February as prices fell.

And it’s not just the party standings. Ardern’s popularity fell to its lowest level ever, as measured by the broad preferred PM question.

The numbers for the PM look even worse when the question is a simple choice between her and new National Leader Christopher Luxon. The Kantar poll found 46% preferred Ardern and 45% preferred Luxon.

So how will this unblock the credit pump?

Clark said banks and other lenders wouldn’t have to ask borrowers about their recent living expenses or include regular savings and investments as examples of outgoings. He said lenders would in future only need information from borrowers directly, rather than information from bank transaction records.

Guidance about when a loan was deemed affordable would also be changed, he said. Clark reaffirmed that the changes were in response to suggestions from banks for regulatory tweaks, rather than a wholesale change in the new act CCCFA, as National had recommended.

Scoops and news of note elsewhere this morning

Genocide accusation – Ukrainian President Vlodomyr Zelenskyy accused Russia of genocide overnight after a bombing of a maternity hospital in Mariupol. Russian state media suggested one of the pregnant women taken out of the hospital on a stretcher was a ‘crisis actor’ planted to make Russia look bad. Meanwhile, China’s state-run television and online news networks are spending millions on Facebook to promote pro-Russian articles and videos globally. Peace talks broke down.

New inflation record – US consumer price inflation rose 7.9% in February from a year ago and was 0.8% higher in the month from January. This was the highest annual US inflation rate in 40 years and reflected prices set before the war in Ukraine sparked 30% rises in oil and grain prices. The result was in line with economists’ forecasts, but it has reinforced expectations the US Federal Reserve will have no choice but to begin putting up interest rates in the world’s largest economy, starting from next Thursday morning NZ time. Economists expect six or seven US rate hikes this year.

Goalposts moved - The Government changed the definitions and reporting of Covid deaths. It frustrated some.

“We've had two years to get this right and all of these data definitions really matter if you're trying to understand the impact of COVID-19 on our healthcare system.” Michael Baker via Newshub.

Intense pressure - This Ruth Hill report via RNZ gives useful detail about the pressures inside hospital system right now, and Hutt Hospital in particular. She reports 15% of staff are off with omicron, a third of patients have it on arrival and some are refusing to be tested.

These details were particularly alarming and indicate the austerity mindset remains dominant at DHBs (bolding mine):

Morale had also been hurt by stalled contract negotiations, including the zero percent pay offer to senior doctors by DHBs last year, (Emergency Doctor Tanya Wilton said.

"Comments by the DHBs' negotiating team that healthworkers must have their 'year of pain' were not especially helpful.

"Nurses also want to see progress on their request for safe-staffing levels. That would really show we're appreciated."

A senior nurse, speaking anonymously, said Wellington Hospital was already understaffed before the pandemic, but it had got much worse.

"Nurses tend to want to look out for each other, so they'll come in if they're not feeling particularly well just to make sure their colleagues aren't left really, really short-staffed. There are constant texts going to staff members to come in and help or stay late - and that sort of behaviour is now the norm rather than a rarity. It's becoming a risk for staff."

One department had lost 50 nurses out of 120 in the last two years - and more would leave now international borders were opening, she said.

I still don’t understand why employers in Wellington and Auckland in particular are not screaming from the rooftops for more affordable housing and urgent Government action because it is high rents and house prices that are driving the exodus of skill.

Near capacity - Jonathan Leask also reports for RNZ that the Christchurch hospital is also near capacity and will wind back to focus on covid next week.

Canterbury incident controller Tracey Maisey said the CDHB was in stage two of its planning where it was consolidating services in preparation for the peak.

"We've combined wards, particularly in our non-acute facilities, both (in) Ashburton and Burwood [hospitals], and proactively relocated some residents from our rural facilities to enable some staff to be redeployed."

Maisey said the DHB is considering moving to the next phase of its Omicron response but the decision has not yet been made.

"The next phase includes deferring non-urgent elective care, postponing non-urgent outpatient activity and increasing the utilisation of telehealth appointments."

Once they reduced some services and other deferrable care, potentially next week, they would be redeploying staff to open those remaining beds.

Partnerships - Anne Gibson has an excellent piece via NZ Herald-$$$ on how some developers are working well with iwi. She quotes Deloitte partner Leon Wijohn and Tāmaki Marutūāhu Collective chair Paul Majurey.

"For every development which runs into problems or has that perception, there are many which proceed smoothly which one hears little about. We've seen some high-profile developments on land which might be sensitive where iwi have been crucial to its success. If you look at Tara Iti and Te Arai [golf courses] to the north, Te Uri o Hau and Ngāti Manuhiri have been key partners.

"Where iwi are going to be involved, most developers know to engage early, build relationships, involve them where appropriate. Marutūāhu and [developer] Ockham developed a relationship on an initial development. The relationship is now a partnership that is strong and enduring and building quality residential developments across Auckland which reflect the world views of Marutūāhu.” Paul Majurey

Useful longer reads and listens

Thread of the day

A fun thing

Ka Kite ano

Bernard

PS: Here’s the link to join me and Peter Bale and Robert Patman for the weekly ‘hoon’ webinar on the events around the world and at home this week.

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: Pressure on food banks and emergency housing providers is intensifying ahead of what is expected to be our worst winter of homelessness and food poverty. Reports are mounting that rent stress and homelessness are adding to the burden for poorer families, many of whom are struggling in Covid isolation and unable to work or pay their bills, let alone buy increasingly expensive food and petrol.

So National Leader Christopher Luxon has understandably ramped his ‘cost of living crisis’ attacks on the Labour Government, supported by the Greens. The trouble is his response would see those on lower incomes get an extra two or three dollars extra, while those on the highest incomes, who are most likely to own their own homes, would get up to $20 a week.

However, the Government is also not responding to the looming food and housing stress this winter. Unlike the first Covid winter when the Government ensured all homeless people had a place to stay and the winter energy payment was doubled, the cash-in-hand being added on April 1 is nowhere near what Labour’s own welfare experts recommended.

It also pales in comparison with the hundreds of millions of cash being paid broadly to small businesses in coming weeks in Auckland and an extra $250m in Government subsidies for air freighters announced last night. (See more analysis of the risks this winter of a widening poverty crisis and the weak Government response below. I have decided to open it up to all given the public interest involved.)

Elsewhere in the news I’m seeing today:

* Chris Hipkins announced MIQ would scale down from 32 hotels to four by the end of June as the borders reopen and that the isolation period for Covid cases and their family contacts was being cut to seven days from 10 days;

* the Public Service Commission recommended Government departments and agencies pause any dismissals of staff who are refusing to get vaccinated after a recent High Court ruling that dismissals of some Police and Defence staff were unlawful;

* Michael Wood announced another $250m in subsidies for air freight for a one-yar extension of a scheme set up in May 2020 to ensure continuity of air freight, with the extension to the end of March 2023 taking the total cost to $815m;

* Global oil prices slumped 12% this morning to US$112/barrel on growing talk the United States can convince Iraq, the UAE and Venezuela to increase oil output; and,

* European stocks spiked 3-7% higher this morning on hopes the European Central Bank will tonight delay its monetary policy tightening plans to stave off a recession caused by ballooning gas prices and Ukrainian war disruptions.

Later today, I’ll be doing more on the Commerce Commission’s grocery inquiry and Three Waters, and will keep an eye on the details of the RNZ-TVNZ merger expected to be announced at midday. I’ll also attend Hipkins’ news conference at the Beehive early this afternoon and welcome any lines of inquiry from paid subscribers in the comments below.

Bracing for a winter food and housing crisis

Reports of increasing food poverty and homelessness are mounting as the toll of fast-rising food, energy and rental costs adds to two years of Covid-affected income stress.

This Newshub article from Ireland Hendry-Tennent captures the mood as more and more working families are unable to afford food, including these comments from a department manager at a big box retailer with a partner and two kids under five who live in a rental property.

“I feel sad because this isn't a place I ever expected to be in my life. Now I'm in the position where I'm accepting food from strangers to feed my family. I'm embarrassed because not being able to provide for your family feels lame as f**k. I'm an adult and not dumb or inept or frivolous or lazy or a junkie, or anything else people might think of someone who can't provide for his family, and I'm having to walk into a food bank to put food on the table

“I'm angry because something is f**king broken. I've worked hard my whole life. I haven't made dumb decisions. And don't anyone say having kids was a dumb decision because they are my whole world and we should live in a country where anyone with a full-time job can provide for their family. "

"This situation is cooked… Five years ago I considered myself middle class. When people are in f**king free-fall out of the middle class, that is exactly when s**t hits the fan.” Unnamed worker quoted by Newshub.

Bay Financial Mentors general manager Shirley McCombe was quoted as saying she was seeing more and more working families asking for food parcels.

“It's a perfect storm of issues that people are facing at the moment. It's not just the cost of food that is rising but petrol, pressure on the supply for housing. For people, particularly those on lower to middle incomes, it certainly feels like a crisis.

"We used to work predominantly with people who received benefits but that's starting to include more and more people who are working.” Shirley McCombe

0800 Hungry Warehouse Supervisor Nicky Bensemann was also quoted as saying there was a cost of living crisis and PM Jacinda Ardern, who has denied such a crisis, did not understand what was really going on.

“She's really got to step into other peoples' boots and see what's going on, it is really affecting people.

“It's not even just working poor, you're finding the pensioners are really, really struggling and they shouldn't be in this position, you're finding people that were in their own homes and now they're in emergency accommodation. 

“There is something going on out there in society and a lot of people are struggling.” Nicky Bensemann

Rent arrears growing at Kainga Ora

Further signs of housing stress are emerging through Kainga Ora’s struggles getting tenants to pay, as reported here by Lane Nichols this morning for the NZ Herald-$$$

Citing figures obtained under the OIA, Nichols reported arrears had grown to $9m from $0.75m four years ago, and that about 12% of Kainga Ora tenants were behind on their rent.

National’s Nicola Willis was quoted as saying Kainga Ora’s no-evictions policy was a factor, along with the cost of living.

"It's a reflection of the cost of living crisis when state house tenants can't meet their most basic obligation." Nicola Willis.

There’s also rises in both the numbers on the homelessness register and the numbers in emergency accommodation, as the latest MSD report for data to the end of January shows. Numbers on the register have more than tripled in the last five years.

Over 10,000 people are now living in motels, boarding houses and campgrounds, with more than two-thirds coming from Maori and Pacific Island backgrounds.

A family in a tent in a storm

Anusha Bradley reported for RNZ yesterday about a homeless mother of six young children and a newborn baby who had no option but to pitch a tent in a Hawke's Bay park during storms in early February after Work and Income was unable to find somewhere with a roof.

Mariska Kruger, 31, was quoted as saying she and her seven children had nowhere to go after the owner of a private rental decided to renovate and sell the home.

“They just said, 'There's nothing we can do for you, there is no housing'. A lady I spoke to just said to me, 'I'm sorry we cannot help you,' " Mariska Kruger.

Kruger then packed the kids into her car and drove to The Warehouse where she spent her last $240 on two tents. However, after she set up the tents in a park, a local resident, Lisa Cunliffe, spotted the family and took them in.

“I walked over and was just kind of like, 'I bought a bag of apples, would you like them? Is everything okay?' And that's when she pointed inside the tent and was just like, 'No, I'm not okay. I've got a newborn baby."

"I looked down and saw the baby lying there wrapped up in a blanket but there was no other bedding in there. My heart just totally went out to her. I could just feel her grave situation.” Lisa Cunliffe

Kruger and her family stayed with Cunliffe and she helped her deal with MSD and Housing First in the Hawkes Bay. The family have since stayed at a Hastings holiday park and then the Bluewater Hotel in Napier, although she has had to send her four eldest children to live with family in Auckland.

Bradley reported The Bluewater charged Work and Income $4,640.02 for a 14-night stay at $331 a night, of which Kruger must contribute $259.98 from her benefit, to be paid in instalments.

Pre-school has to makes food parcels for kids

This article last night from Jody O’Callaghan at Stuff and this article on Tuesday also indicates the growing level of food stress. The New Beginnings pre-school in Christchurch is reported to have been forced to make its own food parcels for about a third of the families of the 50 children it looks after.

A single mum with four kids, Sarah Williams, was quoted as saying her family was one of a number of families at the school struggling with rising living costs.

“It’s not going to be livable. I either need more money, or the prices of everything to drop by 30 to 40 per cent.” Sarah Williams quoted in Stuff.

Last week she had to pay $28 for two RATs, which left no money for food.

“I don’t know what I'm going to do for dinner. It’s just a snowball effect.” Williams.

New Beginnings Lead Teacher Stef Knight was quoted last night as saying there was a crisis, having just made 18 food parcels for the schools’ children after donations flooded in from the first article. Covid and families having to go into isolation was worsening the situation.

“There’s a lot of people who are just in total overwhelm mode and don’t know where or how to deal with that.” Knight.

This is a crisis PM and it demands cash help for the poorest

PM Jacinda Ardern has denied there is a cost of living crisis and has pointed to existing plans to increase benefits from April 1 and resume paying the winter energy payment as a sign help is on the way. But the cash still falls far short of what the Welfare Experts Advisory Group said in early 2018 was needed.

Meanwhile, all this was reported on a day the Government is set to pay out over $100m in cash for a fortnight’s payments to small businesses, on top of the $20b paid to businesses over the last two years in wage subsidies and resurgence payments organised at short notice, as well as the $815m paid to subsidise air freight.

It also comes after the Government chose just before Christmas 2020 not to agree to a request from MSD Minister Carmel Sepuloni for an urgent $50 a week benefit increase in time for Christmas, on the grounds the Government needed to start reducing its deficit and repay debt, despite that debt costing less than 1% of GDP to service and being less than a third the level relative to GDP of other AAA-rated countries. See more on that here in this December 8 article I wrote.

Scoops and news of note this morning

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: A review group the Government hopes will ‘calm the farm’ over the Three Waters backlash from most councils has recommended councils be given shares in the four proposed water entities. (Read my analysis below about why it doesn’t deal with the underlying problem with Three Waters: it is a fudge to avoid a proper debate about public debt and migration.)

Meanwhile, pressure is building on Housing Minister Megan Woods to clear out the leadership of Kāinga Ora after the revelation of another embarrassing email from CEO Andrew McKenzie downplaying the seriousness of its paid promotional article about a Labour candidate.

Elsewhere in the news this morning:

* the US and UK announced their own embargoes on Russian oil and gas, moving independently of Europe, which is much more dependent on imports;

* Brent crude firmed to US$126/barrel and European gas prices gyrated wildly after Russia threatened to cut its supplies to Europe and after a senior Russian minister warned embargoes could push oil to US$300/barrel; and,

* the European Union indicated it would borrow heavily to pay for massive new energy and defence spending, which drove the German 10 year bund yield up 13 basis points to 0.11% and was a factor lifting the US 10 Year Treasury yield by nine basis points to 1.86% this morning.

The latest Three Waters revival fudge

The latest proposal to tweak Three Waters to win back some of the disillusioned Councils and keep a lid on the provincial backlash is back in.

DIA’s Working Group on Representation, Governance and Accountability of new Water Services Entities (website) released its report for Nanaia Mahuta this morning, including a plan to offer councils ‘shares’ in the proposed four water entities that they can use to block any attempts at privatisation, but nothing else.

The group proposes that councils get one share for every 50,000 people in the water entity and can use it to block any attempt by other councils to privatise the assets. But the shares can’t be used to block decisions by the entities to impose water charges, to invest in particular assets or to raise debt.

I don’t think this will calm many of the complaints and fears of more than three quarters of the councils and mayors who oppose it, including Phil Goff, who asked for his dissenting opinion to be included.

In my view, the entire Three Waters process is a fudge to deal with two optics problems that shouldn’t be a problem if only both major parties, councils (and Treasury in particular) would have realistic conversations and take a modern approach to public debt and migration planning.

Three Waters is designed to structure the nation’s water assets so they can bear the $150b of public debt needed to fund 20-30 years of remedial infrastructure work in their own right outside of ‘core crown debt’ held by the Government. The four entities are being extracted out of council assets to take the vexed issue of water chargers and water meters out of the hands of anti-rates-campaigning councillors and mayors. It would have been much faster and more efficient, and a lot less politically painful in the end, for either councils or the Government to take that debt onto their own balance sheets. Councils and both major parties should just have been upfront about the need for higher public debt to both catch up on past under-investment and to improve water quality, along with dealing with a likely continuation of fast population growth.

All because migration and higher debt can’t be talked about in public

But it would have meant having hard public conversations about having higher public debt levels to GDP than is currently the case and taking a collective view on what population growth levels we want as a nation and will pay for.

Aside from the broad reluctance to talk in public about what migration levels we want and why, this is all because of the now-embarrassing and out-of-date obsession with keeping net core crown debt around 20-30% of GDP. This obsession currently also means Auckland Council (in particular) can’t run higher debt levels relative to income or have a lower credit rating. So the ‘solution’ being used for Three Waters, as well as for Kainga Ora and Waka Kotahi, is to create new ‘off balance sheet’ vehicles that carve off specific assets and creates new dedicated revenue streams to fund the debt on those assets.

All so Treasury and our political mainstream can tell themselves and a public that is supposedly paranoid about rising public debt that they aren’t increasing debt. The wider Government sector clearly is, and should, be increasing debt. That’s the most efficient and fairest way to fund these long-term public assets. The failure to properly invest in public infrastructure to prepare for (or just plain cope with) 1-2% population growth over the last 20 years is foundational to most of our problems.

A much simpler solution would have been for both Government and councils to plan the $150b of spending needed over the next 20-30 years and agree a fair split of which balance sheets should have which debt and then just raise the money.

Who is everyone kidding?

I don’t know who the Government or the Councils think they are kidding. The ratings agencies? They can see all this and are happy to take the fees from whoever is borrowing and know there is monstrous demand for this debt globally.

All this is doing is increasing the likely debt costs by layering in unnecessary margins to core crown debt. It is a tragedy of the political economy that 30 years of scaremongering about public debt has led to the unintended consequence of Three Waters becoming lumped in with a general provincial backlash against Government that includes issues as unrelated and peripheral as the ‘Ute tax’, water quality standards, RMA reform and an ugly scare campaign about iwi ‘taking’ water assets ‘back’ by stealth.

Now we’ll see whether Nanaia Mahuta wants to take up the ‘shares’ option and whether councils think it changes the landscape. I doubt it will and now the Government, if it pushes ahead with this, faces the ugly prospect of the provincial backlash overlapping with council elections in October that install Trumpy councillors and mayors who want to upend all the (mostly) good work being done around housing, climate change and infrastructure reform.

All because the Government and councils are scared of talking honestly about public debt and migration.

A maelstrom that is not passing quickly

Nicola Willis continued yesterday to pick away in Parliament at the scab of Kainga Ora’s puff piece problem and found another example of CEO Andrew McKenzie appearing to downplay the issue in emails. (Hansard of Question 7 in Parliament yesterday, Willis’ statement and coverage in NZ Herald from Michael Neilson and in Stuff from Thomas Manch. Here’s the full OIA response of the email trail.

Here’s the key excerpt from an email from McKenzie to a staffer about questions over a Kainga Ora promotional article for NZ Herald’s OneRoof that sparked a Public Service Commission investigation and rebuke for the CEO and chair Vui Mark Gosche.

“As I am sure you will have been told, the judgment call you made was fine. I am happy to stand behind you on it. This little maelstrom will pass quickly. I just hope it doesn't make you too risk averse!” Andrew McKenzie in an internal email.

It’s not passing quickly and Megan Woods clearly has Kainga Ora’s senior leadership on notice.

“I expect Kāinga Ora to improve the culture of understanding of how it is part of the broader Public Service and what that means for staff employed within the organisation. And I will be receiving regular reporting of this work. The chair has indicated to me that he and the board are fully committed to meeting this expectation.” Megan Woods.

But this little kicker at the end of the exchange suggests there is more to come on this. Willis pointed to the relatively fast resignation last year from KO’s board of new outside director Helen O’Sullivan, an experienced property industry executive.

Nicola Willis: Why did Helen O'Sullivan resign from the Kāinga Ora board in November, shortly after these issues became public and just nine months into the job, and does the Minister share my concern that O'Sullivan left because she no longer wanted to be associated with this failing organisation?

Hon Dr MEGAN WOODS: In answer to the second part of the question, I utterly reject the assertion that the member has made. I don't have to make assumptions, because I was told by Helen O'Sullivan herself and communicated also through the chair that she'd accepted another board appointment that was in conflict with her role on the Kāinga Ora board.

Kāinga Ora‘s leadership is now clearly under pressure and in the firing line, with a Minister who is having to answer (and ask) some tough questions in Parliament and behind the scenes. I’ll keep watching this space and welcome any info or tips from readers about KO’s performance.

Scoops this morning and news of note

Cooling market - QV reported its measure of house values shows house price inflation in the three months to February slowed to 2.3% from a quarterly growth rate of 6.1% in the three months to January. This is one of the lagging indicator house price series that tends to downplay what’s happening at the ‘bleeding edge’ of the last month’s data. (Newshub, RNZ)

The data series to watch is the REINZ’s House Price Index, which is the most volatile because it includes the latest sales information for the most recent month, but it is the last of the monthly data series to come out. That shows prices have fallen at least 2.3% in December and January from the peak in November. We should get the REINZ figures early next week.

He said. She said - National is denying Labour’s claim of a ‘fiscal hole’ in the tax cut plan issued over the weekend. Grant Robertson said National had used the wrong Treasury forecasts. National says it didn’t and has only costed the indexation tax cuts.

I’ve written the package isn’t costed properly because it leaves out the other five ‘tax grab’ measures Christopher Luxon pledged on Sunday to reverse and leaves many unanswered questions around those. (Newshub)

Parliamentary exchange of the day

National is focused on the cost of living issue at the moment, as shown in this question (1) reported in Hansard.

CHRISTOPHER LUXON (Leader of the Opposition) (remote) to the Prime Minister: Does she stand by her response when asked if New Zealand has a cost of living crisis that "I wouldn't describe it that way", and is she considering adjusting income tax brackets to help Kiwis struggling with rising prices?

Rt Hon JACINDA ARDERN: I stand by the entirety of the interview, where I stated, "There is an impact that people are feeling undeniably." The debate is not whether inflation has increased and is impacting people. The debate is what we should do about it. The Opposition has proposed cuts to the top tax rate and getting rid of policies to help first-home buyers. We, on the other hand, have worked consistently to increase focused support for low and middle income earners. That's why we've overseen a $5 increase in the minimum wage, benefiting around 300,000 workers. We've increased Working for Families changes that will lead to 346,000 people better off by an average of $20 each a week. We created the winter energy payment, starting again from 1 May, benefiting over a million New Zealanders during the winter months. We made the largest across the board increases in benefit incomes since the 1940s, and we've increased the pay of new police officers by 19 percent since 2017, 16 percent for primary teachers, and 21 percent for new nurses. The Government's plan is providing targeted support to New Zealand families to deal with the costs of living, whilst also investing in critical services and, importantly, keeping a lid on debt.

Christopher Luxon: Why won't she admit that New Zealand has a cost of living crisis when rent is up $140 a week and food prices are up more than 13 percent under Labour?

Rt Hon JACINDA ARDERN: This side of the House absolutely acknowledges the increases that families across New Zealand are currently experiencing—as many other countries are—as we see the COVID recovery mean that demand is often outstripping supply. We also have the issue, of course, of the pressure on fuel prices, which have gone up over 500 percent since April 2020 in terms of a barrel of crude oil. That is having an impact. But what I would contend is that the National Party's proposal, for instance, to take away essentially $26 per week from someone earning under $40,000—because they voted against our increases to the family tax credit—and instead replace it with $2.15 is simply not the way to support families who need it most.

Useful longer reads

Threads of the day

Spookies, profundities, curiousities and feel-goods

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: As I wrote I expected in this analysis back in July last year, the Commerce Commission has backed away recommending an arduous and complicated Telecom-style break-up of Foodstuffs and Woolworths in separate wholesale and retails arms, or a Government-assisted launch of a competitor.

Instead, the Commission today recommended in its final (606 page) report of its markets study that a grocery regulator be set up to police a mandatory code of conduct for the industry, along with industry practices on deals with suppliers, promotional pricing and loyalty schemes. It also wants to try tweaking planning and Fair Trading laws to encourage private competitors to enter the market, possibly with the help of one or more of the duopolies voluntarily offering to sell them goods on transparent wholesale terms.

The clearest and newest detail in the report is that the duopolists have used 190 covenants on land and exclusivity clauses in leases with shopping centre owners that have stopped competitors from getting access to the juiciest locations. In 150 of those cases, the covenants and exclusivity clauses have protected Foodstuffs and Woolworths NZ for more than 20 years. The Commission proposed prohibiting the use of these clauses.

Elsewhere in the news today:

* Global stocks fell 3-4% overnight after oil prices briefly hit 14-year highs of $139/barrel, worsening fears of higher inflation and interest rates that lower asset values (CNBC);

* Germany’s Chancellor Olaf Scholz asked the US not to impose an immediate and total ban on Russian gas and oil exports, saying they were “of essential importance for the provision of public services and the daily lives of our citizens,” which prompted a slight pullback in oil prices overnight (The Guardian); and,

* China’s Foreign Minister Wang Yi warned the United States against trying to form a Pacific version of NATO and of giving more support to Taiwan, while also accusing the United States of having a double-standard over Ukraine’s sovereignty. He also said China’s “no limits” support of Russia was “rock solid.”

The power of the covenant

Reading about the bullying, the rent-seeking and the use of laws designed to protect the environment to instead smear a juicy layer of super-profit into the cost of everything we buy in supermarkets is a lot like finding out how the mortgage-fueled housing market works. Watching an official inquiry conclude not much can or should be done to rectify this was also eerily familiar.

Accidentally on purpose, Aotearoa-NZ has found itself held hostage by uncompetitive markets and dominant market players for two of the basics of life: food and shelter. A series of accidents of political history tied to a naive three-decade-long assumption that free markets would always provide the basics and the luxuries of life both efficiently and fairly has put us in the position where our housing is the most expensive in the world and our groceries are the fifth most expensive in the world.

That’s the conclusion I reached reading today’s final report of the Commerce Commission’s markets study into supermarkets. The same themes emerged time after time:

* Foodstuffs (Pak’n’save, New World and Four Square) and Woolworths NZ (Countdown) have been using the Resource Management Act to lock in the profitability of the assets they had in each part of our major cities and to prevent new supply entering the market to drive down prices;

* their profits are at least twice as much as is normal for running supermarkets, in part because they have used confusion marketing to befuddle consumers, regulators and politicians into doing nothing for decades;

* the major beneficiaries of these super profits have routinely spread the blame for high prices on others in the economy, and other global forces; and,

* regulation is being recommended only as a last resort and only after the dominant market players have taken the piss for so long that it’s become not just embarrassing, but a threat to the nation’s wellbeing through ruinously high living costs, particularly for our poorest.

It’s a tragedy that profits on $23b worth of sales each year are around double what they would be if the market was properly efficient and competitive. Our house prices are around double what they would be if we had an elastic and competitive market for serviced land and transport for housing. Our rents are as much as a third higher than what they should be relative to incomes if our market was competitive.

Our body politic is only now waking up to economic and social pain of allowing markets to be consolidated and then dominated by a few players who capture the architecture of Government to protect those superprofits. The United States has launched a widespread campaign against the abuse of market power under President Joe Biden, targeting industries as widespread as technology, meat-packing, airlines and pharmaceuticals.

So what did the Commerce Commission find?

Here’s a summary of the overall findings and recommendations via the (19 page) executive summary and the full report (609 pages), including:

* “Competition is not working well for consumers” and the duopoly would face more pressures to improve prices, ranges and quality if there was more competition;

* the intensity of competition between Foodstuffs and Woolworths is “muted and does not reflect workable competition”;

* the Commission sees little prospect of new or expanding rivals being able to grow to the scale and geographic breadth to compete effectively without any changes;

* it found returns on capital employed ranged from 12.7% to 13.1% from 2015-2019, which was above the 5.5% the Commission estimated as a normal rate of return for retailing;

* Aotearoa-NZ had the fifth-most expensive groceries in the OECD and households spent the fifth-most per capita per week on groceries in 2017;

* the two groups use confusing promotions, pricing labelling and loyalty schemes to make it harder to properly compare prices across time and the two groups;

* the two groups use their buying power to shift costs and risks back onto suppliers, while also threatening to pull their products and blocking them supplying the other group;

* the two groups had arranged 190 agreements with land owners and shopping centre owners that included covenants and exclusivity clauses that stopped those sites from being sold or rented to competitors, with 150 of those restricting the sites’ use for more than 20 years;

* the Commission recommended the use of the covenants and clauses be prohibited;

* it recommended planning law changes to make more sites available, and to stop the use of the existing laws as blocks to new entrants;

* it recommended the creation of a Grocery industry regulator to write and police a mandatory code of conduct with suppliers and to monitor pricing, profitability and promotion practices, along with land banking by supermarkets; and,

* it recommended one or both of the groups volunteer to supply a competitor on transparent wholesale terms;

* it recommended the Government review foreign investment and alcohol licensing rules to make it easier for competitors to set up; and,

* it found there were so few choices at competitive prices for other smaller grocery operators they simply bought their supplies at retail stores like any other consumer.

“We consider that the New Zealand market could sustainably accommodate at least one more large-scale rival, and that reducing current constraints on entry and expansion would help to facilitate this. In the long term, actual entry or expansion is likely to be the greatest driver of competition.”

“We consider that major grocery retailers offering wholesale supply to other retailers is likely to be the most successful long-term solution for improving access to groceries for resale.

“There is unlikely to be sufficient demand to support a viable independent wholesaler over the longer term. Large grocery retailers throughout the world typically source and distribute products to their own retail stores, rather than purchasing from a wholesaler. This is also true for New Zealand’s major grocery retailers, and some larger-scale potential entrants.”

‘Why we don’t want to break them up’

The Commerce Commission said it considered a regulated wholesale access regime that would have enforced ‘vertical separation’ of the two groups in a way that their wholesale and retail businesses were run separately.

But it decided against a break-up because:

“Introducing a regulated wholesale access regime for groceries would be very complex due to the wide range of products and dynamic nature of the sector; and,

“There are significant efficiencies associated with integrated retail and wholesale grocery operations, and there would be a range of practical challenges and transaction costs associated with separation.”

It concluded:

“Therefore, we recommend that the major grocery retailers be given the opportunity to negotiate commercial wholesale supply arrangements with other retailers, with the regulatory oversight described above. The major grocery retailers have publicly stated that they are open to, or are exploring, the possibility of negotiating commercial wholesale supply in certain circumstances.” The Commerce Commission.

It went on to recommend a mandatory grocery code of conduct based on the Australian code, enabling collective bargaining by some suppliers, and strengthening the unfair contract terms regime for ‘business-to-business’ contracts.

It also recommended the whole industry be reviewed again after three years to see whether the tweaks had worked.

So what happens now?

The Government will be happy it doesn’t have to spend years trying to disentangle the two giants and their suppliers, or have to splash out to build a new ‘KiwiMarket’ competitor.

The Commission also delivered a little kicker in saying that it planned to open formal investigations to enforce compliance with existing legislation, without specifying who it would go after and over what.

The immediate reaction

The Food and Grocery Council, which represents suppliers, described the report as a victory for suppliers.

“The Commission has affirmed its position that competition is not working well for many suppliers, and that the duopoly over the past two decades has pushed excess costs, risks, and uncertainty onto suppliers, with fears of delisting if they do not agree to their terms.

“Changes recommended today will not solve everything but will significantly move the dial. That was always our ambition. The Commission’s report is a ringing endorsement of the Food & Grocery Council’s stance.” FGC CEO Katherine Rich

Commerce Minister David Clark said the Government would immediately progress the Commission’s recommendations and hung out the vague threat of either a break-up or a Government-sponsored competitor if the regulatory tweaks did not work.

“This includes exploring how a Code of Conduct between major retailers and suppliers could be developed and looking at the role a dedicated regulator for the grocery sector could play. 

“The Commission’s findings indicate that restrictive covenants over land are a major barrier to supermarkets accessing new sites, so I want to ban these covenants being used to stop competition.

“The report sets out a clear justification for change in the grocery market. The status quo will not deliver fairer prices for consumers and a better deal for producers and suppliers, and I hope the sector will constructively engage in the changes that need to be made. 

“Given the importance of achieving healthy levels of competition in our retail grocery sector I have not ruled out some of the other options that the Commerce Commission tabled while developing its report, if consumer benefit is not achieved from the changes recommended in the report.” David Clark

Woolworths NZ MD Spencer Sonn said Woolworths supported the creation of a mandatory code of conduct for suppliers.

“We also support having greater clarity and consistency across retailers around unit pricing and promotions, and we support making changes to land covenants to help free up sites for more supermarkets to be developed.  We agree with the Commission’s finding that planning law changes could also play an important part in this.

“We hear the concerns raised about improving the wholesale supply to third party retailers, and we are committed to working with the government on what this could look like.” Spencer Sonn

The founder of online supermarket and home delivery service, Supie, Sarah Balle, said the report wouldn’t result in any tangible change for consumers. Supie was founded last year by Balle and received $2.5m in seed funding from Icehouse. It now has almost 10,000 members.

“This process was the opportunity to make a meaningful change to set up a fair food future and a better outcome for every New Zealander. Fairer access to food will not improve, the cost of food will continue to rise and we as a country will continue to be treated unfairly by the status quo, being the supermarket duopoly.” Sarah Balle.

Consumer NZ said it was also disappointed the Commission hadn’t recommended regulation of supermarket price displays, promotions and loyalty schemes, and there was nothing requiring supermarkets to supply other retailers with groceries at competitive wholesale prices.

“It hasn’t recommended regulation of supermarket price displays, promotions and loyalty schemes and there is nothing that will require supermarkets to supply other retailers with groceries at competitive wholesale prices

 Instead, the recommendations rely on supermarkets voluntarily changing their pricing and loyalty scheme practices and to only consider requests for wholesale supply from other retailers in good faith.

"We are concerned the recommendations rely on the supermarkets doing the right thing. While we’re happy to see the spotlight put on the supermarket sector, we are concerned that if the spotlight is removed, supermarkets will revert to the practices that brought about the need for this market study in the first place. Change is likely to be slow and consumers are not going to see lower prices at the checkout any time soon.” Consumer NZ CEO Jon Duffy

Spookies, profundities, curiousities and feel-goods

Charts of the day

Useful longer reads and listens

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 & TLDL: Bernard Hickey talks in the podcast above with fellow Press Gallery wonk Jenee Tibshraeny from Interest.co.nz about events around the Beehive, including the Reserve Bank’s recent moves to tighten monetary policy. (This was recorded on Friday February 25).

In this podcast, Jenee and I talk about:

* The Reserve Bank’s rate hike and warning of further tightening;

* its plans to sell Government bonds back to the Treasury directly at a rate of $5b per year, and what that might mean for the Government’s borrowing programme;

* the decision by the Reserve Bank to reappoint two members of its Monetary Policy Committee; and,

* the pros of cons of having a dual mandate with the Reserve Bank targeting both low inflation and full employment.

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!

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TLDR & TLDL: This week our worlds changed in a couple of major ways. Russia was excised from the global economy in a way that increased commodity prices more in a week than any other time since World War Two.

Also, Aotearoa-NZ experienced the worst civil unrest since the Springbok Tour of 1981 as anti-vax, anti-mandate protestors rioted, further wrecking the grounds of Parliament and trashing the surrounding streets in a profoundly shocking way. And Covid cases rose to over 20,000 a day.

The podcast above includes our discussion of the week that was, including another guest appearance from the University of Otago’s Robert Patman.

In summary this week:

* the West imposed financial sanctions that are forecast to carve 35% off Russian GDP, increased commodity prices 16% in a week, and may send Europe into a recession;

* global interest rates fell sharply on expectations the shock of Russia’s invasion of Ukraine and an acceleration of de-globalisation will force central banks to slow their interest rate increases, even though the immediate inflation outlook worsened because oil, gas, wheat and aluminium prices spiked to record highs;

* anti-vaxx protestors rioted against police all day on Wednesday as their camps around Parliament were cleared;

* our covid case numbers jumped over 20,000 with a peak not seen for another week or two nationally, while hospitalised case numbers rose over 500; and,

* the IPCC warned again in another landmark report that climate change inaction was a deadly threat to most of the world right now, as our Government moved to ban new pine forest carbon sinks from our climate emissions scheme.

This is our 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.

Five things to note

1. Commodity prices exploded

Russia’s invasion of Ukraine and the West’s belated and financially brutal reaction this week will be seen in the decades to come is a tectonic event in geo-politics and the global economy. The immediate meaningful result for Aotearoa-NZ is the biggest one-week increase in commodity prices in modern economic history and a fall in global interest rates.

I wrote and podcasted in detail about this yesterday for paid subscribers, including a closer look at how the last commodity price shocks of the 1970s changed the global economy.

“We are seeing the commodity 'melt-up' continue with no sign of a let-up. More precisely, there is a massive repricing going on which will presumably stop when most, if not all, of Russia's contribution to the global supply/demand commodity chain is 'scrubbed' off the numbers and discounted by the markets." ED&F Man Capital Markets' Edward Meir via Reuters.

2. Russia was purged from the global economy

In particular, the West’s sanctions have hammered Russia harder than even the west expected, largely because of ‘self sanctions’ applied by global corporates, banks, insurers and traders who either want nothing more to do with Russia for reputational, staffing or cashflow reasons, or are scared witless they’ll get caught in secondary sanctions applied by the US in particular.

Essentially, Russia’s financial, physical and corporate connections to the world are being unpicked, unplugged, unravelled, shredded and dissolved at a pace and decisiveness that neither Russia or many in the west expected.

It is a salutary lesson for China, which has much more at stake than Russia if it was ever sanctioned in the same way. In a way, that’s good for Aotearoa-NZ because we need China to stay part of the globalised economy and not ‘join’ Russia in the ‘east’ in a new version of the Cold War. So far, China has been careful to both express some support for Russia, but also avoid being seen to help Russia evade the sanctions too egregiously. China’s response to this invasion is the key thing for us.

I wrote and podcasted in detail about what that de-globalisation process might mean for Aotearoa-NZ on Thursday, Wednesday, Tuesday and Monday.

“We will cause the collapse of the Russian economy.” France’s Finance Minister Bruno Le Maire.

3. Aotearoa-NZ had its January 6 moment at Parliament

On Wednesday police and fire and emergency staff clashed with anti-vaccination protestors around Parliament in the worst civil unrest seen since the Springbok Tour in 1981. It was the moment all the craziness flooding through the nation’s Facebook feeds for years burst out into real life in the ugliest and saddest way. Bricks were thrown. Fires were started, LPG cylinders were thrown into said fire and police officers (and protestors) injured. The grounds of Parliament were charred and trashed. It was sickening.

Here’s what I wrote on Thursday morning after going behind the Police lines and into the riot with Lynn on Wednesday afternoon and evening.

Somehow, a small portion of the population has become radicalised via social media and infected with virulent strains of the nastiest types of ‘information’. As the PM said yesterday, it is profoundly sad and feels foreign to most of us. The language and the tactics and topics adopted were clearly spawned in the hyper-partisan and violent nether regions of US and UK Facebook in particular. That includes the use of death threats, calls to overthrow democracy and adherence to the most extreme Qanon and other conspiracy theories. Chemtrails and a flat earth are at the dumbest end of the spectrum. The nastier end is truly vile.

My view is we need to understand and regulate the amplifiers and accelerators of misinformation at their sources: the algorithms used by the likes of Facebook, Instagram, Youtube and TikTok to deliver the mass sharing and liking of extreme views, and the dopamine hits that go along with that. Mental health issues are as relevant in this area as politics and technology.

4. New pine forests were chopped from climate plans

This week Stuart Nash and James Shaw proposed a major change to the Emissions Trading Scheme that would stop new permanent radiata pine forests from being included in the scheme from next January.

This is a big deal because so much of our assumed climate change ‘action’ is around planting permanent forests as carbon sinks, but they are only a short term fix and are effectively a way to buy time but not change our reliance on petrol and diesel cars and utes to get around our cities. It’s a major concession to the rural sector, which saw a forestry takeover of more marginal sheep and beef land as problematic.

5. Covid finally went exponential here too

It seems incredible to think that the exponential rise in Covid cases to 22,527 cases by Friday (152,358 active cases overall) and the rise of the numbers hospitalised to 562 (with 11 in ICU) is only one of several major news events this week. There were seven deaths this week, the most in any one week since April last year, although most were of people who died of other causes but had Covid at the same time.

Essential longer reads and listens for the weekend

This series of data graphics from Toby Morris, Harkanwal Singh and Tina Ngata via the Spinoff is well worth your time.

I’m also a huge fan of Chris Schulz’s weekend email newsletter from the Spinoff. Check out this weekend’s version here, where you can also sign up.

Comment of the week on The Kākā

“I agree with Plague Craig. The events of the last week are horrible in Parliament grounds and in Ukraine. The most pressing problem is still fossil fuels and climate change. We must make the burning of fossil fuels too expensive, illegal or both. We must compensate those that suffer from loss of jobs in that industry. Retraining them to household solar may decrease the iron grip of the Gentailers on the population to the consumers benefit.how do we solve other problems? We are ripped off by the Supermarket Duopoly and the broadband market( I pay 130$ per month for data). Current capitalism is disgusting. Marianna Mazzucato however has some good reform ideas within the system but will National and ACT listen. ? Not on your nelly as their voters are up to their eyeballs in neoliberalism!! Politics has failed also on the labour side as they are receiving too many dividends from monopolies and duopolies to change and cannot think! Those that control our country must stop living in the 20th century and move to the 21st. 

“I have had my say. The only antisocial media I belong to are Email and google. Probably why I have no “friends”. Keep up the good work.” Patrick Medlicott in yesterday’s Ask Me Anything thread.

Spookies, profundities, curiousities and feel-goods

The ‘guards’ stopping the relocating protestors from getting into Wainuiomata’s marae entertaining us all.

Some fun things

Have a great weekend

Ka kite ano

Bernard

PS: Here’s 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!

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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: Interest rates fell sharply overnight on fears the war in Ukraine and the shock of higher oil and gas prices could freeze a post-Covid rebound in global growth and inflation in its tracks.

That’s great news for anyone worried that Aotearoa-NZ’s main asset prices in the housing market are about to start falling fast. Slower interest rate rises are being priced in, which will support global asset prices.

Elsewhere in the news this morning:

* CoreLogic reported house price inflation fell to 17 month low in February and is seen going negative in the months to come (see a lot more on this below)

* German 10 year bund yields fell back below 0% on a flight to safety in Government bonds and on fear the war in Ukraine will shock Europe into recession; and,

* money market stress is growing and traders are suggesting central banks again flood the financial system with new US dollars to stop a market freeze.

An autumnal wind blows through housing

Aotearoa-NZ’s housing market is heading for a year or two in the chiller as 2022’s autumnal open home season begins, thanks to higher interest rates in the second half of last year and a joint Reserve Bank/CCCFA tightening of lending standards in November and December.

But, as with past housing downturns, our market tends to slow sales volumes to a crawl and prices tend to freeze rather than free-fall, leaving most sellers able to wait out ever-hopeful bargain-hunters until the inevitable (Government-Guaranteed) next surge in prices. Unlike other asset markets, our housing market tends to ratchet sharply up, but never down in any great way. Apart from the divorcees and estate sellers, most won’t accept significantly lower prices and their banks won’t force them to. Get ready for a blowout in the average time for properties to sell.

CoreLogic reports this morning the chilling of the housing market has already begun. It released figures showing there was still 0.8% House Price Index (HPI) inflation in the month of February, the lowest inflation rate since September 2020, but this is largely due to the lagged effect of massive inflation late in 2021 and the way CoreLogic smears three months of data through to the most recent month in its calculation.

New mortgage lending halves in two months

The more ‘bleeding edge’ but slower raw data from REINZ showed prices actually fell in December and January by a total of 2.7% from the peak in November. We won’t see REINZ’s February numbers for another week or two.

CoreLogic’s NZ Head of Research Nick Goodall points to Monday’s Reserve Bank lending data for January as both evidence and cause of the chilling effect of less credit being pumped into the market.

That data showed total new mortgage lending fell to $4.7b in January from $7.9b in December and $9.1b in November. Net overall mortgage lending rose just $1.7b in the month of January to $332b, which is down from an average monthly growth rate of $2.4b from April 2020 to November 2021, which is when the Reserve Bank’s tighter LVR restrictions kicked in and as the CCCFA was about to kick in.

“Recently published lending data for January from the Reserve Bank shows a significant drop in mortgage activity, adding additional weight to the worsening housing outlook. This trend is likely to persist, as stretched affordability and improved choice for buyers compounds the impact of tighter, more expensive lending.

“The lending data also showed first home buyers are being hit extra hard by recent changes in the credit environment, from the reduced allowance for low deposit lending and tighter income/expense checking under the Credit Contracts and Consumer Finance Act (CCCFA).” CoreLogic

‘A clear change in trend’

Goodall sees a continued cooling.

“Our expectation is the HPI will dip further over the coming months as continued rate hikes and tighter credit controls weigh on market conditions. The significant drop in the monthly rate of growth from January to February indicates a clear change in trend.”

“Regional differences will also start to appear, as local economies, recent first home buyers and property investors all react differently to the changing environment.” Nick Goodall

HODL and dip-buying

Those home owners looking to sell for lifestyle, empty nest or work location reasons will be able to hold without having to take a massive price cut. Even the Reserve Bank only sees another 6% or so of house price falls over the next two years because our market only ever gaps up, rather than gapping down. The Reserve Bank’s underpinning of bank stability and liquidity is a major reason for that.

Few expect any slide to be more than a further 5-7% over the next year or two, rather than the 30-40% implied by some sort of reversion to ‘normal’ house price to income and rent ratios seen overseas. That’s because unemployment is low, disposable income growth is high, equity levels are sky-high and because our banks don’t need to trigger mass mortgagee sales and won’t. They are well capitalised, very profitable and have been repeatedly backed by the Reserve Bank’s infinite ability to create cash to keep them liquid and the loans flowing.

But some areas are falling

But as with any national market, there are some pockets of weakness showing through. Those smaller cities that have raced the highest and the fastest over the last two years are coming off the boil the most.

The cavalry may be coming

Usually at this point in the housing market’s ‘cycle’, home owners settle in to wait for another low-inflation surprise to signal another equally ‘surprising’ leg down in interest rates to put another fire under the market.

However, most think the current direction for interest rates is ever higher, possibly even in a structural way that reverses some of the last 30 years of falls.

That jury is still out though, in my view. Here’s the latest evidence that expectations of big and fast interest rate hikes are brittle at best.

Interest rates fell sharply overnight

Watching an increasingly intense and big land war exploding in Eastern Europe, global investors exited stocks and riskier corporate bonds overnight in a rush to buy US and European Government bonds seen as safe havens in a storm. That pushed up bond prices and pushed down yields. Some are even suggesting a global recession is possible later this year and next year if consumers react badly to further energy price shocks and real wage declines and if Europe’s economy is jolted to a halt.

The key US 10 year Treasury bond yield fell by 13 basis points to 1.71% overnight, its lowest level since January. The German 10 year bund yield fell back below 0% for the first time in month. 

Traders are also dialling back their expectations for higher short-term official interest rates in the United States and the Euro zone. They now see the European Central Bank lifting its key deposit rate by just 20 basis points to minus 0.3% this year. They had seen a shift up to 0% before the outbreak of war. In the United States, investors have discounted the chances of a 50 basis point hike by the US Federal Reserve on March 16, seeing only a 25 basis point start to a series of five hikes this year. Previously they had expected six hikes this year.

Money markets becoming stressed

Further to my piece yesterday on the risk that the freeze of Russian central bank assets could rebound into dislocations in short term money markets globally, there were new signs of stress in these markets overnight, as Bloomberg reported via YahooFinance:

Money markets are showing the most stress since the early days of the pandemic as traders race for dollars in the wake of toughened sanctions against Russia, prompting calls for help from central banks.

The cost of converting both euro and yen payments into dollars using three-month cross-currency basis swaps hit the most since March 2020. The gap between future Libor and Federal Reserve rates, a key gauge of funding stress known as the FRA/OIS spread, also widened for one-month contracts by the most since March 2020.

The moves in funding markets have similarities to the global run on the greenback triggered by the coronavirus pandemic, though not on the same scale. That pushed the Federal Reserve to step in as the lender of last resort through swap lines, which eased a dash for dollars. Some swap lines between the Fed and major central banks are still in place, while others have been closed after the pandemic distortions receded.

The Fed in 2021 established a repurchase agreement facility for foreign and international monetary authorities, known as FIMA, to help alleviate pressures in global dollar funding markets.

“We are likely to see some emergency measures including EUR and USD swap lines in the coming days,” said Mohit Kumar, a London-based managing director of interest-rate strategy at Jefferies. “The immediate concerns of central banks would be to maintain a proper functioning of the funding markets and prevent any stress in the banking system.” Bloomberg via YahooFinance.

‘There’s always a bailout’

These latest signs of drama in global financial markets caused by a ‘black swan’ event such as a pandemic or war are just the latest in a string of instances where financial markets, banks and asset values are protected from falling substantially by central bank action.

Hence the now natural reflex of a generation of investors to Hold On For Dear Life (HODL) and buy any dips, so as to be sure to get the next leg of rising asset prices and in the surety that financial authorities globally have asset owners’ backs.

Those first home buyers and home owners wondering if the last month or two of falls in prices is a precursor of some sort of secular slump in asset prices caused by a multi-decade reversal in inflation and interest rate trends should be careful. We’ve been here before many times. And every time the fall has threatened to go into double-digits, there has been a central bank and Government reaction to stop that.

Two housing market bailouts in 15 years

It has happened twice here in the modern era, once in 2008/09 and again in 2020/21. The measures taken included:

* between October 2008 and April 2009 the Reserve Bank lent our big four Australian-owned banks over $7b in freshly minted money through a Term Auction Facility (TAF) (see chart below) when they couldn’t get fresh ‘hot’ money from global markets frozen in the wake of the Lehman Brothers crash;

* the Government (under both Labour and National) created a wholesale and retail deposit guarantee scheme within days in late 2008 to maintain confidence in banks and stop them having to launch mortgagee sales;

* The Reserve Bank slashed the OCR from 8.25% in July 2008 to 2.5% by April 2009 and lent the banks the $7b to banks at a small margin over the OCR;

* then-PM John Key decided not to accept the 2010 Tax Working Group’s recommendation for a 1% land tax because he feared the resulting 10-20% fall in land values would endanger confidence in the banks;

* Key spoke repeatedly through 2010 and 2011 that the housing supply crisis he had talked about through 2007 and 2008 was no longer a problem and the Government did not need to encourage new house building and pressure prices lower;

* on March 16, 2020, the Reserve Bank slashed the OCR from 1.0% to 0.25% just before Covid lockdowns;

* it then created money to buy $55b of Government bonds to lower long term interest rates from March 2020 to July 2021;

* it created a Funding for Lending loan facility in December 2020 that lends to the banks at the same rate as the OCR to encourage them to lend freely. It is still operating and $8.2b has been lent to banks as Monday;

* it completely removed LVR restrictions in April 2020 for a year to ensure banks kept lending to home buyers, along with pausing a capital upgrade programme that would have forced banks to hold more capital, which usually slows their lending growth; and,

* it exempted mortgages being deferred from its capital requirements for banks in late March 2020 for a year, which allowed banks to more easily defer mortgage payments.

‘It’s our role to reduce financial stress on the economy’

To give readers an idea of how the Government and the Reserve Bank saw its role, here is the commentary in a Reserve Bank paper from 2011 that reviewed the various measures taken during the financial crisis (bolding mine)

“Beyond the immediate aim of calming money market tensions and reducing short-term funding spreads, the supportive actions undertaken by the Reserve Bank were also intended to reduce the impact of financial market stress on the real economy.

By providing confidence in access to necessary liquidity during a period when wholesale funding was extraordinarily expensive, or unavailable, these policy measures probably reduced the risk of a very severe domestic credit crunch. That in turn may have limited the depth of the recession, complementing the effects of the very steep reductions in the OCR during this period.” Enzo Cassino and Aidan Yao in a June 2011 Reserve Bank research paper.

Why housing is so special

This willingness and requirement by Government to ensure house prices and banks do not collapse is one reason why New Zealand housing market is so special in being the least likely to fall heavily of any housing market globally, and certainly of any asset class.

Other assets such as shares, bonds, crypto and commodities show a volatility natural in any free market where demand and supply act to ‘clear’ a market and find an equilibrium. Housing is not allowed to, largely because of the way our housing market is so deeply intertwined into a banking system that is more exposed to house values than any other in the world, and has become much more so over the last two years.

The housing market is special because it is now too big to fail, or even fall much.

Could anyone imagine the Reserve Bank intervening to stop a 30% fall in share values, or cow values, or crypto?(!). No. But it will for housing. It has done so twice in 15 years and would do so again if the current softness turned from being a mild correction of less than 10%, which was what we saw in 2008/09 and what is forecast over the next 18 months by the Reserve Bank.

It’s morally hazardous and deeply unfair to young renters

There is, of course, massive moral hazard and inter-generational inequity built into the effective Government guarantee under our housing market. It not only stops that ‘ladder’ being let down for others to get onto it, but it actively ensures that the Reserve Bank and the Government ensure the ladder is pulled up to ensure the next group who make it into the tree house aren’t overloaded with debt.

It locks in place the biggest intergenerational wealth transfer in the nation’s history, and means the ‘natural’ mechanisms of the market cannot ‘clear’ to ensure an equilibrium that means housing supply is allowed to reach housing demand at a level in line with the long run marginal cost of new homes.

It is a broken market and the Government and the Reserve Bank are now so deeply invested in keeping it broken that that they regularly rebreak it to ensure it never heals properly through a proper correction. They do that because they have built a market that is too big to be allowed to fail, both for bank safety reasons and median voter winning reasons.

Scoops and news of note elsewhere

ACT and National called on Ashley Bloomfield to go after he admitted yesterday the Covid testing system had nowhere near the capacity he had previously indicated. (Stuff, Stuff, NZ Herald)

The Warehouse and Chemist Warehouse have started selling (and selling out of) RATs as Covid patients scramble and queue to get hold of them. The PM had said they would be free. (Stuff, Stuff)

Tex Edwards has told the Commerce Commission’s building materials market study that house building costs are three times what they could be (Stuff)

ANZ in a research note estimated up to 20,000 New Zealanders could leave to go and work in Australia over the next year.

Chinese state-owned bank (and NZ registered bank) ICBC stopped guaranteeing credit in dollar terms for bilateral trades with Russia to avoid secondary sanctions from US authorities. (Bloomberg)

Maersk, Hapag Lloyd, MSC and ONE have all suspended bookings to and from Russia, meaning almost half of the world’s container fleet by volume are boycotting the world’s 11th largest economy. (Reuters)

Visa and Mastercard blocked multiple Russian financial institutions. (Reuters)

Signs o’ the times news

Number of the day

Useful longer read

Thread of the day

Comment of the day on The Kākā

“Kia ora Bernard. In the same way you tend to see so many Aotearoa-NZ stories as housing market stories in drag, my main take on both Covid and Russia's invasion of Ukraine is that future generations will consider them both climate change stories. They're things that happened partly as side-effects of our ongoing failure to regulate ourselves out of the economic behaviours driving climate disaster (habitat destruction plus air travel, in the case of the pandemic; the Ukraine war requires drawing a longer bow, but by definition, if we'd solved the problem of electing leaders able to take us where we need to be going, we wouldn't be dealing with Putin right now, and we wouldn't have Trump's return looming on the two-year horizon). And they're also the distractions we're choosing to prioritise over climate sanity. Today's IPCC report is just the latest speeding ticket given to the drunk driver currently at the wheel of history: us. I keep thinking we're going to sober up at some point. Except it is, clearly, going to be a point well after the tipping points for the tundra methane deposit release and the melting of the ice cap. We're now counting on being the drunk driver who doesn't get themselves killed or maimed. I'm not being sarcastic when I say I wish us and our children all the luck in the world.” Leaflemming on yesterday’s ‘Opening up and closing down’ article.

A fun thing

Have a great day

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: This week we covered a shift in the outlook for interest rates and house prices, and tried to work out what Russia’s invasion of Ukraine would mean for Aotearoa-NZ. The podcast above includes our discussion of the week that was, including another guest appearace from the University of Otago’s Robert Patman.

In summary this week:

* The Reserve Bank hiked again and warned even higher interest rates would be needed to flatten inflation;

* The Reserve Bank forecast house prices would fall 9% in the next couple of years from a peak in the December quarter of last year;

* Core Logic reported home owners who sold their homes in that December quarter made a total of $7.5b in mostly untaxed capital gains;

* Our covid case numbers went vertical and our contact tracers were finally overwhelmed after two years; and,

* Russia started Europe’s biggest war since 1945 and unleashed new surges in global energy and food inflation.

This is our 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.

Five things to note

1. Interest rates are rising again

This week the Reserve Bank made its first interest rates decision for 2022 and issued new economic forecasts for the first time in three months. It hiked the Official Cash Rate 25 basis points and lifted its forecast track for the OCR by around 70 basis points to a peak of 3.35% by the end of next year because it was more worried about inflation becoming bedded in above its 1-3% forecast range.

I asked Governor Adrian Orr a few questions about those changes and wrote this analysis of the decision in my daily email the next day. Paid subscribers can hear those exchanges and the analysis in the podcast that went out with the email.

2. House prices will fall a bit more

The Reserve Bank also extended and deepened its forecast for house price falls to a total of 8.9% from a peak hit in the December quarter to a trough in the March quarter of 2024. They have already fallen 2.7% since November.

I wrote an analysis of why the Reserve Bank’s rate hikes are unlikely to crash the housing market by 30-40% in my daily email and podcast on Wednesday, which paid subscribers received in full.

3. But the December quarter was a doozy (for asset owners)

CoreLogic reported that the final quarter of the house price boom post-covid was spectacular for mostly tax-free capital gains. It calculated the combined capital gains for home owners who sold in the December quarter was a total of $7.5b, with the median capital gains recorded per home almost doubling in the last two years to $420,000. Homeowners had held their homes for a median 7.1 years before selling.

Just 0.7% of the sales reported in the quarter involved the owner making a loss. Just imagine any other asset class where 99.3% of the trades were profitable and the average percentage of profitable trades has been over 90% for five consecutive years.

I wrote this analysis of CoreLogic’s figures yesterday when they came out for paid subscribers, along with a look at what Russia’s full invasion of Ukraine was doing for oil, gas, aluminium and dairy prices.

4. Russia invaded Ukraine and oil rose over US$100/barrel

This week Russia first invaded the eastern breakaway regions of Ukraine, and then raced on through to a full invasion of the former Soviet republic that is physically bigger than the size of France. European natural gas prices rose more than 40% this week to the equivalent of over US$200/barrel. Actual brent crude futures prices rose around US$10/barrel to US$105/barrel this week. (See chart below)

Peter Bale and I did a special half-hour popup ‘hoon’ with Robert Patman on Thursday to explain what happened, why and what might happen next. Here’s the resulting podcast and email that I opened up for both free and paid subscribers.

5. Our Covid case numbers went ballistic

This week our covid outbreak finally overwhelmed our contact tracers after two years. The Ministry of Health stopped publishing locations of interest and the Government’s response moved to phase III, which means only household contacts of positive cases have to isolate. Hospitalisations more than doubled this week to 237, but numbers in ICU still remain very low, as these RNZ charts show. Now we will see if our hospital wards can cope, given we are still a month or so away from the peak of hospitalisations.

Scoops and news of note this morning

Useful longer reads and listens for the weekend

Profundities, curiosities, spookies and feel-good news

Fun things

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