This is the second part of prospects for the coming year. The first part, The Year of Finding Out is here.
Can you imagine the combined total populations of Invercargill, Nelson, Gisborne and Whanganui all deciding to get into planes and heading off somewhere? That would be a lot of people on the move right there – and quite an impact if they all decided to go to the same place.
Well, this also happens to be about the same number (it’s in excess of 200,000) of non-NZ citizens that arrived into this country in the 12 months to September. That’s more people than live in Hamilton. It’s more people than live in Tauranga.
Now, yes, a lot of people departed from these fair isles over the same timeframe, but it still left the country with a net migration gain of 118,800. That’s comfortably more than currently live in Whangarei.
Are we going to keep expanding our population at this rate? And what happens if we do? This for me is the ticking timebomb as we look towards the dawning of 2024. This for me is the number one issue by a mile for this country in the coming year and beyond.
Undoubtedly the (uncontrolled?) surge of migrant workers into New Zealand this year has helped to take heat out of our labour market. That’s been helpful for the Reserve Bank and its inflation fight.
But that’s the known part of the equation. The largely unknown factor is the extent to which the demand side of the migration ledger – be it for housing, infrastructure, services and you name it – will have adverse impacts on the economy, not least potentially through inflation.
The Reserve Bank, as controller in chief of inflation, had appeared sanguine, but then suddenly dropped that in its November Monetary Policy Statement in which every second word appeared to be either ‘migration’ or ‘population’. Clearly it is now getting worried about its inflation plans being swept away in the migration flood.
In respect to the potential inflationary impact of this new wave of migration, up till the RBNZ’s more explicit expressions of concern we had seen a lot of suggestions that ‘this time is different’, given the younger mix of the migrants coming in at the moment. The thought being that this time, the impact will be less inflation. But, frankly, I’m pretty sceptical of such narratives.
Ultimately, we can’t throw that many new bodies into what is by world standards a (for now anyway) small population without it having a substantial impact. The most telling impacts in terms of the demand side of the economy are more likely as far as I can see to come after these migrants have been here for probably two years or more.
And I’m talking about the new arrivals to date. Is anybody – and this is a serious question – actually monitoring numbers of people coming in as it happens, rather than just counting them when they are already here?
Will people keep pouring in even as unemployment does continue to rise? There are surely limits. Isn’t it better to decide what the limits are before we wildly exceed them? I’ve said it before till I’m blue in the face – but this country urgently needs a population strategy.
But, of course, that’s a question for the new Government.
Okay, and so that brings us neatly on to the Government. And questions. What is the Government going to do in a more general sense in its first year? What will its policies be beyond all the hype of ‘the 100 day plan’ (which is largely about stopping and banning things) and how will the coalition conduct itself? There’s a lot of questions and question marks.
In reading the coalition agreements I saw nothing in there that suggested reining back on migration. So, will the new Government see 100,000-plus net new arrivals every year as a good thing? Perhaps more? The more the merrier?
The National Party policy to selectively allow some housing investment by foreign buyers didn’t survive the coalition talks.
But the plan to reverse Labour’s axing of interest deductibility for housing investors did. In fact, thanks to the wishes of the ACT Party the interest deductibility will now be reintroduced more quickly than National had proposed. And the reversal of the bright-line (capital gains tax) test period back to the original two years from 10 years will also go ahead.
Among the above-mentioned policies there’s plenty there that might cause significant impact.
And then there’s just the nature of the Government itself and the whole issue of whether we really will see a “strong and stable” Government as incoming Prime Minister Christopher Luxon has repeatedly assured us.
To me the three-way coalition, when considering the personalities involved, looks like a pretty volatile mix. Any obvious friction within the Government could pretty quickly translate to bumpiness for the economy. I wouldn’t yet rule out the possibility of a snap election (although not in the coming year, please! No, really, please DON’T do that!)
Anyway, the obvious question when looking at all this, is: What about the housing market? Will this all get it fired up again?
On the face of it, we might think “yes, for sure”. But for me the real question in the coming year is the extent to which the housing market will – or actually physically can – pick up strongly in the face of high prevailing interest rates. It is genuinely going to be fascinating to see. Theoretically those high rates should keep providing quite a handbrake, particularly for people who maxed out with borrowing when rates were low and have seen the monthly interest bill perhaps rise 50%.
But the immediate counter to that is, how long will interest rates stay high for – and what happens when they fall?
After the Global Financial Crisis, we saw interest rates ultimately just go down and down, till by mid-2021 they were virtually non-existent. It meant that providing you could get a bank to lend to you, you were able to borrow truly eye-watering amounts of money and still very, very comfortably service the (virtually non-existent) interest costs.
So that fuelled the various housing booms that we saw in that period, culminating in the extraordinary pandemic frenzy when, with interest rates bottoming out, we saw New Zealand house prices as measured by the REINZ House Price Index (HPI) rise by a staggering 45% cumulatively across the 2020 and 2021 calendar years. Subsequently prices fell by about 15%, but have risen again slightly towards the end of 2023.
With the incoming Government’s policies likely giving a strong green light to housing investment, then falling interest rates might be the final piece of encouragement the housing market needs to get really moving again. But when might interest rates fall? If inflation continues to play ball into 2024, then it is possible interest rates might start to fall in the second half of 2024.
But what will the Reserve Bank’s reaction be if the housing market does take on yet another new lease of life? It would not want anything to happen that could threaten to derail the inflation fight. Would the RBNZ look to keep interest rates higher than they might be otherwise for fear of the housing market really taking off again?
The reality is that the combination of a new Government that may or may not be ‘strong and stable’, but has policies that favour a continued inbound surge of migration and do favour housing investment, is something I’m not going to be able to keep my eyes off in the coming year. It just seems there’s a lot that could go wrong.
Right now, as of the end of 2023, I reckon our economy is looking on track for the much-sought-after soft landing and maybe we can get inflation back under control (although I suspect the days when we can ever again expect super-low inflation may be behind us), but the combination of the three things highlighted in this article could collectively provide a very big proverbial spanner in the works. But all will be revealed in the fullness of time. It most definitely will be The Year of Finding Out.
85 Comments
In relation to migration, it is once again going to be an 'unintended consequence' scenario. Governments simply pulling the same levers to presumabale get the same result. NZ has become so unbelieveably inefficient in most aspects of how the counrty operates at a base level, and throwing more humans into the mix is going to backfire in a big way IMO.
Am generalising but.... Young adults have the energy and enthusiasm, no capital. Mid age below retirement individuals, kids have left home, have cash and experience to develop and run business, wont take risks with their capital. We need a Murdock or trump who wants the cut and thrust for decades. Angel investors are useful, they want a sure bet and high yield products, there are a few good opps out there in rural NZ
Public opinion has rapidly turned negative in some places over the last year, especially in Canada, mainly as a reaction to shortages of rental property.
It definitely could become an issue for the next election. If only there was a party with a sensible policy to vote for.
'There are surely limits. Isn’t it better to decide what the limits are before we wildly exceed them? I’ve said it before till I’m blue in the face – but this country urgently needs a population strategy.
Couldn't have put it better.
This trio of yesterday-thinking folk, are going to try and re-create a past which has gone. That is very much reminiscent of Muldoon, in his time. The difference is that we were still in the death-throes of real growth in Muldoon's time; we are well into real de-growth now, only not seeing that because we aren't accounting the real things (resource-stocks remaining; sink-capacities remaining).
The push for 'growth' will fail; even as measured by blind accounting (GDP). The cost of living - reflecting ever-more people at the resource-input shop counter, and an ever-less-stocked shop - will go up. They will attempt to continue the uncontinuable; by cutting even essential services, by deferring maintenance even further, by reducing resilience/capacity. And it won't work.
Thank you. Inflation firmly appears to have been transitory and will eventually come down. It has caused and continues to cause immense pain on the good hard working people of New Zealand.
This government needs to be given a chance to be effective as that would be in the best interest of ALL New Zealanders. We need a strong, cohesive and positive government just like we need a strong and positive opposition. I hope we get both for the next two and a half years before we start chucking pies at each other when the next election cycle starts.
The real issue as I see it with this level of net migration, is how will our infrastructure cope? I also note that all incoming migrants are not going to the same towns where the outbound migrants are departing from. This creates vacuums in some areas and congestion in other places (Auckland).
"Inflation firmly appears to have been transitory". I think it has been longer than 'transitory' and 'look through' as many wrongly termed it in 2022. Remember the vested interests predicting OCR cuts would start mid 2023 (they were saying this at the end of 2022, including many in the housing brigade). The markets are still pricing NZ as one of the highest in the world for 5 and 10 year swaps, they are not buying any of Nationals rhetoric, rather looking at the poorly timed stimulus (tax cuts for workers and housing investors) and massive immigration again. I suspect we have seen at least one red herring this week (probably smoking laws) to take the attention away from retrospective tax cuts to housing investors, who get their cut March 2023, and the PAYE workers get theirs July 2024.
"Inflation firmly appears to have been transitory". I think it has been longer than 'transitory' and 'look through' as many wrongly termed it in 2022.
Various studies are showing much (most) of the price inflation experienced over covid was supply side related, as opposed to the demand side (from fiscal stimulus). Hence the calls of the inflation being transitory, but what central banks can't really predict is how long supply will take to right itself, so "transitory" is a hard amount of time to define.
'I wouldn’t yet rule out the possibility of a snap election (although not in the coming year, please! No, really, please DON’T do that!)'
Agreed. Not this coming year: We don't want a snap election till Labour has removed its leader and all the MPs who failed to represent the poor over the past six years.
Well Winnie could totally fall out with Luxon for starters. They may have signed all sorts of stuff but you cannot cover everything that could eventuate. If the whole thing becomes unworkable then another election could be a possibility. Voters would have to make a judgement call at that point, obviously putting NZF back in would solve nothing so Winnie would get the boot.
Based on the coalition's performance since the election I wouldn't bet on National having the votes to form another govt if an election was called. The agreements between the parties has laid bared the party priorities and there is not much to like. Plus within the next few months/weeks it will become clear that National doesn't have a viable financial plan.
Perhaps we have had a poulation strategy for the past decade or so.....just one that is unacknowledged and unmitigated (infrastructure).
"It is feasible to adopt a population policy with the aim of the population reaching 15 million in the next 50 years – an annual growth rate of 2.5% per annum. This would bring the size and density of the population to levels closer to more prosperous European countries. Fifteen million – two and a half times current projections – is a good target, too, as it allows for several large cities, fostering competition within New Zealand."
https://f.hubspotusercontent30.net/hubfs/20712581/Public%20Publications…
NZIER working paper from 2012....public policy that the public are unaware of and politicians unwilling to vocalise?
We all know those current numbers Frank. But the growth is not inevitable as some assume. Population can be organised, and it can be done well.
The population has exploded recently and is the cause of or many problems. In front of their eyes if New Zealanders look around.
If we keep doing construction and projects at massive cost we won't be able to keep up with population growth demand. We will go backwards.
According to one of the experts our infrastructure build cost is the highest in the world by a margin. We use the same overseas expertise but frontload contractors with obligations. Companies which would normally be involved have decided its not worth it anymore.
Thanks labour and the greens
You know a lot about this area painter, what do you think.
Infrastructure costs will likely only increase in the future.
But there's some factors around infrastructure that could be considered:
NZs previous infrastructure spend was relevant to the return on investment. It's fairly easy to get in a situation of malinvestment in infrastructure. China for instance, started on high speed rail, and it worked quite well. So they pulled out all the stops to now have a fairly large, and unviable network where some 10% of the network is revenue positive, and the rest struggle to repay the interest, or even the electricity required to run. In terms of transport infrastructure, NZ struggles to deploy anything substantion due to the relative sparsity of our population - if Auckland for instance wants a great, comprehensive non-car public transport network, it'll likely need more passengers than what it currently has.
Some of our woes are more maintenance based than investment in new infrastructure. More money is needed to fund the status quo, so the burden of that cost will need to be born by the current population, or partly offset by new taxpayers.
It's a bit chicken and egg, people clamoring about more infrastructure needed, but the same people likely don't want to pay for it.
Taxation doesn't finance anything, it only cancels the governments currency again after it has been spent. https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…
re ... "Taxation doesn't finance anything, it only cancels the governments currency again after it has been spent."
It does if they spend it on maintenance ... which they do ... Maintenance payments become income streams against which the recipients can borrow.
And it does when governments use the increased stream of taxation to underwrite further "borrowing".
Add in 250,000 woking/student visas and we already have five and a half million. Compare that number to our population pre Key government ( with his rock star economy based on increased immigration.) . Infrastructure is beyond bursting point already. It will get worse for everyone except those at the top of the table and more so for those at the bottom. Their numbers will only grow and societal problems that flow on as a result will increase.
We would be a better place, and richer if we limited population.
This claim isn't substantiated by places that are depopulating. The inverse usually occurs; young people leave in greater numbers due to declining opportunity and increased tax burden, and the states funds slide backwards.
It is as substantiated as the claim of the papers author(s)....
"This would bring the size and density of the population to levels closer to more prosperous European countries. Fifteen million – two and a half times current projections – is a good target,"
That list is (roughly) the Netherlands,Belgium,Greece,The Czech Rep.,Sweden, Portugal and Azerbaijan.....missing is Finland and Norway with populations of around 5 million each.
And within that struggling union (as with the rest of the world) there is no correlation between population and a successful economy/community.
There's too many factors outside of pure population size, sure.
But we are trying to mimic economies and societies than generally need larger populations to support themselves.
Would Finland be as successful without 100s of millions of neighbors?
Norway is a rather large outlier being bouyed by natural resource abundance.
When we get into discussions on congestion charging there is the problem in a microcosm. Deckchairs and Titanic come to mind. Would have been better to relax, stop, and chart a different course in the morning.
I preferred the beautiful Auckland of my youth, when you get anywhere anytime easy peasy.
the problem is the explosion in entitled voluntary beneficiaries (aka retirement culture). This has been foreseen for some decades, and the west really only sees two options to address it: either accept a lower standard of living, or throw the floodgates of immigration wide to the countries with burgeoning youth populations. No one wants to accept the former, so we get the latter, and all it's associated problems.
A third option would be to address the issues that have caused societal breakdown to the point the state is expected to provide for the oldies, rather than their families. -but that is too hard.
So, that surge of migrant workers. What happened? Between November 2022 and May 23 we saw a 40,000 jump in jobs as migrants filled the roles that kiwis couldn't / wouldn't do. Most of these jobs were low paid - care home staff, bus and van drivers, warehouse staff, early years education centres, hospital cleaners, and bit of construction. We also saw some growth in nursing, ICT staff etc.
What happened after May 23? Job growth slowed markedly despite big increases in net migration, and the number of people on benefits started to pick-up as job opportunities disappeared. Basically the economy had enough people doing stuff to meet current demand in May 2023, and total demand is now falling. So jobs will fall too (and unemployment is already picking up quickly).
But, migrants add to demand don't they - creating jobs etc? That's the 20 billion dollar question! Did migrants turn up with a stack of savings that they have converted to NZD to spend into the economy? Because with Govt net spending stalled and about to be cut further, and the housing ponzi on a temporary pause (banks are only printing about $1bn net per month), where is the extra money coming from that will allow new arrivals to accumulate NZD and increase demand?
It's a recipe for a deep recession. The idea that we are on for a soft landing is a fantasy.
You might need to consider things in 3-5 year periods, more than 1-2. The current migration we're experiencing now is a delayed action from a couple of years of basically zero migration, and in 12 months time it'll likely reflect the current-short term slackening of the economy.
Yeah. As Auckland turns into more of a shithole, it still offers a lot of opportunity relative to a lower-middle-class life in Punjab or Luzon. Free healthcare and education for starters. Those people won't leave when times get tough because it's still better than where they came from. It's those who have been raised with higher expectations that will leave. Australia will remain the overflow valve for the frustrated.
Slight correction there. Those that can leave will leave, and those that cannot get entry anywhere else (because, you know, other countries have actual standards) will remain here, and import their friends and family as well. Already seeing a large number of skilled foreign immigrants here on PR or a work visa obtaining an Australian work visa and leaving. We'll just have hundreds of thousands of liquor store workers and kitchen hands, but no doctors or nurses still.
"...in percentage terms among the amount of fixed mortgages, the percentage on five-year terms jumped to 2.8% in August from just 1.5% in July."
https://www.interest.co.nz/personal-finance/124626/latest-reserve-bank-…
I reckon our economy is looking on track for the much-sought-after soft landing
With respect David, in my humble opinion, I believe the biggest risk for 2024 is "recession", and by that I don't necessarily mean a GDP number, but rather a significant increase in business failures, followed by layoffs, leading to rising unemployment, and subsequent rising defaults on debt, to a level that leads to significant asset value drops.
I agree - the trend is your friend - mortgage arrears trend is up - I think the Number is 70,000 in arrears, a small % of mortgages but still an upward trend. Centrix recently reported 447,000 active NZ credit accounts in arrears up 7000 from prvious report. Unemployment, insolvencies and Bankruptcies all increasing admittedly not big numbers but the overall trend is indicating a recession at best and should pre/post retail sales disappoint business closures and unemploment numbers will confirm the trend, possibly to a hard landing and deep recession.
A somewhat insular view that ignores the fact all major changes (and most moderate changes and even most minor ones) to the NZ economy come from offshore events.
Thus, it's only Kiwis - inwards looking as always - that believe a new government, elected to take us back to the same policies that were in effect years ago, will make any significant difference. We'll make a lot of noise about the change but in reality - not much is changing. Or at least nothing that would affect our terrible decisions to "invest" capital in unproductive sectors.
If we wanted real change - change that had profound and long lasting effects - and change we were 100% in control of - we'd be looking at a total overhaul of our moribund tax system.
But no. Once again it's about Houses, Government (and the fact they've been elected to not to do much except ensure there is plenty of bickering) and those people coming into NZ to create a better life for themselves while ensuring our lives don't change much.
We're not that bright. But we do get everything we didn't vote for. And then some.
Yes, the best predictor (by a huge distance) of our inflation rate and economic growth is the inflation rate and economic growth across other advanced economies (US in particular)! The idea that we are in control of anything outside of the margins in the short- to medum-term is ridiculous.
That's not to say (of course) that we should just waft in the backdraft of the global economy - we should be focusing on directing investment towards the things that will improve our quality of life and reduce the amount of resources (labour, materials, fossil fuels etc) that we need to live well. Our best bet in the long-term is to increase our independence and be less reliant on an increasingly turbulent global economy; to become the place that you can live well.
Tax is a single component and I suspect NZ is already at peak tax like most western economies so the only solution that will owrk is a combination of lower costs throutgh waste elimination and greater efficiency leading to increased productivity. There are encouraging signs form the incoming Govt but the media are already critical of much Govt policies before parliament has even started legislation so the media bias is clear, my advice to Chris Luxon is a ban on all MSM advertising without cabinet specific sign off and refuse interviews with those who only report negataive aspects without aksing the reasons - Jessica/Tova/and RNZ /Herald I am looking at you albeit at present I avoid listening to your toxic reporting.
re ... " I suspect NZ is already at peak tax like most western economies ...".
Not even close.
The average working stiff? Maybe.
The upper middle class and above in NZ? Not even close. They remain one of the most undertaxed and most privileged groups in NZ Inc.
Doubt me? NZ Inc has no GCT and almost no wealth taxes. All other western economies have CGT (albeit they are ridiculously low in many cases).
re ... "so the only solution that will owrk [sic: work] is a combination of lower costs throutgh [sic: through] waste elimination and greater efficiency leading to increased productivity."
The only solution? Really?
How about changing our tax system to reward work, innovation and risk taking - while discouraging "investment" in unproductive assets, or simply no-investment in productive assets because the returns from untaxed capital gains are guaranteed by a broken tax system?
There are none so blind as those that will not see.
Good article thank you. We need to have the conversation about population but even NZF has gone quiet on this. Why?
NZ was a richer country (per capita) relative to other countries when it's population was a lot smaller. If population was the only factor in improving standard of living, then India and China would be places people would want to emigrate to, not from.
There were two distinct waves of immigration over the last year, with a period of negative migration in the middle. However the characteristics of the first wave are very different from the second wave.
The first wave of people in Sept-Dec 2022 were NZ citizens and residents coming home from overseas who had been locked out of the country for 3 years. The retirees stuck in Australia, the young ones who had gone for a gap year OE, those who had taken off on holidays, the immigrants who had gone back home to visit family and gotten locked out. The point being, most of these people were not new people but returning people. They already had houses to come home to. Their families were already here. Their jobs and businesses awaited them.
The second wave is completely different though. From July onwards - these are all NEW people. They do not have homes here, so they have to find one. They did not have jobs or businesses to come back to, so they have to look for newly created jobs. They have brought their families with them, or are about to bring their families over once they have a job and house sorted. All these people now add to housing and employment demand in a way that those returning to NZ in 2022 didnt.
So we havent seen a year of the effects of rampant immigration, we have only really seen 5 months of it. The worst is yet to come.
The following (from the article) is incorrect, according to Adrian Orr.
"Undoubtedly the (uncontrolled?) surge of migrant workers into New Zealand this year has helped to take heat out of our labour market. That’s been helpful for the Reserve Bank and its inflation fight."
Adrian Orr stated clearly at the last Reserve Bank meeting that immigration fuels inflation.
His exact words were;
"The bigger driver of it [inflation] is actually the total level of spending in the economy and that is largely driven by the growth in the population."
A new person coming in competes with someone already here for a job, so the company may not have to pay quite as much. But they need housing, food etc, so they increase demand for everything. It's as simple as that isn't it? Me feeling rich and splashing out a bit because my house valuation has gone up by 20% doesn't compete with the spending a new family has to do on a daily basis.
Not sure exactly when the bright-line test will be reduced but this will bring even more houses to the market, which should keep the lid on prices for a bit longer. I really can't see house prices rising too much more over the next year or so. They're still too high IMO & I've got 3 of them.
I thought laws don't go in retrospect, i.e. if the brightline test is reduced it'll apply to purchases from now on, not to already existing ones?
Even though the interest deductability changes are retroactive so I wouldn't be surprised if this government would apply those changes as well
Not technically retrospective, since the condition to trigger the payment of Brightline tax is the date of sale contract, not the date of purchase. So if the law changes then any house going under contract after that date would be subject to the new definition of what tax is payable on sale. Retrospective would be to make houses already under contract prior to the date of the law change subject to the new definition even though the old one has already been triggered.
High numbers of immigrants who become permanent residents will impact house prices, all the others cannot buy a house no matter how long they are here for. Which is one reason why NZ will struggle to attract skilled immigrants who would be happy to come work here for a few years but have no interest in being here permanently (like surgeons, rocket engineers, business CEOs). Compare this to Australia where temporary residents can buy houses, so long as they sell them again when they depart.
Traditionally, one of the big immigration policy differences between Labour and National is that Labour hands out PR to everyone, whereas National tends to only give out temporary work visas. So both do high immigration, but only Labour's policies impact house prices due to FBB. National's will however increase the rental housing crisis, which is one reason why they are relaxing rental laws to encourage investors back into the market. Otherwise, NZ will start to resemble Australia with 30% rent increases and vacancy rates sub 1% and locals left homeless while all the new immigrants soak up the housing by having 4-6 working adults in each rental. (Note this is not "exploitation" by slumlords, but simply a function of new immigrants being happy to be a multi-family household, with brothers, sisters, wives, husbands, parents, adult children, friends, cousins etc all sharing the same house.)
However those who don't buy a house still impact the housing market significantly on the basis that they still NEED a place to live and if it becomes more profitable for landlords to rent in an oversubscribed rental market that has severe overcrowding of migrants already then more houses will be taken out of the home ownership market to be used for rentals. At the moment we have significant numbers of migrants targeted by financial scamming with false visas and illegal rental fees for a mattress on a floor in a room you share with 5 others. Its very profitable with a very small risk of detection and response. So in general even those who are here on legitimate visas will significantly impact the housing market through renting and those who have been scammed through rental housing scams of course impact the market but less so than those on legitimate visas.
It is trivial to be a migrant without a permanent visa and buy a house. Just start a company with a service that meets company criteria and buy the house through the company. Then keep buying housing through companies and trusts and rent them. Many people think the foreign buyers ban actually banned foreign buyers. It did not it just made it slightly harder for those who could not afford company services, accountants and lawyers.
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