The Kākā by Bernard Hickey

TLDR & TLDL: The Government essentially extended Auckland’s level-three lockdown indefinitely yesterday and gave no deadlines or thresholds for exit. That extends the social and economic pain until at least mid-December, but this time without the hope elimination could reinstate pre-lockdown normality after it was not-so-quietly abandoned.

The only details able to be pinned down were that Auckland remains in level three with level four borders for the foreseeable future, albeit with two families able to picnic together and early childhood centres opening, until either all or the most vulnerable Aucklanders are more than 90% single or double vaccinated. Ashley Bloomfield sees that taking up to 10 weeks.

Elsewhere overnight and this morning, global stocks fell as much as 2% as concerns about energy inflation drove fears about interest rate hikes. The Brent crude oil price rose 3.1% to a three-year high of US$81.74/bbl after Opec+ decided not to increase output, and as pressure from gas and coal shortages in the UK, EU and China increase demand for oil-powered electricity heading into the northern hemisphere winter.

Coming up, we’ll watch out for more detail from the Government about vaccination certificates and vaccination mandates, at least in healthcare and education. Also, the Reserve Bank of Australia is scheduled to release its latest monetary policy decision early this evening, although little change is expected. But it will be closely watched on the eve of what is expected to be New Zealand’s first rate hike in seven years tomorrow at 2pm.

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Subscribers support my particular version of accountability journalism on housing, migration, Covid, climate change and plenty of other things. See yesterday’s news sent as an email to paid subscribers during the 4pm post-cab presser to see what you get and the way the community works (45 comments)

Only two-family picnics to Christmas

It was one of the more frustrating hours of news conference in the Beehive Theatrette. (You can hear the non-answers to my questions to the PM, and the key comments from Bloomfield in the podcast above.)

It was only as a KPI-free hour of news conference was wrapping up yesterday that Ministry of Health Director General Ashley Bloomfield gave any indication of a potential end to Auckland’s purgatory, and by extension the rest of Aotearoa-NZ.

He was asked at the 57:30 min mark if it would take 4-8 weeks for Auckland to be in a position to remove most of its restrictions around shops and cafes opening, and relaxing the internal boundaries stopping Aucklanders from travelling elsewhere.

“That is the time frame for us to achieve our ambition around vaccination being higher than 90% double vaccinated and then of course another couple of weeks when people then have that full protection, full immunity, so this is the period of time really.

“We want to do that and I'm sure, like everybody, particularly in Auckland, we are looking forward to a summer where we can enjoy freedoms and our ticket that is vaccinations, so the next 4 to 8 weeks into early December is critical to get our vaccination rates up.” Ashley Bloomfield in the 4pm post-cabinet news conference.

Earlier, the PM acknowledged the end of the elimination strategy, without ever formally calling its time of death. She also did not answer questions about what the vaccination thresholds might be for releasing restrictions in Auckland, in particular around whether the Government would wait for vaccination rates for young Auckland Maori and Pasifika to get above 90% double-vaxxed, given they are currently 17% and 24% double-vaxxed respectively. They are 50% and 61% single-vaxxed respectively.

There are still 260,000 Aucklanders who are still not vaccinated at all and immunologists have warned Auckland’s hospitals are likely to be overwhelmed when the virus spreads into these communities, which is now inevitable without vaccination. Ardern again ruled out a move back up to level four restrictions yesterday.

‘No help and no details’

Business leaders and the Opposition were either disappointed or outraged by the lack of guidance and the prospect for restrictions-without-an-early end. Auckland’s business leaders accused the Government of not listening to business needs, not giving extra financial support and not helping through vaccination mandates and the use of vaccination ‘passports’. The Greens lamented the end of elimination and accused the Government of putting the most vulnerable at risk.

Here’s a selection from their reaction (bolding mine):

"The Government's scrambling to know what to do, and while it's great to know that 10 people can have a picnic, we'd like to know when 10 people who are fully vaccinated can go back to work.”

"What we've seen over the last 72 hours is that businesses are getting increasingly desperate. While it's nice to hear that the wage subsidy and the resurgence payment are extended, we all know that there are many businesses that don't qualify for those. We've been hearing for seven weeks that there might be some specific assistance for Auckland businesses, but there's nothing." Employers and Manufacturers Association Northern CEO Brett O’Riley in NZ Herald.

Auckland Chamber of Commerce CEO Michael Barnett called in particular for help with vaccination mandates.

“Government’s phased, 3-stage transition plan to slowly lift restrictions, leaves business desperate for revenue, burdened with debt, shortchanged in the financial support being offered.

“I’m disappointed and frustrated that policymakers and politicians are not listening to business to develop a fairer, more balanced approach to secure commercial, employment and economic outcomes for the good of all, not just responding to health risks. Extension of the wage subsidy for employees and the resurgence payment for employers to only partially offset weekly overheads does not cut it.

“If vaccination is the way out of restrictions, then government needs to enable businesses to implement the no jab no job regime, get access to saliva testing and do the right thing as the country’s biggest employer and get all your staff vaccinated at once.” Auckland Business Chamber CEO Michael Barnett in a statement.

Political consensus breaks completely

Opposition leaders were even more scathing, including the Greens, who were unusually critical of the Government.

Signs o’ the times news

What happened in the last 24 hours

Facebook and its Instgram and WhatsApp websites went down this morning. Productivity went up.

Auckland International Airport appointed Air NZ chief operating officer Carrie Hurihanganui as its CEO to replace Adrian Littlewood, who is leaving on Nov 12 after being CEO for nine years.

Wellington-based fintech FNZ agreed to buy share trading platform Hatch from Kiwibank’s Kiwi Wealth for an undisclosed sum and plans to fund growth plans globally.

Comment of the day in The Kaka community

“Those promulgating misinformation should face up to the cost of the damage they are causing. It's no longer about the right to free speech, our economy and our health system are in jeopardy because of their actions. They are convincing the uneducated and vulnerable with tactics such as fear, that are questionable. Because the government and police won't crack down on them, there are the thousands of personal stories that will emerge of families affected by treading lightly people's right to ignore the advice of Government and science experts.” Beverley Short in this article.

Chart of the day

There is some reasonable news though on the spending front. BNZ Chief Economist Paul Conway released research yesterday from BNZ card spending data showing spending fell 49% in the first week of lockdown in August, but has improved since and was only 5% below pre-lockdown levels in the week to Tuesday the 28th of September. 

Numbers of the day

9% - The percentage of home occupants who agreed to be tested for Covid during door to door surveillance testing last week in the suburb of Clover Park. 91% refused to be tested. (NZ Herald)

2.018m - The number of people fully vaccinated as of yesterday. This is 48% of people over 12. There have been 3.328m vaccinated with one dose, or 79% of the eligible population.

$140m - Dividend being paid by the Reserve Bank to the Government in the 2020/21 financial year, as revealed in the bank’s annual report released yesterday.

11,891 - The total numbers of new cars registered in September, up 7.0% from September 2020 and the most ever recorded in a single month, despite the motu being in various states of lockdown throughout the month. There were a record-high 1,640 electric vehicles registered in September.

1.5% - The level financial markets currently expect the Official Cash Rate will rise to by the end of next year. Currently at 0.25%, the Reserve Bank is expected by financial markets to raise it twice this year, including by 0.25% tomorrow and by a further 0.25% on November 24 with the bank’s final full Monetary Policy Statement of the year.

85% - The chance of a 25 bps rate hike tomorrow, as measured by BNZ Economist Stephen Toplis in his weekly note, and down from 100% last week before cases emerged in the Waikato.

607 - The number of people who died of suspected suicide in the year to June 30, 2021, according to statistics released yesterday by the Office of the Chief Coroner and the Ministry of Health, along with a new interactive statistics tool to analyse the figures. This was down from 628 the previous year. The overall death rate from suicide fell to 11.8 from 11.6 the previous year, but the death rate for Maori is over 20 and double the non-Maori rate.

Quote of the day

“We also outlined our working definition of sustainable house prices. We are in the process of refining a suite of metrics to indicate stretched prices. We will consider these metrics on a regular basis and will review financial policy settings accordingly, potentially adjusting settings to steer prices toward a more sustainable level.” The Reserve Bank commenting on house price sustainability in its Statement of Corporate of Intent for 2021-24 (holding mine)

Useful long reads

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 and TLDL: This is my wrap up of the week’s key news from Aotearoa-NZ’s political economy for all subscribers, both free and paid, including a podcast above of my Friday afternoon live video ‘hoon’ with Peter Bale.

This week we look ahead at whether Cabinet will lower Auckland’s Covid restrictions to level two from level three, and how the broad consensus on the elimination and hard borders approach broke down completely this week. We also look at whether the Reserve Bank will decide on Wednesday to hike the official cash rate for the first time in seven years, and whether it should.

This is the weekly summary and sampler for free subscribers of the more indepth work we’ve done through the week, which is available daily for full paid subscribers. An initial introductory offer expired last week, but there is still a Housing Affordability special offer open for a couple more days. Subscribe here to support my journalism and join The Kākā community. See the highlights of the week below, plus seven numbers for seven days, my weekend reading and some fun things.

Breaking: Just before publishing, news broke of two new Covid cases in the Waikato and of a Covid-positive truck driver who drove down the North Island. PM Jacinda Ardern and Ministry of Health DG Ashley Bloomfield are due to hold a news conference in the Beehive Theatrette at 1pm today.

The end of elimination. But now what?

This week’s cases confirmed the pursuit of elimination any time soon is effectively over. The seven day average of cases remains in double digits and well above the low single digits seen last year in the lead-up to the decision to take Auckland down to level two. The continued ‘surprise’ arrival of cases at Auckland hospitals and growing signs Covid is established in South Auckland’s most overcrowded and stressed households is clear.

PM Jacinda Ardern signalled this week that Cabinet would on Monday keep Auckland’s boundary settings at the current level-four style restrictions that mean very few Aucklanders can get out, except to bring in essential goods. The option to take Auckland down to level two restrictions inside those boundaries is still on the table, but appears less likely by the day as the number of cases remains well into the high teens and twenties, with regular arrivals of ‘unlinked’ cases. Epidemiologists and modellers are now consistently saying there are no good health reasons to take Auckland down, which means an easing of restrictions would be for economic and political reasons.

Cabinet faces the most awful choice tomorrow. If it stays at level two, it will further stress already ragged public support in Auckland and elsewhere for the lockdowns, which can’t easily or quickly end if the elimination strategy continues to be pursued credibly. Or the Government can effectively acknowledge elimination before Christmas is a hopeless task and aim to reopen as safely as possibly while working as hard as possible to get as many vaccinated. The trouble is the rise in first-dose vaccination rates have slowed dramatically in the last fortnight as the ‘final 15%’ looks to be much harder to achieve.

The problem for the Government is it has now boxed itself into a corner and the virus has it on the ropes. It has said it wants Auckland’s first-dose vaccination rate over 90% in order to reopen without stressing the hospital system too much, but that could take until well into mid-November at the current slowing rates. But many Aucklanders had their hearts set on a re-opening from this Tuesday, and many outside Auckland were hoping to reconnect from then too, as well as go down to level one. But the case numbers aren’t low enough, if the Government sticks with elimination and wants to keep the numbers suppressed at or below these levels. Dropping to level two would just force air onto the embers as hundreds of thousands of people start working, playing and mixing again.

However, the pressure to drop anyway is intense, both socially and economically. There are early signs of fading adherence to the restrictions around bubble mixing and mask usage. Gatherings of gang members at a funeral and anti-vaccination protest in Auckland on Friday and Saturday are signs of a fraying social license. Aside from the initial March 23, 2020 decision to go hard and early with nationwide level four lockdown, Cabinet faces its toughest decision of the Covid crisis on Monday.

Here’s what I wrote and said about elimination earlier in the week. These are available to read in full for subscribers.

No plan or progress

The Government released its flagship Government Policy Statement for Housing and Urban Development this week and detailed its tax deductibility policy for landlords.

Here’s what I wrote for subscribers. It also includes a podcast.

The consensus on elimination broke down

Both ACT and National abandoned their remaining support for the Government’s strategy of staying locked down and preserving the elimination and hard borders strategy beyond Tuesday.

Given a level drop is not credible in health terms with an elimination strategy, the Opposition are calling for a graduated opening up based on various vaccination thresholds from 70% to 90%. Modelling from Shaun Hendy’s group this week suggested significant numbers of deaths and hospitalisation rates that would overwhelm Auckland’s ICU units and positive pressure rooms if Tamaki Makaurau was re-opened at vaccination rates below 90%.

This has ramped up the pressure on the Government, which is also dealing with a crescendo of calls from businesses and many individuals stuck on either side of both Auckland’s boundaries and the international borders with all manner of personal and business tragedies unfolding. The social fabric is beginning to fray under the pressure, particularly once the bulk of the population becomes double-dosed within the coming fortnight and the ‘holdouts’ and unreachable are in communities that many in that majority have no connection to and not much sympathy for.

The danger is that the majority, particularly outside Auckland, start blaming and persecuting and excluding those groups in South and West Auckland who currently have much-lower-than-90% vaccination rates, for both legitimate and tragically false reasons.

This tension was inevitable, as I wrote in this piece ‘Time to stop kidding ourselves on the reopening’ on Sept 9 and this piece on Aug 23 asking if it was ‘Time to eliminate elimination’.

Finally, some relief for 165,000 guest workers in our ‘Team of 5m’

Immigration Minister Kris Faafoi finally bowed to pressure to offer residency in a one-off process for up to 165,000 people.

I called for this in a piece I wrote and a podcast I did published on August 8 to all called ‘How Aotearoa-NZ could live up to its Team of 5m self belief’.

Seven numbers for seven days

49.6 - China’s Purchasing Managers’ Index for September, which was below the 50% threshold for expansion and weaker than expected. Power shortages and Covid disruptions could be slowing down our economy’s most important trading partner.

4.1% - Germany’s annual inflation rate in September, which was a 28-year high and outside the ECB’s 2% inflation target. However, the ECB is still printing and buying bonds at a rate of €80b/month because it sees the inflation as transitory.

$28,000 - The average annual earnings of a resident of KawaKawa, which has the most lucrative pokies machines in the country. (Stuff)

20 years - The period of exemption for new builds for rental property investors from new tax deductibility for mortgage interest costs from Oct 1.

26% - The average cost of housing as a percentage of household disposable income, which is the highest in the OECD, where that average is 20%.

46% - The rise in house prices since the Labour Government was sworn in in October 2017. There has also been a 12% increase in rents over the last four years. During that time average wage and salary rates rose 7.8%.

$10b - The amount of exempted high LVR lending since March last year, mainly for new builds, including around $3b to first home buyers and owner occupiers, and the rest to landlords.

70 - The number of the uses of the word affordable in the GPS-HUD, but nothing on what the Government thinks is an affordable house price level, or how it will get there.

My weekend reading

Some fun things

Ka kite ano

Bernard

PS Subscribe to support my journalism on the political economy, including housing affordability, climate change, economic policy and politics.

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

TLDR & TLDL: The Government has announced a swathe of housing policies aimed at increasing housing supply for rentals and owner occupiers, all with the loudly-stated aim of improving affordability. That included a broad housing policy statement aimed at councils and others that didn’t say what amount of affordability improvement it wanted, and to what level.

It also confirmed the specifics of its March 23 tax deductibility ‘shock’, which ended up not slowing the market, and may have the unintended consequence of pushing up the price of new-builds and risks for banks. It may even force the Reserve Bank to further restrict new lending for new builds to avoid a buildup in banking system and macroeconomic risks.

It’s a bit like calling up Google Maps and typing in ‘somewhere over there’ at ‘some point in the future,’ and hoping the app works it out while your passengers enjoy the drivers’ commentary and scenery. The vagueness allows the Government to signal its virtues in favour of affordability without having to take the real actions it knows median voters won’t allow: unleashing a supply and wealth tax shock with the specific aim of lowering house prices and resetting inflation expectations.

(I’ve opened this one up to both free and paid subscribers given the public interest in housing affordability. I’d welcome the support of anyone who hasn’t subscribed yet to take up the 50% off deal for an annual subscription to support my housing affordability journalism.)

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At the moment, the current Government’s strategy of using the housing market as a wealth creation tool to support the economy (and its opinion poll support) during Covid, and refusing to use its lightly-geared balance sheet to signal a long-term housing supply dump, has been responsible for a 46% rise in house prices and a 12% increase in rents over the last four years. During that time average wage and salary rates rose 7.8%.

The Government’s strategies since it was sworn in in October 26, 2017 have delivered a housing market that grew house prices 5.9 times faster than wages and 1.5 times faster than wage growth. Over that time, the owners of homes, both owner occupied and rentals, saw the net equity in their homes rise $423b to $1.24b, but the prospect of home ownership or affordable rental property (to help build up a deposit) has receded so far into the distance many have given up.

The Government has launched a state house building programme, but has also repeatedly reassured home owners and investors that it won’t tax their capital gains ‘in Jacinda Ardern’s political lifetime’ and wants ‘sustained moderation’ in house price inflation, rather than any outright falls in prices.

The Reserve Bank also acted quickly last year to ensure house prices didn’t fall because of the shock of Covid by printing over $60b to lower mortgage rates and relaxing lending restrictions, albeit for a year in which banks pumped an extra $35b of lending into the market, increasing mortgage debt by 12.8% in 12 months.

Property owners know neither Labour and its Green partners nor the National Party will act in a way that lowers house prices back to current levels, let alone the ones in place in late-2017, when the Prime Minister described the housing market as in crisis.

Effectively, the market has a de facto government-guaranteed floor that keeps ratcheting up at a rate that is doubling prices every seven or eight years. I’ve outlined in this previous piece what ‘pulling all the levers’ to achieve affordability would mean. The Government is doing none of them at the pace or scale (or at all) needed to stop prices from ratcheting up.

PM Jacinda Ardern reassured owners last December when the government signalled some action to cool the market that it wanted “sustained moderation” in house price inflation, which she described as something like the 4-5% the Labour/NZ First/Green Government had seen in its first term. Given household disposable income growth of around that level each year, that would imply no improvement in affordability for buyers. Rental inflation has also exceeded income growth since then.

So what just happened?

Yesterday the Government took a couple of actions to publicly advertise its affordability virtues, but with little real action to either improve affordability or allow the Government to be held accountable.

Firstly, the Government published its flagship Policy Statement on Housing and Urban Development, which is a followup to its much more specific and useful NPS on Urban Development from last year, which is forcing Councils to consider densifying their inner city suburbs. This latest GPS HUD was required by October 1 under the Kāinga Ora – Homes and Communities Act 2019 and has to be reviewed every three years.

But yesterday’s statement is much fluffier and sets no specific goals or announces any new tools for the necessary housing supply shock. It is a broad waving of aspirational signals that fit into the motherhood and apple pie category. Here’s a sample (bolding mine):

“The homes and communities we live in are the foundation of our wellbeing and a focus on housing is a priority for this Government.

“All New Zealanders deserve to live in a safe, warm, dry home that they can afford. Aotearoa New Zealand faces complex housing and urban development challenges that have grown over generations.

“Responding to these challenges requires a strategy and direction to align the work of the whole system. This Government Policy Statement on Housing and Urban Development (GPS‐HUD) is intended to fulfil this role. It sets out a shared, aspirational vision and direction for housing and urban development in Aotearoa New Zealand over the next 30 years.” GPS HUD.

Except it then went on to leave out the detail of what success would look like at the end of that 30 years, or what some of the signs of heading in the right direction would look like.

“The GPS‐HUD is not intended to provide a detailed blueprint of all future activity. It takes a long‐term view, acknowledging that the context and environment will change over time. New initiatives, regulatory responses, and investments will be needed to meet changing needs, and ensure we stay on track to meet our vision.” GPS HUD

That meant it referred to some measures of affordability elsewhere in the world, but did not pick out any for the Government to judge others by or be judged by itself.

The most useful information in the document included that:

“Aotearoa New Zealand households spend the largest proportion of their disposable income on housing costs in the OECD. According to The Better Life Index 2020, our households spend on average 26% of their gross adjusted disposable income on housing, compared to the OECD average of 20%. Our unaffordable housing is resulting in too many people in housing stress or experiencing homelessness. In addition, the homes we do have often are not meeting our needs.”

“Tenants in public housing generally pay an income‐related rent of 25% of their income. This is considered affordable for public housing tenants. In contrast, some double‐income families with a mortgage may be able to support a higher proportion of housing costs relative to income.

“A common benchmark used internationally considers that housing that costs more than 30 per cent of income is unaffordable. However, banks will often lend to borrowers where mortgage servicing costs are greater than 30% of the borrower’s income.

At a local scale our population is growing and changing. By 2048 our population will exceed 6.2m people. Much of this population growth is projected to be in the larger urban areas, particularly in Auckland, where the population will increase by almost 650,000 more people.”

I subsequently asked Housing Minister Megan Woods whether the Government wanted to achieve either the 25% or 30% housing cost figures, or had any particular housing volume shortage view that would need addressing over the next 30 years. She said the Government didn’t have any particular targets. I’ve included the audio of the Q&A in the podcast above. You’ll get a sense from her answers of the Government’s vagueness.

No housing supply shock, funding tools or ambition

In essence, to simply keep up with the next year’s 30 years of population growth estimates (which only forecast just half the actual growth in the last 20 years), there would need to be at least 12,000 new homes built each year for the next three decades. That’s before any supply shock to drive down house prices, or to replace obsolete and expired houses, or to build different types of homes needed to hit our zero emissions targets.

There is no suggestion whatsoever in the document of using a supply shock to improve affordability, no definition of affordability to hold anyone accountable to, and no new infrastructure funding or taxation changes that would improve affordability (whatever that is). The only new (ish) idea is the idea of value capture rates, which would have to be imposed by Councils rather than Governments, which mean they would have to take any political pain involved. There is nothing to stop them doing this now, but only Queenstown has used them, and even then only in a limited way.

There were 70 uses of the word ‘affordable’ in this 56 page document and not a single target or tool to achieve it, whatever ‘it’ is. ‘Affordability’ was used once.

This was effectively a box-ticking and virtue-signalling document designed to meet the legislative requirements of the Kāinga Ora Act and give voters the impression the Government knows about the problem, cares about the problem, and is doing something. In actuality, it knows about the problem, but unaffordable housing is actually a political asset and it knows taking real action would damage its support among median voters. So nowhere near enough is being done. The best indication is in the price and rent inflation, and the actual announcements of changes on the ground, including last week’s confirmation of a halving of high-LVR lending, which will hit first home buyers the hardest.

Council planners, government officials, consumers and voters can safely avoid reading it. I read it so you don’t have to. You’re welcome.

Confirming the tax deductibility ‘shock’, but with a bonus

Three days before it was due to kick in (Oct 1), the Government finally announced the details of the changes in tax deductibility rules for interest costs on mortgages taken out by landlords. The indication in March of a four-year phase in was adhered to, but there were a few useful quirks.

The announcement in March shocked many and caused a few to suggest it would reduce house prices, but in reality that didn’t happen. If anything, prices have accelerated in the last three months as listings supply has dried up.

Home owners and landlords know their capital gains are safe from tax, as long as they hold on to them for 10 years (rather than five years previously). If anything, the extension of the bright line test has taken properties out of the market to be on-sold, and lifted prices in the short term.

The rules will exempt people borrowing to build a new home and to service the debt on that home an exemption from the deductibility rules for 20 years, even if they sell in that time. It will add to demand for new houses from landlords, and mean there will be a 10-year trigger point for on-sales to other landlords wanting the benefit for the final 10 years.

I welcome any detail or comment from readers about more quirks buried in the regulations included in these information sheets provided by IRD, along with any other unintended consequences you foresee.

The unintended consequences

One potential unintended consequence is landlords loading up their debt into new properties, as well as leveraging as much debt as possible into new builds, which are exempt from the Reserve Bank rules about loan to value ratios. In theory, that would mean landlords being able to borrow 100% of the cost of a new build, or use a 5-10% deposit with equity withdrawn from other properties.

Given first home buyers are also having to use the LVR exemption for new builds to buy their own homes, this may well increase combined demand and therefore prices for new builds. It means they are more likely to be competing against investors for new builds and will be at the mercy of bank lending policies.

The move ramps up the pressure on the banks to take on the extra risk of high LVR lending on new builds and off-the-plan purchases, which banks already see as riskier than buying an existing home. They and the Reserve Bank will also be wary of storing up too much risk in property developments, which can blow up or dry up at the whim of a consenting officer or shortage of building materials or workers.

If there is a flood of lending into new builds, it may force the Reserve Bank to revisit its exemption for such lending, which has been one of the good features of the LVR controls, which have been in place for almost all of the last eight years (except for the six months or so after the first lockdowns).

Landlords already dominate new-build buying, and it may worsen

There has been a total of $53.4b of new mortgage lending in the six months since the beginning of March this year when the LVR restrictions were reimposed.

First home buyers and other owner-occupiers without rental property collateral got exemptions from the LVR restrictions, which includes new builds, of $2.96b or an average of $493m a month. That’s 5.5% of new lending.

Landlords got exemptions for $7.087b of new lending in the six months to the end of August this year. That’s an average of $1.181b per month and represents 13.3% of overall new borrowing. Combined, there was exempted high LVR lending of almost $10b in the six months for new home builds in the last six months, with most of it going to landlords. That’s 18.8% of new lending going up against inevitably risky homes.

This change in tax rules may have the perverse effect of encouraging even more borrowed money to pump up prices of new builds bought off the plan or brand new, and force banks to take more risks with their lending portfolios. That is the exact opposite of what the Reserve Bank is trying to achieve with its high LVR policy — to de-risk the banking system.

A wide perversity of potential outcomes

Presumably the banks will take action by themselves to avoid taking those risks, which means they will limit their amount of exempted high LVR lending to some percentage of new lending. A number north of 20% seems high and we’re almost there now. That process of rationing the riskiest credit would inevitably see banks favour landlords, given they have collateral and rental income galore in other properties the banks can take into account when assessing affordability and equity levels.

Tony Alexander pointed out today that is already happening (bolding mine).

“One thing we can expect is that existing investors will try to load as much of their debt as possible onto their new build purchases and away from existing properties. And we can expect a continuation of a preference by investors for new builds.

“The monthly survey of property investors which I run with Crockers Property Management shows that on average over the past four months, 49% of investors planning to make a purchase intend making it a new build. Considering that new builds each year only account for about 2.5% of the housing stock, this is an overwhelming bias towards buying new.

“Part of this very high desire to purchase new builds we can put down to the need to meet Healthy Homes standards. But its not going to all be plain sailing for investors in new builds.

Feedback from my various surveys shows that banks are tightening up their new build lending criteria, making applicants (investors and owner occupiers) allow for up to a 20% blowout in costs when calculations are made of debt servicing costs and whether the borrower qualifies for a loan.

“Banks are also increasingly watering down the proportion of expected rental income which landlords can count when calculating their ability to service a requested loan. In similar vein, some banks are heavily discounting rental income from flatmates anticipated by owner-occupiers looking to fund a purchase.” Tony Alexander.

So a policy designed to encourage new builds and give first home buyers a break, could end up screwing the scrum in favour of landlords again and starve new building projects of credit from banks. It may also boost the price of new builds, which would inevitably lift the prices across the market, given new build prices set prices at the margins, which tend to translate to higher prices across the board.

In summary, a policy designed to appear first home buyer and new-build friendly, could end up creating the perverse potential outcomes of favouring landlords, restricting lending for new builds and lifting house prices overall.

No wonder home owners still expect annual house price inflation of 6-7% and base their thinking on nominal house prices doubling every decade. At the current rate of growth, that would imply another collective $1t of tax-free and leveraged capital gains for home owners over the next decade. No wonder there is such FOMO gripping the market at the moment.

The simple facts are the Government is refusing to tax wealth, refusing to invest heavily enough in housing and transport infrastructure, and refusing to promise voters the necessary collective lowering of house prices to make any difference.

It’s refusing to pull all the levers because it knows the median voters that matter in any election want the current situation to continue ad infinitum. That’s why the PM has refused to countenance lower house prices and the Government is refusing to budge from its current adherence to the Public Finance Act’s requirement to reduce Government debt towards the 20% of GDP level seen by Treasury as the natural and ‘neutral’ level of Government debt that allows the size of Government to stay below 30% of GDP.

Ka kite ano

Bernard Hickey

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

TLDR & TLDL: This is my weekly wrapup of the week’s key news from Aotearoa-NZ’s political economy for all subscribers, both free and paid, including a podcast of my Friday afternoon live video ‘hoon’ with Peter Bale.

This week we took a lap around the week's events in geo-politics, plus:

* the morphing of our Covid-19 vaccination, elimination and potential reopening strategies,

* the Reserve Bank’s tightening of LVR rules from November 1,

* the changing outlooks for interest rates here and overseas,

* the risks posed by a potential Evergrande collapse in China, and,

* the potential for a Global Financial Crisis in late October if the US Government defaults on its debt as Evergrande collapses.

This is the weekly summary and sampler for free subscribers of the more indepth work we’ve done through the week, which is available daily for full paid subscribers. We started offering paid subscriptions last Tuesday and I’ve been surprised and humbled by the take-up of the one-week introductory offer for a half-priced annual subscription priced at $95 per year. The normal full price is $190/year and $19/month.

Almost 10% of the thousands of people on the free list built up over the last year subscribed fully to join those able to read all the articles built up over that year, able to comment on the articles and get all the daily articles emailed to direct to them. Come and join our community at The Kākā as we discover Aotearoa-NZ’s political economy together.

Click here to get the introductory offer and you’ll start getting the exclusive emails from tomorrow morning. But don’t muck around because it’s only an introductory offer. It expires on Tuesday. Buying an annual subscription helps make my journalism financially sustainable and I’m enjoying the discussion with full subscribers in the comment streams under each article. Subscribe here.

Right. On with the show in the podcast above, and my summary of the key news of the week below, my seven numbers for the last seven days, my weekend reads, and a couple of fun things.

Auckland’s tougher level three

Cabinet decided on Monday to go ahead with the foreshadowed move for Auckland down from level four restrictions to level three restrictions for two weeks until the evening of October 5. But it wasn’t made crystal clear clear in the news conferences or any of the official announcements that meant the incredibly strict level four rules for travelling outside of Auckland would remain in place during level three.

I’ve checked the transcript and the announcement from the Ministry and there was nothing about this very big caveat in the formal opening statements or documents from the Ministry. It was only obliquely mentioned by PM Jacinda Ardern after a question in the news conference. Here’s the only mention (bolding mine):

“The second thing I’d say is that the reasons for travel essentially remain in place from the 4 environment for the 3 environment. So we are not expecting a big change in the way that that boundary looks and feels. There is still no regional travel, you still have to have permission from MBIE to travel for essential work, you still have to be tested on a seven-day rotation, and if you’re travelling for an exempted personal reason, you must have a test 72 hours before—within 72 hours of travel unless you have an emergency exemption from the Ministry of Health.” Jacinda Ardern in the 4pm livestreamed Beehive news conference on Monday.

That meant hundreds of people who had expected to be able to leave Auckland in a ‘one-way’ direction to move into new homes and jobs up and down the country were blocked. They were initially told they could go, but were then blocked. Mayhem ensued. Here’s useful reports on that from TVNZ’s Katie Bradford on that here and here.

Deputy PM Grant Robertson acknowledged the poor communications on the border restrictions issue in the Friday news conference at the Beehive at 1pm. He said Cabinet would considering relaxing those one-way movement rules somewhat in tomorrow’s meeting and the changes would be implemented as soon as possible.

“If (the incorrect emails to one-way movers) that has occurred, I’m sorry for that. The position was clear that we are continuing to adopt the level four settings (at the internal border). It’s not so much the settings: it’s the exemptions and the way in which exemptions get granted. That’s the process that we’re going to have another look at.” Grant Robertson in Friday’s 1pm Beehive news conference.

(FYI the links below take you to paid subscriber-only content at The Kaka)

First home buyers hit hardest in LVR move

The Reserve Bank confirmed it would halve the speed limit for high LVR lending from November 1, which was a month later than originally planned, but which will still hammer first home buyers hardest.

Vaccine passports are coming, along with mandate pressure

PM Jacinda Ardern is talking up the prospect of a voluntary vaccine passport that retailers, hospitality operators, airlines and other constrained and high touch environments could use to operate their own vaccination mandates.

But employers want more aircover from the Government, which is not keen. Riots in Melbourne this week showed why compulsion is difficult.

A hawk turns into a heron

Assistant Governor Christian Hawkesby published a speech on Tuesday indicating the Reserve Bank is unlikely to deliver a 50 basis point hike on October 4. Meanwhile, the US Federal Reserve signalled it might announce a tapering of bond buying in November and potentially start hiking rates late next year or early in 2023. The central bank of Norway became the first developed world bank to hike rates on Friday night, beating New Zealand to the punch.

The links above take you to the Dawn Choruses put out daily only to paying subscribers.

A reminder: Click here to get the introductory offer and you’ll start getting the exclusive emails from tomorrow morning. But don’t muck around because it’s only an introductory offer. It expires on Tuesday. Buying an annual subscription helps make my journalism financially sustainable and I’m enjoying the discussion with full subscribers in the comment streams under each article. Subscribe here and now.

Seven numbers for seven days

90% - The first-dose vaccination threshold the Government has indicated it wants to see Auckland at by next Monday (October 4), when it decides whether to take Auckland down to level 2, which in theory may allow the rest of the country to go down to level 1. Auckland’s rate just got over 80% on Friday.

7,000 - The number of deaths modelled by Shaun Hendy’s group if Auckland was only 80% vaccinated.

280,000 - The number of workers in Auckland who went back to work under level three restrictions this week.

1.4m - The number of apartments Evergrande has presold for US$200b to buyers across China. It failed to make a bond payment on Friday and now has 30 days to rectify the situation.

15,503 - The number of real estate agents now in New Zealand, which is now more than the 12,250 listings now on RealEstate.co.nz.

$2.75b - The amount paid to over 680,000 businesses in wage subsidies and resurgence payments since the lockdowns started on August 17.

My weekend reads

Some fun things

Ka kite ano

Bernard

PS: Final reminder. Click here to get the introductory offer and you’ll start getting the exclusive emails from tomorrow morning. But it’s only an introductory offer and expires on Tuesday.

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

TLDR & TLDL: In this weekend’s podcast above, I took a 'hoon' with Peter Bale around 'News Zealand Over The Horizon' to survey the week’s big news here and overseas. Summaries of the week’s news and my seven numbers of the week are below for all subscribers.

‘Sacre bleu mate’

Australia surprised everyone by doing a deal with Britain and the United States to arm itself with nuclear submarines (but not nuclear weapons). China declared it was cold war thinking that would destabilise the Asia Pacific. France said it felt betrayed by Australia, which dumped a plan to build A$90b worth of French conventional submarines to do with AUKUS deal. This morning France withdrew its ambassador from Washington.

PM Jacinda Ardern said Aotearoa-NZ was fine not having nuclear submarines, which are still illegal in our ports. China then tried to drive a wedge between us and our ANZUS partners by asking us for permission to join the CPTPP. Here’s my view on that in Friday’s Dawn Chorus.

FYI, from next Tuesday September 21, my week-day posts and podcasts will be for paying subscribers only. I’ll include a special introductory discount code for existing subscribers on Tuesday morning. These weekend summaries with the weekly ‘hoon’ will remain free for all subscribers, including those who have paid and those on the ‘free’ list.

Rampant house price inflation

REINZ reported annual house price index inflation of 31.1% in August, which included almost two weeks of lockdown. Agents said first home buyers and owner occupiers were scrambling to get the few properties listed, using their spare time and money to quench their fears of missing out on another post-Covid jump in prices.

Economists said, if anything, house price inflation had accelerated since May. In the last three months, inflation was running at an annualised rate of over 20%. The Government’s moves to stop landlords claiming interest for tax and the Reserve Bank’s promises to tighten LVR restrictions, to plan DTI restrictions and its forecasts of rate hikes have done little to cool the market. Home owners expect house prices to double every 10 years and are confident the Government and Reserve Bank would stop house price falls in future by again cutting interest rates and removing lending restrictions.

Here’s my views on why the housing market is in this state and what the Government is planning (or not planning) to do about it in Wednesday’s Dawn Chorus.

‘Find a way to end elimination’

The pressure grew this week on the Government to find a vaccination level and a set of border controls and level 1 restrictions that would allow Aotearoa-NZ to re-open its borders and avoid the sort of hard, wide and long lockdowns we’re just emerging from.

ACT leader David Seymour called on Monday for an end to the elimination strategy, while the Malaghan Institute’s Professor Graham Le Gros again challenged the sustainability of the strategy. On Friday, former Chief Science Adviser Peter Gluckman proposed the creation of a ‘red team’ of advises to help the Government ease the elimination strategy out and open up without wrecking the health system.

Ashley Bloomfield and Andrew Little helped somewhat by saying a vaccination rate above 90% would start to allow the reduction of restrictions. Auckland is set to drop from level four to level three on Tuesday night, but the rest of the country looks set to stay at Delta level two until Auckland drops from level three to level two. Ardern indicated the level two restrictions would be loosened a bit to allow indoor gatherings of 100, rather than 50. I wrote more about the elimination debate and where to from here in Tuesday’s Dawn Chorus.

A reminder: From next Tuesday September 21, my week-day posts and podcasts will be for paying subscribers only. I’ll include a special introductory discount code for existing subscribers on Tuesday morning. These weekend summaries with the weekly ‘hoon’ will be for ‘free’ subscribers.

Seven numbers for the last seven days

A$90b - The amount Australia was going to spend buying and building French conventional submarines. The French are not happy. PM Scott Morrison described the new AUKUS (NZ not included) as Australia’s “forever deal.”

90% - The vaccination rate threshold for over 12s named for the first time as one we need to reach to be able to safely open up. Our full vaccination rate yesterday was 32% and our one-dose rate was 62%. Over 7% of adults told the last official survey they definitely would not get the vaccine, and 87% said they definitely would. That leaves 6% who are currently hesitant.

56.1% - The rise in Palmerston North’s REINZ house price index in August from a year ago. Prices were up more than 40% in Wellington City. Nuff said.

100 people - The new level two limit expected for indoor gatherings in cafes, restaurants etc from Tuesday night. Jacinda Ardern indicated the rise from the current limit of 50 would be set after Monday’s cabinet meeting.

50 basis points - The expected rise in the Official Cash Rate by the Reserve Bank through hikes of 25 basis points in each of the October 6 and November 24 decisions. Bank economists strengthened their views that the OCR would rise from 0.25% to 0.75% by the end of the year after stronger-than-expected GDP growth. It rose 2.8% in the June quarter, blew away economists’ forecasts for growth of about 1.1% and the Reserve Bank’s own forecast in August for 0.7% growth.

4.3% above pre-Covid levels - Despite last year’s lockdown, GDP at the end of the June quarter was 4.3% above pre-Covid levels. GDP is seen falling 6-7% in the current lockdown-hit September quarter, before rebounding as much as 10% in the December quarter.

$10b - The economy’s buoyancy has helped bolster the Government’s finances with plenty of tax revenues, allowing Finance Minister Grant Robertson to announce this week he had put an extra $7b into the Covid Recovery Fund to top up $3b still left there. He said this wouldn’t require any more Government borrowing than already announced.

Have a great weekend.

Ka kite ano

Bernard

PS: And remember: From next Tuesday September 21, my week-day posts and podcasts will be for paying subscribers only. I’ll include a special introductory discount code for all existing subscribers on Tuesday morning for when I turn on the subscription system.

These weekend summaries with the weekly ‘hoon’ will continue to be for ‘free’ subscribers.

I’d love to sign up as many paid subscribers as possible to make this work financially sustainable for my family. I love doing it and hope you find it useful and enjoy being part of this community on The Kākā. Only paying subscribers will be able to comment and participate in the weekly ‘hoons’ from next Tuesday. Come and join us.

I welcome your thoughts in the comments below, which are still open for all ‘free’ subscribers until Tuesday.

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: The reverberations from yesterday’s big AUKUS deal to arm Australia with nuclear-powered submarines have already started for us. China just put us on the spot to choose it over Australia, the United States and Britain in a trade deal.

Early this morning, China formally applied to New Zealand to join the CPTPP trade deal, that Australia is a part of and Britain wants to join, but which America opted out of under Trump. New Zealand is the keeper of the documents for the deal and has a special role as a sort of gatekeeper on who can apply to join. (SCMP)

Allowing China in against the wishes of America, Britain and Australia would be embarrassing, but the alternative would mean outright rejection of the wishes of our largest trading partner. PM Jacinda Ardern will have to do some fairly fancy footwork to avoid offending all or some of our friends and trading partners.

What should we do? Comments below please.

My view: We should agree to let China apply and say it’s up to all the members to agree to join. We should also invite America to reapply and see whether Joe Biden is more amenable than Donald Trump. That then puts us in a position to get a sort of free trade deal with America via the CPTPP, which is the one big one we lack. We may as well use some leverage.

We can legitimately claim we’re all for free trade and the more the merrier. America would then have to reject our call to join an agreement that was originally designed as a US-led bulwark against China, but was then crippled by Trump’s decision to pull out. Australia already has free trade deals with America, China, Britain and (of course) us in the form of CER (so many years ago…) Hard to see them complaining at us wanting free trade with everyone. And by the way, Britain needs to get a move on and give us our FTA. They’ve already done one with Australia.

Our only real power is as a rules-based free-trading ‘honest broker’ who wants to be friends with everyone and prefers ‘jaw jaw’ to ‘war war’. Choosing to reject China would really mean we have sided with the Anglo-alliance, which is very much nuclear powered and armed. That’s something we have a law against.

Breaking in our political economy this morning

Finally we have a target - Ministry of Health Director General Ashley Bloomfield said he wanted more than 90% of New Zealanders vaccinated. That will be tough. The latest vaccine hesitancy survey shows only 79% want the jab, while 14% say they're unlikely to get it and 7.4% have ruled it out completely. (Newshub)

Legitimate crypto reasons? - A cryptocurrency entrepreneur and his employee flew by private jet from Auckland to Wanaka last Saturday morning, but Police say they did not breach lockdown rules because the flight was for “legitimate business reasons.” However, MBIE is now investigating. (Stuff)

‘Outraged and betrayed’ - China accused Australia, Britain and the United States of “gravely undermining regional peace and stability,” with their AUKUS deal for Australia to develop nuclear-powered submarines, but not nuclear weapons. France said it felt stabbed in the back by the deal, which means Australia abandoned its plan to build A$90b worth of French conventional submarines. (Reuters)

‘No skin off our nose’ - New Zealand was not asked to join, but PM Jacinda Ardern said our anti-nuclear legislation wouldn’t allow it anyway. She saw no ill effects on either ANZUS or Five Eyes. Taiwan welcomed the deal. (SMH)

“No, we weren’t approached but nor would I expect us to be. This is not a treaty-level arrangement. It does not change our existing relationships including Five Eyes or our close partnership with Australia on defence matters.” Jacinda Ardern at her 1pm presser yesterday.

Rates rising - ASB and ANZ have increased their mortgage rates slightly and financial markets are this morning pricing in a 40% chance of a 50 basis point rate hike by the Reserve Bank on October 6. This followed much-stronger-than-expected GDP growth figures for the June quarter. (Interest)

Rear view mirror - GDP rose 2.8% in the quarter, the third fastest on record after the September quarter of 2020 and the September quarter of 1999. The opening of the Australian bubble (now closed) boosted activity in the June quarter, along with plenty of retail spending and employment growth here. Economists had expected growth of around 1.1% and the Reserve Bank had forecast (in August) 0.7% growth in the quarter.

Higher currency - The two-year Government bond yield jumped almost 80 basis points to 1.12%, near a two-year high. The NZ dollar rose almost a cent to 71.4 USc yesterday, before easing back overnight.

Boing boing - But economists see GDP falling 6-7% in the September quarter, before a 9-10% rebound in the current December quarter, assuming Auckland’s lockdown ends soon. Bank economists see two 25 bps hikes this year, with at least a couple more early next year. Most see the OCR peaking around 1.5-2.0% by 2023.

‘We’ve got this’ - Finance Minister Grant Robertson announced yesterday after the GDP figures the Government had put an extra $7b into its Covid Recovery fund and also had $3b spare already in the fund. He repeated the Government didn’t need to increase its borrowing plans because of the stronger-than-expected economic growth. GDP is now 4.3% above its pre-Covid high, which is driving strong tax revenues.

Breaking overnight in the global political economy

Tapering worries - US retail sales in August rose 0.7% from July, which was much stronger than the 0.8% fall that economists had expected. US stocks and bond prices fell after the news, which again raised questions about whether the world’s largest economy is running too hot and may need interest rate hikes and a tapering of money printing sooner than expected. (Reuters)

This is a worry - China’s new Delta outbreak is widening in Fujian province, putting over 50 children in hospital. (SCMP)

Questions of the day

When will the Government help businesses mandate vaccinations, and also mandate vaccinations for public sector workers such as healthcare workers and teachers?

Will New Zealand agree to let China negotiate to join the CPTPP?

Will the rest of NZ go down to level 1 next Tuesday when Auckland is expected to be dropped down to level 3? Apparently not, given the PM said yesterday she wanted the rest of NZ to stay at the current level 2 (but with 100 allowed inside rather than 50) while Auckland is a level or two higher. But will there be other level 2 concessions?

Will the Reserve Bank really hike by 25 bps on October 6, as economists believe? Auckland will still be in bolstered level 2 lockdown at that stage, given the current timetable and a best-case scenario for new cases. The earliest it could get to level 1 is October 20. I think the RBNZ will hike, but shouldn’t. It should use DTIs sooner to slow the housing market, which has accelerated since April.

I welcome your questions in the comments below.

Chart of the day

ANZ Economist Miles Workman cited internal ANZ card spending figures to show this year’s hard lockdown was not doing quite as much damage to hospitality spending as last year.

“Looking forward, we know renewed lockdown measures are going to drive a material contraction in Q3 GDP. We’ve pencilled in a 6% q/q fall, but with Auckland’s Alert Level 4 status lingering there are downside risks to that. That said, many businesses are now better prepared to work from home (chiefly those in services industries) and that’s expected to limit the impacts of lockdown on aggregate economic activity to some extent. So for a similar duration, we’d expect the current lockdown to have a smaller GDP impact than the 10% decline recorded in Q2 2020. Our internal card spending data certainly suggests a little more is happening through this lockdown, but there will be some inflation in here too.” ANZ’s Miles Workman in this ANZ note

Signs o’ the times news

Comment of the day from The Kākā’s subscribers

“The Don Brash invented inflation targeting should be seriously reviewed as it appears to be very outdated in world with significant disintermediation (Online Stores), Globalisation (Cheap offshore manufacturing) the Gig economy (cheap Labour) etc. To run most major global economies with the key objective to keep CPI in 0-2% or 1-3% band is insane. Why not accept that there is not inflation and allow small amounts of deflation, this should not cause debt defaults. 

House prices are essentially a Bond as they have become an investment asset class rather than a home to live in.  The key issue is that we don't have recessions any more, if there looks like one then we just follow what Greenspan did and print money or lower cash rates. The average 40 year old has not seen a true recession, so we all just keep leveraging.” Arthur in Wednesday’s Dawn Chorus article on 31.1% house price inflation.

Longer reads for the weekend

Some fun things

Ka kite ano

Bernard

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

TLDR & TLDL: In a move set to outrage China and leave New Zealand on the outer, Australia will this morning announce a plan to buy nuclear-powered submarines and long-range strike weapons from the United States and UK.

Meanwhile, Covid-19 modeller Michael Plank says only a 90%-plus vaccination rate would avoid swamping our ICUs, while Rob Fyfe says businesses need the Government to set an actual vaccination rate target. He suggests 80%.

Also, the vultures are circling Judith Collins after one poll found National with 21.5% support and ACT at 15%. Elsewhere, James Shaw announced the Government needs five more months to come up with its climate plan in the May Budget.

Breaking locally this morning

Covid-19 modeller Michael Plank said the vaccination rate would need to get well over 90% to avoid swamping the health system. (NZ Herald)

Former Air NZ CEO and Icebreaker Chair Rob Fyfe called on the Government to set an actual vaccination threshold, which he suggested should be over 80%. (RNZ)

James Shaw announced late yesterday the Government would have to change the response deadlines in Climate Change law to give itself another five months to lay out its climate change response.

Breaking in global politics, the economy, markets and business

Australia is set to announce a major new defence alliance with the United States and Britain called AUKUS that sees our Trans-Tasman neighbour get hold of long-range nuclear strike technology such as nuclear submarines and long-range missiles. This could enrage China. The deal is due at 9am NZT (SMH)

There is no mention of the future of ANZUS in reports overnight from the Sydney Morning Herald, Politico and the AFR-$$$, which also reports Australia is about to abandon a A$90b deal to buy conventional submarines from France so it can buy British or American nuclear submarines.

Casino stocks in Hong Kong and the United States crashed overnight after Beijing announced an inquiry into casinos in Macau. Sands China fell 33% and Galaxy Entertainment fell 20%.

The Hang Seng Index fell 1.8% overnight after the casino probe news. It is also weaker on worries about the world’s most indebted property developer, Evergrande, which is on the brink of defaulting on some of its US$300b of debt. (Reuters)

Boris Johnson announced a major cabinet reshuffle overnight, removing his Foreign Secretary and his Housing Secretary. He elevated Trade Secretary Liz Truss, who had been negotiating NZ’s FTA with Britain, into the Foreign Secretary role. She replaces Dominic Raab, who was blamed for failures with Britain’s pullout from Afghanistan. (Reuters)

Johnson also abandoned a major push to open up zoning rules for new housing in the leafier fringes of Britain’s suburbs after a backlash from Tory backbenchers. (FT-$$$)

Chinese retail sales grew rose just 2.6% in August from a year ago, which was much lower than economists’ forecasts for growth of around 7%. Global logistics grief and a fresh Covid outbreak slowed consumer spending. (Reuters)

Britain’s Consumer Price Index inflation rose to an annual rate of 3.2% in August from 2% in July. It was higher than expected, but also reflected restaurant meal discounts a year ago. Markets nudged their interest rate forecasts up a bit. (Guardian)

Signs o’ the times news

Questions for the day

* Whatever happened to ANZUS? Did Australia check with us first? What will China’s reaction to Australia having nuclear powered submarines and long-range missiles”

* Why isn’t the Govt helping companies mandate vaccination and running information campaigns to counter anti-vaxxers?

* Where is the mass pro-vaccination marketing campaign? Shouldn’t there be incentives and lotteries for vaccination?

Comment of the day

“We simply must get that median income to house value ratio back down. I’m happy with 6 as a medium term goal. Please RBNZ stay out of housing - you’ve done a superb job at price stabilisation since the crazy 80s and 90s - we need you to keep doing that.” Dr David Wilson in yesterday’s Dawn Chorus.

Chart of the day

Useful longer reads

Some fun things

Ka kite ano

Bernard

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

TLDR & TLDL: The case is growing here and overseas for the Reserve Bank to hold off on its rate hikes widely expected for Oct 6 and Nov 24, which is encouraging home buyers to double down on expectations of yet more inflation of the likes of the 31.1% seen in the year to August.

No one seems able to disconnect this perfectly tuned upwards spiral in house prices and leveraged tax-free capital gains, which is manna from heaven for property owners, and a doom loop for renters wanting a secure home and a chance for the future’s seemingly unending and definitely unearned spoils.

The only immediate useful and available option for policymakers wanting to slow the sprial is for the Reserve Bank to itself double down on lending restrictions, including a further toughening of Loan to Value rules and the introduction of Debt to Income multiple tools that would hurt first home buyers the most.

In theory, that buys time for the Government to unleash a storm of new housing supply and limit population growth to remove the fundamental drivers. In reality, the reluctance of both major parties to deliberately change inflation expectations by causing a crash is cementing in prices and inequality that keeps ratcheting ever higher.

Meanwhile, homeowners’ actual expectations are that prices will keep doubling every decade, and they have been more right than politicians and central bankers for 20 years.

My view in summary: The multi-decade trend to ever-lower inflation and interest rates in tandem with low inflation-targeting central banks able to print money at will is the most effective wealth creation tool for existing asset owners in our lifetime, but has also pulled up the ladder and locked out the next generation from secure social and financial futures.

Yet no one in power or close to power is suggesting either the removal of the Reserve Bank’s powers to independently target low inflation and print money to do it. And the current political balance in and around Parliament is to do nothing to change the status quo with a supply shock.

Prices double every 10 years and it’s Government Guaranteed

No wonder 58% of respondents in ASB’s last investor survey expected house prices to keep rising, while 74% expected higher prices over the next two years in the latest ANZ Roy Morgan consumer confidence survey. The Roy Morgan survey respondents in August thought house prices would rise 6.3% per year for the next two years, which is a rate that would see house prices double every 11 years.

The ANZ survey shows that for the last eight months New Zealanders have expected house prices to double every 10-11 years. They’ve learned the market has an effective political and monetary policy guarantee of outsized gains, and no losses. They learned that (again) after the Reserve Bank cut interest rates in March, removed LVR restrictions for most of last year and printed over $60b to keep longer term interest rates low and to use the resulting ‘wealth effect’ of the housing market to stimulate the economy.

The last time New Zealanders thought house prices would double every 10 years was in mid-2016 when National looked sure to be returned for a fourth term, which would have removed the threat of a capital gains or wealth tax. That threat has been progressively removed by PM Jacinda Ardern, starting in the week before the 2017 election by abandoning a CGT in her first term, and then confirmed it was off for the forseeable future in 2019 when she ruled out a CGT in her political lifetime. She then ruled out a wealth tax in last year’s election campaign.

Now the home owners know the Reserve Bank and Government has their backs, those expectations are being embedded again at even higher levels.

Where’s the political and business response?

Do young renters and their parents, who are now the first resort for help with deposits and guarantees, not understand this upward spiral is politically, economically and socially unsustainable in the long run?

Do business owners and employers not understand that our largest cities cannot keep young staff in those cities and motivated if there is no realistic prospect of home ownership and family security, unless they are born into the land-owning class?

How can an economy and society be sustainable in the long run when its Government settings are actively driving wealth and passive income to a consistently smaller and smaller group of consumers and voters?

How do the asset owners and business builders think this will end? Or do they think there is some magical way to keep the whole housing market show doubling every 10 years without renting voters, who will eventually outnumber owners, noticing and voting to destroy the status quo?

I’d welcome your thoughts on the sustainability:

* of low interest rates forever with repeated bouts of money printing;

* an inflation-targeting central bank able to print money and inflate asset prices without a political over-ride;

* a politically settled view that governments should not take action to lower house prices and would prefer ongoing inflation of around 4% per year;

* house buying and renting affordability rates that are three to four times above their averages globally and from 30 years ago.

Why do you think rates will stay on hold near 0%?

Some may question where I’m seeing all this talk of low rates for significantly longer. Surely, they ask: doesn’t everyone think rates are about to rise? That’s true now, but the background is shifting.

Financial markets and bank economists here are currently still expecting the Reserve Bank to hike the Official Cash Rate from 0.25% now to 0.75% by the end of the year, with 25 basis point hikes at each of its Oct 6 and Nov 24 monetary policy decisions. You can measure those expectations through the OIS (overnight indexed swap rate) markets, where traders bet on where overnight rates will be in the future.

Currently, New Zealand is expected to hike rates years before the rest of the world’s major central banks, as this Westpac chart shows.

But the mood music on global financial markets and locally is turning against that view. That includes in just the last 24 hours:

* Last night the world’s largest economy reported its core consumer price inflation was coming off the boil, as its central bank has predicted repeatedly this year in the face of those fearing a 1970s-style blowout in inflation;

* Annual total US CPI inflation fell to 5.3% in August from 5.4% in July, which was in line with economists’ forecast that inflation is coming off the boil, reassuring those hoping the US Federal Reserve will delay its eventual tightening of monetary policy (Reuters);

* Core inflation was weaker than expected at 0.1% for the month and 4.0% for the year, which was the smallest increase since February and lower than economists’ forecasts for 0.3% core monthly inflation (BLS);

* The US 10 year bond yield fell six basis points to 1.26% this morning as investors dialled back their expectations of higher interest rates, and US stocks fell around 0.6% as investors worried about the effects on profits of slower economic growth suggested by the weaker inflation figures.(Reuters);

* China’s latest Covid outbreak in Fujian is widening with a doubling of cases in a day to 55 reported overnight, while Putian, with a population of 3.2m, was locked down yesterday (Guardian);

* Heavily indebted Chinese property developer Evergrande announced it may default on its debt, raising fears of a 'Lehman moment' for China's financial markets as angry investors gathered outside Evergrande's HQ in Shenzhen to demand their deposits back (Reuters);

* The New Zealand Government’s latest 30 year bond issue to raise $3b was four times subscribed and was priced at the lower end of yield expectations at around 2.2%. The 10 year Government bond yield fell 5 basis points to 1.93%.

There’s also a rash of highly respected central bankers in our part of the world who simply don’t believe what the hawks in financial markets are saying, and they’re calling out those expecting rate hikes here and in Australia. Actual investors just bought NZ Government bonds that don’t mature for 30 years for an average yield of 2.2% per annum, and that’s before the Reserve Bank’s inflation target of around 2%.

Let that sink in. Actual investors with their savings on the line are happy to accept a real yield of 0.2% for 30 years if they believe the Reserve Bank will keep inflation around the 2% midpoint of its 1-3% target range. Or even worse, they see inflation well below 2% for the next 30 years. Currently, the so-called ‘breakeven’ rate, which measures market expectations of inflation by comparing inflation-indexed bond yields with nominal bond yields, shows market expectations for inflation of about 1.6% per annum for the next decade. That is not an inflation breakout and it’s not worrying those who look most closely at consumer price inflation.

It would also imply investors are so risk averse they are happy to accept a real yield of around 0.6% for at least the first decade of the next three decades.

A hawk turns dovish

Former Reserve Bank of NZ Assistant Governor John McDermott wrote in an NBR-$$$ column yesterday it would be foolhardy for the RBNZ to hike rates, regardless of what’s happening with Covid, as many in markets expect. In the past he has been seen as hawkish and he has consistently called for rate hikes for most of this year. Here’s his key quotes (bolding mine):

“The economy is not always self-correcting and often needs active monetary and fiscal policy to stabilise it. With this lesson in mind, it seems foolhardy for the Reserve Bank to promise to increase interest rates regardless of the Covid outbreak. 

“Despite this, financial market commentators are expecting the central bank to start raising rates irrespective of the lockdown. Such action would increase the cost of working capital for businesses and mortgage payments for households; heartless when so many are struggling with the lockdown. 

“Waiting to normalise policy until after the lockdown has eased will allow the bank time to assess whether the economy has lost momentum, reducing the risk of prolonging the recession. Moreover, with economies in North America and Asia currently slowing in the wake of Delta, the bank may have other reasons to delay its policy normalisation plans.” John McDermott in NBR-$$$

Also, current Reserve Bank of Australia Governor Philip Lowe said in a major speech yesterday he doesn’t expect to raise rates there until 2024, and not just because of the latest Sydney and Melbourne lockdown pain. Here’s the quotes (bolding mine):

In particular, the Board has said that it will not increase the cash rate until actual inflation is sustainably within the 2–3 per cent target range. It won't be enough for inflation to just sneak across the 2 per cent line for a quarter or two. We want to see inflation around the middle of the target range and have reasonable confidence that inflation will not fall below the 2–3 per cent band again. Our judgement is that this condition for a lift in the cash rate will not be met before 2024.

Meeting this condition will require a tighter labour market than we have now. Our assessment is that wages will need to be growing by at least 3 per cent. We remain well short of this. Even in industries where there has been strong demand for labour, wage increases remain mostly modest. This assessment was confirmed by the latest reading of the Wage Price Index, which showed an increase of just 1.7 per cent over the year to the June quarter, with wages growth slower than this in the public sector doesn’t expect to hike rates there until 2024 and our lockdown economic pain is growing.

This chart shown by Lowe immediately after that assessment tells the story. Despite all the talk of labour shortages and the death of the multi-decade slide in worker power, wage inflation is still falling in Australia.

Briefly elsewhere in the political economy and business this morning

Name suppression lapsed last night on the Auckland couple who travelled to their holiday home in Wanaka last week in breach of lockdown orders. They are equestrian business owner William John Lawrence Willis, 35, and Hannah Rawnsley, 26, a lawyer. (Stuff)

They said they sought suppression because they had a “genuine fear for their safety.” After suppression lapsed, they said in a statement their actions were “completely irresponsible and inexcusable. We are deeply sorry for our actions and would like to unreservedly apologise to the Wānaka community, and to all the people of Aotearoa New Zealand, for what we did.” (NZ Herald)

Education and Covid-19 response minister Chris Hipkins is expected to indicate at the 1pm presser today whether to bring forward school holidays by a week to help out struggling Auckland parents. Principals are opposed. (Stuff)

Judith Collins is on the brink of oblivion, her former PR person Janet Wilson says in this Stuff column and tells The Spinoff’s Duncan Greive in this even-more-damning interview. (See more below in quote of the day)

Apple launched its newest range of iPhones this morning, including phones with 2.5 hours longer battery life and a camera with ‘cinematic’ mode. The launch of Apple’s first iPhone unleashed the app economy, which has been the engine room for global deflation for a decade. The iPhone 4’s use of 4G data and its front-facing camera super-charged that megatrend. (Apple)

Quote of the day

“She prizes loyalty above all else. But then her ugly stepsister, paranoia, steps in, and she has these almost paranoid storms. I think Friday's speech to the National Samoan group on Siouxsie Wiles was completely unacceptable in a National party leader. Completely unacceptable. 

“There is no doubt in my mind that the electorate will look at this and see it for what it is, which is a cheap shot at someone who's... Whatever you think of Siouxsie Wiles is neither here nor there. Empathy will always be extended to Siouxsie because of this attack by a political leader. Why aren't we talking about all the other things that New Zealanders are really, really worried about right now?” Janet Wilson on her former boss Judith Collins in this Spinoff podcast.

Chart of the day

This is not a market that is slowing down much. This chart shows the REINZ House Price Index. It rose 31.1% in the year to August and rose 5.4% in the last three months. Annualised, that quarterly inflation rate is still over 20%. Prices rose 2.0% in the month of August, half of which was in lockdown.

Table of the day

This REINZ House Price Index table shows prices are up 56.1% in the last year in Palmerston North and 40.5% in Wellington City.

Some fun things

Ka kite ano

Bernard

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

TLDL & TLDR: The pressure is growing on the Government’s elimination and hard lockdown strategy, which was extended for at least a week yesterday for Auckland and potentially longer for the rest of the country.

ACT leader David Seymour last night called for an end to the elimination strategy, while the Malaghan Institute’s Professor Graham Le Gros has again challenged the sustainability of the strategy.

I asked the PM last night how high New Zealand’s vaccination rate would need to be to ensure the health system could cope with inevitable outbreaks if the borders were opened. She again declined a threshold figure, but rejected suggestions the health system couldn’t cope even if vaccination got over 90% of the total population. She also declined to say if summer festivals could be held, but was hopeful they could be. The exchanges are replayed in the podcast above.

My view: The Government is in a bind and is doing its best to buy as much time as it can before inevitably being forced to open up next year when vaccination rates are headed over 70% towards 80%. It hopes there will be better vaccines by then because our health system can’t cope for an extended period with the thousands of hospitalisations and hundreds of deaths expected each year, even with vaccination rates over 90%.

I remain of the view we won’t be able to travel easily until late 2023, given the danger of Covid delta and future variants getting through the border, and because Australia is unlikely to have its pandemics under control next year.

Questions for ministers today:

How high does the vaccination rate of everyone (not just adults) need to go to ensure more open borders and fewer ongoing restrictions don’t lead to outbreaks that overwhelm our health system?

When will new MIQ vouchers for non-emergency cases start being issued again by MBIE?

What is happening with the Government’s deliberations on weekly resurgency payments, an events insurance scheme, ongoing weekly wage subsidies, and some sort of rent relief for small businesses?

What assumptions did Cabinet make to say Auckland could drop to level 3 from next Tuesday night? IE Did it assume no new mysteryy cases?

I welcome your suggestions for questions to ministers in the comments below.

News breaking this morning locally

ACT leader David Seymour called for an end to the elimination strategy and said Auckland should be allowed to stay at Delta level 2 (RNZ Checkpoint)

Meanwhile, Auckland University’s Professor Rod Jackson said Aucklanders should have been told they would have to stay in level 4 lockdown for at least two weeks, rather than one. (RNZ Checkpoint)

The Malaghan Institute’s Professore Graham Le Gros, who is leading New Zealand’s own vaccine research programme, again challenged the sustainability of the elimination strategy.

The Auckland couple who used an essential worker exemption to drive to Hamilton and then fly to their holiday home in Wanaka got name suppression last night and their QC is set to apply for an even longer one. (Stuff)

Globally overnight

China’s latest Covid outbreak in Fujian province was started by a returnee from overseas who had completed a full 21 days in isolation. (CNN)

China’s Government announced it would force the breakup of Alipay to ensure it controlled the data used by its consumer credit card and personal loan business to do credit scores. The move drove the Hang Seng down 1.5% overnight. (Reuters, FT-$$$)

Traders in litecoin issued a fake press release last night saying their cryptocurrency would be accepted by Walmart, which caused an initial 30% spike. Walmart then denied it and litecoin gave up those gains and fell more than 2%. (CNBC)

The oil price rose 1% to a six-week high of US$73.51/bbl of brent crude after OPEC issued a surprisingly upbeat oil demand forecast for 2022. It saw demand rising almost 1m bbl/day to 100.8m bbl/day next year, which would be above pre-Covid levels. (Oilprice.com)

Congressional Democrats proposed an increase in the US corporate tax rate to 26.5% from 21% and an effective increase in capital gains taxes. (Reuters)

The WSJ-$$$ reported from a trove of leaked documents how Facebook had created a so-called’ ‘XCheck’ list of VIP users who did not have to comply with the social network’s rules to combat misinformation.

Signs o’ the times news

Chart of the day

Tweet of the day

Longer reads worth your time

Some fun things

Ka Kite ano

Bernard

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

TLDR & TLDL: This afternoon, Cabinet is expected to decide to keep Auckland in level four lockdown for at least another week after the discovery of eight new mystery cases yesterday. That takes the unlinked total to 34, including cases in three sub-clusters deemed not to be fully tracked and contained.

I’ll be at the 4pm presser so questions in the comments below please.

Elsewhere, the political heat over MIQ spaces and internal border restrictions is growing. NZ Expo has taken 380 slots for artists and diplomats, while just 5% of applications for exemptions to leave Auckland are being granted, although one couple got out and flew to Wanaka for a holiday…

Watch out this week for local business confidence, US inflation and NZ GDP figures.

In Covid news here:

Epidemiologists expect Cabinet to extend Auckland’s level 4 shutdown for at least another week when it meets early this afternoon. The rest of the country is not expected to be able to drop to level 1 until Auckland drops a level. (RNZ, Stuff, NZHerald)

Ministry of Health Director General Ashley Bloomfield revealed just 5% of applications for exemptions to travel outside of Auckland are being approved (Newshub)

However, One Auckland couple got an exemption for ‘essential work’ and then flew from Hamilton to their holiday home in Wanaka. They now face prosecution. (Stuff)

New Zealand's Dubai Expo has been allocated 380 MIQ slots for New Zealand artists, diplomats and business leaders to return home to through the October-March event. Up to 100 singers and other artists will attend, including six60, Kimbra, Sol3 Mio and Otis Frizzell (NZ Herald-$$$)

In Covid news overseas:

China shut down the city of Putian (2.9m) in the Fujian province south of Shanghai last night after 19 new Covid cases were reported (AP)

Britain is set to drop a plan to mandate vaccine passports for entry into bars and mass events. It will also remove requirements for Covid tests for returning travelers. (Reuters)

New South Wales Premier Gladys Berejiklian cancelled her daily Covid news conferences on Sunday after the state reported 1,262 and seven deaths in the previous 24 hours. (SMH)

In the political economy, business and investing here:

New Zealand’s average house value hit $1m for the first time in September, up 4.9% in the last three months and 27% from a year ago, NZ Herald reported from Valocity data.

ASB’s latest Housing Confidence survey found a net 59% believed house prices would keep rising, while only 20% throught now as a bad time to buy. (RNZ)

National’s Local Government Spokesman Chris Luxon called on the Government to abandon its Three Waters reforms because most councils oppose it. Minister Nanaia Mahuta said the opposition was ‘curious’. She and Cabinet must soon decide whether to legislate to force it through. (TVNZ Q+A)

Migrant workers in South Island’s dairy industry have launched a petition calling for a reinstatement of a special visa allowing them residency after five years. They report many Filipino families had already left for Australia and Canada, who were offering residency to agricultural workers. (The Press)

In the political economy, business and investing overseas

Sydney Airport’s board finally agreed overnight to a A$32b takeover bid at A$8.75/share from IFM Investors’ Sydney Aviation Alliance. It was the third bid. (AFR-$$$)

Private equity firm TPG Capital has put Australian pet care and vets business Greencross up for sale for a potential A$4b. (AFR-$$$)

Watch out this week for:

This morning - Stats NZ is scheduled to report rent and food prices for August.

This afternoon - ANZ releases its first cut of its September business confidence survey at 1pm. Cabinet will make a decision on the motu’s Covid alert levels. The PM is scheduled to hold a televised news conference at 4pm. I’ll be there and welcome any questions you have.

Tuesday afternoon - Reserve Bank of Australia Governor Philip Lowe is scheduled to give a big speech ‘Delta, the Economy and Monetary Policy’ at 2.45 pm NZ Time. It will be closely watched for hints about Australian interest rates. The RBA is still printing A$4b/week and is not expected to start hiking Australia’s cash rate until late 2023 or early 2024. Our Reserve Bank stopped printing in July after buying NZ$55.1b of local and central Government bonds. It is still expected to hike our official cash rate from 0.25% to 0.75% by the end of the year, with 25 basis point hikes on each of the October 6 and November 24 decisions.

Wednesday morning - US Consumer Price Inflation figures for August are due on Tuesday night out time. They’ll be closely watched by global interest rate watchers for signs inflation is getting out of control in a way that would force the US Federal Reserve to stop money printing earlier than November, which is the current timetable. Economists expect annual inflation of 5.3%, down from 5.4% in July. Core inflation is seen at 4.3%.

Wednesday morning - Apple is expected to unveil the new iPhone 13 range, including lidar and new cameras.

Wednesday afternoon - California Governor Gavin Newsom faces a recall election that could see a Trump-like Republican elected, although recent polls show Newsom in front.

Thursday morning - New Zealand reports June quarter GDP figures. Economists expect quarterly growth of around 1.2% and annual growth of around 4.2%. But it’s a bit redundant, given the latest outbreaks from mid-August are expected to reduce GDP in the September quarter by 6% or so.

Friday morning - US retail sales figures due overnight on Thursday will be closely watched for signs of growth or any delta slowdown in the world’s largest economy.

My weekend reading

Thread of the day

Some fun things

Ka kite ano

Bernard

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