Open warfare has broken out between the National regime and the Reserve Bank. Recent media statements indicate that we are seeing an increasingly bitter war-of-words; a battle of wills, taking place over the growing housing crisis.
National is demanding that the Reserve Bank implement policies to “get on with it” to rein-in ballooning Auckland housing prices. The Reserve Bank is resisting, in an almost Churchillian-way.
In April this year, Key denied flatly that there was any “housing crisis” in this country;
“No, I don’t think you can call it a crisis. What you can say though is that Auckland house prices have been rising, and rising too quickly actually.”
But a year ago, on 15 April 2015, Reserve Bank deputy governor Grant Spencer warned that investors/speculators were becoming a major problem in the housing market;
“Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market.”
Spencer went on to issue what must be the most prescient statement ever uttered by a senior civil servant;
“Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.”
Predictably, Key rejected taxing capital gains as an instrument to control rampant speculation;
“I remember when everyone said to [introduce] the equivalent of a [capital gains] bright line test, it will solve the issues. Well, it really didn’t.”
“We’re going to stick with the plan we’ve got.”
Of course Key is not prepared to reduce immigration . It is one of the few drivers for current economic growth that is stimulating the economy. Curb migration and the economy stalls. Stall the economy and National would have nothing to take to the election next year.
As National’s own minister, Jonathan Coleman stated in 2011;
“It’s important to highlight the economic value of Immigration here…
…New migrants add an estimated $1.9 billion to the New Zealand economy every year.
Immigration recognises the strategic importance of the tourism and export education sectors and the direct links they provide to employers.
Given these compelling figures, my number one priority has been to ensure Immigration is contributing to the Government’s economic growth agenda.”
Coleman’s 6 May 2011 press release was entitled, “Immigration New Zealand’s contribution to growing the economy”.
Key deflected criticism and instead blamed the Auckland Council. In a blustering attack reminiscent of the late Robert Muldoon, Key threatened the Auckland Council with over-riding it’s Unitary Plan;
“The effect of the [government] National Policy Statement would vary around the country, but in essence it linked the price of land to demand in the economy. If the land price is going up too quickly (councils) have to amend their plans to release enough land, and if they don’t do that they’ll breach the law. If the Unitary Plan doesn’t meet the demands of Auckland, the National Policy Statement because of the way it works will drive it, mark my words.”
His solution? Build more;
“Look, in the end, we’ve been saying for some time it is not sustainable for house prices to rise at 10, 12, 13 percent a year. The only answer to that is do what we’re doing: allocate more land and build more houses. It certainly will stop it, there’s no question about that, because if you build enough supply, you eventually satisfy demand.
The mantra to ‘build more, build more‘ overlooks recent statistics which showed that nearly fifty percent of housing in Auckland was being purchased by investors/speculators;
The Reserve Bank has for the first time unveiled official figures that break out the Auckland market from the rest of the country’s mortgage lending figures. The figures confirm what some previous research and anecdotal evidence has pointed to. Investors are huge in the Auckland market.
The figures show that in April, investors committed to $1.623 billion of the $3.536 billion worth of mortgages advanced in Auckland. That’s just a tick under 46% of the total.
Labour’s Phil Twyford said that in some areas of Auckland, up to 75% of housing was being grabbed by investors/speculators. Twyford said;
“They should start immediately by banning non-resident foreign buys from speculating in New Zealand property, unless they build a new dwelling. That’s the Australian Government policy and we think it makes a lot of sense.”
So unless National is prepared to ban foreigner and local investors/speculators from purchasing around half of all new housing in Auckland, building new homes will not address the growing crisis.
On the issue of foreign-ownership of residential property, Key was adamant that his open-door, free-market policy of foreign ownership of housing would be unchanged. Even if it meant New Zealander’s would find it harder and harder to buy their own home, in their own country. As he said to Corin Dann on TVNZ’s Q+A last year;
“But the point here is simply this – I don’t want to ban foreigners from buying residential property.”
But Deputy Mayor, Penny Hulse, was having none of Key’s bullying tactics. She responded with her own tough message;
“We’ve got six and half years of land planned for, infrastructure in the ground and ready to go. Government themselves have got more than 20 special housing areas that belong to Housing New Zealand that are ready to go. There’s no shortage of places to build. Our question to government would be, perhaps you just need to get on with it.”
The reality is that National is unwilling to implement any policy that might lower property prices. As Key has said previously;
“If it is left unchecked, some buyers could find themselves substantially overexposed in an overvalued market, and we all know what happens if those values start to fall.” – John Key, 23 July 2013
“Let’s just take the counter-factual for a moment. Would you want your house price going down? And what most Aucklanders say to me is ‘I’d rather my house price went up, but I’d rather it went up a little more slowly than this’.” – John Key, 6 August 2015
So Key is in a bind. His government’s continuing popularity is at the pleasure of property-owners with bloated housing values.
Build too many houses or implement too many restrictions (including new taxes), and property values in Auckland and elsewhere in New Zealand might begin to fall, as they did in the late 1990s. That would be a financial shock for many New Zealanders who, through rising property values, are feeling like “millionaires”, albeit on paper.
If that happens, National’s popularity – riding high on 47% – would finally crash and burn, paving way for a Labour-Green(-NZ First?) coalition government next year.
However, National’s desperation to resolve what has become a major public crisis has apparently found a new scape-goat – the Reserve Bank.
National’s cunning plan is for the Reserve Bank to do their “dirty work” for them. If the RBNZ were to implement policies that would result in property values levelling off – or even dropping – then Key and English would have “plausible deniability”. They could point to the Reserve Bank as an independent body and wash their hands of its actions.
Recent demands from John Key for the RBNZ to “get on with it” are not the first time that National has interfered with the independence of the bank.
In April last year, in a classic example of nepotistic cronyism, Bill English’s brother was appointed to the RBNZ as an “advisor”;
A year later, in April this year, Bill English took an unprecedented step in demanding greater over-sight of Graeme Wheeler, the RBNZ’s Governor;
According to the Fairfax report, English said;
“The duties of the board include keeping under review the performance of the governor. I would expect to discuss your assessment of the governor’s performance from time to time.”
On National’s* own website, English went further;
“Ministers typically send letters of expectation to the Boards of entities in their portfolio. This letter was prepared after The Treasury identified an opportunity to bring the accountability framework into line with other Crown agencies.”
This is naked interference in an institution that, since 1989, was to be protected from partisan-political interference. The RBNZ supposedly acts according to legislation – not the demands of the Finance Minister. Not since the Muldoon era has the RBNZ been controlled directly by a government minister.
It can only be assumed that National is meeting stiff resistance from the bank’s Governor, Graeme Wheeler, as English attempts to assert direct ministerial “over-sight” (ie, control) over the institution.
The fact that a recent war-of-words has erupted over the RBNZ’s involvement in Auckland’s housing crisis suggests that English’s Very Kiwi Coup may not have been successful.
In fact, the Cold War has become a Hot Conflict.
In the last week, the ‘battleground’ between National and the Bank became more public, as government minister and chief Head-Kicker, Steven Joyce and Grant Spence continued their war-of wills.
6 July, 1.10 AM
“But my sense is potentially one of the risks is you have got people buying rental properties at the moment, borrowing more money but fearful that the Reserve Bank is going to move. If they are going to make changes, probably they should just get on with it.”
Grant Spencer (RBNZ);
“Increased housing demand has been driven by record net immigration, low mortgage interest rates and increasing investor participation. Net migration flows continue to hit new records, with annual net PLT migration now approaching 70,000 persons…
A dominant feature of the housing market resurgence has been an increase in investor activity. In recent months, investors have accounted for around 43 percent of sales in Auckland and 38 percent in other regions […] The prospect of capital gains appears to remain a key driver for investors in the face of declining rental yields.
The declining affordability of New Zealand housing and increasing investor presence have seen a downward trend in the share of households owning their own home. This ratio has fallen steadily since the early 1990s, reaching 64.8 percent at the 2013 Census. The recent increase in investor housing activity suggests that the home-ownership rate may have declined further since 2013.
The Reserve Bank considers that rising investor participation tends to increase the financial stability risks relating to the household sector in severe downturn conditions.
…However, we cannot ignore that the 160,000 net inflow of permanent and long-term migrants over the last 3 years has generated an unprecedented increase in the population and a significant boost to housing demand. Given the strong influence of departing and returning New Zealanders in the total numbers, it will never be possible to fine-tune the overall level of migration or smooth out the migration cycle. However, there may be merit in reviewing whether migration policy is securing the number and composition of skills intended. While any adjustments would operate at the margin, they could over time help to moderate the housing market imbalance.”
8 July, 7.46am
Don Brash (Former Reserve Bank governor);
“The Reserve bank has no statutory responsibility for Auckland house prices or indeed house prices anywhere else…
The Prime Minister wants to pretend this is somebody else’s responsibility. I think the Reserve bank is absolutely right, that this responsibility for Auckland house prices lies first and foremost with local government Auckland and central government in Wellington.
Central government, because it controls the rate of migration, which is by any international standards a very high level, that pushes demand for housing. And of course the Auckland Council, not just now, but for the last couple of decades has restrained the availability of land on which to build Auckland houses...”
8 July, 7.51am
Steven Joyce (Minister for Economic Development);
“Migration is a contributing factor to housing demand…
The prime minister’s comment was entirely fair, which is to to suggest to the Reserve Bank [that] if you’re going to these things then, then do move on them quickly…
The Prime Minister’s comments on Tuesday were just to highlight the fact that actually if you’re going to make these sorts of changes, do make them reasonably quickly…“
8 July, 7.57am
Grant Spencer (RBNZ);
“What we’re saying is that the, what we’re seeing in the last three years is 160,000 net in-flow is unprecedented and it’s an important driver of the current housing situation and therefore it can’t be ignored….
“You can’t manage or fine tune the migration cycle, we know that, but all we’re saying is that given it’s an important driver that we should be taking a look at that policy – making sure that we’re getting the numbers and the skills that government’s really targeting.”
It’s an important driver in the housing market, yes. There’s no doubt about that. But we’re also saying there’s no easy solution. You can’t manage or fine tune the migration cycle, we know that, but all we’re saying is that given it’s an important driver that we should be taking a look at that policy – making sure that we’re getting the numbers and the skills that government’s really targeting.”
We’re running at a rate of 60,000 at present, but how many years can we continue running at a rate of 60,000 and continue to absorb that rate. It get’s more and more difficulty when the country doesn’t have that absorbtive capacity.”
Current battle-status: stalemate.
Controlling house prices, as former Reserve Bank governor, Don Brash said, is beyond the bank’s statutory responsibility. On top of which, the RBNZ is unwilling to be the “patsy” for implementing policies (even if it could) that might crash house prices, and make them the Bad Guys in this worsening crisis.
Only a government can act decisively in such matters – but to do so would be political suicide for Key and his fellow ministers.
Fran O’Sullivan is usually sympathetic to the National government, but her column on 6 July was damning of Key’s inaction;
Most National Cabinet ministers and MPs are well invested in “real property”. So are many of their counterparts from other political parties.
Like most of us who are “established” – that is those of us who bought into the housing market a decade or more ago – the MPs have seen their own on-paper wealth double.
Having rejoiced at the wealth effect, neither the MPs nor the rest of us want to take a financial haircut. Key is right on that score.
But it is a pretty crap society that pulls the ladder up on younger people or those less well off just because they want to preserve their new unearned wealth.
Key again duck-shoved the issue, suggesting it was the Reserve Bank’s responsibility to “have a look at the question around investors”.
What’s notable is his Government will not slap investors with an effective capital gains tax, preferring a “bright line” test which is easily avoided by holding a housing investment for more than two years; refuses to introduce specific taxes to punish land bankers; and will not introduce rules to preserve the acquisition of existing residential housing for citizens or curb migration.
Key could pass special legislation to do this.
The question is why won’t he.
“Why”? Because Key doesn’t want to lose the 2017 election.
This is National’s Achille’s Heel, and it is fully exposed.
In May this year, a TV3/Reid Research Poll was scathing of National’s inaction on the housing crisis. Even National voters were getting ‘grumpy’;
Current ballooning property prices are the highest in the developed world;
• $975,087- Auckland: Average house price, up 4.7% in past three months and 16.1% since June last year
• $492,403- Hamilton: Average house price, up 6.9% in past three months and 29% since June last year
• $599,915- Tauranga: Average house price, up 4.9% in past three months and 23.6% since June last year
Inflation is currently at 0.4%, according to Statistics NZ.
* I have downloaded and retained a copy of the National Party webpage. In the past, National Party webpages tend to “disappear”, and are no longer searchable, making referencing and verification of quotes problematic. If this webpage disappears, English’s comments can still be verified to anyone requesting it. – Frank Macskasy
Radio NZ: Key denies Auckland housing crisis
Fairfax media: Reserve Bank call to look at untaxed property gains
Radio NZ: No change on immigration, says John Key
Beehive.govt.nz: Immigration New Zealand’s contribution to growing the economy
Scoop media: PM – I don’t want to ban foreign buyers from buying
Fairfax media: Key expects LVRs to go ahead
QV.co.nz: How fast is the current property market rising compared to the past? (2013)
National.co.nz: English releases RB Board letter of expectations
NZ Herald: Auckland property: $400k deposit please
Reserve Bank: Housing risks require a broad policy response
Fairfax media: Why MPs may want house prices in New Zealand to keep rising
TV3 News: Government gets thumbs down on housing
NZ Herald: Auckland property – $400k deposit please
Statistics NZ: Consumers Price Index: March 2016 quarter
Previous related blogposts
Cartoon acknowledgement: Tom Scott, Dominion Post
This blogpost was first published on The Daily Blog on 10 July 2016.
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The latest Roy Morgan poll reports a surge in support for National – up 8.5% to 54% – one of the highest rises since October 2011, according to Australian-based the polling company.
Labour and the Greens have suffered a corresponding drop in support;
National: 54% (+ 8.5%)
Labour: 25.5% (-2%)
Green Party: 10.5% (- 3%)
NZ First: NZ First 6% (- 2.5%)
Maori Party: 1% (-0.5%)
ACT: 1% (n/c)
United Future: nil (n/c)
Mana Party: nil (n/c)
Conservative Party: 1% (n/c)
Undecideds were up one percentage-point to 5%.
However, the results should be seen in the context that the poll was conducted in the lead up to, and during, the 2015 Budget, delivered on 21 May.
In fact, National’s polling rises during each Budget event, only to drop back down as media attention and political hype subsides. The charts below show the correlation between Budget events and the days/weeks leading up to each Budget Night, where National drip-feeds positive news stories to the public, via media;
The ‘spike’ in National’s support will begin to abate, as on previous occassions.
As housing prices continue to escalate, and child poverty continues to be a major problem in our society, the public will once again focus on what – if anything – National is doing to alleviate them.
On top of which will be a growing feeling that if English fails to deliver a Budget surplus next year, then National’s talk of tax cuts becomes more and more an absurdity. This seems more than likely according to various commentators, as next year’s surplus has already been pared back from $565 million to $176 million.
National got away with promises of tax cuts in 2008, even as the Global Financial Crisis was impacting on our economy. But at that stage, the Great Recession had not yet hit with full force. Unemployment in 2008 was still only 4.3% and the Clark-led Labour government had paid down most of the country’s sovereign debt.
By contrast, unemployment is now at 5.8% and the country is around $65 billion in debt. (Net core crown debt is forecast to be $61.7 billion by 30 June, up $1.7 billion from last year.)
Faced with the Four Horsemen of the Fiscal Apocalyspse of another Budget deficit; higher debt; broken promise of tax cuts; and a runaway housing crisis in Auckland – National’s undeserved reputation as a “prudent manager of the economy” begins to look every bit as shabby as what Muldoon left the country.
By 2017, even a Budget event may not be sufficient to give National a boost in the polls.
Roy Morgan Poll: May 25 2015
Fairfax media: Budget 2015 – An idiot’s guide
This blogpost was first published on The Daily Blog on 26 May 2015.
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