NZ: A Tale of Two Economies

The last couple of months have been interesting as the media and politicians have got access to facts and figures about the political economy of housing in New Zealand. For too long the powers that be, and those that should know better, have been able to evade scrutiny by exploiting the absence of good data.

Bouquets are due to NZ Herald for its recent sequence of especially insightful editorials here (27 May 2016), here (31 May 2016) and most recently here (11 June 2016). There's also been a robust economic critique from Fallow, and excellent analysis from Professor Spoonley - especially of the economic effects of immigration.

A recent example of good new data was reported in the March 2016 issue of Property Quarterly (the Journal of the New Zealand Property Institute - not to be confused with the remarkably ill-informed and ideologically driven Property Council of NZ). At page 12 (pdf pg 14) of that issue is a report of research (conducted by Department of Property, University of Auckland, researchers) which revealed the extent of speculator involvement in Auckland's residential apartment and stand-alone house market.

I have been thoroughly absorbed in my job as policy analyst at the NZ Planning Institute, working with members to  research and prepare submissions to the deluge of policy initiative streaming from central government - many of which target NZ's housing issue. The most recent of these is the National Policy Statement (NPS) on Urban Development Capacity - which some joke is just another central government Auckland Policy Statement. See Rudman in 1 June.

It's all got me thinking. Partly because much of the discussion sidesteps the elephant in the room. And that's the importance of the housing market now to NZ Inc's economic wellbeing at multiple levels. With the increasing Government rhetoric about leaving it all to the free market and requiring local government to let go the urban planning reins (which the NPS champions and threatens to force) it has gradually dawned on me that we are living in a country with two economies. One is heavily planned. The other is left to the market.

At national level we have an economy that is centrally planned. Nothing to do with market forces. Ministers routinely talk now of pulling levers to achieve national economic objectives. These objectives largely focus upon promoting GDP growth (between 2% and 3%) and employment (unemployment below 6%). And while these objectives might generally be agreed upon by the public, there has been little public debate about what alternative development options, and economic levers, might be best for the country and its citizens in the long term, to achieve these objectives

The levers pulled since the 2008 GFC first concentrated on the Official Cash Rate (my blog on this comparing what happened across the Tasman here), then focussed on dairy farm intensification and centrally planned irrigation strategies (avoiding local regulation, damaging rivers and aquifers), and relaxed a bit when earthquakes hit Christchurch. Why? About $20 billion flowed into the NZ economy from EQC, re-insurance and other overseas sources. For a while this national income, the economic activity it generated, GST and tax revenues, bailed out the national economy and contributed heavily to funding the welfare state.

But that revenue stream has dried up now, and so, for that matter, has new investment in the dairy industry. If anything the dairy industry is going backwards and many farmers are looking at negative equity.

Central government's focus is now firmly on urban development as being the sector of the economy to target to achieve its national economic plan objectives.

It wasn't always so. Just as it wasn't always so in Australia. I attended its Planning Institute Conference a month ago where delegates heard presentations from advocates and politicians (Federal and State) talking up "Australia 50" and "Big Australia" - visions of a country whose population would double from immigration in little more than 20 years. They argued that just as Saudi and Russian oil oligarchs had invested in London real-estate, and Syrian's wealthy sought safe-haven for their profits in Dubai real-estate, so too were the uber wealthy in India and China looking to South East Queensland, Sydney, Melbourne and Perth to invest. And that the competition was on between those "city states" to do whatever was necessary to provide safe-haven for foreign investment in Australian real-estate.

Australia's mining industry is suffering a similar commodity price crisis as NZ's diary industry. It's all hands to the national economic pump there to keep the country afloat, and urban development is the sector of the economy being targeted.

Which brings me back to NZ's national centrally planned economy where levers are being pulled to increase immigration, to remove barriers to foreign investment in urban development, and to remove planning barriers in the way of the domestic development and construction industry building what investors want.

Question. What are the qualities of NZ's urban political economy that would attract foreign investment and immigration (away, for example, from investing in development in an Australian city)?

• safe-haven
• easy to find opportunities for urban investment
• higher and more certain annual return on investment
• fewer and less expensive disincentives and taxes and levies
• more commitment to and support for foreign investment 
• more welcoming of more immigration

These might be among the qualities and measures that NZ's national planned economy needs to ensure rate highly in the eyes of foreign investors. These have become the priority measures for NZ's national economy. You can see why the national political economy cannot abide a situation where property prices drop, or go into decline. That would be a red flag. You can also see why it is essential - as is the case in Australia - that elevated immigration levels are maintained if not increased. As Spoonley argues in his OpEd (referenced above) there is more than just a correlation between GDP increase and immigration. One causes the other. Turn on the immigration tap and you turn up GDP growth. If the objective is 3% GDP growth, the lever is increasing immigration - and if not that - then the next best policy option is to open the country to overseas property investors.

Which brings me to the other economy in New Zealand. The local urban economy. Which is increasingly unplanned. Subject to, and victim of unregulated market forces. Anything goes. Red tape gone. Not quite chaos but getting there when it comes to those members of the population on very low incomes.

An indication as to what importance the national political economy (centrally planned) attaches to the local political economy (market forces) are the measures that local councils will be required to report to central government when the Urban Development Capacity NPS becomes operative. These are:

• The relative affordability of housing, including the ratio of house price to income and the relative cost to rent;
• The increase in house prices and rents;
• The number of resource and building consents granted relative to the growth in population;  
• Vacancy rates for business land;  
• The ratio of the value of land between rural and urban zoned land; and
• The ratio of the value of improvements to the value of land within the urban area.

The national political economy is not interested in reporting the housing status of those on low incomes. Nor on the changing provision of affordable housing. Nor on the reporting of other quality of life indicators where the urban development occurs.

In Australia there is a growing backlash from local communities that are being targeted for urban growth. There are calls there for a national and coordinated settlement strategy - rather than leaving the increased population to the whims of market forces there are moves to properly plan at city level, at local level, for population change. So that planning is not just at national level, it is a conversation that engages at local level. The conference heard a number of presentations where urban community liveability benchmark measures were discussed and described. These include development criteria including numbers of jobs created in an urban area (not just numbers of houses), average distance to work, area of park space and such like.

Here in New Zealand, at local level, as a concession to planning, we have the reductionist idea of Special Housing Areas - SHAs. But it's all about numbers of houses. Numbers of resource consents. Proportions of resource consents processed without notification. Little to nothing about quality of life. And perhaps here I should acknowledge that Auckland Council (and TLAs throughout the country) are going to great lengths to build liveability and good urban design into urban development. But it's a struggle, and its deeply ironic, when those in charge of central planning criticise and mock these local efforts at planning good development.

In Australia - not perfect - but in their local urban political economy at least there the talk is of PDAs - Priority Development Areas. And master-planning and spatial planning and integrated planning for communities, not just to deliver nationally planned economic objectives.

Need to wrap this up. I think the worm has turned in New Zealand. Our centrally planned national economy is sending bigger ripples through local communities, and local institutions are rocking - and not in a good way.

It may be that NZ's economic well-being and future is dependent on increased levels of immigration for a period of time. But there needs to be far greater transparency about this central planning because it affects communities throughout the country. If it's the right thing to do, then surely the whole country, its urban communities, and its people, should be aware of it and buy into it explicitly.

Immigration cannot be the only long term economic development strategy for NZ's future.