David Hargreaves sees a likely need for substantial changes to migration settings and for application of more Reserve Bank 'macro-prudential tools' in the year ahead

David Hargreaves sees a likely need for substantial changes to migration settings and for application of more Reserve Bank 'macro-prudential tools' in the year ahead

By David Hargreaves

They say a week's a long time in politics. In economics, it seems, a month can be like a lifetime.

Since the Reserve Bank finalised its projections for the last Monetary Policy Statement on September 2 and Governor Graeme Wheeler put his signature to the 'policy assessment' part of the MPS on September 9 some of the most fundamental assumptions contained in those projections have undergone severe reversals.

These are what the RBNZ described as its most important policy judgements in that MPS:

  • the exchange rate will remain low, boosting tradables inflation and stimulating activity in the tradables sector;
  • New Zealand’s export commodity prices have troughed, and the recovery is assumed to be gradual;
  • world growth will remain near its past average
  • net immigration has peaked, and its boost to demand and supply will wane over coming years; and
  • rebuild activity in Canterbury has peaked, while house building in Auckland will continue to accelerate. 

The MPS was released on September 10, with an accompanying cut in the Official Cash Rate to 2.75% from 3%. On that day the Kiwi dollar dropped sharply, falling to US62.72c and 68.34 on the trade weighted index measuring a 'basket of currencies' of 17 of our trading partners.

The Reserve Bank said this of the Kiwi dollar: "We assume it will fall further over the next year to about 65 on a Trade Weighted Index (TWI) basis. Two key factors behind the depreciation are lower export prices and heightened uncertainty about the global economic outlook. Both imply weaker prospects for New Zealand’s growth, and inflation, and so lower interest rates."

Further down the RBNZ said this: "A higher exchange rate than assumed would imply lower near-term inflation. The medium-term inflationary impacts would depend on the factors driving the move in the exchange rate. One potential cause of a higher exchange rate would be a rebound in export prices. In such a scenario the medium-term outlook would be for stronger incomes, growth and inflationary pressure. Alternatively, the exchange rate could be higher than assumed if the Federal Reserve or other central banks were to delay interest rate increases because of concerns about a weaker or more uncertain economic outlook. In that case, the implication for New Zealand would be both lower near-term inflation and weaker medium term growth." The bold type is mine, for emphasis.

Sod's law rules

Well, Sod's law and all that, the RBNZ has seen BOTH its alternative scenarios come to pass. Dairy prices have bounced with a strength nobody foresaw, while the US Fed didn't deliver the rate rise on September 18 (NZ time) that it's pre-match bravado might have led people to believe it wanted.

On dairy prices, the Wholemilk Powder (WMP) price is now some 35.9% higher than it was when the RBNZ pulled its projections together. This is what the RBNZ said at the time: "We assume the recovery in world dairy prices, towards a more sustainable level, will be slow [my bold emphasis]. Prices on the GlobalDairyTrade platform are assumed to remain subdued over the next year before picking up."

Slow and subdued? Not really. As things stand at the moment this dairy season is now starting to look like a pretty unenjoyable one for farmers - but not the disastrous one it looked like being just two months ago.

So what of the US Fed? Reasonably dire labour figures released in the US since the non-rate-rise decision suggest that it would be an extremely brave, if not unbelievably quixotic, move for the Fed to hike rates this month. Which leaves only the December decision this year for a move before the US heads into a Presidential election year when the whole process of rate moves becomes incredibly fraught and political. There's got to be a fair chance now there will be no US rate rises certainly this year and with big question marks over how feasible it would be next year.

Kiwi finds wings again

As at time of writing the Kiwi dollar is up over 4% against the US currency since the release of the September MPS, while it's up over 3.5% on the trade weighted index. The TWI is not far short of the 71 mark, which is about 8.5% higher than the level the RBNZ is anticipating  in a year's time. And yes, a year is a long time, but watch this space, since there now appears little to stop the Kiwi dollar continuing to rally in the short-term, certainly ahead of the US Fed's pre-Christmas decision on rates, which comes on the same day (December 10) that the RBNZ makes its last OCR call for the year.

Then there's migration. The RBNZ's now looking for this to have "peaked". Subsequent to the release of the MPS, Statistics New Zealand released the August migration figures on September 21. These showed us hitting a new peak of 60,290 net migrants in the past 12 months. On a seasonally adjusted basis the country's had a net gain every month so far this year of between 4790 migrants and 5730 (in July). The figure in August was the second highest this year so far at 5470. If it's peaked, it's peaked at very high levels and there's no immediate sign of it dropping away from those levels.

The context to all these developments is that the RBNZ is on the one hand trying to satisfy its monetary policy target and get inflation back to around 2%, while on the other hand under its financial stability hat it wants to get rampant house prices back under control. To help to achieve the latter it has new rules coming into effect next month that will mostly prevent property investors in Auckland borrowing more than 70% of the value of the house they are buying. The RBNZ's also loosening a little the amount of money the banks can make available for loans to high-LVR (above 80%) customers outside of Auckland.

The inflation puzzle

Let's look at inflation. In the June quarter it was 0.4%. Ditto the annual rate in the year to June. That's a hell of a long way short of the 2%. The Government's frustration with how far away from the inflation target the RBNZ has been on a consistent basis is growing. New inflation figures for the September quarter are out next week. The market's expecting a benign figure (around 0.4%) and the RBNZ's expecting a benign figure.

The heat goes on the RBNZ into next year, when it is expecting big things to happen. It's predicting chunky 0.7% increases in the CPI in both the March and June quarters, principally as the impacts of the lower dollar (which may or may not be currently starting to partially reverse itself) feed through into price increases. The RBNZ reckons it will hit that 2% midpoint of its 1-3% official targeted range by the September quarter next year.

But will it? I think the Kiwi dollar will continue to fight back, particularly if there's no US interest rate rise and particularly since the enormous drops in dairy prices from March onward have now close-to been reversed. Wage pressures are likely to remain subdued here because unemployment's now seen as rising again, and the influx of migrants has already been officially acknowledged by the Government as something that has kept the lid on wages in lower-paid jobs.

I don't think the RBNZ has a prayer of making that target. If it doesn't the heat will go right on it to try to rectify the situation, and that can only mean a need for lower interest rates.

But of course still lower interest rates will add fuel to the fire as far as the housing market goes.

Some impact

The original impost of the 10% LVR 'speed limit' in 2013 did dampen the market then (though you've got say, and the RBNZ rather skirts over the fact these days, that the ill-starred hiking of the OCR from 2.5% to 3.5% in the early part of 2014 helped a lot too). So, it is to be expected that the new curbs on lending to Auckland investors will have an impact in Auckland. I've said previously I think prices will drop in Auckland.

But what about elsewhere? Already the signs are that markets nearby to Auckland are perking up. The RBNZ has already shown some signs of concern with indications it may delay a proposed phase-out of the LVR rules outside of Auckland.

Personally I think that will just be the start of it, because with potentially even slightly lower interest rates available next year it is going to continue to be A/ Unrewarding to invest money on fixed deposits and B/ Still cheap to get mortgages.

Investing in houses is still going to be hot. If people feel constrained in Auckland they will go elsewhere, which will push prices up elsewhere. There's no doubt in my mind that before we've got as far as say March the RBNZ will have reversed its earlier loosening of LVR rules outside of Auckland.

Where to?

But where does it then go from there, after the impact of that move starts to wash through the market and as, inevitably the rules on Auckland housing investment start to lose some of their impact - I would pick by halfway through the year?

With no ability to lift interest rates the RBNZ will again have to go back to its macro-prudential tool kit. What it might come up with I'll perhaps ruminate on another day. But before next year's out, something else will be needed.

But the Reserve Bank is going to need more Government help. About 27,000 of the new migrants in the year to August indicated they were settling in Auckland. That puts upward pressure on housing. It puts pressure on the labour market.

If the tap doesn't turn itself off - and I don't think it's going to - then the Government needs to step in. The huge complication for the Government is that so many of our tertiary institutions are now clearly dependent on attracting offshore students in order to keep funding levels up. However, at least some of those students are clearly here really to seek work rather than education per se.

Something is going to have to give. But the Government will need to act. If the funding of tertiary institutions needs looking at, then look at it. But I just don't think the Government can keep assuming that rampant inbound migration is something that will go away of its own accord. It needs controlling.

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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International students should only be allowed to work if they are studying either full undergraduate degrees or post graduate courses and only part time during course time. ie they must be at a university or doing a degree level course at a polytechnic.

The scams run by foreigners registering 1 contact hour a week courses at independent tertiary whatevers need stamped out right now.

This loop hole which allows mass migration of minimum wage workers needs stopped. It has put massive upward pressure on housing, massive downward pressure on low end wages and overall will lead to crime and societal issues as the dreams of these would be immigrants fall apart.

NZ should not be exploiting these people.

If I was a landlord and business owner I'd be very happy with the current system. Ho many National MPs are landlords and business owners?

Auckland is caught in a deadly dance-of-the-tarantulas where the housing needs of PLT's migrating into Auckland, exceeds the number of new houses being built each year

Thus, all the gymnastics of Nick Smith and Auckland City Council are for the benefit of newcomers

Effectively the quantum of all new housing in Auckland is being commandeered by inbound imports who don't participate in the provision of new-builds

There must be limits on asset price inflation. It's very well to suggest that migration is a driver of house prices, but there are behavioral constraints as well. Asset prices can only rise so far until the nexus point of the trade off is reached. The only deviation from "the mechanism" that rationalizes the value under current assumptions is inflation or debasement of the currency. Sure, I cannot argue that a modest abode in Glenfield cannot be worth $1,000,000. That value is in the eye of the beholder, but there is a point where the sacrifice and / or risk is just not worth it anymore.

by any normal macro houses in Auckland are way overvalued for the local population.
but where you have the perfect storm, cheap credit, cheap currency, no restrictions, high migration, tax incentives for rental properties, no checks on funding, and buyer frenzy and hype house prices will continue to rise.
the major problem is those in power with a vested interest (from both sides of parliament) in keeping it going, they could stop it tomorrow if they really wanted to

..and as the cancer spreads to the regions, has any one wondered what will happen once the regions become unaffordable as well? Are these buffoon politicians happy that the masses become tenants, the 1% ers the owners of all?

Wake up Labour...there are votes to be had.

Oh, so that makes the NZ govt omnipotent and they orchestrate markets how they please. Possibly. But there are things called externalities, which should be threatening enough to keep vested interests in check. We're not Vietnam.

Could not agree more, however housing is now treated as an investment, not as a place families need to live in. As such housing is no different to the sharemarket. I remember prior to the 87 crash, investors put milliions into the sharemarket simply because the price was going up and they did not want to miss out, housing, now is no different.
Yield on investments meant nothing, it was all about capital gain.
The same scenario is playing out with housing in Auckland. The longer the frenzy goes on the bigger the correction when it occurs. It is not if but when.
This Government, because of vested interests, do not want prices to stabilise or come down.

I believe the new regime and bright line tests will have a major impact. IRD are gearing up big time now moving staff into the property division. Auckland property prices rise 22% in a year. That's a big capital escalation. Tax on that is enormous. Personal tax rates to go down? Watch this space.

It would be a bit of a stretch to lower personal tax rates based on a very temporary influx of property-related tax, and that's assuming there is even much of an increase in tax being paid due to property sales

why not? paye taxpayers have been the mainstay of the tax base for years - why shouldn't they get some tax relief at the expense of property investor.

IRD has turned a blind eye to property speculators for years, you have to change their internal mindset and focus before you will see results.
The only way to make it happen was to put in a hard and fast rule because they didn't use " intention" very often

The immigration graphs are scary. The early 2000s boom is now dwarfed and the trend is still heading higher. Dont know if we'll see any further rate cuts. I think we'll see house building finally ramp up and this drive up inflation and the OCR, which will be more potent this time round than in mid 2000s where it seemed to do nothing until floating mortgage rates hit double digits. Regions can happily see 20-40% house price inflation without too much drama or any more changes by rbnz to lvr's etc. Aucks done its dash for this decade and will flat line. If this time next year they are infact up nearer 40% (hamilton currently going at close to this rate) than 10% in regions then I think the rbnz might look at whos buying and make the 30% deposit for investors a nationwide thing.

We limit refugees hugely, but there appears to be no policy problem with very large immigrant numbers.
Maybe we should just stop the immigration unless there is absolute benefit to New Zealand. We then could take larger numbers of refugees on humanitarian grounds.

Thank you for this excellent piece .

Its about bloody time we recognised the distortions we have created through our immigration policies

Its migration which created this economy from $5 Billion to $180 Billion in 50 years!!

Mostly inflation mate!

So around 7% average inflation over 50 years? Seems a little high to me.....

Still a huge increase in real terms.

In combination with natural population increase as well obviously. Check RBNZ for actual inflation I think it was close to 6%pa over the period.

6.1%pa inflation over past 50 years


Plus 1.1%pa population growth

And then the fact that population growth occurred to a greater extent in the 60s (closer to 2% growth) means that over the past 50 years real growth was virtually zero (7.4%-(6.1%*1.1%)-time distribution factor)~0

So proof that population growth is of absolute zero benefit to real growth rates.

To go from 5 to 180billion in 48 years would take about 8% average inflation which seems excessive.

A very simple excel model,

year amount inflation rate(multiplier)
1 5billion 1.08
48 186billion 1.08

The interesting thing is the take off in GDP in about 2002. When did property take off? oh about then.


Suggests to me much of the GDP is make believe.

Especially when on top of that NZ's economy seems to have become less energy intensive moving to services ie less real goods more make believe.

"From 1995 to 2013, the energy intensity of the economy per unit of GDP declined by 25 percent. A contributing factor is the growth of relatively less energy-intensive service industries"


On top of that for about the same period inflation was negligible,


So where really does all this "GDP" come from? smoke and mirrors?

So what real economy do we have?

the strange thing is when it occured,



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