PM Key says housing market concern hit Q4 GDP; 'Zero budget' could hit economy, but govt wants people to keep spending

PM Key says housing market concern hit Q4 GDP; 'Zero budget' could hit economy, but govt wants people to keep spending

By Alex Tarrant

Prime Minister John Key is playing down the possibility New Zealand had negative economic growth in the last half of 2010, as the economy took a hit from the September 4 Canterbury earthquake and as a slower housing market took its toll on consumer behaviour.

"If you go back to the last half of last year, Q3 was slightly negative – I think negative 0.1 [percent – it was officially negative 0.2%]. Whether Q4 is plus 0.2% or minus 0.2 actually it’s all in the margin of error," Key said on TVNZ's Breakfast program.

"Basically what it shows you was a weak second half of last year," he said.

Two things drove that weakness from New Zealand’s point of view, with effects of the earthquake adding to the contraction.

"But I think actually in general there was quite a lot of concern around the housing market – it started faltering – and you started seeing people being very concerned going into Christmas," Key said.

"It wasn’t unique in New Zealand, the UK was negative, most other countries were as well," he said.

However there had been reasons to be optimistic.

"Actually, funnily enough I thought we were starting to look a lot more positive coming into this year, and generally the numbers were supporting that – lower exchange rate, lower interest rates helping us, high commodity prices," Key said.

“We’re now going to have effectively a two speed economy. You’re going to have growth around the country, particularly in the rural part of New Zealand, but [a] very weak and contractionary position in Christchurch," he said.

Tough budget

Meanwhile, Key said on the weekend there could effectively be a 'zero budget', with no overal spending increase by government in next year. The budget for the year is due to be delivered on May 19.

“What we’ve done is we’ve said, the previous government spent NZ$2.8 billion extra a year – that’s over on top of everything else. We cut that back to NZ$1.1 billion. When we started the year I said, ‘look, New Zealand’s got this debt position. I’m worried about the fact, not so much at the government level, although that is a factor, and a growing factor, but I’m worried about New Zealand’s overall level of indebtedness," Key said on Breakfast.

"One of the ways to do [fix] that is to spend less, so we [had] decided to increase that expenditure, instead of being NZ$1.1 billion, only to spend NZ$800 million more," he said.

"Now we are going to spend more in health and education, but the view of the Cabinet is that needs to be found, for the most part, from savings in other portfolios. We haven’t considered all of them, we’re working our way through them – we’ve looked at some.

"It’s not going to be a savage attack on one particular thing, so if I was a person that had arts funding, I wouldn’t be terribly concerned that all of sudden that’s going to evaporate," Key said.

The government needed to be very careful.

“There are only a couple of options here. You either tax New Zealanders more, or the government spends a little bit less, because eventually we’ve got to pay that debt back and we’ve got to get on top of our financial position," Key said.

If you’re taking out surely if you’re taking out – if you’re going to have a zero budget – then you’re not putting in NZ$800 million you would have put in, that would also discourage economic activity.

However government not spending an extra NZ$800 million could also discourage economic activity, with that amount not being injected into the economy.

"The question is, 'what’s the marginal economic impact on this stuff?' For instance if we put higher taxes on people, we take money out of the household budget, they definitely can’t spend that money," Key said.

"Sometimes you get less economic benefit from some of the things that government does," he said.

"I’ve seen the Greens going out there and saying, ‘why don’t we just put a levy basically on rich people?’

"That’s all very nice, but actually that doesn’t raise nearly as much money as what you need. And when you really look at what they’re talking about, they’re talking about putting a levy on people that earn about NZ$40,000 a year," Key said.

The Green party's preffered option is for the introduction of a 'disaster levy' on incomes over NZ$48,000 (see the Greens' latest comments on the disaster levy below).

"Now they are New Zealanders, between NZ$40-70,000 a year – middle New Zealand – they’re not feeling richer and they’re really struggling. They’re paying higher petrol prices at the pump, we’ve got all these issues in the Middle East, so that’s unlikely to see lower petrol prices anytime real soon," Key said.

"They’re dealing with other factors, and the government’s quite conscious of their position, and we’re trying very hard to make sure that they can make ends meet. And the last thing they need is another bill from the government," he said.

Here are the Green Party's latest comments on a disaster levy:

The Government’s plan to simply borrow to fund the rebuilding of Christchurch will cost us millions in interest; a levy makes more economic sense, Green Party Co-Leader Dr Russel Norman said today.

Dr Norman was responding to recent remarks from Finance Minister Bill English who said that there was no other option for the Government but to borrow to pay for the Christchurch earthquake. As a result, this year’s operating deficit is likely to balloon to $16 billion with Crown debt expected to exceed 30 percent of GDP by 2014, doubling from just 14 per cent in 2010 when National first took office.

“Now it is more important than ever for the Government to live within its means,” said Dr Norman.

“The Government is being fiscally irresponsible by putting the country into further debt when it could raise some revenue to help pay for the rebuild instead.

“The Government is proposing to borrow a further $5 billion to cover the uninsured cost of rebuilding Christchurch. This will cost an additional $255 million a year to service alone.

“On the other hand, a temporary levy on income could raise an additional $1 billion each year to cover quake-related expenditure avoiding costly borrowing,” said Dr Norman.

The Green Party has modelled a number of different levy scenarios for income earners above $48,000. A levy of 1.5% applied to an individual’s income between $48,001-$70000, 3.0% on income above $70,000, and leaving the corporate tax rate unchanged at 30% would raise $1.026 billion per annum.

People earning $50,000 a year would pay an additional 58 cents per week. People earning $70,000 per year would pay an additional $6.33 per week. People on $100,000 would pay an additional $23.59 per week.

“Australia is raising a levy after their flood disaster and their Government is, financially speaking, in a much better position than ours,” said Dr Norman.

“Australia is also not on a negative credit watch. We are, meaning that there’s a 50:50 chance of a credit downgrade, and this was before the Christchurch earthquake hit.

“Bill English is gambling that borrowing to pay for the earthquake won’t affect our credit rating. If he’s wrong, everyone with a mortgage or loan will be paying an additional 30-100 basis points on their debt.

“A credit downgrade and a subsequent rise in interest rates would mean more money will simply go offshore taking further money out of the local economy and dampening a rebound.

“We don’t agree with Bill English who says that a small levy could stifle economic performance. The levy would target those on higher incomes who typically save or invest their additional income rather than spending it.

“The risks are all with further debt. Raising additional revenue is sensible and New Zealanders desperately want to help Cantabrians re-build their city – helping thy neighbour is a deeply held belief.

“The fastest, fairest, and most economically sensible way for New Zealand to rebuild the livelihoods of those in Christchurch is to introduce a temporary earthquake levy on those who can most afford it,” Dr Norman said.

More information of the levy proposal:

http://www.greens.org.nz/sites/default/files/how_an_earthquake_levy_could_look_green_party_research_1.pdf

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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25 Comments

“There are only a couple of options here. You either tax New Zealanders more, or the government spends a little bit less, because eventually we’ve got to pay that debt back and we’ve got to get on top of our financial position," Key said.

That is our Prime Minister explaining his understanding of NZ's economic situation and his governments role in it.

Nothing more needs to be said.

Indeed at a high level those are the only two options...

regards

 

At a very SIMPLISTIC level those are the only two options. That Key sees, or pretends to see, things so simplistically is why I made my comment. Remember, Key was pushing asset sales as a third option a few weeks ago, but in mentioning that I am only nit picking.

Is government there essentially to accept the status quo but decide whether to "either tax New Zealanders more, or the government spends a little bit less"?

Who then is responsible for the complex issues of population size, the massive resource misallocation government policy engenders, the financial systems we run or our trade policies? Our dependency culture, education and social welfare systems?

Key is trying to deflect blame for his government's lack of effectiveness on to previous governments and natural disasters. I am not impressed.

Nicholas Arrand and Kakapo add more detailed points in following comments.

How do we save money? Make things cheaper to buy; put more disposable money into people’s pockets. What’s the most expensive thing in most people’s budget? Housing costs either rent or mortgage payments. So. We have to make housing cheaper to own and, therefore, rent. We have a choice. We can keep the ‘property investment’ industry going, thereby ‘bailing out’ those who are currently ‘caught in at the top’. But that just replace those ‘caught’ with another tranche of owners at a higher ‘caught in at’ price. All asset markets stop or turn, and by definition someone is ‘caught at the top’; someone has to be the last buyer. Our only question is, “Do we stop the game, here and now; or do we keep it going, and for what reason? Keeping property prices rising from here does two things: (1) keeps income away from those who need it right now and (2) delays the day of reckoning, and merely transfers it on to another set of people who will suffer at a higher purchase price. Give people more money to spend on non-property related items (use the upcoming Budget to discourage any temptation to use ‘new’ disposable income in that segment) and that will stimulate the economy – in the right areas – and keep our people employed. Higher property prices do not make most people richer; they make them poorer, as wages always fail to keep up with the price rises; consuming more and more of whatever income a household has. And we wonder why 'the consumer' is not drinking his coffee...!!

 

Why isn't there more protest from business and industry at the way they're being parasitised by the property sector, through over-expensive premises rent, and the reduction of the disposable income and customer pool?

Isn't 'the churn' over for the moment.

I'd love to see 'the only game' disappear, but half the population don't want it to.

Much as I may want cheaper housing, I can only see it 'not increasing'. Why would the average house owner sell now?

Distressed sales may drop prices - but this may be short term.

stagnation... Not much structural change or deliberate intent.

I can't see anything other that will reduce the price /cost (surely price is only known when you try to sell).

The banks seem happy to lend at more than 3x, no-one is trying to build less expensively, building plots aren't suddenly cheaper.

Anecdotally I know of RE agents accepting 1% commissions etc. They'll expect to wait for the 'good times' to return.

bau.

 

 

 

"A slower market took its toll on consumer behaviour"....no kidding....and what's about to happen post the election when Bollard rushes to raise the ocr...what then My Key!....oh by then the tradeables sector will have saved the nation....the debts will be paid off..... cows will be jumping over the moon!

Ouch....

Why should people keep on spending when they are going broke?

Because John Key and Alan Bollard think it's the only way to get the country out from beneath a stonking massive pile of debt...surely you can see the logic in that IndianKiwi...you gotta take on more debt and splurge your way to wealth...see....it's so easy...now go and borrow some money from a nice firendly bank and have a splurge.

Reminds me of this dialogue from "American Dad"

Francine: Well I'm glad you won but I wish you didn't spend our whole life savings doing it.
Stan: You have to spend money to make money
Francine: but you didn't make any money
Stan: Then by that logic I didn't spend any money either!

..and yet come election week he shall smile, he shall wave, and you lot shall vote for him...

I'm taking a voting holiday this year. Sick of having to choose from the political equivalent of a MacDonald's menu.

shame that such a deliberate/considered action cannot be recognised in the polling!

Can we get a public referendum organised in time to have a "None of the above" option added to the ballot papers?

or fund/found the 'No Confidence' party, a single issue party with the goal of getting  'none of the above' added to the ballot. :)

 

bit off topic but I thought I would ask this question

to what extent should valuers consider the integrity or weathertightness of a building in their valuation?

3 bed place I was looking at got a valuation (for the vendor) of $550K. No reference in the valuation was made to structural building issues, only superficial appearance / aesthetics.

We thought this valuation was too high, but who am I to argue with an expert valuation?

We were quite interested in the property but had some concerns about the house in terms of structural condition, moisture content etc .There were clear signs that the basement might be subject to flooding and associated building damage

We got a building inspection done on Friday and our fears were basically confirmed. The inspector basically said walk away. He reckoned the moisture content in the walls was about 80%. Reckons we would need to spend at least 70K to fix it up properly

We told the agent that we thought the valuation was a bit overpriced anyway, now we've had the building inspeciton we think it is way overpriced. Given the remedial works we think a fair price would be about $460K 

She now sounds desperate and is talking around 500K 

My main point is this -  how can valuations not properly consider the structural integrity and condition of buildings? To me it is a ridiculous exclusion!

Note this is not a 1990s / 2000s leaky building. It was (on first glance) a solid 1960s brick and tile and concrete house

My faith in NZ's housing quality has been utterly decimated, and really wondering how kiwis continue to throw so much money at such garbage. No doubt someone less informed than us will throw stupid money at this place   

Looking at a property in a good suburb of Auckland

ssshhhhh.... don't tell anybody.

Seriously - banks need to start insisting on full structural inspections before lending. Retain the cost of remedial work from the mortgagee until the work has been done - then watch prices 'settle down' - protect their customer. Can't imagine why they don't (tic).

"We were quite interested in the property but had some concerns about the house in terms of structural condition, moisture content etc .There were clear signs that the basement might be subject to flooding and associated building damage"

What's the name of the building inspector? I might use him too for my house purchase

 

Valuers are not building inspectors. Pretty much every valuation report will have a disclaimer in it somewhere stating that no assessment of structural integrity has been carried out and they will make no guarantee as to the quality of the build or Code Compliance standards are assumed to have been met. As for the reason... there would be little point from a valuation perspective of introducing building inspections unless you also had building inspections on all of the comparable sales. Otherwise how would you compare them properly? Whos going to pay for building inspections on all of the comparable sales? You can see the endless cycle of problems this would create.

Good on you for getting a building inspection. It amazes me how reluctant buyers are to fork out the $500 for an inspectors report, when they're about to spend half a million. I totally agree KW John, you'd think the banks would require an inspection for mortgage security on all new loans given how woefully inadequate our building codes have been... I wonder why they aren't doing that? hmmmmm.....

As I understand the law today....an agent is bound by law to fully inform buyers of anything they know about the condition of a property......!

I just can't believe it. How can a full market valuation not take account of fundamental structural / weather tightness issues?

the market valuation is supposed to reflect what value, all things being equal, the market would pay for the property today. If the market however does its proper due diligence, then the market would pay substantially less for that property if the structural report shows it to have serious flaws which need to be rectified at great expense

If our building stock was great, with structural / weather tightness issues rare, then this omission might be OK. But come on, a very significant proportion of our building stock has issues, which indicates to me that a significant proportion of valuations are too high  

the property I looked at, which was a cross lease, also had not had all building additions accounted for and shown on the flats plan. In my view (and the qv website mentions this) this should reduce the value too, as you would be facing close to 10K to fix this up - worst case you might have to knock down a significant amount of building, so the costs could be even higher     

also point out that I approached a valuer for a quote to get my own independant valuation. Won't go ahead now that we know the building issues are huge. But the way he talked to me, asking what we wanted to pay etc, was as if he was going to at least partly tailor the valuation to our needs. I would have thought that is potentially unethical -surely a valuer must value independant of a vendor or buyer's needs / expectations??? 

 

MIA. Dont know if this helps. When I was looking for investment properties in AK, I did most of my looking during winter (market was docile then so urgency wasnt a problem). Able to eliminate nearly 80% of all properties presented to me for examination. So many had water problems. You could tell by a damp course seeping over sections of the footpaths or driveway, or softness in the lawn close to the house. Did my own inspections. Would be lucky if 5 out of 50 were worth examining inside.

too right iconoclast, kiwis have been ripped off big time, paying far to much for piles of crap.

this whole episode has just hit home to me how much the system is corrupt and biased towards keeping this house of cards up - whether it be pollies, planners, valuers, RE agents, bank economists etc etc