The Kākā by Bernard Hickey

TLDR & TLDL: Grant Robertson and the Labour Government have effectively given up on making housing affordable for most home buyers any time in the next couple of decades. Robertson admitted that yesterday when saying he wanted house price stability, rather than the big drops most voters want and the OECD fears in the wake of the 40% spike in the last two years.

Robertson said he didn’t believe home owners wanted their own house prices to fall and has effectively repeated the Prime Minister’s underwriting of house prices at current levels. He is saying house prices only ever ratchet up. They can never, and will never, be encouraged or allowed to ratchet down in a way that would make housing affordable again for current generations of first home buyers.

(I have published this for all and opened it up for the public. I’m able to do this sort of accountability and explanatory journalism on housing, poverty and climate because over 1,300 people have become paid subscribers. I’d love you to join as a full subscriber, which allows you to comment below and gives you access to all my daily emails, and access to my weekly webinars and chat threads. Come and join us.)

Yesterday the OECD issued its biennial survey of New Zealand’s economy and included some analysis of what it would take for house prices to become more affordable again, or at least as affordable as the ‘housing crisis’ levels Jacinda Ardern pointed to in 2017 when pledging a housing affordability transformation to get elected.

This chart below shows just how much the horse has bolted in the last four years since then, and what it would take to make housing more affordable. Even a 5% fall in house prices per year, year upon year, would be required to return affordability to 2017 levels, as measured by price to income ratios, and even then it would take four years. Simply holding prices stable would mean it would take eight years to get back to eight times income. The implied trajectory would not see affordability back to 2013 levels until 2040, and not until 2060 to get back to five times income. That was previously seen as the upper end of the affordable range.

Instead, the PM’s preferred house price growth of around 5% per year would see housing affordability worsen to 12 times income from eight times income when Labour took office.

Anything sooner than 2028 would require a 20-30% fall, which is line with the 47% of voters in this week’s 1News/Kantar poll who said they wanted house prices to fall “a lot”. A further 29% wanted prices to fall “a little,” while only 18% wanted no fall.

The OECD is so concerned at how over-valued the market is it is concerned about a sudden correction.

So what does the Government actually want?

So I asked Deputy Prime Minister Grant Robertson yesterday at the weekly post-cabinet news conference whether he also wanted house prices to fall a lot, and whether the Government would intervene to stop that happening. He essentially didn’t answer the questions by saying he didn’t see it happening, and didn’t think New Zealanders really wanted that.

Here’s the transcript of our exchange (the audio is in the podcast above):

Bernard Hickey: The OECD said they were worried about a possible sharp drop in the housing market. Would the government act to ensure that that didn't happen if it was threatened?

Grant Robertson: There's a lot of forecasting speculation on it in the OECD report and so I tend to listen to that but also listen to what we see from forecasters here in New Zealand, the Reserve Bank, Treasury and others. They are not forecasting the kind of sharp drop that you're talking about. They are forecasting over the course of the next year or so. As I've often said, our position is we do want housing to be more affordable, and that we will take action to do that. But I haven't seen anything in the forecasts that we rely on here in New Zealand that would cause me to intervene in that situation.

Bernard Hickey: Do you agree with the 47% of people on the one news Kantar poll who said they wanted to see house prices fall a lot?

Grant Robertson: The message I get from that is that New Zealanders want housing to be more affordable. They want people to be able to buy their own home and live in the home and they want to make sure that the price of housing reflects that value. That doesn't necessarily translate to people wanting the value of their own home to drop.

And so I do think you've got to be a little bit careful about polling questions like that. Regardless, we share the aspiration of New Zealanders that we want more people to own their own home. It is a long journey to come back from around 30 years of the way in which our housing market has gone in the direction it has, but we believe we're undertaking the things that need to be done in that space.

Robertson was later asked if average house prices of almost $1m in some provincial cities and outer suburbs (Hastings, Lower and Upper Hutt and Porirua) were affordable for first home buyers. His answer was it would take some time, especially as he wanted stable prices. Here’s the transcript: (The bolding is mine)

Robertson: “We don't believe that the price inflation we've seen in the housing market in recent years is affordable and so we've been taking actions both in terms of the supply side building more houses, we've got record consents, and on the demand side, to be able to dampen particularly investor and speculative demand. I've often said I don't sit here saying I want house prices to go down by X percent. We set the criteria. We set the rules so that they can have a more affordable housing market. And that's what we'll be worried about.

“There's drops forecast by both the Treasury and by some economists at the moment. That is the nature of the nature of the housing market, and some of the changes we've made, some of the changes that the Reserve Bank has made. I'm not expressing a view either way on that here. I answered Bernard's question before about not intervening. We're trying to set up a stable housing market in New Zealand and we put the rules in place that I believe will both help do that and make housing more affordable, but it doesn't happen quickly.”

Which begs the question: how can the Government possibly be credible in saying it wants affordability when its own preference is for no improvement any time soon.

Here’s my final exchange with Robertson (bolding mine):

Hickey: Just finally on housing affordability. How are you going to get to an affordable housing level, whatever that is, without a big drop in house prices?

Grant Robertson: The forecast that we're seeing now from the likes of the Treasury and a number of banks do see drops in house prices. We've always said as that we will set the rules to try and make house prices more affordable, whether that involves a drop of the kind that’s been forecast from the Treasury or not.

How do we do it? We do it unfortunately, over a long period of time, because it takes a long time to build up the stock of houses that we need, because we inherited such a large deficit in that stock, but we're making progress in that regard. We do it by on the demand side, making sure that we, for example, remove foreign buyers from the existing home market, by making sure that we don't allow advantages to speculators. It has to build up. The Reserve Bank has its role as well, which obviously they're continuing to work on.

His comments imply an acceptance of the status quo, and that the Government has no intention of ratcheting prices down, or improving affordability any time soon, or even for decades. Why not? Is the market now too big to fail or fall for political and financial reasons?

Here’s the final exchange from yesterday (bolding mine):

Bernard Hickey: Is this market now too big to fail? You can't afford for it to drop quickly. So you're going to essentially sentence another generation of first homebuyers to having to wait decades and decades before it gets affordable.

Grant Robertson: Now I don't accept that in terms of the overall premise of that. We've taken a number of actions to make the housing market more affordable. We will continue to work on those and we will continue to make sure we build more houses. This is a problem decades in the making that unfortunately is going to take some time to solve.

OECD cites RBNZ actions in big house price move

Robertson and the Reserve Bank have previously denied responsibility for the surge in house prices after their decision to print $58b to unleash a ‘wealth effect’ boost for the economy. But the OECD sheets the blame straight back to the Government and the Reserve Bank in its report (bolding mine).

“Runaway house prices are a major drag on wellbeing in New Zealand, especially for first-home buyers, and are by far the greatest concern identified by households in the IPSOS NZ Issues Monitor. Real house prices had already increased much more than in most other OECD countries since the turn of the century before the COVID-19 pandemic hit but went on to rise by another quarter since then, largely owing to the monetary policy measures implemented to support the economy House prices have also increased more relative to fundamentals – household income and rents – than in most other OECD countries. The large rise in house prices has increased wealth inequality between house-owners and non-owners.” OECD

We are different and it is a crisis

Here’s the OECD’s charts showing the scale of New Zealand’s exceptionally awful housing and rental affordability numbers.

Here is the final nail in our society’s housing coffin. This chart shows the share of the population under intense rental stress. We are the worst in the OECD.

We can’t wait for 40 years

The implications from the PM and the Deputy PM’s recent statements are that everyone will just have to wait a few decades for this to solve itself.

In my view, we can’t wait that long, if only because of the massive costs everyone will have to pay in decades to come in terms of child poverty through the justice, health and education systems, but also the lost productivity growth because another entire generation is shackled, living in unhealthy, expensive, insecure and overcrowded houses.

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: New mortgage lending figures for the first month of operation under the CCCFA suggest the ‘credit crunch’ talked about by mortgage brokers was less of a crunch and more of a slight grind down.

Reserve Bank figures out yesterday showed there was still $7.9b of new lending in the month of December, which was down 13% from November, but in line with the $8.3b average for the rest of 2021 and above the $7.2b seen for the last two years. New first home buyer lending of $1.56b was down just 10% from November and in line with the monthly average for 2021.

See more of my analysis below the paywall fold on why there’s still plenty of credit being pumped into the housing market and still listings shortages in the hottest markets. Also, more detail on why the David Clark-ordered MBIE review of bank lending under the CCFA is rightly sceptical of the very crunchy crunch talk.

Elsewhere in the news this morning:

* almost half (47%) of people polled by 1News/Kantar said this month they wanted house prices to fall “a lot,” while a further 29% said they wanted them to fall “a little,” while 18% wanted no fall;

* the OECD is calling again for Aotearoa-NZ to extend the retirement age beyond 65 to contain the growth of long-term debt (OECD);

* the US and UK threatened financial and other sanctions on Vladimir Putin’s family and close circle of fellow Russian oligarchs that they said would cut them off from the international financial system and stop them parking money in West or sending their kids to top Western universities (Reuters); and,

* Charlotte Bellis hit back overnight at Chris Hipkins’ statement yesterday challenging her view about there being no MIQ places for her, describing it as “incredibly disrespectful”. (Stuff, NZ Herald)

Later today, I’ll be covering an online OECD news briefing with Grant Robertson and OECD Secretary General Mathias Corman on its survey of New Zealand, its first since the onset of Covid. I’ll also be watching out for the Reserve Bank of Australia’s interest rate decision at 4.30 pm NZT, where it is expected to bring forward the timing of its first rate hike from next year to later this year.

Not as crunchy as we were all told

We finally got the real data to test all the anecdotes we’ve been hearing for a couple of months from mortgage brokers about it being virtually impossible for first home buyers and any non-standard landlords to get new loans because of the December 1 introduction of the CCCFA.

I’ve been wary of buying into the all the noise suggesting some sort of complete stop in lending or that the CCCFA and the Government are solely to blame for a looming ‘credit crunch’ caused by overzealous bureaucrats and bank loan officers and directors being too freaked by the threat of legal action to sign any loan documents.

The Reserve Bank’s tightening of LVR restrictions in November is also a big factor, as is a natural and sensible caution by banks themselves not wanting to overexpose themselves to a market most say is over-valued. It’s much easier to blame the meddling Government’s bureaucrats than either the Reserve Bank, which grants them the license they have to literally invent money, or their risk managers back in Sydney or Melbourne.

It turns out all the noise about a collapse was mostly noise. The actual figures show the slowdown wasn’t that serious in the first month under the CCCFA.

Reserve Bank figures out yesterday showed there was still $7.9b of new lending in the month of December, which was down 13% from November, but in line with the $8.3b average for the rest of 2021 and above the $7.2b seen for the last two years.

New first home buyer lending of $1.56b was down just 10% from November and in line with the monthly average for 2021. It was still above the December levels of the previous three years.

The investor share of high LVR lending (albeit with their 60% threshold rather than the first home buyer threshold of 80%) did rise above the first home buyer share for the first time in over a year, but remains well below the extreme levels of early last year.

The annual growth figures do look very low in comparison with the growth rates seen in the times of explosive growth seen in late 2020 and early 2021, especially as banks looked to finish all the deals started when the Reserve Bank’s high LVR shackles were off and as they were about come back on in early 2021.

Yesterday David Clark also released the terms of reference for MBIE’s inquiry into potential unintended consequences of the CCCFA rules, which are also suitably cautious about taking the mortgage broker complaints hook, line and sinker. An initial report is due with Clark next month and a final report is due in April.

Clark told Jenee Tibshraeny at Interest.co.nz he had asked to meet with the heads of the big banks later this week. Reading between the lines, he is also challenging the narrative that the CCCFA is solely to blame.

“It is important we get to the bottom of exactly what aspects of the CCCFA responsible lending rules were not being adhered to by some banks previously. Anecdotal evidence to date suggests the new lending requirements have presented a greater challenge for some parties.” David Clark.

By the way, check out the crunchy peanut butter ad from the 1990s. A blast from the past from us oldies. Way before the days of gourmet peanut butters…

Scoops, news snippets and useful longer reads

What has our world come to when a tenant renting a shed for $220/week ‘thanks their lucky stars’ (TVNZ)

Unlike in 2020 when the Government pulled out all the stops to home the homeless at risk of getting Covid and being on their own on the streets, it’s taking a less blanket approach and is back to giving grants to food shelters and others (RNZ)

Christopher Luxon is reported to have said yesterday at National’s annual caucus retreat in Queenstown (sans its board members) that he wants to show voters the party cares about poverty. He even ordered Simon Bridges to read Max Rashbrooke’s book about wealth inquality Too Much Money over the summer. (TVNZ,

Tauranga’s rental market is in crisis with listings down 30% and up to 100 people showing up to viewings (NZ Herald) It also reports Wellington’s rental market much worse than everyone thought. NZME’s Aaron Dahmen also reports from inside Wellington’s rental hellscape.

Nicky Pellegrino’s feature on Russell Lowe, the man who saved the Kiwifruit industry from PSA by finding the SunGold variety being tested was more resistant, is excellent. The rest is history of how an industry on its knees used the solution to vault into something much bigger. (Stuff)

The detail in this Stuff report on a new 1,200 home subdivision just outside Morrinsville is useful, including that the town's median house price was $879,500 in December and that most of the houses being built in the next stage are retirement homes. That’s where the equity is coming from.

Thomas Coughlan reports via NZ Herald-$$$ the new 39% top tax rate for those earning over $180,000 had captured 119,000 taxpayers, which was more than the IRD originally forecast.

Chart of the day

Listings are up in most markets, but the ratio of listings to sales remains much tighter than long-term averages, keeping most of the power in the hands of sellers and keeping upward pressure on prices, as this RealEaste.co.nz chart shows.

Spookies and profundities

The craic

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: This week some gaps in our omicron preparation opened up, the winners and losers in our covid ‘rekovery’ were revealed, investors saw glimpses of what the end of easy money could do to asset prices, and the Government chose to dig a longer Auckland rail tunnel that delays climate emissions reductions and costs $6b more than the original plan for a tram along Dominion Rd.

Peter Bale and I spoke about all of these developments and more in our weekly ‘hoon’ zoominar for paid subscribers, which is live for an hour on Fridays at 4pm. The recording is available above in podcast form for both paid and free subscribers to listen to.

This is my one weekly summary sampler email for all subscribers, but I’d love you all to become full paid subscribers and join the community here fully. Paid subscribers get access to all my daily emails and podcasts, and are able to comment and join the webinars and ‘Ask Me Anything’ sessions on Fridays at midday. This community of paid subscribers supports my type of accountability, explanatory and solutions journalism on Aotearoa-NZ’s triple crises of housing unaffordability, child poverty and climate inaction.

Five things to note

1. Gaps opened up in our omicron strategy

Jacinda Ardern, Ashley Bloomfield and Ayesha Verrall gave a few more details this week about the Government’s plans to fight omicron, although plenty of questions were left unanswered and a big unannounced decision angered many. The outbreak is now at an inflection point and Bloomfield said it could reach a thousand cases within a fortnight. Other modellers see up to 50,000 to 80,000 omicron cases a day at the pandemic’s peak some time in late February or early March.

There were two set-piece news conferences in the Beehive Theatrette I attended this week. I asked questions about the border reopening and the availability of rapid antigen tests (RATs).

Firstly on Tuesday, Ardern had her first full post-Cabinet news conference of the year, announcing the bones of a new three phase strategy to be overlaid on the ‘red’ traffic light setting, which superceded the ‘levels’ system. Verrall announced more details on Wednesday in a sometimes testy news conference. It focused as much on Bloomfield’s decision to grab all incoming RAT orders for the Ministry, including those already ordered by private firms, as on the three phase system.

Private importers criticised Bloomfield’s unannounced decision last Sunday as as a ‘requisitioning’ or ‘commandeering’ of supplies they’d already ordered and in some cases paid for. Verrall rejected the accusation that orders had been taken, saying that private importers had no guarantees they would actually get them, given massive global demand, and the ministry’s intervention made early imports more likely. Bloomfield was accused inventing a new doublespeak when he described the move as ‘consolidating the tests into Government stock,’ rather than a requisitioning.

In the current first phase - the phase when there are up to 1,000 cases a day - positive cases have to self-isolate for up to 14 days and close contacts have to isolate for 10 days. Those with symptoms still need to go to a testing centre for a nasal swab PCR test. Labs have capacity for up to a baseline of 58,000 PCR tests a day, and surge capacity for up to 77,600 for up to seven days. But it’s expected the testing and tracing system will become overwhelmed as cases head towards thousands of cases a day.

In the second phase, when cases go over 1,000 a day, asymptomatic critical workers will be able to return to work if they test negative with a RAT, but the RATs will not be widely distributed. Verrall could only define critical workers as those doing work to ‘keep people alive’ and details of occupations and workplaces are still two weeks away. There are only 4.6m RAT kits in the country, with another 14.6m scheduled to arrive in the next five weeks. A further 22m are on order, but their deliveries aren’t confirmed. In phase two, the self-isolation period for cases will drop to 10 days and to seven days for contacts.

In the third phase, when there are many thousands of cases a day, only household and ‘household-like’ contacts will have to self isolate. All but the most serious cases will be expected to manage themselves at home. Both Verrall and Ardern pushed back at my questions about when all households would get access to RATs to use at home themselves. They said they preferred people went to testing centres or pharmacies to have trained testers use the limited stock available there.

The gaps opening up

In my view, the gaps in the Government’s strategy to fight omicron include:

* A lack of RATs to start using and distributing them to everyone now because of a slow pivot from the elmination strategy employed before September’s capitulation towards a ‘living with it’ strategy, which is only now being contemplated, because it is being forced on us by omicron’s transmissability. It made sense not to use RATs during elimination, given they have false negative and false positive rates ranging from 20% to 70%. But when the PCR testing and tracing capacity is overwhelmed, using RATs will help avoid the health system being overwhelmed and help avoid the supply chain problems Australia and others have had because the sheer volume of essential workers who are isolating as cases or close contacts, unable to have any surety they can work without spreading Covid.

* A lack of hospital capacity continues to limit the Government’s options for ‘living with Covid’, given it knows we can’t handle the outbreaks seen overseas. Australia has twice the regular hospital beds and staffed ICU beds per capita than Aotearoa-NZ, both because of 30 years of under-investment in infrastructure and staffing here, and because Australia has been able to call on a much larger private hospital system, which has been built up over decades through more available and subsidised private insurance. And remember, Australia’s much better resourced system is only barely coping right now.

* An erosion of trust and cooperation between the Ministry of Health, the DHB’s Public Health Units and the private companies running supply chains and their own Covid testing systems is a growing issue. There’s been plenty of niggle over the last two years as the Ministry has sought to control the testing and tracing systems. Its slow adoption of saliva testing and its long-running rejection of private alternatives has frustrated many. This week’s ‘consolidation into Government supplies’ worsened those relations again concentrates the risks in the hands of one organisation, rather than having a diversity of responses. The ‘big Ministry’ approach worked in 2020 and up to September last year, but delta and omicron were finally too clever for the elimination strategy and now the Government needs to open up, both with its response and at the borders.

The key quotes:

The PM arguing why regular people won’t get RATs they can use themselves any time soon:

“It may well be that people are able to use them (RATs) at home, but we want to make sure that, when people are using them, it’s because there is good cause to use them: they’re a contact, someone in their household has Covid, they’re symptomatic; where they’re part of a surveillance regime because of their essential work, for instance.

“But just people testing in a widespread way for no reason actually is not something that I think we’d want to encourage, given false positives and false negatives. We don’t want someone staying at home when they don’t need to.” Jacinda Ardern

Ashley Bloomfield explaining how he made the decision to ‘consolidate’ private RATs orders into Government hands during a call last Sunday morning with Roche.

“We were discussing our forward orders, and trying to get as much certainty as possible about how much of those forward orders would be delivered and the timing of those between now and the end of February," Bloomfield said.

“During that conversation, I was asked about the orders that other New Zealand-based companies had and I was asked about whether we should prioritise the all-of-Government order. And I said yes – that should be the priority for now.” Ashley Bloomfield.

2. The winners and losers of the covid ‘rekovery’ revealed

This week I dived into Stats NZ’s national accounts data for the September quarter to try to work out who had benefited from the Government’s covid response policies over the last two years or so. Here’s the piece I put out on Wednesday via email to paid subscribers documenting how the Labour Government, supported by the Greens, presided over policies that accidentally on purpose engineered the biggest transfer of wealth to asset owners from current and future renters in the history of New Zealand.

I asked paid subscribers if I should open it up to the public and they encouraged me to, so it’s free for all to read and share.

I spoke with RNZ’s Kathryn Ryan about that report on Thursday morning here.

3. Inflation rose and the blame game started

Our headline annual CPI inflation rate rose to a 30-year high of 5.9% in the December quarter, thanks largely to higher fuel, food, housing rents and building materials costs. National blamed the Government’s spending, while Labour said the inflation was mostly imported and not the Government’s fault.

In my view, some of the inflation is imported, and the Government’s spending is only very partially to blame. One source of inflation here that hasn’t gotten as much attention as it should have, and has done overseas, is the ability of companies with dominant market positions to increase prices more than they could in a more competitive or controlled market.

We have duopolies and monopolies in building materials, supermarkets, fuel, electricity, insurance, banking, newspapers and electricity. Profit margins are higher in those sectors here than overseas, and have been the source of a good chunk of the inflation here. Obviously, the Commerce Commission has already investigated and re-regulated fuel. It’s now doing supermarkets and building materials is next up.

In my view, these market studies and re-regulations can’t come soon enough. I’ll be diving into this area more in the weeks ahead. I welcome suggestions for lines of inquiry from paid subscribers in the comments below.

4. Investors looked into the abyss of the end of easy money

Stock markets gyrated wildly this week, often falling sharply in the mornings and then bouncing back in late trade as ‘dip buyers’ jumped in with the confidence that the Fed would of course continue to ‘guarantee’ ever-rising asset prices.

Some are nervous the Fed’s pivot in November to signalling a tightening of monetary policy to control US inflation that jumped to 7.1% in December will lead to as many as seven rate hikes this year. For nearly 25 years, investors have taken for granted that the Fed and other central banks will come to their rescue whenever the chips are down with rate cuts and money printing. That was possible with ever-falling and often below-target inflation.

I still think the jury is still out on whether this era of surprisingly low inflation is over, but Covid has certainly changed the trajectory in the last 18 months, thanks to disrupted supply chains and worker shortages in countries where a chunk of the workforce has literally gotten sick or died, or hasn’t been able to work because of disrupted childcare and schooling arrangements. Much higher oil and prices because of supply problems in the middle east and Latin America have made it worse, along with the growing push to raise fossil fuel costs and use less coal for climate change reasons. The end of nuclear power stations in Germany and Japan are also factors.

Now the excuse of low inflation is gone away, central banks are withdrawing stimulus and threatening to put up interest rates. Jeremy Grantham’s widely read piece on the likely bursting of a fourth ‘super-bubble’ (which I referred to in last weekend’s summary) at a potential cost of US$35t has unnerved a few people. I wrote in more depth in Tuesday’s email about why some are nervous about the end of the Greenspan/Bernanke/Powell put. I wrote about why I don’t think the era of bailouts is over, and how it all might end. Or not.

5. Government chooses higher carbon emissions by 2030

The Government announced on Friday it had chosen the Tunnelled Rail option (purple line below) for the Auckland CBD to Airport mass transport project, rather than the option of either a tram along Dominion Rd (apricot line below) or a collection of over ground and underground rails lines alongside Sandringham Rd (teal line below). Surprisingly, it also announced it would bring forward a decision on a second harbour crossing via tunnel from Takapuna to Wynyard, probably just with a rail line.

If delivered on time and budget, the tunnelled CBD-to-airport route would mean Auckland generated 400,000 tonnes more in carbon by 2031 than doing nothing, because so much carbon is emitted to make and install the concrete and steel and drill the tunnel in the 10 years before it is completed in 2032.

The wider problem is Aotearoa-NZ and Auckland need to more than halve transport emissions from cars and trucks before 2030, which is when scientists say we need to have stopped growing emissions and be reducing them sharply to avoid the planet warming more than 1.5 degrees — beyond which the risk of feedback loops and tipping points causing an uncontrollable and catastrophic rise in temperatures becomes a much bigger risk.

Compared to the original Dominion Rd tram option, the Tunnelled Rail will go underground all the way from Wynyard Quarter to Mt Roskill, before coming out above ground and going alongside the motorway to the airport. The indicative business cases for the three options released in October last year show the Tunnelled Rail option was forecast to:

* cost ($14.6b) almost twice as much as the Dominion Rd tram ($9b);

* have four fewer stations, but take 14 minutes less to get from the CBD to the airport;

* affect 322 fewer properties because it does not go along Dominion Rd;

* be carbon neutral 10 years later than the Dominion Rd tram and generate 300,000 more tonnes of carbon than the tram option by 2031; and,

* generate 400,000 tonnes more carbon than the ‘do nothing’ option by 2031.

In my view, it’s too late to be building rail now. We have to get most people out of cars and utes and onto footpaths, cyclepaths and into buses if we are to reduce emissions substantially before 2030. Sadly, it’s too late for the railways.

The latest plan without funding signed off, an end date or bipartisan support

Sir Dove Myer Robinson’s 1972 rail plan was scuttled by the third Labour Government in 1975

Key quotes:

Transport Minister Michael Wood on the failure to adopt the 1972 plan above:

“The city suffered because of that failure.” Michael Wood (Stuff).

National ridiculed the latest proposal and said the money should be used instead to build two new motorways.

“If it ever goes ahead it will be at least $15 billion of wasted spending. The number one priority for Aucklanders is a second Harbour Crossing for both public transport and private vehicles.” National’s Transport spokesman Simeon Brown (Stuff)

Unfunded, uncertain, carbon intensive and divisive

In my view, a lot of voters and infrastructure planners will take all of this with a double-cab ute full of salt. There will be a change of Government, probably before funding is signed off and construction has started. Without a bipartisan approach, it seems unlikely to ever happen, particularly given National’s self-promotion as the party that doesn’t ‘hate cars’ and the huge sums involved, which Treasury (and both main parties) insist can’t be funded through a longer term increase in core crown net debt.

The funding will have to come from value capture rates (which land owners loathe because it deprives them of some of the unearned and untaxed private capital gains from land values rising around publicly funded infrastructure and its new zoning), local rates surcharges (which locals hate), congestion taxes (which locals hate). The alternative is a purely Crown debt-funded project, which the rest of the country doesn’t want and the current interpretation of the Public Finance Act won’t allow because it would push net debt outside the 20-30% range that Treasury deems prudent.

National has already begun attacking the project as wasteful, disruptive and ‘anti-car’, while warning of the ‘tax increases’ implied through the funding vehicles mentioned. These projects are at the heart of New Zealand’s ‘culture wars’ that pit Team Mike Hosking and his Ferrari against Team Julie-Anne Genter and her electric bike. Meanwhile, the top selling vehicle by a country mile last year was the diesel-powered Ford Ranger (12,580 sales), which weighs in at two tonnes and generates 20 times more carbon emissions per kilometre as a petrol-electric hybrid hatchback.

My current assumption is that this CBD-to-airport rail line and the under-harbour rail tunnel to Takapuna will not happen in my lifetime, and I hope I have a good 50 years left in me… If I’m wrong, I hope it’s because it’s built before the end of a long life, rather than because I’m not around in the mid-2030s when they are proposed to be finished. Friday’s announcement hasn’t changed my view, or lifespan.

I also think it shouldn’t happen because of the extra carbon emissions over the next 10 years, particularly in comparison to the counter-factual of a fast move away from cars and utes to walking, cycling, scootering, and bus usage. Although I also think that is unlikely with the current mix of public opinion, parties, and their policies. Long story short? Nothing much will change any time soon. This may seem unrealistically pessimistic, but I would refer you to Sir Dove Myer Robinson’s proposed rail map above from 50 years ago.

The politics of magical thinking

While a generation of voters and politicians remain of the view they can have it all: big infrastructure projects and low taxes, at the same time as low public debt that keeps interest rates low to support high house prices. Politicians who won’t be responsible for the planet’s temperatures in 2050, or the likely carbon (and other) liabilities, are currently able to persist with this magical thinking that appeals to voters, sometimes because they believe it, and sometimes because they can’t see a way to change it.

Humans in democracies often make long term decisions with short term thinking dominated by political tactics that:

* emphasise the benefits of the status quo;

* highlight the risks in the unknown future;

* emphasise the pain and disruption of change; and,

* focus on the immediate financial losses caused by bearing investment costs now in exchange for future benefits that other groups and generations will receive.

The kids being born when Sir Dove Myer Robinson was Auckland’s Mayor are the least likely now to vote for these railways that won’t run fully for another 30 years, even though they personally would have benefited from an Auckland Rail network like the one in the faded map above. Unless, of course, they own property along the proposed route and around the 18 proposed stations, and even then, their votes will be conditional on no value capture rates or local rates surcharges that dilutes their untaxed and leveraged capital gains, and no new national taxes or higher public debt that endangers current land values.

I realise that’s a tad cynical, but after 50 years of political choices taken and the current political landscape, I can’t see any other outcome. Happy to be wrong.

A fun thing

Ka kite ano

Have a great long weekend if you’re an Aucklander, although I’ll be publishing on Monday because I’m in Wellington providing a national service. Just like the Monday just gone, when I published because it was a Wellington holiday and I provide a national service… :)

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: Official figures show the stark explosion in inequality since the onset of covid as the Government’s interventions to print $58b and give $20b in cash to business owners helped make owners of homes and businesses $952b richer since December 2019.

Meanwhile, renters have missed out on that asset growth and have been hammered with real wage deflation and rents rising faster than incomes. The poorest are now $400m more in debt and need twice as many food parcels as before Covid.

The Labour Government, supported by the Greens, presided over policies that accidentally on purpose engineered the biggest transfer of wealth to asset owners from current and future renters in the history of New Zealand. I detail those numbers and explain how it happened below the paywall fold. (I have decided to open this up to all subscribers and the public given the public interest involved. Please subscribe to support my type of accountability, explanatory and solutions journalism on the climate inaction, housing unaffordability and child poverty crises)

Elsewhere and here in the news this morning:

* Nicholas Jones has gotten hold of a leaked document from Auckland’s DHBs showing they want MIQ scrapped for overseas arrivals once omicron has taken hold to free up resources “which will be badly needed elsewhere.” (NZ Herald-$$$)

* However, epidemiologists Nick Wilson and Michael Baker called on the Govt to keep the border closed until the omicron wave has passed (Stuff)

* Lab workers say they are exhausted, underpaid and short of 400 staff even before the omicron outbreak has started. Some said they plan to leave for Australia as soon as they can for higher wages and better conditions (Stuff)

* New South Wales extended its Covid restrictions for a month, despite case numbers having passed a peak and hospitalisations plateauing (RNZ)

* Pfizer and BioNtech began clinical trials for a vaccine specifically designed for omicron (CNN)

* Australian CPI inflation was 3.5% in the December quarter from a year ago, which was above expectations and has pulled forward forecasts for a Reserve Bank of Australia rate hike to mid 2022 from late 2022 or early 2023. (Reuters)

* The IMF lowered its growth forecasts for 2022 and 2023, while also increasing its inflation forecasts. It warned of a very uneven covid recovery (IMF)

* US stocks were again on a rollercoaster ride this morning, falling another 2-4% in morning trade, before rebounding in mid-afternoon trade to be down 1% by 8am NZT. It did a similar thing yesterday, rallying sharply into the close after my Dawn Chorus was published! (CNBC)

* UK Police are now investigating another report that Boris Johnson hosted an indoor birthday party last year in breach of covid rules. A highly critical report is due in the next day or two and his survival as PM is even more in doubt (ITV)

Coming up today, Ayesha Verrall and Ashley Bloomfield are due to have a news conference this afternoon to release more detail on the ‘three phase’ plan for dealing with omicron, particularly around self-isolation exemptions for critical workers, the length of self-isolation stays and distribution plans for RATs, which I reported on last night here. I’ll be at today’s news conference and welcome questions from subscribers in the comments below.

A massive wealth transfer in black and white

Stats NZ reported its national accounts for the September quarter yesterday, which included its measures of the income, savings and net worth of various sectors of society, including households, non-financial businesses (ie not banks) and both central and local Government.

It’s possible to untangle the various flows of cash from one sector to the other and what has happened to their savings and the value of the their assets through the Covid k-shaped ‘rekovery’.

The accounts illustrate vividly how unequal the recovery has been and how Government and Reserve Bank policies have engineered, deliberately or otherwise, the biggest and fastest increase in wealth for home and business owners in the history of Aotearoa-NZ. This happened at the expense of the renters of today and tomorrow, who have experienced a massive real wage shock because inflation has been more than twice wage growth, and rents have risen faster than wages. Renters have also missed out on the bonanza in asset values and now face the widest gap in wealth in our history, with the inequality focused on home ownership.

Beneficiaries and the poorest were given an extra $48m in cash grants in 21 months, while households with homes and businesses received an extra $18.8b in cash and were able to increase their cash holdings in banks by $51.6b.

Any of those renters hoping to make the leap into home ownership now face a chasm to save a deposit in the hundreds of thousands, while also having to pay the most expensive rents relative to incomes in the world from wages that have fallen 2-3% in real terms over the last year. And that’s before they try to get a loan from a bank asking them whether they’re pregnant and why they bought lunch.

The national accounts show that household net worth rose by $629b between the end of December 2019 and the end of September 2021, while the net worth of non-financial businesses rose $323b. In short, asset owners got $952b richer during Covid, while the poor saw their real incomes go backwards and their debts to MSD rise by $400m to $1b by mid-2021 (CPAG)

So what happened to all the cash?

The accounts show the Government paid a total of $19.95b in subsidies to businesses over that period, made up of wage subsidies, resurgence payments and other support packages, while businesses recorded profits totalling $27.16b, up by $15.492b in the previous 21 month period. That begs the question: why weren’t businesses told, or even asked nicely, to pay back their extra surplus, driven largely by taxpayer cash? And where is the outrage from the Taxpayers Union, ACT and National, who profess to care about misuse or unfair payment of taxpayer funds to individuals?

The Government has not asked those businesses to repay the cash from the increased profits, and the businesses themselves have repaid less than $4b of the money given to them as wage subsidies and resurgence support payments. It hasn’t come back to the Government either, at least not yet. The cumulative corporate tax profits paid in the 21 months since Covid was $19.73b, which was actually down from the previous 21 months at $19.95b.

And then there was the money printing

Also over that period, the Reserve Bank printed $58b to buy Government bonds and relaxed lending restrictions, which dragged mortgage rates lower and sparked a rise in house and commercial property prices of 20% to 40%, depending on location and property type.

Here’s a compilation that follows the money, comparing the post-Covid period with the pre-Covid period. It shows the Government gave businesses an extra $18.8b in cash in wage subsidies from the March 2020 quarter to the September 2021 quarter inclusive. Businesses then increased their profits by $15.5b and increased the cash in their transaction and deposit bank accounts by $26.3b.

Also over that time, household cash balances rose by $25.3b.

Over the same period, the Government increased cash grants for the poorest by $48m to a total of $3.233b, compared with the same 21 month period before Covid. Since Covid, demand for food parcels at the Auckland City Mission more than doubled to 20,238 in the six months to June 2021 from the same six months in 2019.

In summary, the Government’s Covid policies made the rich almost $1t richer, while the poor were allowed to get $400m further in debt to the Government itself, and were forced to apply for more than twice as many food parcels in our largest city.

The Government’s emergency cash support for businesses was given without any means testing and there has been no comprehensive review of whether they still need it, or whether it should have been clawed back.

Meanwhile, the PM extols ‘Labour values’ to Labour MPs

PM Jacinda Ardern said last week to her MPs at their caucus retreat at a wedding venue on the South Taranaki coast that her Government had managed equity and fairness with ‘Labour values’ during the Covid crisis.

“The test of equity and fairness is how you manage a crisis ... I'd like to think through the last two years we've demonstrated Labour values. We will continue to demonstrate our ability to manage challenges and change when it comes to climate, housing, poverty, everything we continue to face as a nation." Jacinda Ardern last week.

A question for paying subscribers. Do you want this full article opened up to the public? Please like the article or make a comment if you would.

Other news and useful snippets

The Monte Cecilia housing trust in Auckland is calling for more Government help to house hundreds of people on its waiting list. (RNZ)

Wholesale electricity prices are climbing sharply again (Stuff)

Tony Alexander writes via OneRoof first home buyers shouldn’t wait around for investors to sell out of rentals.

“Will investors still keep looking to sell? Again, some will. But when a net 14% say that they are finding it easy to get good tenants compared with just 3% back in June, there is an absence of pressure to sell caused by a high risk of having one’s property empty for a decent period of time. Such ease of finding tenants also means firm ability to raise rents if desired – though as yet my surveys struggle to find much evidence of a generalised lift in rent rise plans.”

“It all adds up to no wave of investor selling. The only wave underway currently is of first home buyer withdrawal because of the Government’s ham-fisted Credit Contracts and Consumer Finance Act changes.” Tony Alexander

Charts of the day

Useful longer reads and reports

Some fun things

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 omicron started spreading in the community, our border controls were effectively tightened, we learned house prices started falling in December, wholesale interest rates surged again globally on inflation fears, and the Government is looking at tweaking regulations to ease the CCCFA credit crunch.

In particular:

* omicron ‘super-spreader’ wedding events attended by a Covid-positive Nelson family last weekend in Auckland forced all of Aotearoa-NZ back into the ‘red’ setting of the Covid traffic light restrictions from 11:59 tonight;

* we learned house prices fell 1.0% nationwide in December and more than 3% in Auckland City, with ANZ predicting a fall of as much as 7.0% later this year;

* wholesale interest rates rose again on inflation fears here and overseas, with ANZ forecasting our Reserve Bank will have to hike the official cash rate to 3.0% by early next year, implying 6.0% fixed rate mortgages later this year;

* MBIE stopped releasing new MIQ slots for March and April, effectively closing the border to anyone who hasn’t already booked a regular MIQ slot until further notice; and,

* ministers indicated they may tweak regulations, rather than legislation, to ease the CCCFA credit crunch that meant 20-35% more mortgage applications being denied in December than usual.

Next week we’ll find out if:

* households and small businesses will be able to get hold of and use Rapid Antigen Tests (RATs) themselves from home any time soon (Wednesday);

* inflation hit 6.0% in Aotearoa-NZ in the December quarter (Thursday at 10.45 am);

* what the Fed is likely to do with global interest rates this year (Thursday 8 am our time); and,

* whether Russia might invade some or all of Ukraine, which would shunt interest rates, oil, gas prices, and share prices all over the place.

Peter Bale and I talked about all these developments (except for today’s omicron red alert announcement) and more in our Friday afternoon ‘hoon’ webinar for paid subscribers, which we recorded above in podcast form for all to listen to. It was recorded at 4pm on Friday before today’s omicron announcement.

This is The Kākā’s one guaranteed free and full weekly summary article for all subscribers. I’d love ‘free’ subscribers to become paid subscribers and join us as full members of the The Kākā community. Full subscribers receive all of my journalism in The Kākā’s daily emails and podcasts and get invites to ‘Ask Me Anything’ and ‘Weekly Hoon’ zoom webinar sessions on Fridays at midday and 4pm. They can also comment below.

Paid subscribers support the accountability, explanatory and solutions journalism I do on the housing unaffordability, climate inaction and child poverty crises. Join us now.

1. Omicron starts spreading

PM Jacinda Ardern and Ministry of Health Director Ashley Bloomfield announced today in a late morning news conference in the Beehive Theatrette that a Motueka-based family of nine had tested positive for the omicron variant of Covid, and that they attended a wedding in Auckland and other events with more than 100 people last weekend that were likely to be super-spreader events. One person infected was an Air NZ attendant, who had then gone on to work on four flights between Auckland, Nelson and New Plymouth on Sunday, Wednesday and Thursday.

Ardern said this meant omicron was likely to have been spreading in the community in the Auckland and Nelson regions in the last week, which meant Aotearoa-NZ would have to all move back to the ‘red’ setting of the traffic light system of restrictions from 11.59 pm tonight for “some weeks” so as to slow an expected surge of omicron cases. This means no events with more than 100 people can be held, and that indoor events and hospitality venues must seat guests more than a metre apart.

The key details from the news conference included:

* case numbers are expected to rise to at least 1,000 a day within the first phase of the outbreak over the next 14 days, during which the current approach would not change for PCR and Rapid Antigen Tests (RATs), contact tracing and two weeks of isolation for positive cases and close contacts;

* that means RATs would only be available at official PCR (polymerase chain reaction nasal swab) testing sites and pharmacies, or through those employers who had successfully applied to the Ministry of Health to import their own;

* tactics would adjust during an unspecified transitional second stage to focus on those with more risk of developing serious illness, and less about self-isolation of everyone with a positive test or who was a close contact;

* the final third stage would be once case numbers reached thousands per day and would have different definitions and rules for self-isolation, which contacts need to isolate and how much contact tracing will be done;

* Ardern said RATs were only 80% efficient and would only be used once the current 40,000 per day capacity for PCR tests and current contact tracing systems were overwhelmed, would would be in second and third phases;

* she said Bloomfield and Associate Health Minister Ayesha Verrell would give more details on Wednesday about how the rules and definitions for self-isolation, contact tracing and RATs availability would change in the three-phase system;

* Ardern said over 4.5 million RATs were in the country and another 1 million were expected in the coming week;

* Ardern reitrated there were no plans for lockdowns or regional boundaries;

* Bloomfield said the Ministry of Health was reconsidering its advice on mask usage, the four week gap between first and second does for kids and the four month gap before booster shots;

* Ardern and (later) Deputy PM Grant Robertson said scenarios ranged from having thousands of cases a day to 50,000 cases a day and that the health system had contingency plans in place for those numbers;

* Robertson said the mid-point scenario of 25,000 cases per day would see up to 350,000 workers or 12% of the workforce self-isolating at home and that the Government was working with the private sector to limit the effects on supply chains;

* Treasury estimated that 25,000 cases a day would cost around $50m per week in leave support payments of $600/week for fulltime workers and $359/week for part-timers;

* Robertson said the Government was looking at further sectoral support options, but had no plans for more widespread wage subsidy or resurgence payments, but that there was currently enough left in the Covid Response Relief Fund ($4b) to pay for the omicron response;

* He said the Government had enough fiscal headroom to handle omicron without the need to borrow more than currently planned because stronger-than-expected economic growth had improved PAYE, corporate profit and GST income receipts; and,

* Ardern said businesses should plan to be in ‘red’ for some weeks and she reiterated Cabinet had made no decisions about whether to extend the current end-Feb date for the start of MIQ-free travellers for residents returning from Australia.

Quote of the day:

“Such is life.” Jacinda Ardern when asked what she thought about having to put off her wedding planned for later in the summer.

Here’s the full news conference if you want more and have just over an hour to spare...

The key unanswered questions

I went to Labour’s annual Caucus retreat at a coastal wedding venue just south of New Plymouth on Thursday to hear the first full comments of 2022 from Ardern, Covid-19 response minister Chris Hipkins and Robertson on the omicron and economic outlooks. I asked a bunch of questions around border settings, RATs availability and plans and the likely economic and fiscal effets of omicron.

These are the four unanswered questions as I see it:

When can people start testing themselves at home with RATs?

Currently, the Ministry of Health will only allow a limited number of large businesses to import and use a limited variety of RATs. It has worried their relatively high false negative rate would mean Covid carriers would keep spreading the virus and break its elimination and ‘stamp it out’ strategy of tracing and isolating every single close contact.

Its current plans are for people to have to go to pharmacies or PCR testing sites to have trained testers conduct the RATs under supervised conditions. It has wanted to avoid the chaos seen in Britain, Australia and elsewhere where people who bought RATs off the shelves in pharmacies used a variety of tests in a variety of less-reliable-than-PCR ways that could not then be integrated into national reporting and tracking systems.

But it’s clear to everyone that once testers and tracers are overwhelmed, RATs will have to be used at home and in many more workplaces to avoid infectious people being unable to test themselves and therefore keep spreading it, and non-infectious close contacts being unable to quickly clear themselves to keep working. The absence of RATs once testers and tracers are overwhelmed massively increases the risks of a steeper rise in case numbers and self-isolation numbers that then overwhelm hospitals and cause supply chain chaos like that seen in Australia, where empty supermarket shelves and essential service closures have unnerved many.

Do we have enough RATs to cope once our testers and tracers are overwhelmed?

Ardern said on Thursday we had just over 4.5m RATs in the country and said today there was another 1m coming in this coming week. Millions more were on order, she said. But it’s possible we’ll need those many more millions within a couple of weeks. This is all as governments everywhere are desperately trying to get their hands on RATs to send them out to households and workplaces in their millions.

The Government’s long-held reluctance to let the public get their hands on RATs because it conflicted with the elimination strategy looks like it is coming back to haunt us with a vengeance.

Should essential workers and all their close contacts have to isolate for the full 14 days if they’ve been in close contact with a positive case or been at a location of interest?

The risk is that the outbreak grows so quickly that our testers and tracers are overwhelmed before we have enough RATs to avoid positive cases spreading it without knowing, or non-positive cases having to self-isolate unnecessarily. Both situations combine into a nasty feedback loop that both worsens the surge and peak of the cases, and takes out workers needed to keep supply chains working and cope with extreme pressure on the health system.

We’ll find out a lot more about the plans for RATs and for rules about self-isolation periods and thresholds on Wednesday. There are obviously tradeoffs around shortening self-isolation periods and raising thresholds for close contacts from locations of interest having to self-isolate. A lot will depend on how many RATs we can get our hands on and how quickly.

Here’s more from my report sent to paid subscribers on Friday from the Labour Caucus retreat.

By the way, one of the flights from Auckland to New Plymouth was on the Wednesday night (7.50 pm) and may well have included junior Labour MPs travelling to the caucus retreat. Most MPs and all of Cabinet were already in New Plymouth by then.

2. Will the border really reopen on March 1?

MBIE announced via Twitter on Monday night that it had indefinitely postponed a release of new MIQ slots for March and April because MIQ was increasingly full with omicron cases and the rooms may be needed for domestic omicron cases. Effectively, it meant there would be no new MIQ slots issued for the foreseeable future. Currently, the plan is for residents to be able to return from Australia without having to go through MIQ from March 1. That deadline for arrivals to be able to self-isolate was extended from mid-January just before Christmas.

The PM said on Thursday Cabinet had made no decisions about either allowing arrivals to self-isolate from March 1, or extending the deadline again. However, she said the border controls were a major tool in the Government’s arsenal to slow the arrival and spread of omicron, and would continue to be.

She said again today:

“We are still taking very seriously the role of using the border to slow down cases.” Jacinda Ardern.

My reading of that is the PM remains very conservative about reopening the border and adding (even marginally) to the pressure on the current outbreak. My reading of comments from others, including Hipkins, is they think an opening is preferable sooner rather than later, especially if the peak of the omicron wave has passed by the end of February. They want to avoid a peak coinciding with flu admissions in winter.

However, omicron will be far from over by the end of February, and certainly not soon enough for the airlines to schedule services for those that want to come. My reading of the current situation is that the country will remain closed to people who don’t already have MIQ vouchers until at least the second half of this year. It took at least two months for omicron to peak in the UK and Australia. I think it’s very unlikely the PM would allow new MIQ slots to be released or non-MIQ travel to resume until it is clear we’re past the peak and our hospital system has coped. The goldilocks moment for the omicron peak, if there ever could be such a thing, would be March, which would allow MIQ-free travel from June or July and avoid further over-loading the health system in winter.

However, given omicron has only just started spreading in the community and the official policy is to squash and extend the curve, it’s possible the omicron surge could keep going well into April. That would leave little time to open MIQ slots and/or schedule flights for self-isolation before the second half of this year.

By the way, anyone running or planning an event with more than 100 people in one place should not expect any relief or real certainty until well into the second half of this year, in my view. And that’s without another variant coming along.

Councils who have just spent millions upgrading their airports and building convention centres will be particularly frustrated, especially after two years of depressed events venue rents and parking ticket revenues over 2020 and 2021.

I welcome your questions for further inquiry below.

3. House prices are falling

The Real Estate Institute reported this week its national house price index fell 1.0% in December from January, and that sales volumes fell 29.4% in December from the same month a year ago. The index for Auckland City fell 3.1%, while Porirua and Lower Hutt fell 2.9% and 2.6% respectively.

Quote of the day:

“We are noting signs of deceleration in annual price growth compared to previous months. While the market remains confident, the impact of rising interest rates, tighter lending criteria and changes to investor taxation restrictions are starting to shift dynamics. In particular, the amendment to the Credit Contract and Consumer Finance Act (CCCFA) on 1 December 2021 — which requires stricter scrutiny of borrowers’ financial health — seems to have had an immediate effect. Feedback from several regions notes a falloff in buyer numbers — particularly first-time buyers — as a result.” REINZ CEO Jen Baird

Here’s the email I sent to paid subscribers on Wednesday:

ANZ’s economists then forecast a fall in house prices of as much as 7% in 2022 after it also increased its OCR forecast to 3.0% by early 2023, arguing the Reserve Bank needed to act more aggressively to control inflation expectations as annual CPI inflation hits 6.0% in the December quarter (data due Thursday). ANZ had previously forecast an OCR peak of 2.0% and house price falls of 3.0%.

Quote of the day:

“We’d still call this a soft landing, given the starting point. It would likely take a significant household income shock (forcing the sale of properties) for house prices to experience a very severe contraction. That said, anecdote regarding the impacts of the CCCFA have certainly made our ears prick up, and the 0.5% m/m contraction in December suggests this may be biting hard. It’s entirely possible this is the straw that breaks the housing market’s back, contributing to a sharper fall in prices than we assume.” ANZ’s economists.

4. Interest rates are rising

US inflation data showing an annual rate of 7.0% in December and the prospect for a 6.0% inflation rate in New Zealand in the December quarter (data due this Thursday) helped drive up wholesale interest rates in the last week.

The main focus is on the world’s biggest central bank, the US Federal Reserve, which is due to release its next interest rate decision on Thursday morning at 8am our time. No one is expecting it to hike this month, but everyone now expects the first of four 25 basis point hikes this year to start in March.

Chart of the week:

The red line shows the CME FedWatch market expectations for a 25 basis point rate hike in the fed funds rate from the current 0.0-0.25% at the Fed’s March 16 meeting.

What the Fed does is important because it sets the base for interest rates globally and the Fed’s decision since October to stop printing more money and putting up interest rates is challenging the valuations of stocks built up over more than a decade of falling interest rates. Rising interest rates would put downward pressure on asset prices, both for stocks and property. Some fear it could pop a bubble.

This week famed fund manager Jeremy Grantham wrote in a note to clients titled ‘Let the wild rumpus being’ that US stocks and other assets were in a ‘superbubble’ that was about to burst. Asset values could fall by US$35t he wrote. That’s ‘t’ for trillion.

“The most important and hardest to define quality of a late-stage bubble is in the touchy-feely characteristic of crazy investor behavior. But in the last two and a half years there can surely be no doubt that we have seen crazy investor behavior in spades – more even than in 2000 – especially in meme stocks and in EV-related stocks, in cryptocurrencies, and in NFTs. This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.

“What is new this time, and only comparable to Japan in the 1980s, is the extraordinary danger of adding several bubbles together, as we see today with three and a half major asset classes bubbling simultaneously for the first time in history. When pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history.” Jeremy Grantham in a note to investors on Thursday.

This time is different?

All of these warnings about higher interest rates and bubbles popping (quickly or slowly) are based on that idea that central banks and governments don’t intervene to protest the wealthiest.

However, that implies that this time is different and that central bank governors and finance ministers finally decide to let the chips fall where they may, even if it is severely damaging to the banks they regulate and the individuals that donate or vote the most to support their re-elections.

The masters of the universe running central banks and treasuries have intervened repeatedly to bail out banks and big companies and print money in the last 15 years, without any opposition from politicians and voters. What makes the current harbingers of doom think that anything is different this time?

I wrote more about this with reference to ANZ’s forecast for an OCR of 3.0% in an email to paid subscribers on Thursday:

5. Don’t worry. The re-leveraging cavalry is on its way

Despite warnings from the banks last year, the application of the CCCFA (Credit Contracts and Consumer Finance Act) from December 1 has unleashed a rash of reports of both equity-rich landlords and income-rich first home buyers being rejected for new mortgages by bank loan officers (and their managers) who are apparently freaked out that they’ll be held personally responsible for lending to someone who can’t afford a loan.

The CCCFA was designed to make life difficult for loan sharks trying to load up high-interest rate debt on car and personal loans. Instead, banks decided (or are saying) it was aimed at stopping them lending for investors to buy more rentals and first home buyers stretching to get onto the ladder.

Reports have abounded over the last months of applicants being asked to justify takeaways, holidays and clothes spending. Some have been asked of their plans for children. Centrix reported 20-35% more mortgage applications being denied in December than usual.

However, the timing of the introduction of the CCCFA also coincided with the tightening of LVR rules by the Reserve Bank and questions from bank boards themselves about whether they need to tighten credit standards to avoid risks of bad loans. The Government may be the most obvious party for the lending officer or mortgage broker to point their fingers of blame when the blame could be spread more widely.

Commerce Minister David Clark announced over the last week the Council of Financial Regulators (Treasury, the Reserve Bank, the Financial Markets Authority and the Commerce Commission) would bring forward their already-scheduled review of how the CCCFA was being implemented to address the complaints.

I asked Grant Robertson on Thursday if the issue could be resolved with regulatory tweaks than a rewrite of the legislation. He agreed that was possible.

“I think if we put all of those things together, get the right people in the room, we can resolve that. You wouldn't necessarily have to do a law change. It could be a regulatory change. I just think it's really important here that we get on the same page around what the purpose of the legislation was, and whether or not it's a question of interpretation and implementation, or if it's a question to do with the law itself.” Grant Robertson.

As I wrote in an email for subscribers on Monday, the pressure for rate hikes to stop and for the Government to enable a resumption to the leveraging up of asset prices, or at least stop them falling, will be intense by the end of the year.

It’s hard to believe that the Reserve Bank will keep punishing asset owners to change their inflation expectations because of a global supply shock and that the Government will allow house prices to fall more than 10% or so going into an election year.

A fun thing

Ka kite ano

Bernard

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

TLDR & TLDL: Here’s five things I think mattered in Aotearoa-NZ this year, as of December 21, 2021, which is known to Paul Kelly fans such as myself and The Kaka’s sub editor and photographer Lynn Grieveson as ‘Gravy Day’ (see the video below). Let’s hope the next nine days are incident free…

This is my selection of the events, trends, numbers and charts that I think summarise and clarify the year that was. This is for all the ‘free’ and paid subscribers to The Kaka to mark the end of the first three months since I turned the paywall on and invited subscribers to support my explanatory and accountability journalism about housing unaffordability, child poverty and climate change inaction.

This end-of-year wrap includes a podcast above of a final hoon of the year I recorded last Friday afternoon with two fellow Press Gallery ‘wonks’ on the political economy, Jenee Tibshraeny from Interest.co.nz and Stuff Political Editor Luke Malpass. NZ Herald reporter and columnist Thomas Coughlan is also on the roster for this Gallery ‘Hoon’ of wonks and I recorded this hoon with him the previous week. We’ll be doing this regularly during Parliamentary sitting weeks next year.

(I’d love those on the ‘free’ list to join our community at The Kaka. This ‘Gravy Day’ special of 50% for a year to become a paid subscriber with access to all the articles, full emails, webinar access and the ability to comment is open until 11:59 pm December 21 GMT (1pm Weds Dec 22, NZ Time. That will be it for the foreseeable future. Going, going…gone. I hope you all find my gratuitous use of GMT to give you a free more hours on Gravy Day useful)

1. Fortress NZ was virtually closed for another year…

…and it may just have worked to help us dodge another bullet.

Aotearoa-NZ had both the loosest covid restrictions in the world for the longest period in 2021, and the tightest restrictions for the longest period in 2021. Aside from a short scare around Valentine’s Day, we went blithely through 2021 until August 17 with the view we could be eliminate covid again with short, sharp lockdowns and there was no frantic hurry to vaccinate. We even begun to think we could open up more before we had vaccinated over 90% and stay covid-free, mask-free and meet in our thousands. For almost all of those first seven and a half months we had the least stringent covid restrictions in the world.

Then delta broke out, so we tried to eliminate again with a “short, sharp lockdown” we assumed would last just a couple of weeks. It turned out we underestimated both delta and our ability to track and trace the virus in a part of the population mired in the poverty of expensive and over-crowded housing.

Independent economist Rodney Jones, who had been helping model the outbreak for the Government, identified Sept 7 as the day our elimination strategy died, citing a decision not to do widespread surveillance testing in South Auckland in case it appeared racist. Essentially, stressed communities with low trust in Government and few connections to the health system could not be reached by the contact tracers and couldn’t strictly abide by the lockdown rules, allowing the virus to spread undetected and unquashed. Tragically, many remain unvaccinated because

Our housing poverty problem and the lack of social cohesion that created effectively eliminated our elimination strategy in the face of delta. And it turned out we didn’t really have a ‘Plan B’ to cope without a hard and long lockdown for Auckland. So that’s what we had to do.

I wrote this on the morning of August 17, hours before news of the lockdown broke, pointing out we had bet the farm on elimination, which risked long hard lockdowns and a virtually closed border well into 2022. I then wrote this on the morning of August 23, asking whether it was ‘Time to eliminate elimination?’. I got enormous blow-back, so wrote this in response on August 24: ‘Why elimination will have to end before most voters want it to’

Elimination was formally abandoned on Oct 4, as I reported from the news conference here. Auckland ended up spending 104 days in lockdown. It’s borders only opened seven days ago, four months after they were shut.

As it turned out, the shock of our failure to eliminate and the fear that delta would rage through the motu, helped unleash the most enormous and broadly successful vaccination programme that is now giving us a chance at ending the year with the lowest covid death rate in the developed world.

Ironically, the failure of elimination and the extended border closure served us well. That fear of a breakout, and the imposition of mask use and vaccination mandates that the Government would not have proposed in the elimination era, has given us a fighting chance to keep that death rate low. All was not lost.*

Here’s the two charts that tell our covid story for 2021. Loose restrictions, then very tight restrictions, and the lowest death rate in the developed world.*

2. Our economy grew strongly and unemployment fell…

…but inflation rose too, triggering early Reserve Bank rate hikes

In tune with what we saw in the second half of 2020, the economy kept growing strongly through the first half of 2021, thanks to faster-than-expected growth in consumer spending through the summer and a very resilient construction sector. The still raging housing market helped fire up the economy’s animal spirits too.

Happily and somewhat surprisingly, the collapse of the international tourism and overseas student industries was more than offset by astonishingly strong exports of commodities. Our commodity export prices rose 23% in NZ dollar terms to fresh record highs and they were shipped successfully to overseas markets in record volumes, despite all the global logistics grief.

This is was all great news for GDP, which grew on average by 4.9% annually in the year to the end of September, even after a 3.7% fall in the September quarter.

But all that growth also came with an inflation rate that rose to an annual rate of 5.9%, which was the highest annual rate in 35 years*. Although two thirds of the inflation was generated by overseas prices and asset prices (fuel, rents and house building costs), all of which the Reserve Bank can’t and shouldn’t be trying to control with interest rate increases.

3. The Reserve Bank tightened earlier than the rest…

…and is likely to have to stop hiking rates next year

The Reserve Bank reacted to the higher inflation by hiking the Official Cash Rate in two 25 basis point chunks in October and November respectively, increasing it from 0.25% to 0.75%. It also forecast the OCR would need to rise to almost 2.6% by the end of 2023 to get inflation back to around 2% and keep it there.

Our central bank was either more prescient than the rest of the world’s developed world central banks* or was too trigger happy. The US Federal Reserve, the Reserve Bank of Australia and the European Central Bank all kept their powder dry and held their rates at zero or close to zero throughout this year. They’re all still printing money too, although the Fed signalled last week it would stop doing that by March and probably start hiking midway through next year. The RBNZ stopped printing in July.

In my view, it may have jumped too early. It hiked a day after our elimination strategy ended and while our biggest city was still in a hard lockdown. It also hiked before it was clear the inflation spike had transmogrified into a wage inflation spike and before it was clear the global pandemic was over* The RBA has said it wants to see the whites of the eyes of a wage inflation spike over 3% before it hikes interest rates. Currently, it expects to leave them on hold all of next year, before hikes in 2023 probably.

Meanwhile, our wage inflation is barely 2.4% and we have continued to grow labour force participation through covid, unlike in Australia or the even more dire situation in the United States. This means our labour market has a bit more flex than some might think, even though migration has stopped. This chart shows our grey line well above the yellow line of US participation.

One major reason for that is our superannuitants, who don’t have to give up their pensions when hit retirement age and keep working, keep continuing to work more than we (and maybe they) expected. That’s good news, but also means wage inflation is not so likely to take off, in my view. (Thanks to ANZ’s economists for the chart from this great note)

My view, not shared by bank or other economists, is that omicron and fiscal tightenings in the Northern Hemisphere will slow the global economic rebound, adding to the transitory nature of a lot of the inflation. In particular, the assumption that wage inflation will inevitably come is yet to be proven. Real wage deflation and sharply higher market interest rates are doing their job of slowing things down too.

4. The housing market stayed hotter for longer…

…but may finally be cooling because bankers have new boxes to tick

Most economists thought 2021 would be the year the housing market cooled down after a 25% rise in 2020. Instead, they rose another 28.3%, despite a raft of Government and Reserve Bank moves to take out some steam, including:

* banning landlords from claiming interest as a taxable expense on already-existing homes (but not for new homes);

* doubling the ‘bright-line’ test for calculating income tax on trading gains from house sales to 10 years from five years;

* forcing councils and neighbours to accept the building of up to three homes up to three storeys each on a regular section without the need for a resource consent;

* the Reserve Bank cutting its allowance or ‘speed limit’ for high loan to value ratio loans (of over 80% of a home’s value);

* the Reserve Bank talking about introducing a limit on debt to income multiples next year, after formalising an interest rate affordability threshold (possibly around 7%) that banks already use internally; and,

* the Reserve Bank forecasting a rise in short term interest rates of over 200 basis points to 2.6% by late 2023, which increased wholesale interest rates, and in turn lifted the cheapest fixed mortgage rates from 2.2% to 3.5%.

Just imagine what would have happened without those measures.

However, it may be something else entirely that has finally put a stop to the rampant inflation, in the short term at least. The new Credit Contracts and Consumer Credit Act that came into force on Dec 1 has forced the banks to do a lot more checking about the affordability of loans, including asking for details of spending plans and assuming that any substitutable spending on eating out, drinking in, travelling away and shoes can’t be substituted for interest payments.

The banks may well have used the CCCFA as the excuse for saying no to loans they have to reject to comply with the RBNZ’s new tighter LVR rules and the coming DTI rules, but it has certainly stopped a lot of the ‘easy’ money dead.

Brokers, agents and a few bank economists are saying this will finally cool things down, pointing to a growing disconnect between sales volumes and prices. We’ll see. Lots of people thought similar things a year ago.

5. The poor struggled while home owners got much richer…

…which will further erode social cohesion and worsen inequality

Last year was bad enough, but the Covid ‘Rekovery’ extended into dangerous new territory this year as home owners extended their post-covid wealth gains to nearly $900b, while poorer families were forced to apply for special needs grants and got an extra $200m in debt to MSD.

The Government refused to increase incomes for beneficiaries enough to deal with past underpayments and didn’t invest enough in new housing to deal with punishing housing costs. See more on this issue here, here and here.

Have a great summer. I’ll be back from Jan 17.

Ka Kite ano

Bernard

PS: As a treat, here are the five most popular emails on The Kākā for 2021, which have all been opened up for everyone to read in full and share to their heart’s content.

* ‘Please crash this housing market’

* Luxon’s perfectly rational investing choices

* An intergenerational Wellbeing Crime Scene

* PM ties herself in housing affordability knot

* ‘Our Kounterproductive Kovid ReKovery’

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 unveiled a much healthier financial outlook this week, but chose to use almost all of a $54.5b jump in expected tax revenues and most of an unspent pile of $50b in cash to lower debt over the next four years.

It chose to lower public debt and have slightly lower interest rates than would otherwise be the case, instead of investing much more heavily in infrastructure and social spending to improve housing affordability, reduce child poverty and address climate change. Again, it chose lower interest rates and holding up inflated asset prices now, over paying it forward to deal with housing and climate emergencies.

I asked Grant Robertson why the Government didn’t use the extra fiscal headroom to increase capital and social spending to improve wellbeing in areas such as housing affordability and child poverty by much more.

He said the Government needed to ‘strike a balance’ between extra investment and reducing the debt expanded during Covid. This section from his Budget Policy Statement summarises his reasoning:

“Our fiscal strategy continues to take a balanced approach to supporting current and future generations by managing debt prudently and reducing the deficit caused by COVID-19, while growing the economy sustainably and investing in important public services like health and education.” Robertson’s Budget Policy Statement.

Essentially, the Government is choosing lower debt now over higher wellbeing for future generations, let alone filling the infrastructure deficit estimated at up to $75b created over the last 30 years. Cutting debt instead of investing would make sense if our debt was precariously high and we risked being bankrupted by it, or being cut off by international markets, but that is nowhere near the case, as Robertson himself pointed out this week with this chart comparing our debt with our peers with similar credit ratings.

Lower interest rates bolster asset prices now

So why would any Government with a longer term view than winning the next election and one that professed to run ‘Wellbeing Budgets’ choose debt reduction over improving future wellbeing? Especially when the need is so great, both to fix the most expensive housing market in the world relative to income and rents, but also to take actions to address our housing and climate emergencies.

The first answer is that Labour has no choice under the law. The Public Finance Act (1989) effectively forces any Government to run surpluses and repay debt as soon as it gets the chance after any increase caused by a crisis. (I explain in more detail below the paywall fold why the PFA was written that way and followed ever since, and why it has become the key tool for intergenerational wealth transfer for 30 years.)

The second answer is that this is exactly what the Labour Government wants to do, and what the bulk of median home-owning voters who put it in power want it to do. In their heart of hearts, they both know that higher Government debt means slightly higher interest rates, which in turn puts downward pressure on inflated asset prices. Public debt reduction is so ingrained as an axiom of our political and economic life that it’s never questioned. Not investing in the future to keep interest rates low, effectively pulls forward wealth from future generations to inflate asset values now.

Somewhat strangely, given it’s 30-35 years since public debt was a national threat, the ‘Overton window’ of mainstream political debate has excluded using the Crown’s balance sheet to reverse this intergenerational wealth transfer, or even to stop it.

The debate is quickly framed and shut down with this paraphrased argument:

‘Big spending Labour (or National) can’t be trusted to run up higher debt because future taxpayers will just have to pay it back through higher taxes, and it will just overheat the economy and generate inflation, We’re doing our grandkids a favour by keeping debt low, and it gives us protection if we have another earthquake or pandemic.’ My paraphrased summary of the low debt mantra.

But don’t take my word for it, here’s what new self-professed-centrist Opposition Leader Christopher Luxon and his new finance spokesperson Simon Bridges said on the issue of spending and debt and inflation shortly after the Government released the Half Yearly Economic and Fiscal Update (HYEFU ) and BPS:

“Why is she (PM Jacinda Ardern) continuing to spend at record levels, despite inflation running at a 30-year high with prices growing faster than wages, making everyday hard-working Kiwis poorer?” Christopher Luxon asking PM Jacinda Ardern a question in Parliament.

“Does he accept taking core Crown expenses to $128 billion next year—68 percent more than when he first became finance Minister—in an already hot economy will raise inflation and really hurt Kiwis?” Simon Bridges asking Grant Robertson a question in Parliament.

‘Don’t borrow to invest. The kids won’t thank us’

Even Robertson argued in the BPS future generations would be better off if he kept the debt low.

“Net core Crown debt is forecast to be 30.2 per cent of GDP in 2025/26. This is significantly lower than forecast for most advanced economies and will reduce the intergenerational inequity of high public debt.” Robertson.

(See below for more of my analysis of how a couple of generations of voters, their politicians and their bureaucrats created budget processes and tools to engineer this ongoing transfer of wealth and wellbeing from future generations to today’s asset owners.)

(And remember, here’s this special last-time-ever offer from me to you and other existing ‘free’ subscribers who’ve been putting it off, subscribe fully now for 50% off for a year to join the The Kākā discussion community, to get full access to all my daily emails and articles, and to get all my daily podcasts (like the one above paid subscribers can listen to).

(This ‘Gravy Day’ offer is open until the end of Dec 21, 2021, to celebrate the first three months since we launched The Kākā on Sept 21. It’s the last special offer I’ll make for the foreseeable future. Subscribe to support my type of accountability and explanatory journalism about housing affordability, child poverty and climate change. You’ll also be able to see what’s in the full daily email, along with listen to my podcast above)

Intergenerational inequity and how it was created

Wealth transfers can happen two ways: between different groups of people in the same time period, or between groups of people now and groups of people in the near or distant future.

We all understand intuitively how we can make our incomes and wealth feel better now by not investing to fix wear and tear in the past and by not investing for future benefits that we won’t be able to experience. It’s why businesses run three different measures of their success so they know when today’s managers are essentially stealing from the future, or investing for the future. Those accounts are:

* profit and loss accounts to understand performance in any one period;

* cash accounts to understand what cash flowed in and out during the period; and,

* balance sheets to compare snapshots of stocks of assets and liabilities at the beginning and end of the period.

For example, a manager could make the cash accounts look good and make shareholders feel better in the short term by not using surplus cash to invest in repairing wear and tear on the businesses assets, or to not invest to improve future production, and instead paying out a higher cash dividend. But this can’t (or shouldn’t) be hidden because this action to consume capital for the short term gain of shareholders would be reflected in a reduction in the stock of assets there to produce income in the longer run, and therefore generate a reduction in shareholder equity.

That decision to take a bigger dividend instead of investing would show up in the two other accounts because the now-tattier and more tired assets would be revalued lower in the balance sheet. To reflect that, there would be a revaluation loss in the P&L.

There should be nowhere to hide in these accounts and it’s one of the reasons why the Government moved to a similar way of reporting its finances after the passing of the Public Finance Act (1989). There are clear measures of a type of P&L that shows a budget deficit or surplus in place of a profit. Then there are cash accounts and a balance sheet, which should show the value of the Crown’s assets and liabilities.

It should make it difficult to structurally under-invest and ‘steal’ from the future, but the way assets and liabilities are measured across Government independently of the rest of rest of society makes that hard to spot. And this is where taking a business-like approach to measuring performance breaks down.

Treasury doesn’t measure the collective value of Aotearoa-NZ’s air or water, nor the collective future pain and grief from mental health issues, a diabetes crisis, deaths from air pollution and the lost productivity from kids living in poverty, bouncing from one mouldy and cold rental home to the next and never settling in at school. It can measure the value of the Government’s assets, such as Kāinga Ora’s land and houses, as well as plant and equipment, but it doesn’t measure the future liabilities from all those kids growing up in poverty, such as higher benefit costs, higher justice and corrections costs, higher health costs and lower taxes because of lower productivity and PAYE paid.

So it made sense for Governments since 1989 to not to borrow to invest in new public housing, and to let these houses run down. Kāinga Ora, then called Housing NZ, even had to pay a dividend to the crown. That meant ‘profits’ were recorded in the accounts, but not the increased long-term liabilities because of higher child poverty.

Government’s land revalued up by $12b

For example, the value of Government land rose $12b to $71b between the May Budget and the HYEFU (page 121) this week, largely due to Kāinga Ora’s land being revalued up, even though housing quality often remains dire and there’s clearly a massive shortage. But there’s no measure in the accounts of the despair and the stress suffered by renters and frustrated first home buyers now locked out of the market, or the number of quality-adjusted-life-years lost because the homes were mouldy and many kids living in poverty are growing up with diabetes and mental health issues.

Treasury, the Labour Government and some other parts of Government have started to talk more in recent years about trying to measure wellbeing and manage the Crown’s finances to improve it. The PFA was even amended to sprinkle the word ‘wellbeing’ throughout. Read this week’s BPS and it would seem Treasury and the Government are deadly serious about it. For example, here’s the first three paragraphs of the BPS (bolding mine):

The Labour Government is committed to achieving its policy goals using a wellbeing approach. This aims to improve New Zealanders’ living standards by taking an intergenerational view to tackling long-term challenges. It also means looking beyond traditional measures of success, such as gross domestic product (GDP), and towards broader indicators of wellbeing.

The Treasury’s Living Standards Framework recognises that human, environmental, social, and physical and financial capital needs to be developed and sustained in order to achieve wellbeing. A complementary framework is being developed to sit alongside, He Ara Waiora, which draws on a te ao Māori perspective. Each framework provides a distinct contribution to understanding New Zealand’s wellbeing outlook.

These frameworks invite us to consider the distributional impacts of policies on different groups and the environment. This is achieved by working in the spirit of kotahitanga (unity) with those most affected by policy changes, and by considering the intergenerational impacts of the choices we make to support our tiakitanga (stewardship) and mana whanake (intergenerational prosperity).

Yeah…nah…

It’s just performative

This ‘wellbeing’ approach has been honoured more in the breach than in the observance, although the lack of clarity or real information has made accountability impossible in many areas, especially on the environment and housing.

As the Parliamentary Commissioner for the Environment, Simon Upton, reported this week, few signs could be found in either the Crown’s accounts or the actions of Government that they had changed their decisions because of that ‘wellbeing’ approach or the ‘Livings Standards Framework’ that is talked about so much, and which the PM has talked up so much overseas to great acclaim. Here’s Upton in the report (bolding mine):

“The Treasury’s reasons for recommending against the environmental proposals scrutinised as part of this review in the context of the first three wellbeing budgets were almost invariably drawn from a traditional menu of arguments honed to rein in budgetary creep. There are no signs to date that spending proposals are being knocked back on the basis of their potentially negative impacts on current or future wellbeing.” Simon Upton

This failure to analyse funding decisions or to justify different investment, borrowing and spending choices is writ large in just about every variable in this week’s Half Yearly Economic and Fiscal Update (HYEFU) and BPS.

Inflation’s dividends captured by asset owners

Here’s a quick summary of the key details in this week’s reports:

* faster than expected economic growth and higher inflation means forecast GST, PAYE and corporate tax revenues for the next four years are $48.6b higher than the May forecasts;

* that’s partly because of fiscal drag (higher incomes drags taxpayers up into higher tax brackets) and partly because of higher interest rate forecasts, which lift term deposit withholding taxes;

* higher carbon credit prices mean Emissions Trading Scheme revenues are $5.4b higher than expected in March and total revenue increases from the May budget are $54.5b;

* new operational spending worth $12.8b over four years was added, largely from a one-off $6b sum to create the new Health NZ and the Māori Health Authority; and,

* a new Climate Emergency Response Fund (CERF) worth $4.5b, of which only $3.6b is allocated over the four years;

* the Budget is forecast to be in surplus at least two years earlier than expected and the combined deficits or losses are $18.5b better than expected over the next four year; and,

* all that led to a decision to borrow $41b less over the next four years than was signalled in May; and,

* that meant net crown debt will peak eight percentage points lower than expected at 40.1% of GDP, and fall back to 30.2% within four years.

So normal service is resumed. The net debt track is back into the 20-30% of debt band that Treasury has preferred for 20 years or so and the Govt will be back in surplus next financial year 2022/23. The Govt is complying fully with the PFA’s direction to always post surpluses and get debt down once a crisis is over.

In essence, an economic rebound and an inflation ‘dividend’ landed in the government’s lap and it had a choice about what to do with it. It could choose to keep borrowing as much as it had previously planned and use that ‘bonus’ to invest more in housing, climate and welfare measures, or it could use the spare money to borrow less.

Govt chose to borrow less and hand back spare cash

Here’s the chart that shows firstly the improvement in the ‘profit’ line, described here as the Operating Balance before extraordinary gains and losses (OBEGAL):

And here’s the chart showing what that means for net debt, and how much the curve has been allowed to drop by not investing in future generations. The grey line was the May forecast and the red line is this week’s forecast. (Ignore the light pink line that includes low interest rate loans to banks by the Reserve Bank of freshly printed money. That will be repaid).

Just to ensure you understand why Robertson and the Treasury is so focused on debt reduction, here’s the key part of their ‘Fiscal Strategy’ section of the BPS (bolding mine):

“Our fiscal strategy continues to take a balanced approach to supporting current and future generations by managing debt prudently and reducing the deficit caused by COVID-19, while growing the economy sustainably and investing in important public services like health and education. Given the nature of the COVID-19 global economic shock and the need to support the economy, debt remains at prudent levels throughout the forecast period, and there remains space in the Government’s fiscal strategy to respond to future shocks.” Robertson in the BPS.

There’s the reasoning in bold: we want low debt so we can borrow again if there’s another shock. Essentially, we’ve got a rainy day fund for the next rainy day. But what about all the kids living out in the rain now? Or that the rain is crashing down now because of climate change? Why reduce debt just in case there is a future emergency, when there are two emergencies right in everyone’s faces right now?

But wait, there’s more

One of the most extraordinary decisions revealed this week was the Govt’s quiet move to run down a massive cash pile it built up by over-borrowing during Covid. Yes, you read that right. Treasury issued mountains of new bonds during Covid, in part because the Reserve Bank was hoovering them up in the secondary markets with freshly printed money. In effect, the Government was receiving cash indirectly from the Reserve Bank and then putting it in a cheque account with the Reserve Bank, known as a Crown Settlement Account (CSA).

Treasury wanted to ensure it had plenty of cash on hand, just in case Covid got really, really bad and the financial markets shut down. Think of it like when you withdrew loads of cash from an ATM the day before the lockdown and never needed to use it because all the EFTPOS machines kept working throughout. That’s what happened and here’s the account balance chart:

Treasury’s Debt Management Office announced this week it had decided to run down that cash surplus to a longer term level of around $15b, which is just under 5% of GDP, and about in line with where other countries have their Govt cash reserves.

DMO will do that by issuing less debt than it normally would over the next couple of years. In effect, the Goverment already had as much as $50b in cash and other liquid assets in its account. It could have invested in infrastructure and allowed the account to have gone back to normal levels of about $5b and not even had to borrow more. Instead, it’s using the extra tax revenue from inflation and economic growth to reduce the borrowing programme by about $41b.

That’s the scale of the opportunity missed. New spending on houses, public transport and hospitals that could start reversing the intergenerational wealth transfer worth at least $1t over the last 20 years.

There was $40b in cash just sitting there and Cabinet chose not to spend it.

Just think now about Treasury’s advice last Christmas (which Cabinet accepted) not to spend an extra $1b or so a year through an immediate $50 increase for beneficiaries, as Social Development Minister Carmel Sepuloni had wanted to do. See more on that from my Dec 8 article.

So I asked Robertson why the government had chosen not to invest more than the extra $4b in capital spending allocated over four years as signalled this week, of which only $2.2b is actually scheduled to be spent inside the forecast period.

Here’s his answer:

“It's a balance. We have continued to increase our investment over time in infrastructure but as I've tried to do throughout my time as Minister of Finance, it is a balance around what we also leave in terms of net crown debt. I'm confident that the balance is right, but we always keep looking at it. And as I say there are some large infrastructure projects coming down the line, which we will pay attention to in due course.” Grant Robertson.

Balancing asset owning-voters vs non-voting renters

Robertson also talked up the wellbeing approach’s move to create Child Poverty Reduction targets, which are included in the list of amendments to the PFA (1989).

This is where the rubber hits the road for the wellbeing approach: writing hard targets into law to give some steel and accountability to the words.

So if wellbeing mattered, why hasn’t the Govt set housing affordability targets?

His answer was no:

“We haven't given specific consideration to do that. There are a number of objectives in the government's housing program that we can be assessed against. And they are on dashboards that are made available on a regular basis, but we haven't given consideration to a legislative change.” Grant Robertson.

For the record, there are no housing affordability measures anywhere on the MBIE, HUD or MSD websites that the govt has committed to. See more on that in my article this week on the PM refusing to set affordability targets.

Also for the record, the Govt’s surprisingly good forecasts and decision to reduce borrowing by $41b was welcomed by bond investors, who pushed the five year Government bond yield down by 15 basis points to 2.17% this week to celebrate.

That means there’s a minor chance mortgage rates might fall a bit, or not rise by a bit. That will help keep asset prices up. Yet again, value is pulled forward to asset values now, and costs are pushed off into the future, where someone else can deal with them.

So how could things be done differently?

The essence of the problem is the PFA’s obsession borne of Robert Muldoon’s borrowing spree in the 1970s and early 1980s in foreign currencies with variable interest rates. Given our fixed exchange rate, those debts were bombs that could go off at any moment.

That is not the case any more. Our Government borrows in NZ dollar with fixed interest rate securities that transfer the interest rate and exchange rate risk to foreign investors, or are simply held by local investors. The PFA is a relic of an age when bond vigilantes were kings. Now bond investors are desperate for more bonds. From any one. They are happy to lend money to the German Government for minus 0.35% when German inflation is over 6%.

The other tool that needs to change is the Treasury’s use of punishingly high discount rates for cost benefit analysis. The current 5% discount rate used for most projects discounts away the costs and benefits to nothing within a few years, meaning the interests of future generations are ignored.

The Stern report into climate change used a 1.4% discount rate, as Simon Upton pointed out this week in recommending the Government look to use lower discount rates. Watch out tomorrow for more from me on that in my Spinoff podcast.

Here’s our use of discount rates compared with others, courtesy of the PCE.

Chart of the day

Just to show how low our debt is. Global public debt is nearly 100% of GDP. Ours is 40% and falling. If bond investors did get grumpy, we’d be the last in the queue to get shot.

A fun thing

Frank PSA on Twitter: Year in review 2021 edition

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: The final two weeks of the Parliamentary year are always pressured, but this year’s has a feel all of its own, thanks to delta, an Opposition leadership change and the bipartisan reaction to the housing crisis.

I spoke for just over half an hour on Friday afternoon with NZ Herald political and economic columnist and reporter Thomas Coughlan about these last two sitting weeks of the year. An air of exhaustion pervades the Parliamentary and Beehive complex. Politicians, advisers and reporters alike are limping across the line.

But last week’s penultimate sitting week of the year was a big one for news, and this one will be no different.

We spoke about:

* Christopher Luxon’s first week in Parliament up against Jacinda Ardern;

* the changes made to Townhouse Nation through the committee stages; and,

* we look ahead to Wednesday’s HYEFU and how Grant Robertson might tweak his use of the Public Finance Act to finance next year’s Climate Budget 2022 (See more in Thomas’ article in Saturday’s NZ Herald).

I’ll be doing these ‘hoons’ weekly when Parliament sits from now on with a rotating cast of Parliamentary Press Gallery ‘wonks’, including Thomas Coughlan, Stuff Political Editor Luke Malpass and Interest.co.nz’s political correspondent Jenee Tibshraeny. When I say ‘wonk’, I’m talking about our shared interest in covering economic, macroeconomic, financial and housing policies.

I’ve left this open for all subscribers, both paid and free, as a taster, which means you can all listen to this week’s podcast. They’ll be behind the paywall in future, starting with our final one of the year this Friday. The first ones for 2022 will be Feb 10 and Feb 20. The link to Parliament’s calendar for 2022 is here and it’s down below in image form.

Here’s next year’s calendar to give you an idea of when we’ll do them next year. The green shaded weeks are Parliamentary sitting weeks.

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: In this week’s ‘hoon’ webinar for subscribers recorded on Friday night, we took a lap around the big events of the year and focused on:

* How delta ended our elimination strategy and how the summer and next year may take longer to open up than we all expect;

* What’s happening to the ‘Townhouse Nation’ accord to soften the NIMBY backlash;

* How investors now buy the dip and hold on for dear life at any sign of a slump in asset prices; and,

* Why we should all keep an eye on Taiwan and Ukraine as China and Russia flex their military muscles against a divided and weakened US and EU.

(This is the weekly ‘sampler’ email and podcast for both free and paid subscribers that includes the ‘Weekly Hoon’ podcast above with Peter Bale and me that was recorded on Friday night in a webinar for paid subscribers. The links to this week’s articles go to the paywalled articles I wrote this week. But I’d love the free subscribers listening to the podcast, and reading the detail and analysis below to subscribe fully to join our community and get all of my daily emails and podcasts. It also makes my version of accountability, explanatory and solutions journalism about affordable housing, climate change policies and child poverty financially viable.)

The five things that mattered this week

1. Townhouse Nation was lowered a bit

As previewed in my piece on the day of Christopher Luxon’s election as National Party leader to replace Judith Collins, the select committee considering the bill to implement the Labour-National ‘Townhouse Nation’ accord came back with changes watering down the deal Collins agreed to with Labour. A bit.

Those changes made through the second reading this week and tweaks put through in supplementary order papers included a lowering of the maximum height of three-storey buildings to 4m from 6m. The National-Labour majority on the committee wanted to lower it even more, but were unsure if it would reduce the likely increase in housing supply. It turned out that idea would cut the extra supply by a third.

But the select committee also responded to allow developers to create more space at the rear of properties and less at the front, which may offset the housing supply reduction implied by lower height somewhat. It wasn’t clear whether the changes would reduce the expected increase of supply, which was estimated in a PwC/Sense Partners report on the Medium Density Residential Standards (MDRS) at over 100,000 in Auckland over the next 20 years and over 200,000 nationally.

Modelling released by the Government this week found just 40,609 homes would be added in the next five years without the MDRS change. The original bill with a 6m limit would have increased this to 79,776 homes (an extra 37,477), but the lowering to 4m is estimated to reduce that improvement by 1,690 homes. Another proposal to reduce it to 3m would cut 12,124 from the expected increase.

So those opposed to the bill got some of what they wanted, but not an awful lot.

Here’s my piece from Monday on a survey showing 42% of those surveyed wanted the Government to lower house prices somehow.

2. A world of buying the dip and holding on for dear life

The big news in global markets and the economy this week was the formal default of China’s largest property developer, Evergrande, which has over US$300b worth of debt. Usually, that would trigger carnage in global markets, but the Chinese Government was very careful to arrange a controlled implosion where it knocked the heads together of the state-owned banks, the state-owned fund managers and the state-controlled developers to agree a series of write offs and move on in a way that doesn’t spook local savers or international investors too much.

Also, US CPI inflation rose to the highest annual rate since 1982 (6.8%), reinforcing worries about the US Federal Reserve being likely to signal next week a faster reduction in money printing and higher interest rates. Both should weaken stocks in normal situations.

Instead, the S&P 500 rallied again on Saturday morning our time to yet another fresh record high. The index had its best week since February.

This is all about ‘buying the dip’ and expecting that, whatever happens, central banks and Governments will keep protecting and boosting asset prices. The assumption is there’s always a bailout and the dumbest thing to do is give up on the rally-to-infinity…

Here’s a longer piece I wrote this week about how that’s expressed in Aotearoa-NZ.

3. Last Christmas the Govt chose not to help the poorest

In this piece I published on Wednesday, I covered the CPAG review of the Government’s progress in implementing the Feb 2019 recommendations of the Welfare Experts Advisory Group. It showed how the Public Finance Act instincts to always reduce debt meant the Government chose slightly lower interest rates over reducing child poverty.

4. When playing the man was the wrong thing to do

This week Christopher Luxon chose his front bench, including Simon Bridges as Finance spokesman. Bridges agreed in a Youtube chat shortly before National’s leadership vote that he wouldn’t reappoint Adrian Orr to a second term as Reserve Bank Governor. He walked that position back a bit after the naming of National’s new shadow lineup, but here’s what I wrote to challenge Bridges’ view on Tuesday.

5. The MSC Vaiga III diverted to Northland from Auckland

You probably won’t have heard about this, but it’s an important symptom of the way the world’s supply chains have clogged and burst under the stress of Covid. The MSC Vaiga III is a container ship that arrived at the Marsden Point Terminal in Northland on Monday. It should have stopped as scheduled at the Port of Auckland to unload about 1,500 containers filled with all sorts of mixed consignments of goods from ports around Asia.

Instead it chose to divert to unload the containers at Whangarei because of the Port of Auckland was ‘filled up’. That means those 1,500 containers will have to be trucked back down to Auckland over the next couple of weeks at the importers’ (extra) expense of up to $2,000 per container on the same road as thousands of cars and trucks venture out of Auckland for the first time in four months when the borders open on Wednesday.

I did this week’s When The Facts Change podcast on the ‘shipmageddon’ crisis that is causing all sorts of global logistics grief and is contributing to a surge of inflation.

Just like the rest of the world, Aotearoa-NZ’s ports are clogged with containers, trucks, ships and bigger shipping bills. But it’s not all because of Covid worker shortages and lockdowns. I took a deeper look at how the many weird economic effects of Covid are playing out through the world’s logistics chains, all the way from frantic factories to empty shelves.

It turns out most of the problems stem from changes in what we’re doing on our couches at home and because logistics planners are pivoting from a just-in-time approach to just-in-case. The best example played out this year in Adele’s delayed launch of her new album, in part because her record company needed an extra six months to book most of the world’s pressing plants to cater for locked-down fans’ new-found love of vinyl records and turntables. Indie bands had to get in the queue behind Adele and the new pressings for Fleetwood Mac’s Rumours and Queens’ Greatest Hits. 

I spoke to Chris Edwards, the President of the Custom Brokers and Freight Forwarders Federation, and Professor Tava Olsen, the director for the centre of supply chain management at the University of Auckland’s Business School, about how much of the global logistics shock will last. We also talk about how it might shake up our ports system and create a new Government-backed coastal shipping service.

Chart of the week

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: Christopher Luxon was elected National leader and almost immediately watered down Judith Collins’ ‘Townhouse Nation’ accord with Labour by lowering the maximum building height in the accord’s Medium Density Resident Standards from 6m to 5m. Then he called for Auckland to go straight to green.

Elsewhere, global stock markets were extremely volatile because of fears of omicron and after US Federal Reserve Chairman Jerome Powell said inflation was more entrenched than originally expected and monetary policy would need tightening sooner than expected.

(This is the weekly ‘sampler’ email and podcast for both free and paid subscribers that includes the ‘Weekly Hoon’ podcast above with Peter Bale and me that was recorded last night in a webinar for paid subscribers. The links to this week’s articles go to the paywalled versions. But I’d love the free subscribers reading the detail and analysis below to subscribe fully to join our community and see all my reporting and analysis. It also makes my version of accountability, explanatory and solutions journalism about affordable housing, climate change policies and child poverty financially viable)

The five things that mattered this week

1. National’s caucus elected Christopher Luxon as leader

Simon Bridges withdrew from the National caucus’ leadership contest early on Tuesday morning, clearing the way for an uncontested vote for former Air NZ CEO Christopher Luxon to become leader after just over a year in Parliament and just two speeches in the general debate. This was the fastest rise of any leader of a major political party in New Zealand.

He was immediately questioned about his Christian beliefs and views on social issues such as abortion and conversion practices, along with his knowledge of his own wealth. His seven homes made more tax-free capital gains in 11 months this year than he made in his best year as Air NZ CEO. Luxon said he didn’t know that, but he didn’t want house prices to fall much and saw income growth as the way to improve housing affordability.

But he also signalled in his first news conference that National would support amendments to the ‘Townhouse Nation’ accord signed by his predecessor Judith Collins, which is designed to speed up and increase the supply of new houses.

Luxon talked in his first speech about increasing productivity and the ‘tide’ of economic growth, which he saw lifting all boats. He didn’t offer any policies to do that, given the current policies pursued by both parties have strangled productivity and widened inequality over the last 20 years, especially for renters.

2. ‘Townhouse Nation’ will be one metre shorter

The select committee considering submissions on the ‘Townhouse Nation’ accord reported back to Parliament for the bill’s second reading with changes to address NIMBY complaints that forcing councils to accept three three-storey dwellings on a single section would rob neighbours of sunlight and create slums.

The committee recommended cutting height standard for the three-storey homes to 5m from 6m and said they would have cut it more, but were worried it might reduce housing supply. They also changed the ‘setback’ provision at the front of properties to 1.5m from 2.5m, which is expected to allow more backyard sunlight for neighbours. But it may also give developers more freedom to improve the liveability of homes.

3. The Fed pulled out of ‘Team Transitory’ on inflation

US Federal Reserve Chairman Jerome Powell signalled the Fed would speed up its ‘tapering’ of money printing and could start hiking interest rates earlier because it appeared inflation was becoming more embedded.

He said the ‘transitory’ word to describe inflation should be retired. Stock prices slumped as much as 2% initially on fears the Fed would withdraw the money-printing support under asset prices, but rebounded the next day after the European Central Bank said it would keep printing and still saw inflation as ‘transitory.

Bond investors don’t believe inflation is out of control and are beginning to worry the Fed is tightening too soon and too much, which would slow economic growth and drive down inflation. German bond investors are happy with a minus 6% real yield at the moment.

4. Auckland raced through its first red light day

Aucklanders ventured out to cafes, bars and restaurants able to host less than 100 guests yesterday on the first day of the ‘traffic light’ system. But hospitality industry leaders say the 100 limit in ‘red’ is not financially sustainable for long. They hope the Government can move Auckland to orange when it makes its next decision on the Monday after next.

Meanwhile, Covid case numbers eased back towards 100 a day and the number in hospital has remained reassuringly under 100. Deputy PM Grant Robertson told me at the 1pm presser on Friday a move to orange for was possible in Cabinet’s Dec 13 decision.

But it was all too late for the summer’s flagship music festival. Rhythm and Vines announced on Thursday night it had postponed its three-day event just outside Gisborne until Easter next year. Gisborne is in the ‘red’ traffic light and is unlikely to go to orange any time soon because the Tairāwhiti DHB is still only 76% double vaccinated and other 5,018 doses are needed to get to 90%.

5. Omicron spread like wildfire in South Africa

Omicron multiplied with an R rate of over 6 in South Africa this week, unnerving those who were initially less worried it will spark fresh waves of hospitalisations and deaths around the world. (Guardian)

It’s too early to say yet whether it is more lethal than delta, but it’s certainly more infectious and the early signs are that is able to get past the defences of those who have previously had Covid.

‘A study published yesterday as a preprint suggests Omicron is causing more infections in people who have recovered from an earlier bout with the virus, one sign that the new variant is able to escape at least some of the immune system’s defenses. “This does not bode well for vaccine-induced immunity,” says virologist Florian Krammer at the Icahn School of Medicine at Mount Sinai.’ Science.org

Quotes of the week

‘He has no idea’

"I have no idea. I haven't thought about the number, or thought about that at all. What I have to say to you is….Yeah, I get where you're coming from...You can attack me for being successful. I can't defend that.” Christopher Luxon when asked in an interview how much he thought his seven homes were worth.

‘Time to tighten’

“It's probably a good time to retire that word (transitory) and try to explain more clearly what we mean” when talking about inflation.” Jerome Powell this week when saying the Fed would need to tighten faster.

Charts of the week

Wellington home owners eye the exits, increasingly listings in Nov

Farmer confidence crashes despite record high prices

Numbers of the week

28.4% - Annual house price inflation in November from a year ago, Core Logic reported. That’s the first fall in annual inflation since August and below the 28.8% seen in October.

$44b - Owner occupier borrowing rose by $2.0b or 0.9% the month of Oct to $234.9b, while lending to residential property investors rose 0.3b or 0.4% to $86.7b. Total housing lending has risen $44b to $321.6b since the onset of Covid.

Must reads and listens for the weekend

Some fun things

Have a great weekend

Bernard

PS:

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