Briefly in my Daily Chorus on Thursday August 21, the top news, scoops and deep-dives in Aotearoa’s political economy around housing, poverty and climate are:* The Lead: The Reserve Bank cut the Official Cash Rate by 25 basis points to 3.0% yesterday, as expected, but issued surprisingly dovish forecasts signalling two more rate cuts by the end of the year. The Monetary Policy Committee even considered cutting 50 basis points yesterday, with two of the six member voting f...
Briefly in my Daily Chorus on Thursday August 21, the top news, scoops and deep-dives in Aotearoa’s political economy around housing, poverty and climate are:
* The Lead: The Reserve Bank cut the Official Cash Rate by 25 basis points to 3.0% yesterday, as expected, but issued surprisingly dovish forecasts signalling two more rate cuts by the end of the year. The Monetary Policy Committee even considered cutting 50 basis points yesterday, with two of the six member voting for such a ‘bazooka’ cut: an unprecedented split.
* The Sidebar: Finance Minister Nicola Willis celebrated the news, claiming the Government’s spending cuts had taken pressure off inflation and created room for rate cuts, which she said would boost confidence and get the economy growing again. But RBNZ Chief Economist Paul Conway was more cautious about lower interest rates being enough to fire up GDP growth much, given low productivity growth and low migration.
* The Quote of the Day is from Conway, who noted house prices weren’t rising, which was suppressing consumer spending and investment, which was unusual at this point in the cycle: “Can the New Zealand economy grow without that sort of wealth effect coming through the housing market?”
* The Chart of the day below reflects that lack of consumer spending and business investment, showing how vehicle imports have virtually halved to around three per thousand people in the last four years.
* The Deep-Dive of the day is by Tim Brown for RNZ: 'Nowhere to go': Council orders homeless off church grounds.
* The Must-Read of the day is by Amy Williams for RNZ: The wild west of housing - boarding houses
Paying subscribers always hear more detail and my commentary in my Daily Chorus podcast and video above first, and in text and chart form below the paywall fold. They can also comment below. Non-paying subscribers just get this opening brief intro.
The Lead: Our political economy can’t handle the truth
Aotearoa’s political economy is now a fully captured housing-market-with-bits-tacked-on, with the bits tacked on being more mortgages and more low-wage temporary migrant workers. Ever-lower real wage inflation and ever-higher net migration are the engines of growth and tax-free-and-leveraged capital in this type of economy. But the engines can’t fire when house prices are stuck 10-20% below their peaks and there’s low net migration because of a lack of economic and jobs growth, especially relative to Australia.
That means rate cuts alone aren’t enough now to make our economy grow much when house prices are falling and net migration is low. But the Government’s strategy is focused on reducing its own investment and borrowing to lower rates, which in turn has sapped lower-wage households and businesses of both the confidence and disposable income to spend and invest. Higher-income homeowners, meanwhile, are also feeling uncertain, with the housing market moribund and rents falling.
Ironically, perhaps, their reaction to lower interest rates and lower after-tax incomes is to increase their savings in term deposit accounts. Despite the generalised political commentary of ‘households doing it tough’ and expectations they’re likely to spend extra cash from lower mortgage rates, household savings in bank accounts increased by $26 billion in the 18 months since the election to $263 billion at the end of June. The actual situation is that working and non-working renters are suffering real wage deflation, while owners of multiple homes are simply saving the benefits of lower mortgage rates and better tax arrangements for rental property investors.
New Zealand’s economy is stuck in a balance sheet recession worsened by the Government shifting disposable income through the tax system from renters to landlords, who are hoarding rather than investing or spending in bank accounts.
That’s my conclusion from yesterday’s surprisingly dovish rate cut by the Reserve Bank and the ensuing commentary. The Government’s entire strategy is built on engineering rate cuts to pump up economic growth, but the bank itself pointed out it only does short term policy to keep inflation low. Rate cuts alone are not enough.
In the absence of mortgage-expansion-driven inflation in house prices and another surge in net migration that is even bigger than the outflow of residents seeking higher wages in Australia, the economy can’t grow much in the long run.
Without much investment by either the Government or businesses and households, the economy is just treading water as a housing market with bits tacked on. The Government is holding back investment in the hope the household and business sectors step forward to borrow and spend and invest.
But they aren’t because:
* real wages for households that have to spent 100% of their incomes are sagging, partly because of those Government job cuts, investment freezes and administered inflation in electricity, rates and other fees and charges;
* the usual engine for mortgage-driven investment and inflation in the housing market is turned off because rental property investors are wary when the Government says it wants lower rents and house prices;
* businesses haven’t borrowed or invested much since Covid because they, like the households that ultimately decide where to invest, understand that the lowest risk and highest return investment returns after tax and the effects of leverage come from residential land; and,
* banks are reluctant or unable to encourage much more mortgage lending because of LVR and DTI limits, and another scheduled increase in capital requirements, albeit under review.
Essentially, everyone is waiting for something or someone to fire up the engine of the housing market again. That’s difficult with household equity in housing currently $165 billion below its December 2021 peak of $1.432 trillion.
My current expectation is the current Government will try to fire up the housing-market-with-bits-tacked-on again by:
* announcing within weeks that ‘golden visa’ holders who have invested $5 million in businesses or $10 million in bonds can buy a home to go with the visa, thus increasing population growth and demand for homes;
* encouraging the Reserve Bank to suspend or delay its current plans to increase capital requirements for banks by a combined 3.5 percentage points or over $16 billion over the next two years, which would free up the banks to lend over $100 billion more than they can currently; and,
* increasing the ability for businesses to bring in more temporary migrants on lower wages to work in retail, agriculture, health, education and other services sectors.
Immigration Minister Erica Stanford announced last week an easing of migrant worker requirements for rural contracting, adventure tourism, meat working and some farming jobs through its Global Workforce Seasonal Visa last week.
The Reserve Bank, under new management after the exit of Adrian Orr, is expected to finalise the capital requirements review it announced shortly after Orr’s departure. Orr drove through the capital upgrade plans in 2019.
Quote of the day: ‘Can we handle the truth?’
“Population growth is very low and house prices and population growth have been sort of key drivers of economic growth in this economy for decades. So it really gets us back to the issue of productivity growth. If we want to sort of get growth going forward in the long run, then it's about improving productivity in this economy. And monetary policy is not the instrument for that. We're about controlling demand to keep inflation low and stable. There's only so much we can do.
“Normally we'd expect house prices to be increasing a bit more at this point in the cycle, but they're not. We're not expecting them to increase a great deal over the coming 18 months or so. And when you look at household consumption, it's very highly correlated with changes in what's going on in the housing market. So there's a bit of an open question there. Can the New Zealand economy grow without that sort of wealth effect coming through the housing market?” RBNZ Chief Economist Paul Conway speaking in yesterday’s MPS news conference
Chart of the day: Vehicle imports per capita
Timeline-cleansing nature pic
Ka kite ano.
Bernard
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