The Kākā by Bernard Hickey

TLDR & TLDL: The Government has announced it will add almost half a billion to the $19.5b pile of cash grants to businesses already given to asset owners during Covid, further widening inequality and reinforcing the unfairness and counterproductive nature of its Covid recovery spending and actions.

I go into detail on the winners and losers of the ‘K’ shaped nature of the Government’s recovery policies and results below the fold.

Elsewhere in the news overnight and this morning:

* markets bounced this morning on easing fears about omicron, which appears not to hospitalise many cases (CNBC);

* NZME announced it would buy BusinessDesk for $5m or about $500 per subscriber;

* Australia announced last night it would delay its border reopening due tomorrow for two weeks because of omicron, and Japan joined Israel overnight in closing its borders completely (CNN) (The West Australian);

* summer festivals planned for Gisborne and Northland are in doubt after the regions were included in the ‘red’ zones, which limit events to 100 – Rythm and Vine organisers said last night they would announce a decision this morning on whether to go ahead;

* the National caucus have yet to find a clear choice for its new leader with just a few hours to go before its 3pm caucus meeting and reports suggesting Christopher Luxon holds a small lead over Simon Bridges, but not enough to find a clear winner, and not enough to avoid a contested vote;

Watch out today for:

* ANZ’s publication of its first cut of its Nov business confidence survey at 1pm;

* the Reserve Bank's release of bank lending and deposit figures for Oct at 3pm; and,

* a National Caucus leadership decision due after 3pm.

FYI for free and paid subscribers, I’ve decided to open this one especially because of the deep dive below into the way the Covid recovery is widening inequality, and how it is proving counter-productive for social cohesion, child poverty and the next public response to a crisis. To support my independent journalism and analysis on housing unaffordability, child poverty and child poverty, subscribe here to this one-day 50%-off special of $95 for a year, or $9.50 a month.

That gives you full access to the archive, all articles, podcasts and emails, and access to webinars and Ask Me Anything sessions for subscribers, who are able to comment below.

Our counterproductive and unfair Covid ‘rekovery’

It’s now the oldest trick in the history of democratic governments captured by the wealthiest voters: privatise the gains from economic growth and socialise the losses of economic shocks.

The response to the Global Financial Crisis set the template of big business and bank rescues, cash grants and subsidies to asset owners and money printing to pump up the asset values of the already-wealthy. Now the Covid recovery is using that template, but at a larger and faster and more brazen scale. Asset owners now believe taxpayers should bail out their companies and pump up their asset prices whenever there’s a crisis.

They’re now so sure it will happen, they ‘buy the dips’ whenever there is a slight fall in prices, knowing a central bank can and will intervene, or that a Government will ensure their businesses don’t fail. Moral hazard is now baked into the DNA of global capitalism, and even more so here because our housing market is bigger relative to incomes and GDP than anywhere else, and has risen faster than anywhere else over the last 20 years.

It is happening all over the world in a variety of Covid responses, but the Labour Government’s response here is the worst in the world in terms of widening wealth inequality relative to GDP, and through the counter-productive and wasteful of use taxpayer funds to not ‘Build Back Better’. It is also much bigger than the bailouts and central bank support delivered to asset owners here during and after the 2008/09 GFC.

Time for a stocktake

Now it’s becoming clearer what the total bill for the Government will become once the support ends for businesses and the Reserve Bank continues reducing stimulation early next year, it’s worth doing a stocktake.

Since the onset of Covid in March 2020, the Government of Aotearoa-NZ has delivered one of the biggest fiscal and monetary policy responses in the OECD in terms of taxpayer money spent and central bank money printed relative to GDP. It also unleashed the strongest economic recovery, the fastest asset price inflation and delivered the lowest unemployment rate in the OECD.

Surely that’s all good? The Labour Government certainly paints its response as a kind and progressive one that has not left the most vulnerable behind. It has touted the success of its wage subsidies and regularly highlighted the various dollops of funds paid to food banks and for emergency housing and special needs grants.

But what was the scale of the support and who is better or worse off as a result? The headlines look good, but what are the bottom lines?

The effects now evident in asset values and bank accounts nearly two years after the outbreak of Covid are simply astonishing. They show asset owners, who have been the beneficiaries of almost all the Government’s direct support and central bank actions, are now astoundingly more wealthy.

Working families and beneficiaries who pay rent are now mostly worse off or barely treading water since the first lockdowns in March 2020. Food banks are seeing record demand and the waiting list for public housing has risen 65% to 24,475 since the beginning of Covid. It has trebled in the last three years.

The rich’s wealth rose by $872b or 50%

In short, by my calculations from Reserve Bank figures on term deposits, household financial assets and house and land valuations, asset owners’ wealth is on track to rise by $872 billion or 50% to $2.63 trillion within two years of the outbreak, including:

* a $45b increase in cash in bank deposits to $319b, which incorporates a $21b rise in non-financial bank deposits to $110b and a $24b increase in household deposits to $209.1b;

* a $608b increase in housing equity due to a $648b rise in the value of houses and land to $1.74t and a $40b rise in home loans to $318b; and,

* a $257b increase in the value of shares, bonds and other non-bank financial assets to $954b.

All of that increased wealth and cash on hand is due to Government payouts and the actions of central banks here and overseas. Yet the money keeps flowing to those who already have it.

Here’s another chunk of change

The Government announced yesterday it would pay up to another $490m of cash grants to business owners as a transition payment going into the ‘traffic lights’ system, extending taxpayer support at large to the owners of capital and assets to $20b in cash since the onset of Covid.

Just to be clear: wage subsidies were not paid to workers. They were paid to business owners to offset the wages of the employees they would otherwise have made redundant, although that willingness to fire staff or the ability to use their own existing buffers was never tested.

Meanwhile, the cash balances of transaction and term deposit bank accounts of non-financial businesses and households owning property have risen by a net $45b since Feb 2020 to $319b at the end of September. Significant increases in cash deposits can be seen in March and September soon after the Govt payments, and have continued increasing since then.

None of the wage subsidies, resurgence payments and the new transitional support payments were ever means tested or given as loans for repayment. An assumption was made in March 2020 that there was not enough time to check and business owners needed a shot of confidence to keep employing people. Somehow, that assumption was not challenged or revisited in August 2020 or August 2021 when fresh resurgence payments were made, even though the experience after March 2020 was of quick economic and spending recoveries, and a strong labour market.

Why no means testing or clawbacks?

There was never any suggestion of clawing it back if, in the event of a strong recovery, businesses ended up with cash surpluses, which is indeed what happened.

The desperate situation forecast in March 2020 of double-digit unemployment meant the first handouts of cash labelled as wage subsidies were forgiveable and certainly worked spectacularly to stabilise the situation, largely due to the speed and lack of conditions with the cash.

But it was clearly abused in retrospect, and then the Government failed to follow up and pull back funds through the end of 2020. By then the Government had given $14b in cash to businesses and less than $1b had been paid back. MSD did not even send letters to businesses asking them to check if they had indeed needed the money and whether to pay it back. Auditor General John Ryan criticised the MSD’s lack of proper audits and follow-ups with subsidy recipients.

Many companies, including Hallensteins Glassons, Fletcher Building, Harvey Norman, the Norman family’s James Pascoe Group (Pascoes the Jewellers, Stewart Dawsons, Goldmark, Whitcoulls and Farmers), NZME, and Fulton Hogan took the cash and did not repay any or all of it, even though they quickly returned to profit and are again paying dividends to shareholders.

Some refused to pay the money back on both sides of the Tasman, including Michael Hill Jewellers, Kathmandu and Harvey Norman. Then there were the luxury product and services businesses, often owned by rich-listers, that took the money and never repaid it, including The Wellington Club, The Northern Club, the Kauri Cliffs golf course and the Millbrook resort and golf course in Queenstown. The luxury lodges, wineries and golf courses owned by US hedge fund billionaire Julian Robertson claimed more than $1.2m in subsidies and didn’t return them, despite making hefty profits by the end of the year.

‘We feel a balance was hit’

Some surprising figures have even defended board decisions to pay the cash to shareholders rather than hand it back to the Government, including Kathmandu chair David Kirk. Kathmandu was given A$20m in grants through Australia’s JobKeeper wage subsidies and wage subsidies in NZ, but decided in March to pay A$14m in dividends to shareholders rather than pay the cash back.

“Kathmandu has raised a lot of capital and our shareholders have suffered quite significant (earnings per share) dilution. There have been no dividends paid to shareholders for a year, which is a loss that will never come back.

“So when you think about our stakeholders, we think the pain has been pretty fairly shared. A repayment of JobKeeper at this point would be a transfer from shareholders funds to the government, and we feel a balance has been hit.” David Kirk quoted in the SMH.

Kathmandu received $6.1m in wage subsidies from the NZ Government last year. It has so-far received a further $2.7m during the delta outbreak this year.

Some were embarrassed into paying

Some businesses were effectively shamed into repaying their wage subsidies through mid-2020, including The Warehouse, Briscoes, Ryman Healthcare and Vector. Others hastily repaid the money slightly earlier when they realised their customers, staff, regulators and competitors could find out here the names of which large companies were paid and how much. There were some embarrassingly high-end names who had to scramble to give the money back, including blue-chip law firms such as Bell Gully, Simpson Grierson, MinterEllisonRuddWatts, Meredith Connell and Lane Neave. Some, including the private equity-owned and heavily-indebted TradeMe only repaid after revolts from embarrassed staff.

So far, only one reported prosecution has been launched by MSD against those who took the money without justification, out of over 1,000 cases referred for investigation. During that time, MSD has launched dozens of prosecutions against beneficiaries.

Various advisers, including in a detailed report from the auditor general’s office, recommended someone in the government simply ask those who received cash to prove with GST receipts that they needed the money and if not, repay the money. Neither has happened. There has also never been proper audits of how the money was sent, used, and not repaid. Newsroom’s David Williams, who has been doing some excellent reporting on this, reported earlier this month that MSD had asked for about $6.8m of repayments from the 10 largest companies it had requested repayments from.

Meanwhile, here’s the list compiled via Newsroom of the top 30 recipients of wage subsidies, who received a total of $842m, most of who are large overseas-owned or listed companies. Newsroom reported last month that MSD had done sample checks on 339 of the 396,817 businesses that received the subsidy last year.

Yet here is some more money

So far in this latest series of wage subsidies, the Government has paid out over $5.5b during the delta outbreak, on top of the $14b paid last year. The latest resurgence payments will take the total to $20b.

In the podcast above I include my exchange with Finance Minister Grant Robertson about the fairness of the payments and the lack of clawbacks, given beneficiaries and recipients of special needs payments are often subject to clawbacks.

He argued that the $24,000 cap on the transition payments limited the number of large companies benefiting from the payments, although many still are receiving ongoing wage subsidies, including SkyCity with $14.2m since August this year.

Not nearly as much or as fast for the working poor

The biggest losers in the Covid recovery have been those in itinerant work or piecemeal work, who have lost income, along with those renting. Last year those on benefits and the working poor received benefit increases that were not enough to cover rent increases. Last year they received a doubling of the winter energy payment, but not this year.

The Government announced earlier this month it would lift the incomes of 346,000 families by an average of $20/week with various increases in best start payments and higher tax credits, but only from April next year. The PM said it would lift 6,000 children out of poverty. It is costing $68m/year for the next four years. Just imagine what $20b worth of cash paid to increase benefits, let alone to invest in housing and infrastructure, would have done to reduce child poverty.

Last month, MSD Minister Carmel Sepuloni announced an extra $9.6m in hardship assistance for low income workers, although some of it can be clawed back at a later date.

Child poverty activists have described the recent one-off grants and tax credits, some of which are clawed back as recipient incomes rise, as disappointing and out of touch.

That has been reflected in massive increases in demand for food parcels and a rise in debt owed by beneficiaries to MSD. As of March 2020, 67% of beneficiaries owed an average of $3,600 in debt to MSD, with debt rising $150m to $750m in the year to March, 2020. The Govt has rejected suggestions of an MSD debt moratorium or writeoff.

So in summary…

Due to Government policies for cash payments and money printing to create a wealth effect and rescue the economy and jobs:

* the wealthy were made $872b richer, largely because of a 54% rise in house prices forecast in the two years (the RBNZ sees another 10% rise over the next year) after the onset of Covid;

* the Government will have given at least $20b in cash to business and asset owners in a period when those asset owners have increased their cash savings accounts by $45b to $319b;

* the even-wealthier recipients of those cash grants have largely refused to repay the money, even though it is considered normal for the recipients of benefits to repay money deemed not necessary to overpaid; and,

* workers and beneficiaries who rent are worse off because of part time and extra hour job losses, along with rent increases and inflation in costs of petrol and food.

Yet many boards and leaders talk about ‘Building Back Better’ and just transitions. Some have even said workers should be grateful for low unemployment and that the measures taken have made New Zealand a model for the rest of the world.

Treasury, Reserve Bank and Finance Minister Grant Robertson have even denied that the response has worsened inequality in recent weeks.

A counterproductive erosion of social cohesion

One feature of the double standard when it comes to the Government helping businesses with no-questions-asked cash grants while clawing back special grants and benefits from the poor, is that the poor notice and, understandably, are not very cooperative when the Government needs them to physically do something for society as a whole. Such as get vaccinated.

Essentially, the social contract is broken.

The clearest sign of that inevitable loss of social cohesion can be seen in vaccination rates, which are closely aligned with the most deprived and vulnerable suburbs, as can be seen in this Stuff chart showing which towns have the highest number of unvaccinated people.

When business leaders and asset owners express surprise and disappointment when poorer voters and citizens are uncooperative or vote for the ‘wrong’ candidates, they should look first at whether they seriously think the last two responses by Government to crises were just and effective.

The strategy of bailing out businesses and making the wealthy wealthier has worked for the wealthiest during the GFC and Covid, but it has further deepened the societal divisions in the process, storing up yet more social and political conflict for the next crisis.

Comments of the day in the The Kākā community

‘Is anyone looking at my email?’

“Is the government aware of the confusion and issues overseas kiwis are apparently having trying to provide proof of vaccination? Some have apparently sent the proof using the appropriate process but have not got a response (not even confirmation of receipt). The various online communities have constant posts and questions about this, so makes me wonder how big the problem is and whether the MOH are being proactive enough at following up on these potential issues? Omce vaccine certs are required, I can just see an endless stream of stories in the media from people that haven't got their vaccine certificate because of some hole in the process that they fell into. 

“For any overseas kiwis seeing this: you should be getting an automated response to your email. If you haven't got a response (usually instantly), something has probably gone wrong somewhere and you should follow up on it. It's usually a problem with your email getting caught in their security settings.” Josh in yesterday’s traffic lights announcement article.

‘When are the young going to revolt?’

“I wasn't free to look at the AMA on Friday, but I'm struck by today's comment from David Martin. It's hard to gauge numbers, but it seems very plausible there are a lot of economically privileged people who want a path towards giving up some of their privilege in exchange for a fairer society, which would be a happier, safer and better society. Government could do this for us any number of ways -- a land tax, a wealth tax, a capital gains tax, so many options for taking more from us and then giving it to the people currently paying us rent. What I want -- what we all want? -- is lower house prices. Right now I have massive wealth on paper, but the minute I sell my house I'll need every cent of it if I want to buy another. Who does this benefit? If my house was worth a tenth as much and everyone else's was too, I'd be precisely as well off as I am now in real terms, and my children and their friends wouldn't be locked out of the market -- so actually, I'd be much, much better off. How do we fix this? (My daughter's answer: we need a revolutionary overthrow of the state. My daughter, before you laugh, is not kidding. How many years before this stops being a fringe position?)” Leaflemming on yesterday’s Dawn Chorus.

A fun thing

Ka kite ano

Bernard

PS: My apologies for yesterday reporting in the first draft of the traffic lights decision that all of the North Island north of Whanganui was in ‘red’. A map made available after I sent the email showed Waikato, Bay of Plenty, Taranaki and Coromandel were orange. I corrected the article online immediately and thank you to subscribers for pointing out the error.

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

TLDR & TLDL: This week the Government set the terms and conditions for the summer, the Reserve Bank signalled borrowers may have prove they can handle a 7% mortgage rate, Judith Collins launched a kamikaze attack on Simon Bridges, and, Adrian Orr rejected the idea that the 40% rise in house prices since Feb last year was catastrophic for anyone other than a few first home buyers.

Elsewhere, the ‘Omicron’ Covid variant emerging from South Africa was described as potentially more dangerous than Delta, and triggered a slump in stock and oil prices this morning. Trump appointee Jerome Powell was reappointed as US Federal Reserve Chairman for another four years, reassuring some worried that a potential Democrat appointee, Lael Brainard, would be even more of a money printer.

Coming up in the week ahead, the Government will decide on Monday which colour ‘traffic lights’ we’ll all be on from Friday and use the last non-Parliamentary sitting week of the year to prepare for a final sprint to Dec 15, when summer has to start.

(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 and explanatory journalism about affordable housing, climate change policies and child poverty financially viable)

The five things that mattered this week

1. ‘We can’t wait for everyone to get over 90%’

The Government decided on Monday that all parts of Aotearoa-NZ would join the ‘traffic lights’ system from next Friday, even though the original Oct 22 plan was to wait for all DHBs to be 90% double vaccinated. At current vaccination rates, only the Auckland and Capital and Coast (Wellington) DHBs will be 90% fully vaccinated by Dec 3. The ‘laggard’ Lakes, Tairāwhiti, Whanganui, West Coast and Northland DHBs are unlikely to get there until February.

Essentially, the Government decided the nation couldn’t wait until next year to join the traffic light system, which basically allows potential super-spreader venues and workplaces to reopen for vaccinated customers, staff and suppliers who have passes.

It bought itself a couple of weeks extra time to vaccinate more of the most vulnerable outside Auckland by delaying the opening of Auckland’s borders until Dec 15, but it softened the blow by deciding checks for vaccination passes or negative tests at the border would be via spot checks with $1,000 fines, rather than the current hard border.

So far, the delta outbreak seems to be plateauing around 150-200 cases a day, with hospitalisations below 100 and ICU bed usage below 10. Delta has yet to spread in earnest much beyond Auckland, but many fear a fuller opening and the inevitable widespread movement of Aucklanders up and down the country for the summer will start outbreaks in the remoter and less-vaccinated regions such as the East Coast, Northland and Taranaki/Whanganui. Maori health experts didn’t want the opening and are asking Aucklanders to consider not travelling to those regions.

In summary, here are the ‘Ts & Cs’ for summer:

* cafes, shops and larger workplaces can fully reopen to those with vaccination passes in Auckland and the rest of Aotearoa-NZ on Dec 3;

* Aucklanders can finally leave (and others can pass through or come to) the city through cordons with spotchecks at the boundaries from Dec 15 (Beehive);

* vaccinated and negative-tested NZ residents can come home from Australia without having to go through MIQ from Jan 17 as long as they self-isolate and test negative again for seven days;

* vaccinated NZ residents can return from the rest of the world from Feb 14 as long as they self-isolate;

* vaccinated non-resident students, tourists and (a few) migrant workers can come in without going through MIQ from April 30 (Beehive);

* health, education, Police, prison, border and Defence Force staff must be vaccinated (Beehive);

* but other private sector workers such as those in construction, retail and hospitality, and other public sector employers such as Kāinga Ora, Oranga Tamariki and MSD don’t have to be vaccinated (although they can use a risk assessment framework to put their own mandates in place)(Beehive); and

* businesses can start using rapid antigen tests from Dec 1 and the public can start buying off-the-shelf rapid antigen tests at pharmacies to be administered by pharmacy staff from Dec 15 (Beehive).

Labour’s support dropped 5-10 percentage points towards 40% since the elimination strategy failed in September and it became clear the Government had not developed a clear enough and detailed enough back-up plan to ‘live’ with delta should short, sharp and wide lockdowns fail to stamp it out.

The Dec 3 and Dec 15 reopening dates were the last realistic dates for reopening for summer, which PM Jacinda Ardern had promised, without leaving lower-vaccinated areas too exposed, and while arresting Labour’s slide in the polls. Perhaps ironically, the die was cast on these T&Cs and the Govt’s political rearguard action just days before the National caucus’ latest self-immolation.

Number of the week: 42.4% - The percentage of Murupara’s 1,390 eligible residents that are fully vaccinated as of Nov 24. The town’s two GPs have stopped working from its clinic because they aren’t vaccinated. There were 662 residents yet to be vaccinated as of Wednesday.

Chart of the week: This Stuff chart shows the towns in each decile with the highest percentages without any Pfizer doses. Each red dot represents a suburb and the shade of red represents the number of people unvaccinated. Decile 9 and 10 towns predominate. Vaccination rates are highly negatively correlated with deprivation.

2. ‘Why can’t they come home for Christmas?’

Earlier this week real momentum was building behind calls from distraught families, National, ACT, tourism businesses and Air NZ for vaccinated Kiwis stuck in Australia to be allowed to come home outside the MIQ system by self-isolating at home for seven days.

A surprise call from Otago University’s crack team of epidemiologists for the govt to allow vaccinated travellers to come in without having to stay in MIQ galvanised the issue.

“Analysis of countries with reasonable quality data implies that the risk of Covid-19 infection for most vaccinated international arrivals is typically less than the current risk for Auckland residents. Current MIQ requirements for vaccinated arrivals to Auckland could therefore be dropped for most, without increasing the risk for Aucklanders,” Dr Lucy Telfar Barnard, Dr Jennifer Summers, Lesley Gray, Prof Michael Baker, Prof Nick Wilson wrote in an Otago University post on Nov 8.

But PM Jacinda Ardern and Covid-19 Minister Chris Hipkins ended the debate this week by deciding not to start self-isolation for vaccinated residents returning from Australia until Jan 17, and until Feb 14 for residents coming from beyond Australia.

They argued the potential for extra cases could add “cumulative risk”of much deadlier ‘nodes’ of new outbreaks, but the Opposition argued the returning New Zealanders would be no more dangerous travellers than those leaving Auckland.

Air NZ was among those throwing its hands up in frustration when the Cabinet decision came through, cancelling 1,000 flights due to arrive in NZ before the end of 2021. That shredded any remaining hopes those in Australia had to get home for the summer.

The trouble is the Government is failing to paint a compelling picture of how risky allowing in vaccinated travellers would be.

Dr Ashley Bloomfield confirmed to on Wednesday the Ministry of Health’s modelling showed just 60 extra cases a week were expected if self-isolation was allowed for arrivals of vaccinated travellers. He argued they could cause more lethal outbreaks than other travellers, given higher estimates of their transmissability (r values of 5 to 6).

The prospect of less than 10 extra cases a day on top of the existing 200 or seemed a low risk to take for those watching the prospect of a ‘normal’ summer and family reunions fading away into the distance.

3. ‘We won’t lend you more than 80%’

I reported this week on a mini credit-crunch that has started in recent weeks as banks clamp down on riskier mortgage lending to keep within tighter Reserve Bank LVR restrictions from Nov 1 and to comply with stricter new rules on responsible lending due to kick in next Wednesday.

Kiwibank, BNZ and ANZ have all now stopped lending more than 80% to ensure they keep within the Reserve Bank’s speed limit.

4. ‘Non. Je ne regrette rien’

Reserve Bank Governor Adrian Orr rejected the idea that the 40% rise in house prices since Feb last year had been a catastrophe, saying instead on Wednesday the surge had been good for homeowners and kept workers in jobs. He indicated the bank could not be held back from doing its job by the needs of first home buyers.

He repeated that house prices were unsustainable, but the bank forecast another 10% rise in prices over the next year, before they eased back around 5% in 2023. The Reserve Bank hiked the OCR as expected by 25 basis points and lifted its OCR forecast track by around 50 basis points to a peak of 2.6% in early 2024.

5. Ready for a mortgage rate serviceability test floor too?

The Reserve Bank started consulting this week on the details of two new rules to restrict riskier mortgage lending and be able to cool the housing market without necessarily lifting the Official Cash Rate.

It went into more detail about creating an official mortgage serviceability test floor that means borrowers would have to be able to prove they could afford a mortgage with the assumption of a higher interest rate, possibly around 7%. That’s higher than the 6% floor that banks currently use internally and suggests the Reserve Bank could effectively tighten credit to the mortgage market without having to put up the OCR.

The bank would prefer to bring in the floor first next year, before swapping it for a debt to income multiple limit, possibly starting at 6, towards the end of next year.

Quotes of the week

‘He/she said what!’

“This evening, with unanimous support of the board of the National Party, Simon Bridges, Member for Tauranga, has been demoted and relieved of his portfolio responsibilities. The decision follows an allegation of serious misconduct relating to Simon Bridges' interaction with a caucus colleague.” Judith Collins wrote in a late-night press release that referred to a five-year-old incident where Bridges joked with colleagues about how to make a baby girl, which was overheard by MP Jacqui Dean.

‘She’s gotta go’

“It’s truly desperate stuff.” Simon Bridges the next morning on the way into a caucus meeting where Collins was rolled.

Onwards and upwards

“This is not our best day, but we will raise our eyes to the sky.” Interim National Leader Shane Reti speaking after the caucus voted out Judith Collins in the wake of the statement above.

Chart of the week

Longer must-reads and listens elsewhere this weekend

Comment of the week in The Kākā community

“Hi Bernard, long time listener first time caller. I have an existential question for you. Firstly, love your work, thanks for all that you do. But it stresses me out. As a millennial home owner I am a super privileged beneficiary of the massive intergenerational Wealth transfer that we love discussing. Like I said I’m very engaged with the news and am always very interested in your perspective. But as a relatively normal but privileged person, what can I be doing to be a better member of society. As at this point learning as much as I can about issues / the economy is freaking me out but I’m not sure how to transfer that into something constructive???.” Tessa Williams in this week’s Ask Me Anything.

Some fun things

Have a great weekend

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 govt is barrelling towards a Nov 29 decision to open up Auckland to the rest of the country for summer, regardless of whether is Auckland is under control. House prices kept accelerating in Oct, regardless of the various levers pulled to stop them, and the govt continues to deliver slower and stingier help to those on low incomes than to those with assets running businesses.

I cover these issues and the big events globally every Friday at 4pm with Peter Bale in a zoom webinar ‘hoon’ (plural for Kākā) for paid subscribers, including 15 mins for Q&A at the end. Peter does an excellent free weekly world news bulletin email here. I also do an Ask Me Anything thread at midday for an hour on Fridays for paid subscribers. I’ve opened up last Friday’s for everyone to give those on the free list a chance to see what we do in the community of paid subscribers.

(This is the weekly ‘sampler’ email and podcast for both free and 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 make my version of accountability and explanatory journalism about affordable housing, climate change policies and child poverty financially viable.)

Five things that mattered in the last week

1. Summer is Coming. And so is Covid.

The govt made clear it is leaning towards opening up Auckland and the rest of the country sooner, rather than later, as Auckland’s tiredness and frustration grows as fast as Labour’s popularity is waning (fyi Andrew Chen’s polling summary chart below and here). One option is moving everyone to the ‘traffic lights’ soon after the big Nov 29 cabinet decision to avoid Auckland border snarlups.

2. Housing getting hotter. Not cooler

REINZ’s House Price Index rose 3.3% in October from September, meaning annual inflation was 29.9%. This monthly inflation rate was up from 2.0% the previous month and defies expectations of a slowdown because of higher mortgage rates, lending restrictions and the govt’s removal of tax deductibility for landlords’ interest payments.

So far, expectations are house prices will keep rising 7-10% per year ad-infinitum, which is fuelling FOMO behaviour from buyers and sellers. This is unlikely to change unless expectations are broken. Nudging them isn’t working.

3. US inflation’s 30-year high

Annual CPI inflation rose to a 30-year high of 6.2% in the United States in Oct, which was faster than markets expected and bedded in expectations the US Federal Reserve will raise its short term interest rates from 0% to around 0.5% later next year, although the Fed still sees the inflationary as transitory because of Covid. A key thing to watch will be whether current (Trump-nominated) Fed Chair Jay Powell is renominated by Biden.

There’s talk Powell may be replaced by the more dovish Lael Brainard. The key number to watch (always) is what the US 10 year Treasury bond is doing. So far, it’s not going totally nuts about inflation.

4. ‘They are not us’

There were angry and loud marches by thousands of anti-vaxx and/or anti-mandate protesters in Wellington on Wednesday and Christchurch. The PM said they weren’t representative of the vast majority of the population, but the divisions within our society between the poor and rich, the disinformed and the rest, and between Māori and the rest were on full display in the marches.

Apart from a couple of weeks in March last year, we have not been a ‘Team of 5m’. But there is now definitely a couple of hundred thousand people not on board with the national drive for vaccination, in part because of an increasing volume and speed of disinformation spreading on various social media networks. This Covid-19 map of vaccination rates by suburb gives a more granular view.

5. Deliberately widening inequality

The govt announced a $68m/year boost in tax credits for low-income families, starting from next April, but increased the income claw-back rate for Working For Families, which creates a marginal tax rate of 57% for those earning over $48k.

Meanwhile, the govt has given $20b in cash to businesses in the form of wage subsidies and resurgence payments. Cash stored in business and household bank accounts rose over the last 18 months by $49b to $320b.

A fun thing

Ka kite ano

Bernard

PS: My apologies for the publication on Monday morning. Needed a weekend break. Aiming to get these out early Saturday morning in future.

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

TLDR & TLDL: This week the Government started to fray over how (and whether) to open up for the summer as it became clearer the ‘fringe’ DHBs won’t reach the 90% double-vaxxed threshold before February. Elsewhere, our Reserve Bank denied responsibility for the latest housing boom and the US Federal Reserve announced it would start tapering its money printing, but cautiously to avoid a ‘taper tantrum.’

In this week’s Friday afternoon zoom webinar ‘hoon’ with Peter Bale at 4pm for paid subscribers (listen to the podcast above), we also discussed Aotearoa-NZ’s commitment to cut climate emissions 50% by 2030 (albeit with two thirds of the work being done offshore, and China’s plans to quadruple its nuclear arsenal.

(This is the weekly ‘sampler’ email and podcast for both free and 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 make my version of accountability and explanatory journalism about affordable housing, climate change policies and child poverty financially viable)

Five things that mattered this week

1. Fraying at the edges

The Government’s kitchen cabinet stumbled through a week of mixed messages over whether Aucklanders would be able to leave the city for Christmas and summer holiday. PM Jacinda Ardern told a music radio station Aucklanders would need to be certified as doubled-vaxxed and have a negative test before they could fly or drive somewhere else.

Covid Minister Chris Hipkins suggested Aucklanders might need to book time slots to avoid motorway queues on the way out, but Deputy PM Grant Robertson ruled out the idea as impractical. He agreed another way to keep the virus out of Tairawhiti, Northland and Whanganui might be to cordon off those areas instead.

It’s now clear from the vaccination rate trajectories (see Stuff chart below and interactive analysis) that Tairawhiti, Northland, Lakes, Bay of Plenty and Whanganui are unlikely to get to 90% double-vaccinated before February, if ever. In theory, that would stop the rest of the country easing their restrictions and stop Aucklanders leaving for the summer. But the PM has promised the nation a ‘classic Kiwi summer’, forcing the Govt to look for a fudge, or to break its promises to either the regions or Aucklanders. The Nov 29 cabinet decision is looming. At current rates, Counties Manukau is unlikely to hit the 90% target by then.

What they said (bolding mine):

“We do still want Aucklanders to move around though particularly over summer and Christmas so what we are looking at for now is how do we keep in that hard border, but some checks around it so more people can move but we might say use testing or vaccinating status to help people move around a bit more.” Jacinda Ardern

“It might be that people get allocated a time in which they can travel. We haven't made that decision yet. It's an option. We're just working through what the practical options are to ensure that we don't end up with people spending days sitting in their cars.” Chris Hipkins.

"I don't think it's particularly likely that there would be the kind of scheme where you were allocated a day. I can't see that - it wouldn't be very practical. But we do have to find a way through in the event that we still have a boundary there." Grant Robertson on the idea for time slots.

The key chart: Are we there yet?

The key number: 54,361 - The number of second dose vaccinations still to be given to the eligible population in Counties Manukau to get to 90% double-vaxxed. In theory, Auckland cannot relax its restrictions inside its boundaries until Counties Manukau reduces that number to zero. At current vaccination rates, that is not until mid-Dec.

2. No taper tantrum. Yet.

The US Federal Reserve announced it would start tapering its money printing and bond buying programme later this month and finish by mid-2022, citing elevated inflation pressures that were “largely reflecting factors that are expected to be transitory.” This is slightly tougher language than its previous comment that inflation was transitory, but the mid-2022 end to the taper was in line with market expectations.

Global stocks rose to fresh record highs on the news meeting expectations, and because company profits keep surging and companies keep handing record amounts of (freshly printed) cash back to shareholders to recycle into a bank or a Govt bond. Those fearing (or hoping for) another ‘taper tantrum’ like the one seen in late 2013 (see dotted line below showing where the Fed signalled its post-GFC printing taper) did not see one. The 2013 bond market meltdown saw the US 10 Year Treasury yield jump from 1.7% to 3.0%, which forced the Fed to resume money printing to avoid a financial meltdown and boost GDP growth again by pushing up asset prices.

Fed Chair Jerome Powell hosed down expectations on Wednesday that the Fed needed to react more urgently to the recent inflation spike, which also helped dampen longer term interest rates on Thursday and Friday.

What he said:

“We think we can be patient. We don’t think it is a good time to raise interest rates because we want to see the labor market heal further.” Jerome Powell in a news conference.

The key chart: 2013 was a tantrum - 2021 is not. So far.

The key number: 30 basis points. The reaction of bond markets since the Fed started signalling a taper in July has been much milder than in 2013, when the yield rose 130 basis points. The 10 year yield is up from only 1.2% to under 1.5% this morning.

3. ‘Blame someone else’

The Reserve Bank rejected accusations it was responsible for the 34% explosion in house prices over the last 18 months, saying it was only a ‘bit player’ in a market bedevilled by supply side problems and tax advantages it was not responsible for fixing.

But I argued this view downplays the central bank’s enthusiastic adoption of unconventional monetary policy (money printing to buy bonds) at Fed-like levels, and ignores its now-reversed decision to completely remove restrictions on riskier mortgage lending. It denies responsibility, but the Reserve Bank actually made a political decision with the agreement of the Finance Minister to increase the wealth of the wealthiest to stimulate the economy. 

It worked to cushion the worst economic shock in our history, but it also permanently widened wealth inequality massively. They were advised of the effects and there were alternatives, but went ahead anyway and are now trying to shift the blame to others. That’s a pity. They’re not fooling many, and there will be an eventual political reckoning when the generation locked out of their futures work it out.

What he said (bolding mine):

“The role of the Reserve Bank is a ‘bit part’. We are one cause of demand changes as we alter interest rates to meet our monetary policy Remit.

“The extent to which New Zealand house prices have reacted to changes in housing demand is mostly related to the inability of housing supply to respond. Houses have been scarce at a time that demand was strong. The reverse is now evolving – with housing building at record levels at a time that population growth is static.” Adrian Orr in a speech.

The key chart: The Wealth Effect

The key numbers: The Govt’s stimulus spending of at least $18b in cash grants, plus the Reserve Bank’s $57.6 of money printing to buy Government bonds, generated an extra $549b in wealth for property owners, an extra $45b in business and household deposits in banks, and an extra $2.3b in consumer spending. The bank knew the wealth effect was a blunt instrument with diminishing returns.

The bank’s own research from 2019 shows that every $1 rise in household wealth generates three extra cents in spending. So far, that would mean the $549b extra in household wealth from housing would have generated an extra $16.5b in retail spending. It’s unknowable what retail spending would have been without the money printing and bond buying, but the Reserve Bank appears to have gotten poor stimulative value for its money, while also dramatically worsening wealth inequality.

4. The NIMBYs lash back

The backlash has begun to the Government’s ‘Townhouse Nation’ accord with National to allow three three-storey dwellings on each suburban section without notification or the need for a resource consent. Councillors on the Auckland Council debated the new Medium Density Residential Standard (MDRS) on Thursday and it got real ugly real fast.

Those thinking councils have nowhere to turn and no tools to stop it should think again. The discussions centred around launching a public campaign to reverse the policy and looking at how to use development contributions to stop intensification. It unleashed extreme comments from former National minister Christine Fletcher and others about how the Govt was riding roughshod over residents and ‘urban slums’ were not needed. The council’s planner John Duguid said there was plenty of land zoned for housing and intensification was not needed.

The key chart: The land price impact

This chart from the PwC-Sense Partners report (page 49) on the MDRS’ impact on land prices shows how land close to the centre of Auckland will rise in value, but land 10-20km from Britomart will reduce in value as the policy ramps up intensification. Good.

They said it:

“This is a scorched earth policy to build Soviet-style blocks. We don't want to be the council that oversaw the uglification of the city." Orakei Local Board chairman Scott Milne.

“I see it as tantamount to the rape of Auckland. I can't believe a piece of legislation with significance such as this is going to be rushed in such a way. I have no intention of withdrawing, and furthermore I'd say it's gang rape because it's by both Labour and National, and I'm appalled.” Christine Fletcher

The key numbers: No wonder they’re fighting hard

$198.264b - The PwC-Sense Partners estimate (page 15) of the combined value transfer from existing owners to renters and first home buyers because of MDRS over the next 22 years in 2019 dollars. They also estimate lower house price inflation worth $133,000 on average across New Zealand. Table below.

5. Don’t believe it’s over yet

Former PM John Key has warned the housing boom is over because rising interest rates will hit very-heavily-indebted home owners hard, land supply is opening up and high migration has finished. He also wants tighter Govt spending and lower public debt.

I argued in this email for subscribers and in my podcast above it’s premature to say house prices won’t keep rising, that home owners will be stressed and that migration has finished. Actually, extra land supply is not a given, mortgage stress is low and there’s plenty of political and economic reasons why high net migration will fire up again in the coming years. Public debt is also nowhere near being a problem

What he said (bolding mine):

“I personally think house prices won't collapse. I think that's a good thing because I don't think you actually want to leave a whole lot of New Zealanders with negative equity. But I think that the rise and the rapid rise in house prices is not sustainable, and it can't and will not continue.” John Key

The key charts: Mountains of equity, low servicing costs (even for new buyers)

Key’s basic argument is home owners are very indebted and face negative equity if house prices fall, and that interest costs rising will put them under pressure. However, there is actually mountains of equity in the housing market and mortgage stress is at record lows right now.

The key numbers: Everyone is well above the water

The debt servicing load is currently close to 5% of disposable income for home owners overall. It would have to triple to get to the pain levels seen in 2008. No one is expecting a 9% mortgage rate any time soon. The highest likely mortgage rate is expected to be around 6%.

Also, households have $1.3t in equity in a market worth $1.7t. Only those who got into the market in the last couple of months would be anywhere near being in negative equity, and even then would have to see a 30% fall overnight to be in that position.

Some fun things

Have a great weekend.

And if you’ve got this far and you’d like to support my work, please subscribe.

PS: I have a special offer now of 50% off for students using their .ac.nz email addresses.

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 Reserve Bank has rejected accusations it is responsible for a 34% explosion in house prices over the last 18 months, saying it was only a ‘bit player’ in a market bedevilled by supply side problems and tax advantages it was not responsible for fixing.

But I argue below this view downplays the central bank’s enthusiastic adoption of unconventional monetary policy (money printing to buy bonds) at Fed-like levels, and ignores its now-reversed decision to completely remove restrictions on riskier mortgage lending. It denies responsibility, but the Reserve Bank actually made a political decision with the agreement of the Finance Minister to increase the wealth of the wealthiest to stimulate the economy.

It worked to cushion the worst economic shock in our history, but it also permanently widened wealth inequality massively. They were advised of the effects and there were alternatives, but went ahead anyway and are now trying to shift the blame to others. That’s a pity. They’re not fooling many, and there will be an eventual political reckoning when the generation locked out of their futures work it out.

In news breaking overnight and this morning in our political economy:

* Aotearoa-New Zealand signed up overnight to a global pledge to reduce methane emissions by 30% between 2020 and 2030, which effectively triples the nation’s current official commitment to reduce biogenic methane emissions (ie from cows and sheep) by 10% between 2017 and 2030 (Rod Oram) As recently as last week, James Shaw would only say the Govt was considering joining the pledge (Reuters). Achieving a 30% reduction in eight years would involve major reductions in dairy herds and output with current technologies;

* PM Jacinda Ardern said after a flying visit to Northland (the top half of which was put back into level three last night after a mystery case was found) she would visit Auckland next week;

* House price inflation re-accelerated to a monthly rate of 2.1% in Oct from Sept and annual inflation was 28.8%, CoreLogic reported last night, saying it was due to lockdown-related shortages of new listings and continued strong demand.

Coming up later today, I’ll be covering the Reserve Bank’s Financial Stability Report and labour force data due later this morning, and then the US Federal Reserve’s decision due overnight on whether and how fast to reduce money printing ahead of rate hikes next year or 2023.

(Normally, the section below in my daily email is only for paid subscribers. But I’ve decided to open it up to all free subscribers and new readers, given the level of public interest in housing. If you think this sort of explanatory and accountability journalism is useful for the public in the long run, I’d welcome your support as a paid subscriber to keep my focus on housing affordability, climate change and inequality financially sustainable.)

‘A bit part.’ Really?

The Reserve Bank yesterday rejected accusations it was responsible for a 34% explosion in house prices over the last 18 months, saying it was only a ‘bit player’ in a market bedevilled by supply side problems and tax advantages it was not responsible for fixing.

Governor Adrian Orr used a long speech on Tuesday to essentially throw the blame in a gentle way back at the Government and Councils for allowing or creating the land, labour and building materials shortages that made it difficult for housing to respond to demand shocks. Orr also nodded to the tax incentives for people investing in housing as an asset and recommended home owners look at diversifying into other assets because house prices currently unsustainable.

Orr delivered the speech the day before the bank’s half-yearly Financial Stability Report was scheduled to detail the sustainability of the banking system’s exposure to the $1.5t housing market and just before news the housing market accelerated again in October (see above).

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

“Movements in interest rates do affect the demand – and ultimately the price – of housing assets. However, it is mostly the long-term trend in interest rates, as opposed to short-term changes in rates related to monetary policy. The secular decline in global interest rates over recent decades has driven asset prices – including house prices – up globally.

“The extent to which New Zealand house prices have reacted to changes in housing demand is mostly related to the inability of housing supply to respond. Houses have been scarce at a time that demand was strong. The reverse is now evolving – with housing building at record levels at a time that population growth is static.

“We expect to see an easing in house prices over the medium term as a result of these supply-demand dynamics. This means house prices would be moving back toward a more sustainable level – a level that can be explained by underlying economic fundamentals. 

“The move toward more sustainable house prices will be incentivised by slowing demand – as an outcome of higher interest rates and low population growth, and an increase in space to build. The recent Government announcements on reducing urban building restrictions is significant in terms of adding to the ‘space to build’.

“The role of the Reserve Bank is a ‘bit part’. We are one cause of demand changes as we alter interest rates to meet our monetary policy Remit. We also work to limit mortgage lending when it appears excessively risky. However, this is more about limiting the damage to banks’ balance sheets, rather than altering overall demand.” Adrian Orr in a speech via Zoom to the Property Council of New Zealand Retail Conference in Auckland.

So what didn’t the speech cover?

But the speech glossed over the bank’s active decision in March last year to print more than $50b to buy Government bonds in a way that lowered mortgage rates, just so it would inflate asset values and create a ‘wealth effect’ to bolster consumer spending.

The Reserve Bank printed just as much as the US Federal Reserve, relative to the size of our economies, in the months after the Covid outbreak (See chart showing yellow line of NZ and black line of Fed). The Reserve Bank actively decided to make already-wealthy home owners wealthier as a way to boost consumer spending and the economy.

It worked to cushion the blow of Covid, but did it at the expense of a massive widening of wealth inequality, and in the process destroyed the hopes of a whole new generation of first home buyers, given they know prices can now never be allowed to fall fast by the Reserve Bank and Government, for monetary policy and political reasons.

That generation has seen how central banks and Governments have repeatedly bailed out banks and chosen to use monetary and fiscal policy to protect and pump up the value of assets. It’s the reason why so many young people are investing in stocks. They want to get in on the free money too. They can’t afford a deposit on a house, so the best way to get exposed to the free money is by investing in stocks.

The $549b wealth effect

In my view, to somehow suggest that the bank’s actions somehow didn’t matter over the last 18 months beggars belief. It deliberately used the housing market as a monetary policy tool, which effectively meant it was making a political decision to enhance the wealth of two thirds of households to increase consumer spending. It may argue it had no other choice because it could not cut rates below 0% (as bank computer systems couldn’t handle it) and banks weren’t lending to businesses, but it could have thrown the choice back into the publicly accountable lap of the Government and told it to use fiscal policy in a more direct way (see below).

Instead, an independent arm of Government with the agreement of Finance Minister Grant Robertson created money and relaxed lending restrictions in a way that increased the wealth of home owners by $549b to $1.74t (that’s t for trillion) over the course of the pandemic. The Reserve Bank’s actions unleashed a torrent of bank lending that pushed up the value of existing homes. Banks cut their lending to businesses and reduced their lending to back residential property developments.

There was an alternative

The fairest and much more effective way to immediately boost consumption would have been to make large and equal cash payments to all residents. It would have been much cheaper, fairer and would have done much less to widen inequality. Most of the grants would have gone into consumption, given those on lower incomes have to spend a higher proportion of income consumption. The Govt and Reserve Bank would have gotten more stimulatory bang for their buck with so-called ‘helicopter money’.

Instead, the Government (in the form of Government Covid spending and Reserve Bank actions) chose to pump up asset values for the already wealthy, who have a lower propensity to spend and a higher propensity to save, and to give cash to business owners, who are mostly the same people owning property.

The Govt gave $18b (and counting) of cash payments to businesses (without means testing, document checking or auditing) with the aim of keeping workers from being sacked, but it chose not to proceed with direct cash payments to all residents, as happened in some other countries and as suggested by some officials. That $18b has ended up almost totally in non-financial business and household savings accounts, rather than being spent.

Non-financial deposits rose from $89.8b in Feb 2020 to $110.2b in Sept 2021, while household deposits rose from $184.5b to $209.1b. Retail spending, however, rose just $2.3b to $152.7b in the 18 months to the end of June from the previous 18 months.

In effect, the Govt’s stimulus spending of at least $18b in cash grants, plus the Reserve Bank’s $57.6 of money printing to buy Government bonds, generated an extra $549b in wealth for property owners, an extra $45b in business and household deposits in banks, and an extra $2.3b in spending (although it could be argued the counterfactual would have been a sharp fall in retail spending).

This chart shows how bank lending to businesses fell sharply during Covid, while they increased lending to home buyers, and how the $18b of wage subsidies ended up in term deposit and transaction accounts of home owners and businesses.

But the bank knew the wealth effect was a blunt instrument with diminishing returns.

The bank’s own research from 2019 shows that every $1 rise in household wealth generates three extra cents in spending. So far, that would mean the $549b extra in household wealth from housing would have generated an extra $16.5b in retail spending. It’s unknowable what retail spending would have been without the money printing and bond buying, but the Reserve Bank appears to have gotten poor stimulative value for its money, while also dramatically worsening wealth inequality.

A changing tune on using the ‘wealth effect’ as a monetary policy tool

The Governor may have argued in yesterday’s speech that the bank did not and would not target price levels in housing, but its actions last year showed it definitely saw rising house prices as a feature, not a bug, of its monetary policy.

Here’s what Orr said in a speech to a Victoria University seminar on Sept 2 last year (bolding mine):

“We do acknowledge that low nominal interest rates for a long time will support asset prices, will lead to a sense of increased wealth and hence a higher desire to spend and invest. That is one of the channels of monetary policy and is a deliberate outcome … we are more than comfortable accepting that risk and being aware and talking openly of it and round what policies might mitigate and manage these types of risks but our first and foremost best effort that can be made to wellbeing at the moment is around supporting job security." Adrian Orr at 37 mins

He went on to say if the wealth effect pumping got too much, the bank could use its other tools such as lending restrictions to quieten things down.

“We as a central bank need to be aware of well…are those asset prices being unnecessarily inflated, are they going beyond any sense of fair value, and what would a sudden adjustment in those asset prices, a fall in prices, imply for the financial system as a whole and that’s where we have our prudential tools….high and persistent unemployment keeps me awake, not house prices.” Orr at 51 mins

The tone of yesterday’s speech was very different, and the Governor’s comments at select committee hearings has also pushed back at the idea the Reserve Bank contributed to the 34% rise in house prices, at a time when migration collapsed, the economic suffered its biggest shock in almost 100 years, and housing supply grew at its fastest pace since the early 1970s.

Here’s Orr in yesterday’s speech (bolding mine):

“With regard to using interest rates to target house prices, this is not in our mandate - nor does it make sense. Monetary policy is best used to manage overall consumer price inflation stability i.e., an aggregate consumption price index, rather than being used to target a specific asset price. Likewise, trying to target both consumer prices and house prices with monetary policy will quickly lead to confusion and suboptimal outcomes.”

“In summary, our monetary and financial stability tools do not increase the ability to supply more houses in response to changes in housing demand, and they only – very indirectly – incentivise broader investment awareness and portfolio diversification.” Orr in yesterday’s speech.

The bank could argue it did not target a particular level of prices, but it certainly wanted higher house prices last year.

You want us to diversify? Seriously?

Another feature of yesterday’s speech was Orr’s recommendation home owners look to diversify into other asset types.

He is not the first Reserve Bank Governor to warn households their houses were over-valued and they should worry that higher interest rates will cause them losses.

Here’s his comments in the speech (bolding mine):

“The recent extraordinary rise in Kiwisaver balances has been outstripped by recent house price increases. The benefits of diversification are not being fully overlooked by New Zealanders. But the weight of money is still favoured toward housing – helping drive house prices unsustainably higher.’

“Property will always be an important asset class in a well-diversified investment portfolio. However, there are strong grounds to believe that in New Zealand many of the associated risks have been inadequately priced, identified, and managed. As such, New Zealand households continue to hold uncompensated risk and are overly exposed to mortgage debt. 

“This investment preference has worked well over time for many. However, this is not the case all of the time, for all people, and compared to all of the benefits that a more diversified portfolio will provide for the same or less risk.” Orr

However, the Governor himself undercut that argument in showing how New Zealand’s house price corrections have been the lowest in the world, with this chart in the speech.

He also has to contend with a history of Reserve Bank Governors warning households of lower house prices and higher mortgage rates, only for house prices to double and treble in the coming decades and for mortgage rates to more than halve.

A house price expectations credibility issue

The Reserve Bank has worked hard and won the battle to keep CPI inflation expectations around the middle of its 1-3% target range. But it has been less successful shaping them for house price expectations.

Here’s a hit parade of central bank Governor’s comments over the years:

Reserve Bank Governor Don Brash in April 1998:

“Far too many people still see getting heavily into debt to buy a second property as the best way they can save for their retirement, even though, in my view, they will be disappointed.” Don Brash.

House prices have risen 411% since he said that.

Brash then said in August 1998 house prices were likely to rise in line with other inflation of around 2%:

“Property investment is not a low risk activity in a low inflation environment, and urging people of limited means to borrow heavily to undertake it puts them at risk of serious loss in today's circumstances.”

House prices have risen 409% since he said that.

Reserve Bank Governor Alan Bollard said in September 2003 after house prices rose 14% in the previous year that rental property investors should soon expect real deflation:

“I'm concerned that this could end in disappointment, especially for unsophisticated investors rushing to get on the housing investment bandwagon.” Bollard.

Prices have risen 278% since he said that.

Bollard said in Sept 2004 the success of housing as an investment depended on the prospects for capital gains in the coming years because yields from rents were so low:

“A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions,” he said.

Prices have risen 226% since he said that.

Bollard told central bankers in Switzerland in June 2006 that New Zealand house prices would start falling by the end of 2006 as higher interest rates took effect. House prices have risen a further 159% per cent since he said that.

Reserve Bank Governor Graeme Wheeler warned in February 2015 there could be a sharp correction in house prices.

Then PM John Key supported that warning, saying:

“We are building a lot of houses in Auckland now. People can get a bit carried away with the fervour of these things and believe it is all going in one direction. History shows you house prices go up and down.” John Key

Finance Minister Bill English also said then:

“There's no asset price that can go up at over 10 per cent a year forever, so sometime it will stop. And in this case we are really starting to get more supply coming at speed into the market.” Bill English.

Prices have risen 88% since they said that.

Wheeler said in March 2017 Auckland house prices faced a heightened risk of a sharp correction because of the risk of higher interest rates and the number of homeowners with high debt-to-income ratios.

Prices rose another 56% after he said that.

House prices have risen an average of 20% a year for the last 20 years. Investors currently see house prices rising 6-7% per year or doubling every 10 years, as this ANZ Consumer Confidence chart on expected house inflation over the next two years shows. They have been much more right than the central bank Governors.

There is also an unacknowledged moral hazard problem

Home owners have seen twice in the last 15 years how the Reserve Bank and Government have intervened to protect the housing market when it looked like falling substantially. Understandably, they don’t believe these warnings or pleadings to diversify, particularly when they are able to leverage up their outsized gains, unlike with other investment decisions.

Apart from one short period after the arrival of Covid in February/March last year, investors have seen house prices rising 6-7% a year every year into the ad-infinitum. That implies house prices would double every decade or so.

Interestingly, an analytical paper put out yesterday by the Reserve Bank on measures of house price affordability and sustainability used consumer expectations of consumer prices, rather than investor expectations of house prices

I’d suggest the Reserve Bank challenge its own assumptions about what investors think about future prices, and ask the public whether it thinks the Reserve Bank and the Government have built a too-big-to-fail housing market that they can’t allow to fall for political and economic reasons.

Also, interestingly, the Reserve Bank’s own research shows that any attempt by the Reserve Bank to do a ‘reverse wealth effect’ to slow the economy would have quite an impact. Here’s the paper referred to above, which gives a sense of the feedback loops involved and how this is a difficult tool to put down (bolding mine):

“Our empirical results show that, on average, the marginal propensity to consume out of housing wealth is about 3 cents out of one dollar, but it is larger in responding to negative shocks than positive changes in housing wealth. We further investigate the role of household indebtedness in accounting for the asymmetric effect. Our findings suggest that household leverage reinforces the housing wealth effect in a housing bust, but dampens the housing wealth effect in a boom.” Reserve Bank paper.

This emphasises the diminishing economic returns of flogging the housing market to stimulate the economy and raises questions about what the Government should do next time.

Yesterday’s speech showed the Reserve Bank does not think there is a problem to solve. I think there is.

Ka kite ano. Have a great day

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: In the last seven days, the Government changed our Covid restrictions system from levels with steps in Auckland to traffic lights, but only if all DHBs get double-dose vaccination rates over 90%.

PM Jacinda Ardern hopes that can be done in time to allow an opening up inside Auckland before Christmas, but doubts remain over whether Auckland’s hard boundaries will be relaxed in time for Aucklanders to leave, or others come in, before Christmas. The future for the ‘Kiwi Summer’ of 2021/22 remains in doubt, in part because the vaccine certificate needed to enforce widespread mandates won’t be ready until early December and it’s not clear if Auckland’s borders will relax until all of the rest of the country’s DHBs get over 90% double-dosed.

Elsewhere in the political economy, National and Labour agreed to allow anyone to build three three-storey homes on any suburban section as of right under the Resource Management Act, but they didn’t agree on how to fund the extra infrastructure and public transport councils say they need to build the extra 100,000 houses or so in the next eight years, as suggested by an analysis put out with the historic ‘accord’.

Almighty fights are now likely in the 2022 council elections and the 2023 general election between:

* NIMBY homeowners and ratepaying voters wanting to keep their leafy suburbs uncluttered, and council and Crown debt low; and,

* young urban renters wanting to be able to rent affordably to save for the huge deposits needed to buy their own affordable homes near city and transport centres.

In the broader economy, New Zealand’s annual CPI inflation rate jumped more than expected to almost 5% and may yet go to 6% early next year, bolstering bank economist expectations of a rise in the Official Cash Rate to 2.0% next year from 0.5% now. That would lift the lowest fixed mortgage rates from around 3.5% now to about 5.0% by late 2022.

Overseas, economic growth is slowing because supply chains are still blocked all over the world, which is also fuelling inflation. However, central banks in the US, Europe and Australia still see the inflation as ‘transitory’ and are not expecting to stop printing money and start hiking rates until well into next year.

FYI for both free and paid subscribers, the ‘hoon’ podcast above is available weekly with this summary. It is a recording of the hour-long live zoom webinar Peter Bale and I have every Friday at 4pm for paid subscribers. Sign up to Peter Bale’s free weekly newsletter here. This week we spoke about:

* The changing Covid landscape;

* The ‘Townhouse Nation’ deal;

* The trade deal done with Britain this week; and,

* China’s testing of hypersonic gliders able to avoid America’s anti-missile defences.

(FYI I’m making this one open to all and sending to both paying and free subscribers as it’s the weekly ‘sampler’ summary. But I’d love the free subscribers reading the detail and analysis below to subscribe fully to make my version of accountability and explanatory journalism about affordable housing, climate change policies and child poverty financially viable.)

The five things that mattered this week

1. The new ‘traffic lights’ - PM Jacinda Ardern and Deputy PM Grant Robertson announced the replacement of the current ‘levels’ system of Covid controls (which also has ‘steps’ in Auckland’) with a ‘traffic lights’ system, but only once DHBs had reached double-dose vaccination rates. Ardern said Auckland would be able to migrate to the first ‘red’ light once all three DHBs reach 90% double dose vaccination rates, while the South Island may also move once all its DHBs reach 90%. Auckland’s boundaries will remain hard until all of Aotearoa-NZ’s DHBs reach 90% double-dosed rates.

Ardern said the settings would be reviewed on Nov 29, which is around when Auckland’s DHBs are expected to have reached their double-dose rates. She still thinks there is a chance Auckland’s internal restrictions could be relaxed for Christmas, but it’s unclear how Aucklanders could safely leave for summer holidays and return, or those outside Auckland go to or through Auckland and the Waikato, unless all DHBs get over the 90% double-dosed threshold.'

Here’s what I sent to paid subscribers around lunchtime on Friday:

Here’s what I sent paying subscribers earlier that morning:

2. The big housing deal - National and Labour agreed to RMA changes that will give suburban section owners the right to build three three-storey homes on their section without needing a resource consent. A PwC-Sense Partners report estimated between 48,200 to 105,500 extra houses could be built over the next five to eight years, which would reduce house price inflation by about $133,000 on average over the next 22 years.

However, there was no agreement on how the infrastructure and public transport for these extra houses would be funded, either by councils or the government. National announced on the same day it would repeal the Three Water reforms if elected, which would reduce the ability of councils to plan for the future and use less-debt heavy balance sheets to fund the infrastructure with debt.

Here’s what I wrote for subscribers on Wednesday morning:

And here’s what I wrote for paying subscribers on Monday.

3. National’s spending cuts - National also announced an economic recovery plan to increase support for businesses while also cutting $30b of Government spending to achieve a lowering of net debt from 30% of GDP to 15-25% of GDP.

Here’s what I sent paying subscribers on Thursday on that:

4. The big inflation number - CPI inflation in the September from a year ago was 4.9%, the highest since 1987 once GST hikes are excluded and above the 1-3% range targeted over the medium term by the Reserve Bank of New Zealand.

Bank economists strengthened their forecasts for further OCR hikes over the next year or so. They now see the OCR rising from around 0.5% now to 2.0% by late 2022 or early 2023, which would lift the best fixed mortgage rates from around 3.5% now to around 5.0%.

Here’s what I wrote for paying subscribers on Tuesday on that:

5. A destabilising glider - China was reported to have trialled hypersonic gliders capable of carrying nuclear weapons at five times the speed of sound in a way that avoids detection by US anti-missile defence systems. That includes flying over the South Pole (and New Zealand) and into America through the ‘back door’.

The news surprised US and Russian officials, who warned it could destabilise the current ‘mutually assured destruction’ balance between nuclear powers and spark a new arms race.

Five numbers that mattered this week

Three - The number of houses and the number of stories that will be able to be built on any section from next August under the ‘Townhouse nation’ accord agreed by National and Labour.

90% - The double-dose vaccination threshold formally adopted for all DHBs. At current vaccination rates, Auckland may get there by the end of next month. Laggards such as Tairawhiti, Taranaki, Lakes, Bay of Plenty and West Coast are not expected to get there until early 2023 at the earliest. That implies the Govt would have to be ‘pragmatic’ about allowing Auckland’s borders to relax before those DHBs get to 90%, especially if the Govt wants to have a ‘Kiwi Christmas and Summer’.

Three - The number of first dose vaccinations on the West Coast of the South Island on Saturday.

$9.6m - The amount of extra hardship funds on offer to 25,000 people on benefits or low incomes, as announced on Friday. It is means tested and may have to be repaid. The Government agreed to offer an extra $940m per fortnight in support for businesses able to show a 40% reduction in income, but it is not means tested.

$108b - The amount of funds held in bank savings accounts and bank transaction accounts by non-financial businesses at the end of August. That’s up from $89.2b in January 2020. Non-financial business transaction balances (available cash) were $51.2b at the end of August, up from $33.3b in January 2020. (See chart below)

Chart of the week

A fun thing

Have a great day

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: It all seemed too good to be true, and it turned out it was. We didn’t have to wait long to find out.

Only 112 minutes elapsed yesterday before the structural (and bipartisan) underpinning of our housing supply blockages was again revealed and we understood we were back at square one, which is: voters still don’t want to pay now (or ever) for the housing and transport intensification needed to house future generations and reduce climate emissions.

The bottom line emerged quickly in my view: neither Labour or National will allow the Crown’s balance sheet to be used to fill the nation’s gaping infrastructure deficit and ‘pay it forward’ in a way that rightly smears the costs over the next 50-100 years with debt. Neither party really wants to reverse the 30-year-long transfer of wealth now worth $1 trillion to today’s home owners from renters and the generations of non-home owners to come. Without a consensus on this, nowhere near enough houses can get built to return housing costs to affordable level. Even the bipartisan deal’s own analysis shows it will not lower prices, only slow the inflation a bit.

(FYI I’m making this one open to all and sending to both paying and free subscribers, given the public interest involved. But I’d love the free subscribers reading the detail and analysis below to subscribe fully to make my version of accountability and explanatory journalism financially viable.)

But hang on a minute. Wasn’t this a huge deal?

Let me explain, because there’ll be plenty of people, both home owners and renters, who think the rules of the game were changed fundamentally yesterday with the bipartisan accord announced at midday to allow three three-storey townhouses to be built on virtually any section in the country as of right.

On the face of it, this would mean open slather. ‘Old leafy’ NIMBY home owners in Ponsonby, Grey Lynn, Herne Bay, Parnell, Remuera, Mt Eden, Mt Victoria, Mt Newtown, Thorndon, Mt Cook Kelburn, Fendalton and Merivale would not be able to oppose neighbours building townhouses to the horizon. This announcement would further intensify the National Policy Statement on Urban Development (NPS-UD), opening up the prospect for their sun to be blotted out by next door neighbours building rows of townhouses to the horizon. That’s on top of the six storey apartments allowed on transport routes and around bus and train stations in the original NPS-UD, which they are already up in arms against.

The NIMBYs would be correct in fearing ‘Townhouse Nation’ if their councils, NZTA, the Crown and lines companies allowed this by funding the rebuilding and beefing up the pipes, roads, cycleways, walkways, bus services and train lines to handle this intensification. (Spoiler alert: Don’t worry. They won’t. This is all mostly for show).

But at first glance, it would be understandable for NIMBYs to think the worst and pro-development urban activists to celebrate, given the optics of the first joint National and Labour announcement since 2007 (when John Key and Helen Clark agreed to pass anti-smacking legislation). It is rare and notable when any minister shares the Beehive Theatrette stage with the Opposition. It looks transformational and inter-generational, and that’s how it’s supposed to look.

These bipartisan announcements have led to multi-decade settlements of deep divisions and entrenched those settlements in law and the Crown’s balance sheet. Examples include:

* the deal Winston Peters did with Labour in 2005 (not 1999 as earlier published) to lock in NZ Superannuation at 66% of the average wage (up from a 60%-and-sinking level under National in the 1990s and 65% earlier) and for it to remain un-means-tested, which National agreed to in 2008 — that arrangement now costs us billions extra each year and no one bats an eyelid;

* the effective bipartisan agreement in 1989 to create an independent inflation-targeting Reserve Bank with a mandate to crunch inflation down to between 0-3% (in various ranges and guises), which is still in place and has dominated how our economy and housing market has developed since then;

* the launch in 1989 under then-Labour PM Geoffrey Palmer and the enacting in 1991 under then-National Minister Simon Upton of the Resource Management Act, which was designed to stop arms of the state and other powerful interests over-riding local interests and hurting the environment, and has dominated city planning and the housing market since;

* the Local Government Act of 1987 and the use of the Local Government Commission from 1989 onwards in tandem with the RMA and the creation of NZTA to amalgamate 625 local authorities into 94 bodies that are governed by centrally-set financing rules and where transport is effectively run and funded centrally;

* the Government Roading Powers Act of 1989, which led to the eventual creation of NZTA, the hypothecated National Land Transport Fund, and the arrangement that means local roads and public transport are effectively governed and half-funded centrally; and

* the grand-daddy of them all, the Public Finance Act (1989), which forces Governments to run surpluses and repay public debt in all but the worst crises, and then only for a year or two, which has effectively created a long-run debt ceiling of around 20-30% of GDP in perpetuity and has meant the Government can’t grow to be much more than about 30% of GDP without big new taxes.

At first glance…

I initially thought this bipartisan deal to pass under urgency the Resource Management (Enabling Housing Supply and Other Matters) Amendment Bill by the end of the year might be one of these epic ground-shaking deals too. On the face of it, it seems to radically change the ability of owners of traditional single-storey stand-alone homes on suburban sections to create enormous amounts of new homes, by being able to build three brand new three-storey townhouses on the section without needing a resource consent.

It effectively removes the ability of neighbours to block these homes through the RMA, except for under some very strict and rare purely procedural methods. This really does strip NIMBYs of their power to say no relatively easily. It also turbo-charges and brings forward the National Policy Statement for Urban Development (NPS UD) by a year. It is designed to allow six-storey buildings on major transport routes and around bus and train stations, and has already caused conniptions among the old leafies and the councillors they vote for.

But then I dug beneath the surface with a few of these council and Government politicians and found the same old (and big) blockage is there and unresolved: infrastructure funding. Councils, lines companies and the Government itself will still be able to block large-scale and fast housing supply growth by starving them of infrastructure funding. You can’t treble the number of houses on a street without widening pipes, creating new public transport options and green spaces.

Councils and lines companies will be able to whack huge development contributions and capital charges onto home owners and developers in ways that deliberately stunt growth, along with changing parking rules and starving public transport of funds, as they have done for 30 years. They already do for the larger apartment developments taking advantage of the somewhat looser rules brought in for some areas in the Auckland Unitary Plan.

Just look at what’s happening in Drury in South Auckland at the moment, where neither the Government or the Auckland Council want to pay for roads, pipes and parks for new houses because it would breach their PFA-driven debt limits. The Council announced last month it would increase its development contribution charge for sections in Drury from $11,000 to $84,000, which developers and the Property Council said would simply increase the cost of new homes and reduce the number built.

In short, nothing much has changed, but it’s worth showing how nothing much has changed, if only to show what really needs to change.

What everyone else sees as a transformational deal

Firstly, back to how yesterday’s announcements played out and have been portrayed in the media elsewhere here:

Labour and National join forces for housing crisis fix, ending decades of standoff (Thomas Coughlan in the NZ Herald)

Labour, National announce sweeping housing density law, three-storey homes without consent (Henry Cooke in Stuff)

Labour and National's plan to increase housing density by cutting regulation and sticking it to NIMBYs (Henry Cooke in Stuff)

Labour and National's latest housing fix will only make a small dent in the number of new houses, says Auckland councillor (Bernard Orsman in the NZ Herald)

New rules could mean thousands of new homes in Wellington (Joel McManus in the Dominion Post)

Medium density housing law proposal greeted with tentative support (RNZ)

Housing density plan: Mayors caught off guard by announcement (Charlie Dreaver at RNZ)

What was behind Labour-National united housing stand against Nimbys? (Claire Trevett in NZ Herald)

David Seymour not keen on housing bill, promises he is still a libertarian (Thomas Coughlan in NZ Herald)

There were celebrations and welcomings

The pro-intensification activists at Generation Zero, Renters United and A City For People were thrilled collectively in this statement, prematurely in my view:

“This is huge for renters, young people and anyone at the sharp end of the housing crisis. This is really going to turn Wellington around. Right now it’s stagnating, it’s hard to live here, and it’s getting hard to love.” Generation Zero’s Marko Garlick in The DomPost.

“The Govt's housing announcement about fast-tracking and expanding the NPS-UD is a huge win towards guaranteeing affordable and quality homes for all.” Renters United in this tweet.

Even some business leaders, including Wellington Chamber of Commerce chief executive Simon Arcus, saw the bipartisan announcement as helping growth (although the Chamber is part of a lobby group ‘Progress Wellington’, which opposes public transport and roading changes to enable housing densification)

"Too often, developers ready to make change are held back by high costs and restrictive planning laws. The proposed changes recognise that business is ready to help, and is best placed to solve Wellington’s housing crisis.” Simon Arcus in the DomPost. 

The NIMBYs were clearly unsettled

Mt Victoria Planning Group convenor Rob Brown said the new rules stripped away the rights of homeowners in character suburbs and risked new homes blocking out the sun on pre-1930s villas, which would make them cold and damp…

“The NPS-UD just says ‘to hell with you, little old people’ – and gives developers the right to build regardless of the damage or adverse impacts." Rob Brown in The DomPost.

Auckland Character Coalition spokeswoman Sally Hughes said she was concerned the bringing forward of the NPS-UD by a year would give supporters less time to protect heritage.

The NPS-UD seeks to remove the suburb-wide character and single-house overlays in the Auckland Unitary Plan (AUP) that currently protect almost all of Ponsonby, Grey Lynn, Birkenhead, Devonport, Mt Eden, Parnell and Grey Lynn. (They are the light olive and grey areas in this map.)

Hughes said the Character Coalition had found just 11,000 of the 70,000 homes currently protected on Auckland’s isthmus could be carved out as ‘character’ under the new NPS-UD.

"It would be losing a lot of historic neighbourhoods that tell the story of Auckland to gain very little housing, let alone affordable housing. Intensification in those areas will not produce one affordable house.” Sally Hughes in the NZ Herald.

It turns out David Seymour is right, even if apparently hypocritical

National’s decision to join up with Labour to apparently throw its own ‘old leafy’ supporters under the bus was amplified for ACT Leader and Opposition partner David Seymour, the MP for Epsom.

He has regularly called for the controls on housing development in the RMA to be cast aside in libertarian way that allowed property owners to do what they wanted with their own land.

However, Seymour has always been in a difficult position in his leafy and mostly suburban electorate of Epsom, where he has knocked on every door and been told by most constituents they were not just NIMBYs: they were BANANAs (Build Absolutely Nothing Anywhere Near Anyone).

Seymour contorted yesterday to oppose the unlikely coalition to cast off the shackles on development of single home sections close to the centre of Auckland, or anywhere for that matter. He rejected the accusation his opposition was because his Epsom constituents didn’t want development.

“That's a very cynical thing to say - my view is if we want to solve a very serious problem of housing affordability, those are real problems we need to solve. We've been thinking about this for years now, and planning law is part of the solution, but planning law alone is not going to solve this. If it did, the AUP (2016) would have solved it years ago.

"The Auckland Unitary Plan has said for the last four years 420,000 additional dwellings are theoretically possible but prices went up 35 per cent - why? Because councils don't have the funding for the infrastructure and they'll do everything they can to stop development.” David Seymour in the NZ Herald.

Seymour then pivoted to saying land owners wanted certainty and had bought land on the basis of the rules at the time (which would suggest zoning could never change, the RMA would never be repealed and is effectively an argument for conservatism and the status quo, rather than the view of a red-tape-cutting libertarian.

"This is not so much deregulation, it is sweeping aside a system of rules that Auckland agreed to over a pretty tumultuous three or four years for the Auckland Unitary Plan, which already allows 420,000 additional dwellings." Seymour

Even if it is extremely convenient for Seymour to point to the funding issues, it is also very true. The ultimate calling of Seymour’s bluff would have been for National and Labour to agree some sort of new revenue stream for Councils linked to housing development, which would have expanded the Councils’ borrowing limits set by the Treasury-run Local Government Funding Agency of 280% of revenue by expanding their revenue bases.

ACT itself called in July for Councils to get a 50% share of the GST from house building, and for the creation of a public-private-partnership ‘Nation Building Agency’ (combining the already existing Infrastructure Commission and Crown Infrastructure Partners New Zealand) to fund infrastructure for housing and transport through issuing debt funded by user-pays charges. That same policy proposal also included the removal of the RMA and its replacement with an Urban Development Act that would “significantly expand the rights of property owners to build on their own land.”

ACT is now in a right mess. It wanted to repeal the RMA’s restrictions on land development. National and Labour has called its bluff, and now ACT has to keep its Epsom voters happy, as well as its younger urban professional voters who want all these new townhouses.

Is it truly historic without infrastructure funding changes?

National Leader Judith Collins and Housing spokeswoman Nicola Willis painted the deal as a game changer.

"Today is truly a historic moment for New Zealand: a time when our two major political parties stepped up together to give Kiwis the Right to Build.

But they and Housing Minister Megan Woods were coy about whether it solved the infrastructure funding issue, or whether it would deliver the supply shock that forced down prices.

“What it doesn’t do is get the houses built, so there are other things involved. And those are things for another day, which are around building supplies, training trades, all those sorts of things, all of which are important to getting a house built in terms of value. I think what we’ll find is that there will be some people who will feel that their lawn is now something of value, and some people will find that they can sell that lawn.

“But in terms of house prices, so I think that that’s going to suddenly bring about a drop? No, I don’t see this as a supply shock. I believe it is a shot in the arm to make sure that the country doesn’t continue down a path whereby housing is something that other people own, and our kids get to rent.” Judith Collins

Woods was equally cautious about the idea of a supply shock driving down prices.

“It's actually about sending a very strong message to people making quite long-term investment decisions in many cases that are going to stretch over 10, 20, 30 years. It is about giving that long-term signal and long-term certainty to people so that we can start to see the planning and the investment that we need to come on stream to get the houses that we need to solve our housing crisis." Megan Woods in the news conference in answer to my question (20:20 in) about a supply shock.

I also asked Woods whether the Government would ease the debt limits for councils so they could pay for the infrastructure and transport to back such an intensification (42:20) She would only say the current $3.8b Government grant fund would help, even though it was not enough and had been applied for many times over by councils.

No new funds for council infrastructure

So by the end of the news conference it was clear the bipartisan accord didn’t extend to helping councils pay for the infrastructure.

One solution put forward by the Government to get around its current 20-30% PFA-driven debt limit is through the Three Waters reforms, which are at a delicate moment. They would see water assets and debt extracted from council balance sheets, allowing councils to borrow more for other infrastructure, and putting the cost of new infrastructure into new Crown-backed vehicles able to borrow more than councils.

Three Waters is essentially a Labour fudge to get around the PFA rules stopping both the Government and Councils to borrow more. The new water bodies would be similar to Kāinga Ora and NZTA in that they are able to borrow outside of the rules, albeit this is more of a figleaf type of side-step. The much simpler option would be to amend the PFA to remove the requirement to run surpluses whenever it can outside of crises, and instead allow the use of debt to deal with intergenerational inequities.

And then came the coup de grace

So the bipartisan ‘coup’ was shaky after an hour. Then at 1.52pm came the final nail in the coffin. Collins sent out a press release pledging that National would repeal Three Waters and hand back the water assets to councils, along with their debts.

That leaves the councils without the flexibility to use up the just-created room under their borrowing limits.

“Labour’s proposal to centralise council water assets into four mega-entities, taking them away from local ratepayer control, is hugely unpopular with a majority of councils across New Zealand.“It’s clear the Government plans to imminently legislate their Three Waters Reforms and make them compulsory for all councils, forcibly seizing ratepayer-owned water assets and bundling them into these new entities.“If Labour do try to ram their changes through Parliament, National will unwind the four entity model when we form the next government in 2023.” Judith Collins statement.

Game over.

Back to square one.

I welcome your comments and questions below.

Ka Kite ano

Bernard

PS: Collins also made the Three Waters statement in her own name, rather than that of Local Government spokesman. That is Christopher Luxon.

(Updated to correct date of Superannuation Accord between Winston Peters and Labour)

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

TLDR & TLDL: Aotearoa-NZ now faces an awful decision, similar to the one our leaders collectively had to make in the third week of March last year.

Should we forge ahead and reopen before Christmas, but leave behind the ‘stragglers’ who are unvaccinated to get infected, and potentially overwhelm the hospital system?

Or should we wait and work for many, many more weeks into the summer to get 90% of all the motu vaccinated, in the hope it can avoid the long-term social, economic and health grief from widespread outbreaks among the unvaccinated, especially young Māori who are the least vaccinated and highly vulnerable to long Covid?

The Government has to make the decision within the next week or two and it will define what happens politically and economically in the months and years to come. It will also define the Government’s character and reflect the values of its leaders. See more below on the scale of the decision and which way it seems likely to go.

Elsewhere in the news this morning, the Ministry of Health’s saliva testing contract debacle took another painful twist, Ashley Bloomfield may have accidentally committed the Government to many more weeks of lockdowns, and, China has tested a potent new nuclear missile that would fly over us and via the South Pole to attack the United States.

Coming up later today, I’ll be covering the post-cabinet presser at the Beehive at 4pm. We’re expecting a decision to extend level three restrictions in Auckland and the Waikato, but Northland may be allowed to drop to level two.

Wait for the stragglers? Or open up and hope our hospitals can cope?

As I’ve referred to above, the Government faces a term-defining decison in the next week or two, similar to the ‘go hard and go early’ one made on March 23 last year.

Does it lower Auckland’s restrictions and signal an opening up for Christmas and the summer once Auckland’s overall first-dose rate ticks over 90% later this week? Or does it hold on to lift young Māori vaccination rates in Auckland, Northland, the Bay of Plenty and East Coast above 90%.

Many who are already double-dosed and not from those most vulnerable communities are already calling for an opening up in early December, arguing that will give enough time for the ‘stragglers’, the most hesitant and the outright anti-vaxxers to make up their minds and get the shot. Why should the rest of the country be held hostage by ‘the losers, laggards and loonies,’ they ask.

Here’s a sample of that view from ACT Leader David Seymour, who seems to be better at bottling the lightening or ‘mood’ of the floating and centre-right ‘mainstream’ voters than National Leader Judith Collins at the moment (bolding mine):

“ACT believes in personal responsibility. At some point we have to stop waiting for the stragglers, procrastinators, and crazies who believe anything they read online. Once everyone has had the opportunity to be vaccinated, it’s time to get on with life.” David Seymour in an ACT statement last night.

Those ‘stragglers’ are overwhelmingly Māori, especially in the epicentre of the endemic delta outbreak, where 79% of those infected since mid-August were either Māori or Pacific residents. The Ministry of Health tables reproduced below show less than 50% of Māori are currently fully vaccinated in Tamaki Makaurau. They also show (second and third chart and table respectively) that young Māori in Auckland, Northland and Bay of Plenty-East Coast are vaccinated at half the rates of non-Māori and non-Pacific youth. (Interestingly, the Pacific youth vaccination rates are slightly better than for young Māori).

Auckland will be 90% average first-dosed later this week

The decision is near because Auckland’s overall population will be 90% first-dosed by the end of this week, which has already sparked calls from the likes of ACT for a December 1 ‘freedom day’ where Auckland opens up.

Until now, the Government has been coy about which particular version of the 90% threshold it is using for that opening up decision.

However, Ministry of Health Director General Ashley Bloomfield appeared to shift the debate somewhat on Saturday when visiting the overwhelmingly Māori and Pacific community at Cannons Creek’s Super Saturday event.

He said he wanted “all groups” more than 90% vaccinated. If he is referring to the double vaccination of Māori in Auckland, then that means another 55,818 people or 41.7% of the Māori population there need to vaccinated. If he is referring to the single-dose rate, then another 26,125 shots are needed. That equates to a vaccination rate of 14 ‘Super Saturday’-like days of 1,888 first doses per day.

“We don’t want a 90 per cent average uptake of the vaccine – we want it to be 90 per cent across all groups.” Ashley Bloomfield at Cannons Creek on Saturday, as quoted by Stuff.

The decision Cabinet makes in the coming weeks will say a lot about its priorities and its values. The Government decided in March this year not to take the advice of Māori health experts to prioritise Māori and Māori community and health groups in the vaccination plan. It saw the ‘optics’ of favouring Māori as too difficult with median voters, especially outside Auckland. Instead, the Government prioritised by age group and medical condition.

My view: The irony is that decision may be the reason why the reopening may have to be delayed for yet more many weeks, effectively turning a political decision about optics seven months ago into a bad decision on both health and economic grounds now.

Or the Government could simply repeat the March, 2021 decision by forging ahead with a reopening before Māori are 90% vaccinated, especially in Auckland, the most remote communities of Northland and the East Coast, betting that it will be politically more acceptable and may not overwhelm the hospitals.

It could be argued the decision to drop Auckland from level four to level three on September 21 was a precursor of that decision, and therefore a leading indicator. Māori health experts and community groups have repeatedly called since then for a reversal of that decision, which has clearly led to an increase in the number of cases in the last two weeks.

Health of all = Economy? Or Health of all vs Economy?

One framing of the decision is that the Government made the right call in late March last year to prioritise the long term health of the people over the immediate economic impact of lockdowns, and was surprisingly rewarded when the strict lockdowns were mercifully short and led to the biggest economic rebound in the developed world. Essentially, the decision to equate health with the economy, rather than seeing the decision as health vs the economy, was the right one then.

However, this time around, the lockdowns have dragged on and the Government is concerned it is losing its ‘social license’ for the sort of lockdowns New Zealand has, which are the strictest in the world. However, few are saying extended lockdowns are economically disastrous in the same way many feared in March last year, and which forced most other developed world Governments to wait or prevaricate over hard lockdowns.

For example, the Reserve Bank has just hiked interest rates (mistakenly in my view) and everyone else sees another couple of hikes over the next six months because consumer spending and business confidence is robust.

However, the political and social pain is more of an issue this time around than economic pain. Back in March 2021, we had not experienced long lockdowns and there was no prospect of opening up and tolerating a spread of Covid in the community. Back then there were no vaccines and we had no understanding of what closed borders for two years and the prospect of four months of lockdowns in our largest city were like.

Aucklanders and much of the rest of the country are exhausted, and just want the lockdowns to end. ‘Freedom Day’ feels so close for those who are double-dosed that there’s a type of white-line fever in the air. Many feel it would be safe to open up, even if there is nervousness about how the hospital system would cope. Many voters ‘feel’ it’s a sensible and hopeful decision to open up. PM Jacinda Ardern has encouraged that by talking of a real chance of a ‘Kiwi Christmas’ and a ‘normal’ summer music festival season, albeit with vaccine certificates.

But the clock is ticking. The festival organisers are close to their ‘drop dead’ dates for decisions about whether to go ahead. Many of the pre-Christmas ones have already gone. Family Christmas plans all over the country are on tenterhooks. Bach and flight bookings are poised to be either cancelled, or locked in. The decision about moving down Auckland and the Waikato down to level two will need to be taken within the next fortnight to make a ‘normal’ summer a realistic prospect.

So, if the Government chose again to prioritise health over economic and immediate political drivers by waiting for young Māori to reach 90%, how long would it take before the economy and society could open up again?

14 more Super Saturdays needed

The national first dose vaccination rate rose one percentage point to 85% over the weekend of vaxathon action, while the fully vaccinated rate rose by slightly more to 65%. The first dose rate in Auckland hit 89% yesterday and the Ministry of Health said another 20,360 first doses were needed to get over the 90% overall threshold. It saw that happening some time this week.

There’s been a lot of doubt about exactly which rate is the threshold for Auckland to start reducing restrictions and the country starting to open up. PM Jacinda Ardern has often cited 90%, but has been coy on whether that was national first dose, totally vaccinated, Māori overall, young Māori, or Auckland young Māori.

Currently, the national Māori first dose rate is 66%, while the second dose rate is 44%. The overall Māori first dose rate in Auckland of 71% is 18 percentage points below the rest of the population in Auckland. The second dose rate for Māori in Auckland is 49% vs 71% for the total population in Auckland.

There were 1,888 first doses given to Māori in Auckland on Saturday, which is 1.4% of the Māori population there. There would need to be 14 more ‘Super Saturdays’ worth of vaccination rates for the overall Māori population to get to 90% of the 133,857 over-12s population of in Auckland. It could take twice as long to get young Māori vaccination rates above 90%.

So which way will the Govt go?

The two most recent big decisions — to not prioritise Maori in March and to drop from level four to level three on September 21 — suggest the Government is tired of the lockdowns too and can see the political dangers of keeping everyone in Auckland and Waikato locked down through Christmas, let alone significantly restricted through the rest of the North Island and especially the South Island.

“One of the things I think we all need to recognise around alert levels is, alert levels work when there is a really high degree of voluntary compliance. We were already seeing at the end of that level 4 period that more and more people were not sticking with that. We're seeing that increasingly the tolerance for those levels of restrictions has really waned." " Chris Hipkins on Newshub’s The Nation.

It may also feel the hospital system can cope, although that remains actively under debate inside the DHBs.

The politically expedient thing to do right now would be to signal an opening up before Christmas and make a song and dance about frantically vaccinated as many of the vulnerable as possible as fast as possible. My bet is on this option being taken.

The way I think it should go

But it should hold on until young Māori are 90% double-dosed, if it was to display the same values it showed in late March last year. The difference is that back then some of the most prominent figures in the business community, and in the Opposition, were also in favour of a hard lockdown that prioritised health over the economy. Essentially, the Government had air cover.

This time it doesn’t. The Opposition is firmly baying for a reopening and the usual fault lines in our society along racial and socio-economic lines are opening up. The business community is also desperate for a reopening of the internal and external borders. It has been less blatant with its public rhetoric, but it is just as insistent behind closed Zoom meetings.

That brief period of solidarity from March 2020 has dissolved under the pressures of our fundamental inequalities and history of choosing the interests of the median-voting Pakeha majority over Māori. It appears we’re about to do the same again in the most awful way that will see tens of thousands of Māori youth suffer long Covid.

News and scoops breaking this morning

Couldn’t give a spit - Saliva testing delivered by Asia Pacific Healthcare Group (APHG) was well short of the 3,000 to 20,000 a week expected by the Ministry of Health under a $60m contract, Dileepa Fonseka reported in Stuff this morning.

The saliva testing roll-out has been the source of much public embarrassment for the Ministry of Health after its roll-out fell behind schedule. An immediate roll-out of saliva testing was recommended by the Simpson Roche report in September last year.

A saliva testing contract for border workers was tendered in March, enacted in May, but only rolled out to border workers days before the Delta outbreak in August.

Much of the public tension has revolved around a dispute with saliva testing provider Rako Science, whose diagnostically validated test was passed over for another test which was not similarly validated at the time. (Stuff)

News in our political economy here and overseas over the weekend

Vaxathon conga line - Just over 130,000 doses were given in Aotearoa-NZ on Saturday, well over the 100,000 doses PM Jacinda Ardern hoped for. That included a record-high 10,825 first doses to Māori, lifting this group’s overall first-dose rate to 66% of the eligible population and the second-dose rate to 44%. The Māori second dose rate rose to 49% in Auckland and remains well short of the 90% rate epidemiologists want.

MIQ loosening coming - Covid-19 Minister Chris Hipkins indicated over the weekend that shorter MIQ stays and a greater potential for double-vaxxed returning residents to self isolate were likely sooner than previously expected.

"I think you'll see some changes there in the coming weeks. There is a Cabinet process to go through where we make those decisions and I don't want to get ahead of those, but we are absolutely looking at our border settings now in the light of the fact we've got more cases in the community." Chris Hipkins.

A Sputnik moment? China tested a nuclear-capable hypersonic glide missile in August that circled the globe, catching US intelligence by surprise, the FT reported on Saturday. The missile flies at five times the speed of sound at a low trajectory and is manoeuvrable, making it harder to detect and destroy. It could also fly over the South Pole to attack the US, confusing North Pole-focused defences. Russia and the US have not developed such missiles yet. (NDTV)

A lump of coal - A single Democratic Senator forced US President Joe Biden to start revising a US$3.5t infrastructure spending plan because he opposed the core of Biden’s climate emissions reductions plans around shutting coal and gas plants. West Virginia (Pop’n 1.8m) senator Joe Manchin was reported by the New York Times late on Friday to have blocked the package. The state has 13,000 coal miners (2% of the state’s workforce). (Reuters)

Thread of the day

Charts and video of the day

These charts in a presentation by micromobility expert Horace Dediu illustrate the potential for e-bikes, scooters and buggies to solve our transport emissions problem.

‘The overwhelming number of trips are short, but we prepare our vehicles for the rare worst-case trip. (The 300-mile one-way-trip, family and suitcases jammed into our car.)’ Horace Dediu

The cost of micromobility is dropping fast. Dediu compares the trajectories of micromobility devices vs electric cars, with the trajectories of PCs and mobile devices.

“When mobile devices arrived at a lower price point, they dramatically increased the size of the market. (Compare the yellow dotted line to the grey dotted line of PCs below.) His argument is that micromobility, the array of smaller e-bikes, scooters and yet-to-be-invented buggies, will similarly expand the market.” Horace Dediu

Here’s his presentation in full.

Comment of the day in The Kākā community

“In the past couple of weeks, I have discovered that a number of my young whanau’s friends are not getting vaccinated. They had obviously influenced my younger family members until I convinced them to get the jab. I’ve also discovered to my surprise that one of my educated middle aged friends is the same. I think the common thread is mistrust in a government who tells us to trust them and do what they say while saying one thing and doing another themselves. In the past, the PM used her public speaking skills to bring everyone together. But people now understand that her entire leadership is basically just words and the are often lies. Peter, Bernard is right when he says that housing is everything. NZ used to pride itself in being an egalitarian society and we elected a PM who promised to save that, but she didn’t. And now we don’t know who we are.” Erina here in the week’s end summary.

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: This week the Government gave up any remaining hope of ‘stamping out’ Auckland’s Covid outbreaks and is now racing to vaccinate the most hesitant and hard to reach parts of the population before delta reaches them.

It effectively told the nation to brace for a doubling of cases in the next couple of weeks and laid out how it hoped the hospital system will cope in the coming months. ‘Coping’ will probably mean thousands of delayed elective surgeries, cancer screenings and other tests, as DHB’s reshuffle staff to jury-rig a near-doubling of ICU and high dependency unit beds.

Also: our Government put out a half-baked discussion paper on its climate emission reductions plans that could embarrass Aotearoa-NZ on the global stage of a key conference at Glasgow in two weeks time. There’s now a risk our trading partners will punish us for being an Australian-style climate laggard by putting climate import tarriffs on our meat and dairy exports.

Meanwhile, energy prices exploded in Europe and raised fears higher inflation will become embedded enough to force the world’s biggest central banks, the Fed and ECB, to stop printing money and start hiking rates sooner-than-expected next year.

Look out below the fold for my five things to know this week, my five numbers of the week, my five charts of the week, my five must-reads elsewhere for the weekend, and, some fun things. I’ve spread links to the emails sent this week to paying subscribers as a taster for those yet to subscribe in full.

Also, have a listen to my ‘hoon’ with Peter Bale in podcast form above from last night. It’s a Zoom webinar opened up for paid subscribers and happens every Friday at 4pm for an hour. It’s like a Zoom drinkies session for members of The Kākā community.

(This is the weekly summary for all subscribers to my email newsletters and podcasts on The Kākā , including both the paid and free subscribers. Becoming a paid subscriber helps me continue my accountability and explanatory journalism on housing, climate, transport, welfare and the economy.)

Our ‘hoon’ around the week’s events in geo-politics and the political economy in and around Aotearoa-NZ covered the following topics, and answered questions from paying subscribers on the webinar:

* The end of the Covid elimination strategy and what it means,

* The likely doubling of Covid cases over the next fortnight and whether our hospital system can cope;

* The widening energy crisis in Europe and China, and whether Russia is helping or hurting;

* Whether higher inflation is bedding in globally and will force the Fed and RBA to hike soon;

* The death of Pakistan’s father of the bomb, AQ Khan, from Covid-related complications at the age of 85;

* The floating oil bomb just off Yemen that threatens millions; and

* How an Australian real estate agent was tripped up by poor apostrophe practice.

Peter produces an excellent free weekly email on global affairs via The Spin-off I’d recommend signing up to here.

Five things worth knowing this week

1. Pivot! Pivot! - The government finally pivoted hard to preparing for Covid to become endemic among Auckland’s unvaccinated communities. It signalled most of those who test positive for Covid and don’t need hospital care will be able to self-isolate at home to leave space in MIQ for the riskiest spreaders and returning ex-pats.

It’s possible MIQ stays could become shorter earlier than the end of the March quarter of next year, now the imperative to avoid incursions is sliding away.

2. Intergenerational pain - The Government revealed a much-healthier-than-forecast set of Crown Accounts for the year to June 30, including a deficit before gains and losses of just 1.3% of GDP, less than a third of what was forecast in the May Budget just five months.

That’s because of the economy’s strong rebound after last year’s lockdowns. But it also showed how inadequate our Public Finance Act rules from 1989 as a way to ensure we invest in future climate and housing infrastructure, let alone catch up on 30 years of under-investing.

3. Covid ate my homework - The Government unveiled a discussion paper with a few ideas on how to reduce climate emissions, more than two years after the passing of the Zero Carbon Act and almost a year after declaring a climate emergency. The ideas fell short of achieving the Climate Commission’s carbon budgets in the early years and were widely ridiculed by climate experts.

Climate Change Minister James Shaw can only hope he gets something more substantial to take with him to Glasgow in less than a fortnight in a form of a Nationally Determined Contribution that avoids Aotearoa-NZ being labelled a laggard to be targeted by carbon tariffs.

4. Are we there yet? - PM Jacinda Ardern refused again this week to specify when Auckland, Northland and the Waikato would be released from its level three restrictions, let alone the rest of the country stuck in level two. In particular, she wouldn’t say what the vaccination threshold the Government is targeting, other than wafting ‘over 90%’ over the motu.

That could mean 90% double dosed of the most vulnerable communities in South Auckland, Northland and the East and West Coasts, or it could mean 90% single dose of the Auckland-wide over-15 population. As of Saturday morning, those most vulnerable communities remain below 25% double-dosed, while Auckland’s adult first-dose rate is at 87%.

5. Will it stick? - Energy prices across Europe and Asia jumped to record highs this week, raising fears consumer price inflation spikes over 4% in many countries could become embedded. Emissions reductions policies, including the closure of coal mines and power plants, are finally hitting prices in a dramatic way. These shortages and price spikes are also slowing global economic growth and worsening supply chain snarl ups ahead of the Christmas shopping season.

The bigger question for asset prices and the global economy will be whether the US Federal Reserve and the European Central Bank become worried enough that they are forced to admit the inflation surge is not transitory. The could see them end their money printing (US$120b and €80b a month respectively) early and start hiking interest rates next year. The jury is still out, but some see the verdict coming next month.

Five numbers of the week

60 - Last Sunday’s Covid case numbers, which ended any remaining debate about the possibility of ‘stamping it out’ in Tamaki Makaurau. Cabinet extended lockdowns in Auckland, Northland and Waikato.

0.9% - The rise in retail sales in September from August, as measured by spending through debit and credit cards. This was weaker than the 10% bounce some economists had expected because of the easing of restrictions to level three in Auckland and level two elsewhere during September.

US$125b - The amount of tax expected to be paid by big tech firms in markets they operate in, but aren’t based in. The OECD agreed a deal over the weekend to set a global minimum corporate tax rate of 15% for large businesses, which will see of tax redistributed from the home countries of global tech and other firms to those countries where they operate.

5.4% - The annual consumer price inflation rate in the United States in the 12 months to September. Annual inflation in the 12 months to August was 5.3%. Energy, food and rent inflation drove most of the increase and heightened fears the Covid-era inflation would become embedded in a way that forced interest rates higher.

170 - The number of daily Covid cases that Public Health Director Caroline McElnay said this week would start to prove difficult for tracking and tracing teams to keep up with. She said it was likely numbers would double by next month with the R value over 1.

Five charts of the week

A fun thing

Have a great weekend

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

TLDL & TLDR: It seems everyone except renters and aspiring home owners are winners from the housing boom, even the Government, which in theory is supposed to be making housing more affordable.

All the political and financial incentives in front of the Government are designed to keep residential land prices rising, and never to let them fall. That was reinforced yesterday in the latest Government financial report showing the biggest winner from the 30% rise in house prices over the last year was the Government itself, both from higher land valuations and surges in tax revenues from an economy driven by the wealth effect in the housing market.

Treasury reported the Crown Accounts for the year to June 30 yesterday, showing the Government’s operating balance after gains and losses was a surplus of $16.2b, including $12.2b from revaluations higher in land values. State housing land revaluations totalled $5.8b.

(I’ve opened this one up for all given the public interest, and to remind the free subscribers about what they get daily as paid subscribers. Subscribe to support my accountability and explanatory journalism on housing, climate, politics, economics and business.)

Before gains and losses, the Government’s deficit of $4.6b or 1.3% of GDP, which was less than a third of that forecast in the May Budget and a massive turnaround from last year’s $23b deficit. Tax revenues were $6.5b higher than expected at $98b and a whopping $18b up on the previous year.

However, capital spending remains anaemic, increasing just $3.3b to $12.7b. It was almost matched by the Reserve Bank’s lending of $3.1b near-zero-interest-rate loans to banks through its Funding for Lending programme, which was almost all pumped back into the housing market.

All this meant net core crown debt at $83.4b was $11.6b below the May 2021 Budget forecast. As a percentage of GDP, net debt was just 30.1% of GDP, down from the 34.0% expected in May. That means Aotearoa-NZ’s net debt is less than half that of its AAA-rated peer Australia and less than a quarter of peers such as Britain and the United States.

So what does that all mean?

Finance Minister Grant Robertson was asked yesterday if he was pleased the Government had been the single biggest beneficiary of the latest jump in house prices. He said he took no pleasure and the Government still wanted to make house price inflation more sustainable. He has stopped using the phrase ‘affordable’.

Note however, he did not say he wanted house prices to be more affordable. He was only saying that an inflation rate of 30% was too high. PM Jacinda Ardern has said an inflation rate of around 4% per year was preferable, which means the Government has no desire to improve housing affordability by seeing house prices and rents fall. That would be the only way now to see any significant improvement in the ratios of house price to income multiples and the share of disposable income going to rent. Both are the highest in the OECD now.

My view: These figures show again why it is so hard to reverse the ever-ratcheting-higher nature of house values. Median voters ‘lock in’ the gains in their house values as soon as they happen, and politicians refuse to say they would encourage or accept lower prices. Now the Reserve Bank is using the housing market as a ‘wealth effect’ monetary policy tool, both the major players in the economy are both guarantors and beneficiaries of the unearned gains in land prices.

Our economy and society truly is a housing market with bits tacked on. No matter where you turn, the fortunes of the Government, businesses, families and institutions depend on house prices rising constantly, or at least not falling.

For example, the ratcheting up of land prices and the rules in the Public Finance Act (1989) forcing the Government to run surpluses and reduce debt in all but the most extreme situations, have created an institutional bias towards never freeing up public land for mass house building. Any attempts to sell land to developers or to account for its use in house building means that land prices keep ratcheting higher. Eg. Treasury won’t sell land to developers to build affordable houses at below market rates because it’s not allowed to under the PFA, which perpetuates land shortages that drive prices ever higher. This was a major factor hobbling KiwiBuild.

Those rising prices benefit the personal (and often small business finances) of home owners who vote, the Government’s finances, and the Reserve Bank’s monetary policy aims. None of them are actually serious about improving housing affordability because it would stop the politicians from meeting their political aims (to win more median voters than the other main party) and stop the officials from meeting their legislative obligations (to keep debt low, interest rates low and Crown net worth rising)

Hence, rinse and repeat.

So what would break this doom loop?

My view is the Public Finance Act (1989) needs to be repealed and replaced with directions on the use of the crown’s balance sheet to take into account the intergenerational needs of the population. That would include changing the focus from public debt reduction and effectively reducing the size of Government to around 30% of GDP, and instead focus on investing in infrastructure that would benefit future taxpayers and the future Government finances by reducing housing, health cost, justice cost, climate cost and education cost liabilities, while also increasing productivity and ultimately the Crown’s own balance sheet.

Currently, the PFA, (see note 24 on page 115 of the Crown Accounts), specifies the Treasury and Government must at all times (bolding mine):

* reduce total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year

* once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues

* achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future

* managing prudently the fiscal risks facing the Government

* when formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates

* when formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy

* when formulating fiscal strategy, having regard to its likely impact on present and future generations.

That last one is honoured more in the breach than by the action, otherwise we have invested heavily in public infrastructure for housing, renewable energy and transport to ensure affordable housing costs and a pathway to carbon zero — neither of which we are anywhere near.

PFA not fit for affordable housing and carbon-zero world

For example, the Infrastructure Commission today estimated in its draft report to Government that our infrastructure deficit at $75b and that 115,000 new houses are needed to fix our housing crisis. It recommended doubling infrastructure spending to around 10% of GDP.

I asked Robertson yesterday how much fiscal headroom he saw to address the climate change issues, for example. He has already previewed Budget 2022 as a climate Budget and the Government is still (!) going through the process of deciding its policies to achieve carbon zero by 2050, or even faster reduction as seems necessary to achieve new climate goals being determined at the Glasgow conference next month.

He would only say he and Climate Minister James Shaw were revisiting aspects of the PFA that currently made it difficult to budget for spending across ‘clusters’ of departments. Both have been reluctant to shy too far away from the orthodoxy around permanent debt reduction towards effectively having the lowest level of Government debt possible, while still keeping the bond markets liquid. This is seen at around 20% of GDP. There have been suggestions of changes for over a year with no detail.

My view: The PFA needs to be rewritten to emphasise the longer-term view on climate and societal liabilities, rather than simply keeping short term debt low to ensure interest rates stay low and house prices stay high.

Scoops and news breaking overnight

Signs o’ the times news

Some fun things

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