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Bernard Hickey asks why Aucklanders are so reluctant to let their Council borrow to invest when they themselves are borrowing and betting on Auckland's growth

Bernard Hickey asks why Aucklanders are so reluctant to let their Council borrow to invest when they themselves are borrowing and betting on Auckland's growth

By Bernard Hickey

Here's a question for Auckland's property owners, and be honest with your answer.

What would you do if you could take out a mortgage that was fixed for 12 years at 4.01% to invest in an asset that will last decades and have a guaranteed customer base of over 1.5 million? Would you take on that debt if the interest costs represented less than 15% of your income?

The answer for Auckland property owners in their own capacity is clear for all to see in the recent mortgage approval and house sales figures. House sales in Auckland rose to a 12 year high in July and more than 40% of the buyers were rental property investors or owner occupiers buying houses with mortgages fixed for one or two years at 4.7%.

Understandably, those home-buying investors were betting that demand for property would be so strong in a market that was already short of 30,000 houses that they would be able to rent out these properties and do well in the long run.

These investors were betting on the long term future Auckland and were comfortable to borrow at 4.7% to do it. They were also comfortable to do it in a way that rent barely covered the interest costs, or that interest costs were around 40-50% of take-home pay for owner-occupiers.

They were buying assets they could see and touch in a high growth market they understood and were confident in. Auckland's houses are worth over NZ$450 billion and are being paid for with well over NZ$120 billion of mortgages, suggesting a gearing ratio of around 26%. 

Aucklanders seem relatively relaxed about that level of debt gearing and serviceability for their own homes.

So why are they so nervous about their own Council's gearing ratio of 17%, particularly when the population growth is expected to be explosive over the next two decades and the Council can borrow at 4% or lower?

Why are they so worried about being able to service that debt when 60% of New Zealand's population growth over the next decade -- and therefore its rateable base -- will be in Auckland.

Why are they concerned about the need for the infrastructure that debt would pay for when they see it in front of their stationary windscreens every day? Why are they confident investing in housing that only has value if tenants and owner-occupiers can get to work on the roads, buses or trains and can drink the water and play in the council-run parks?

The Auckland Council and some of its councillors regularly argue that Auckland has maxed out on its debt and cannot afford to borrow more. That would be the case if the borrowing was for salaries and rubbish collection, but no one is saying that.

Ratings agency Standard and Poor's has given the Auckland Council a AA credit rating and the Council successfully borrowed NZ$250 million from 'Mum and Dad' investors in March at an interest rate of 4.01%. There was huge demand which drove down the cost of borrowing.

The irony is that councillors opposing more debt are no doubt from the same communities and circles with over NZ$140 billion in term deposit accounts who are desperate to lend to Councils.

Auckland desperately needs investment in its roads, rail networks, buses, water systems and all the other infrastructure needed to cope with an extra million people over the next 50 years or so. Those people will be ratepayers and the growth of Auckland's economy will support that debt.

The contradictory thinking about the personal debts of ratepayers and the public debts of their councils in a city that is growing as fast as Auckland is untenable.

Simply ask yourself the question: Would you borrow at 4% to invest in multi-generational assets with guaranteed customers in a fast-growing economy?

Of course you would.

The same could be said more broadly for the central Government in growth areas such as Auckland, and in areas of the greatest need.

The central Government can currently borrow for 3.3% and has a net debt to national income ratio of less than 30%. Yet it also has this same contradictory approach to using debt to invest in inter-generational assets.

Bill English and John Key like to congratulate the voting public on their 'wisdom of the crowds' when it comes to national savings and the current account deficit. They're certainly not challenging the wisdom of the crowds jumping into rental property in Auckland. Yet the Government too seems reluctant to use the lowest interest rates in a couple of generations to invest in future generations.

The intergeneration scandal of the Government's decision to stop contributions to the New Zealand Superannuation Fund is a case in point. It won't borrow at 3.3% to contribute to a fund earning 10.3% in its first 12 years, and then it has the gall to collect over NZ$4.7 billion of tax from the fund.

Both Aucklanders and the Government should drop the two-faced approach to debt and invest in growth for future generations.

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A version of this article first appeared in the Herald on Sunday. It is here with permission.

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39 Comments

I thought the last election campaign would be fought over competing visions of nation building infrastructure provision. I certainly got that wrong but maybe the next one will be?

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Bernard , its the sheer scale of the council's long -term borrowing proposals that has us terrified .

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And in 12 yrs time, what will the interest rate be then?
Are you sure that Auckland will keep growing as fast as it is now?
How about a govt change or a long recession?
Please speak for yourself about the wisdom of debt.

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Councils and governments unlike property buyers can access debt at long term fixed interest on bond markets. Maybe David will have the details but I believe the terms can be 20 to 40 years.

Otherwise I think the point Bernard was making was the private sector seems to be borrowing based on a level of perceived demand that is not matched by the public sector. And this is causing the Auckland economy in particular to become unbalanced.

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Mass stupidity.

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Is this a valid comparison. The infrastructure debt isn't secured againest the sale of the asset or its ability to generate income. It's secured againest the ability of the rate payers to pay rates, which would also contribute to their reluctance.

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Bingo - hence what could go wrong? Nothing according to Krugman.

Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt. Read more

But, what if Albert Edwards prognosis is correct.?

Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all. Read more

Surely, the bite of depression, at this point, will make it difficult for all to service/repay their personal and civic/sovereign liabilities? Meanwhile, the wolves of Queen Street will have run off with the proceeds.

If interest rates rise, who knows, but Roger J Kerr has been preparing LGNZ, probably at some hedging cost to date, for as long as I have been registered at this site?

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Indeed, a couple of major economic planets are aligning that suggest New Zealand should embark on considerable infrastructure spending. The current world sharemarket and commodity price collapses suggest a global recession could be very close. Meanwhile NZ will have the resource capacity post a Christchurch rebuild peak to invest in other building type things. The only sensible global response seems to be either tax cuts for all to boost consumption, or infrastructure spend. (And I would fund it with helicopter QE, rather than asset buying or foreign debt as recently, but that is another story). If there's an infrastructure gap in NZ, then that would seem the best route for us.
Is anyone in the Nats bold enough to manage this? There's little evidence to date that Key or English are sufficiently bold, but it is fairly likely that events will compel them to be fairly soon.

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dp

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A standard QE undertaking would call for more sovereign debt to be issued since most of that outstanding is foreign owned (~70.0%) and may not be given up if yields are predetermined to fall. Direct fiat injections into the citizen's A/Cs would be spent on frivolous imports, much as borrowed foreign money is now.

The risks are many and documented.

The Japanese economy sank yet again, more than suggesting there is no recovery from the “inflation”-led recession that began six months before any tax change. Almost right from the start of QQE, Q4 2013, Japan’s GDP has either been contracting or barely rising. The net result is the monetary hole left behind by so many flawed theories. Primary among them, as Q2 2015 lays bare, is that currency “stimulus” isn’t much of one (a fact that China is undoubtedly aware). Read more

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Stephen L:-

As a proposition - what infrastructure spend would you recommend - what on, and where?

Can you give examples? - your top 10 would be good - in descending order

These questions could equally be directed at Bernard Hickey - so blitz away Bernard

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I am not really aware of the priorities; Bill English last week floated a 30 year plan, including considerable school maintenance/refurbishment. Water and wastewater systems are touted to be past their use by date in some cases.
In Auckland, where I am, transport is a key issue that will not cope well with another few hundred thousand residents without considerable investment. National have floated investing in the rail system from 2020 from memory- in other words they kicked the can as far down the road as they plausibly could.
Some of these things they should get on with, assuming spare resources- in particular relevant labour skills- are available.

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Was thinking about the priorities from your perspective - not Bill's perspective

What is the most immediate pressing (Auckland) issue - Transport? Roading?

Should you agree - how would you fix it?

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There is a good case for the rail project if you buy into a somewhat condensed Auckland, rather than a completely open urban sprawl- which I don't think works in Auckland's isthmus in any case. The Council, for their faults, actually have worked through all the bus/train connections, with then scope for extra house/apartment building along those links. It will never get easier or cheaper to start building the system.
The fear that it would be an unused white elephant doesn't stack up. Buses and trains are generally well used now. Given NZ's tax and rates structure, paying for what is a very large project should be a mix of Council, government, and user pays.
The schools and other things they noted in their report, I also would do, assuming their report is well founded. Not everything can be done at once.
But I would start the urban rail project very soon.

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As we found with Palmerston North's City council who got to the final two contenders to get a Velodrome for the area, It would have been an asset to the area, and the council were very keen for it and the extra spending and it would have helped Massey University with their elite sporting/human performance studies colleges.... But. The borrowing was to be secured by rates payers (fair enough) but so was it's operational costs which were never going to even break even ever (not acceptable). But the council really wanted it.

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PN should be pleased they missed out, cowboy. It seems the Avantidrome in Cambridge is still putting its hand out for more.
http://www.stuff.co.nz/waikato-times/sport/68238174/Waikato-Regional-Co…

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We would be a lot better off if Debt was not the answer. Clearly that model is beyond abused.

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The answer is to stop flooding Auckland with immigrants at such an irresponsible rate.

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That would be a good start. These growth rates they are preparing for are completely unsustainable so why not pare them back a bit and everybody just calm down. 2.5% annual growth (that's what some are saying) results in a doubling every 28 years. 3 million then 6 million then 12 million and so on. In less than 200 years (the present age since colonisation) there'll be 192,000,000 Jafas! I'm not convinced this is a good idea.

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With all this borrowed money, just fill in the the Manukau Harbour and with the dredging to make your new west coast super deep water port and build a few 50 storey accomodation blocks to make the new Southern Hemisphere Hong Kong. Auckland then achieves its status as the most liveable super metropolis. Wonderful!

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The problem is that there is no long term plan or vision for NZ that is why we are falling behind the once 3 world Asian countries.

Also there seems to be an adversity to business and success.

Nz has not moved on since the crash 1987

House and speculation is the main gain with Govt taking its profits in the form of taxation.

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Your tight Bernard there should be several muni funds set up to match the life of the assets created

10 yrs 20 yrs 30yr 50yrs 100 years

Councils should be able to tax all people in its area to broaden it's income.

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Is it the councils job to push aside private businesses? I would say "hell no" with a side serving of that will cripple local economies. PPP is one thing, socialist/communistic 3 world businesses model another.

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Councils do not invest, they spend, create waste. At least with MY mortgage I decided to get I am only answerable to myself. Plus it is being paid down, unlike Len & his mates so called investments. Do you truely think Len gives a toss on debt in the future for Auckland. He is a prick that only looks after himself.

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Agreed, councils are less accountable than they need to be. They put up rates by and amount to pay for a targeted program, but then there is no way to ensure that is just where they spend that money. A once every three yearly election doesn't really seem much of a threat to either local body or national politicians.

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I sometimes wonder if the projected population growth rates are primarily used to justify borrowing rather than the other way around.

Personally, I don't see a big issue with some additional debt if it will truly go towards productive infrastructure that will improve the city. Projects like the city rail loop don't inspire confidence that will be the case.

The whole situation is so crazy it's almost funny - hundreds of migrants arriving in Auckland every week - an anemic consent and building rate - far too little investment in infrastructure (but probably not enough wealth/income to support much more investment). One or more of these factors will need to change big time or Auckland is going to become a gridlocked slum.

No offense to any John Key supporters but the country seems in a stupor with current Government and deserve the hard times that will come in future as a result. I can't help but take it personally as a Kiwi living offshore - I would very much like to move back to Auckland one day but it seems the place is going down the gurgler. Very sad.

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"Bernard Hickey asks why Aucklanders are so reluctant to let their Council borrow to invest when they themselves are borrowing and betting on Auckland's growth"

Answers:
(1) The Council does not critically require a domocile
(2) The Council does not have a career to invest in, nor has it birthed any children personally
(3) The individual parties in the Council don't feel jointly and separately responsible for the debts.
(4) The Council individual parties do not intend repaying the debt solely from the fruits of their own voluntary trade/labour efforts.
(5) Most importantly, the Council do not appear to recognise the difference between their behaviour and endeaveours compared with the list 1 - 4 above, and thus if they do not recognise such differences then they are a most unwelcome dependent for those left to face the mess/bills.

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Is this an infrastructure plan?

Finance Minister Bill English says 30yr infrastructure plan will include national data standards for roads, water & buildings; Sees more use of tolls
As reported by Gareth Vaughan here on 20 August 2015
http://www.interest.co.nz/business/77181/finance-minister-bill-english-…

Which takes you to
Bill English's 30 plan
http://www.infrastructure.govt.nz/plan/2015/nip-aug15.pdf

NZ Govt's 30 year infrastructure plan
http://www.infrastructure.govt.nz/plan/2015/

An 86 page PDF 3 mb file of mind-numbing clichés and little else
Lot of words that add up to very little - lot of motherhood statements - short on vision - simply amounts to a dissertation explaining that most of our exisring infrastructure is nearing the end of its useful life and needs replacing

That's a vision? - that's your leader leading? - hardy-har-har

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Bernard is loopy. Council's should virtually never borrow for infrastructure.

Why?

1. Because they can't liquidate those assets to repay debt (like a home owner can)
2. Because the assets almost never make a financial return
3. Because borrow and spend starts a limitless cycle

If you need infrastructure because of waves of minimum wage earning newcomers, who provide no upfront funding for it, then the cause of that infrastructure need needs addressed. Here goes the "i" word again (I can't utter it but it has two "m" and ends in "n".

Also it strikes me that if Auckland can't afford the infrastructure that it needs for growth, then the other phrase I am banned from uttering is true (despite some editors believing that it isn't). In my view, Hickey's article is proof Auckland is fu#%!

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I'm not disagreeing with you, but infrastructure has a finite life, and at some stage will require replacement. How is that to be funded, without borrowing?

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Easy Murray. Every year there will be some piece of the infrastructure to do. So you do it that year and pay for it out of income. Next year something else. Because in the big city building infrastructure in a continuous activity.
It's not like a house to live in which you borrow once and big. and pay off over time. It's not repeated every year.
So you need the income stream. The reality is Aucklanders need to pay rates at quadruple the current level. And borrowing to cover the refusal to do so is not investing. It's just irresponsible to borrow to cover the refusal to pay the realistic rates.

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levies on its use, so those who are using it can honestly assign true cost of services to their endeavours (like farmers and factories should be passing on costs of environmental protection, so consumers can make true choices)

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Exactly. These are core fundamentals that often get missed in discussions like this. Why then can't we make, and hold local and national bodies to conform to this?

Nationally this is an issue too. The Government has announced that it is going to withdraw support for Kiwi Rail, but Kiwi Rail has never been able to compete on a level playing field with trucking companies. Successive Governments have admitted that trucking companies do not face the full cost of the damage they do to the roads. Those costs are spread across all users, while it is clear that it is the trucks who do all the damage. Plus this Government has actually allowed the trucks to increase in size, increasing the cost of the maintenance required, and many bridges needed reinforcing to accomodate the additional loading, but it wasn't the trucking companies who paid for it. Why not? They are the ones who benefit, at our expense. James Shaw (Greens) said it first I think, they are publicising the risk while privatising the profits. We are getting screwed while others profit.

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Daft isn't it. Core Rail is one of those assets that should be owned by neutral State and rented (with security) to national and local operators, dependent on their ability to met KPI's.

Rail has always been better than trucking - except where government has sent in hatchet-men to stop it, so they can drum up road tariffs. Not the truckers fault, just greedy politicians.

But again the truckers really aren't the ones' benefiting - they only benefit from miles hauled and loads carried. They'll make as much profit with smaller tighter businesses with higher margin than big businesses running huge long haul.
so who gains? All those tariffs... all the certifiers... all the loaders. Breaking the power of NZ's biggest non-military employer of the day. All the reinforcing jobs.,... all extra government income and make-work.

It's not privatising the profits, Get Shaw to go through the numbers again. Why and how could truckies get government to do such things? Why influence could they have? why would government of the day suddenly listen to them? no- shaw is fingering the patsy, how do I know ? Because one of the biggest Freemason groups is the Railroad Servicemans subgroup, and I also went to polytech with a ex-manager of (old) Railway...and I know a lot of truckies and they have to run tight ships and pay lots of fees just to stay on the road - there's no gravy train there that's for sure.
See a lot of truckies were BMW's, nice suits, and drink cups of tea in cafes? no...but lots of high level government types (aka "public servants" that do.) .... Show me the money ....

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"Show me the money..." interesting Cowboy. I do understand that today most truck driving jobs are essentially minimum wage jobs so where is all the money going? surely the Government is not able to rake that much out without complaint? And yes i very much agree that politicians wages and packages, and likely those who work for them are way out of whack with the rest of us.

Is this andother facet of the economic model where the fringes get too much while the people who actually create the value get SFA?

Fundamentally though Kiwi Rail should be allowed to compete on a level playing field. And ordinary motorists shouldn't have to pay for road damage done by trucks. Let the costs fall where they are incurred and don't let greed continually demand ever larger profits!

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Worth $450B? When Europeans arrived first arrived they found Auckland largely abandoned by Maori. In a perverse reality the volcanic soil proved so desireable, but indefensible, that Auckland became too hot to handle. Now we throw houses over prime productive land and say they have value?

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This is a bit of number juggling Bernard.
The council debt as you state is 17%, based exactly on what assets and can they be sold by the council? And while it is likely true in the way you calculate it, one can also state with all truth that current debt is twice the council income from rates and other services. About 6 billion versus about 3.
It is also true that when buying a house one usually ends up with a debt level far higher to income, it is under the buyer's control and relatively liquid.
The buyer then, usually, gets rid of the debt over time rather then accumulating further and ends up with a debt level at less then annual income or ideally with no debt. Investment debt not withstanding.
Ok, the income earning span of the private person is finite unlike that of the council.
All the ratepayer sees is more debt and an ever increasing interest bill which has to be paid for by the mentioned ratepayer, a debt increase over which the ratepayer really has no say, council elections make no difference in this. If your income does not increase much another 10% rate increase can hit hard.
Then to top it off, most of what this money is used for has no bearing on the ratepayer's enjoyment of this city, selfishness kicks in here.
Public Transport for instance will never pay for itself and the more that is invested in this the higher the PT component of the rates bill will become, principal repayment, interest costs and the increasing operating deficit. And all that so a few privileged people can now spend half as long in the traffic, for a fraction of the cost, playing games or checking the latest Ashley what's it's name list and to top it off they do not have to pay for parking their car. You might even end up talking to someone you don't know, what is that about? Not many know how to do that anymore.
Up the cost of PT fares to reflect this privilege and make it comparable to taking the car into work. Ah yes that will get people to drive their car to work again. Not unless we double the road infrastructure, so don't do it. Toll on the roads will further drive people to take PT, so you can now increase the PT fare even more. What a wonderful ever increasing income spiral. In the end PT may even become income generating or at least not a rate payer burden on those who do not use it.
(just to be clear here, I love PT and use it where I can but it is far to cheap compared to the benefits gained by using it).
Swimming pools are another great social spend. Absolutely useful. I don't use them as I don't like to swim in water where someone else has just been coughing and spluttering, but that is a personal choice. Part of my rates go there too.
I don't have a sealed road outside my gate, don't use town water or sewage, have regular power cuts and internet is slow. Yet I pay Auckland City rates so others can enjoy all these things.
And you wonder why some people think the constant rate increases due in part because of constant increased borrowing are a bit over the top. (but I do cross the bridge from time to time and would even happily pay a toll for that if it helps).
More user pays is a big part of the answer in my opinion, and that can turn 'council assets' into 'income generating assets'. These are worth far more on the balance sheet and the 17% will be reduced to next to nothing in % terms according to this article's accounting.
In real terms however?

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If the council needs to borrow then it's living beyond its means.

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I tend to agree with the people who say the councils should not be in debt. Like my business and household, if we need a big ticket item then we save for it. There seems to be "too much too fast" going on at present, brought on by excess immigration and high house prices But that may not always be the case, I mean if house values fall will rates also fall? I'm guessing no... anyway In my opinion councils in general have run their course, and might as well be abolished and central government given the workload... so they can justify their bloated paychecks... stop rant:

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