ANZ economists are picking that net immigration will reduce from the current 68,000 a year to about 40,000 per year within the next two years, but they say the outlook's uncertain "for a few reasons".
In their latest Market Focus publication the ANZ economists have had a detailed crunch on the migration situation, including looking at why the recent surge in immigration has not caused the kinds of spikes in inflation previous such surges have.
The economists say if the net migration inflow does slow to about 40,000 a year this would be expected to contribute to moderating GDP growth, labour force growth, and house price inflation.
However, there are those uncertainties, including an "unclear" policy outlook.
While the Labour Party had prior to last year's election indicated that it intended to reduce migration inflows by 20,000-30,000 per year it has not yet since forming a Government yet indicated any plans to implement a stricter immigration target.
"This perhaps reflects the fact that immigration remains important to meet labour shortages across a range of industries and if migration were to be reduced significantly, many businesses would find the operating environment more difficult," the economists said.
The risk of changes to migration policy may have been a factor contributing to the decline in business sentiment since the election, they believe.
The economists say that historically, strong immigration has tended to put upward pressure on house prices, with more people meaning greater demand for housing.
"If supply responded perfectly and immediately, there would be no pressure on house prices in response. But housing supply is constrained by land availability, regulation and construction sector capacity."
On why housing supply has struggled to keep pace with population growth: "It comes down to planning restrictions, land availability, land banking incentives and restrictions, the scale and structure of the building industry, funding availability, labour availability and mobility, and local or central government-influenced costs and bottlenecks, such as around infrastructure provision."
But the economists said it is not as if the home-building sector has been sitting on its hands, with the data showing that as a supply squeeze forces prices up, so consent numbers for new houses respond.
"The resulting net supply response has a very strong correlation with real house price inflation, showing that house prices are doing their job – encouraging more supply, albeit not fast enough to quite keep up with population growth."
The economists note, however, that since late 2016 the housing market has slowed even though net migration has held up and interest rates have remained highly stimulatory.
They point to a number of factors:
- RBNZ loan-to-value ratio restrictions have taken the heat out of the market, although that is not a new thing.
- The “funding gap” that opened up for banks, combined with new regulations regarding foreign funding, meant reduced credit availability has likely been a dampening influence over the past year or so.
- Affordability constraints are biting, particularly in Auckland. House price levels matter.
- Proposed government policies are intended to reduce the attractiveness of housing as an investment, including banning non-residents from buying existing property, extension of the bright-line capital gains test, and possible other tax changes.
"These headwinds explain the correlation breakdown. It is not necessary to conclude that the impact of migration on the housing market has reduced – just that it is has been outweighed. It is fair to say that house price inflation would have been lower in recent years if migration inflows had not been as strong."
The economists say a key driver of this migration cycle has been relative weakness in the Australian labour market, compared with New Zealand. When the New Zealand unemployment rate is lower than in Australia, trans-Tasman net migration flows make up a greater proportion of total net migration. And this means a quicker boost to labour supply than otherwise.
"Kiwis not leaving for Australia are already embedded in the local labour market, while Australians come from much the same culture and language and are often arriving for a specific job. This means there is less of a timing mismatch between contributions to aggregate demand and supply. This leads to the finding that when the New Zealand labour market is outperforming its Aussie counterpart, a given net migration flow tends to be less inflationary."
The economists say the accessibility of overseas labour means the available pool of workers in New Zealand is effectively larger than it appears.
"Overseas applicants for jobs are not counted in New Zealand’s labour force, but they are part of the pool of workers employees are competing with, even if they do not eventually move to New Zealand.
"If firms believe they will be able to hire from offshore pretty easily – either because of Government policy or the relative performance of foreign labour markets – then they will be less inclined to offer higher wages to lure local applicants.
"Effectively, the pool of potential workers has been even larger than labour force data suggest. And this has likely dampened wage growth. So while employment growth has certainly been strong in recent years, labour supply, measured and effective, has broadly kept pace. This is likely a factor contributing to unusually subdued wage inflation, which has in turn contributed to weakness in CPI inflation."
The economists say, therefore, that when it comes to explaining why strong migration has not been more inflationary this cycle, they see two main explanations: fairly prompt growth in measured labour supply due to the mix of migrants and the unmeasured pool of potential offshore workers, and more recently, deliberately imposed headwinds for the housing market.
"Migration inflows have been stronger than expected in the past few months. But we are not expecting house price inflation to take off again. Namely, we expect that the factors weighing on house price inflation will persist – the Government seems set on its tax changes, and the Reserve Bank will ease LVR restrictions only very cautiously. However, the outlook for migration is a key risk to that forecast, in both directions."