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Is it possible to talk about the economy without talking about housing?

So much of the New Zealand economy appears to be doing well. Tourism numbers are astonishing, Kiwis are coming home in their droves alongside new migrants, many of whom are young. But Rebecca Stevenson finds the Kiwi property market is always looming behind the sunshine.

Do all roads in New Zealand lead to housing? Probably. The housing market, Auckland’s high house prices, and our weak response to the need for more homes is doing more than casting a shadow over first home buyers’ ownership dream – it is inextricably linked to our economic performance.

Agglomeration economies, which is simply people and businesses being close together, like they are in cities, create important opportunities for productivity growth, the OECD noted in its most recent New Zealand economic survey. Our years of fingers-in-ears denial about our housing needs and failing to build up in the right places is constraining the economy, and our individual ability to earn more.

Patchy urban planning, and lack of basics like transport and water infrastructure, and artificial constraints on construction growth, are barriers to agglomeration. Worryingly, the areas where we are allowing intense building – think of the developments starting to take shape west and northwest of Auckland – are too far away from the action, the OECD says.

We need to make Auckland central more dense to allow businesses to work together and grow bigger so they can compete on the global stage; this way real economic growth, and wealth, lies. We also need our unproductive businesses to be killed off, the economic watchdog says, and should look at whether our regulations are getting us the best deal as consumers. What is good for consumers is also good for the economy as a whole.

This is not a pretty picture, but the sky hasn’t fallen in. In fact, our economy has been going pretty well. Housing gets all the airtime, Kiwibank’s Zoe Wallis says, but there’s plenty to be pleased about. The bank’s chief economist, a rare young woman in a field dominated by men, says tourism numbers are “huge”, with about 3.7 million visitors to this country for the year ended July 2017, on the back of the World Masters Games and the British and Irish Lions’ tour.

Sure, tourism brings its own issues – again, we are back to pressure on infrastructure – but to pay for the infrastructure we need to keep attracting tourists.

Another bright spot is consumer sentiment, Wallis says. It’s steady, and with private consumption accounting for a healthy chunk of our gross domestic product, it’s not a bad time to be in business. Again, housing is part of the mix, as rising house prices have increased household wealth, and consumption.

“Consumer spending has been pretty strong,” Wallis says, pointing to the growth in sales of furniture and textiles of 6.2% year-on-year. But Wallis doesn’t see Kiwis being as flash with the cash in this period of house-price growth, relative to the last peak, and says “people are being more cautious this time around”. Is that caution well-placed? The heat has come out of the housing market thanks to the loan-to-value ratio restrictions, and prices now appear to be failing in Auckland, Wallis says.

But if house prices fall, would that mean consumer confidence would take a hit, and then take down business with them by tightening the purse strings? Maybe those misrepresented millennials could pitch in; Wallis says a 9% rise in Kiwis’ spending on dining out could be the non-property owning young folk enjoying life. This is probably understandable, given buying a house is essentially impossible for so many.

A drop in house prices could knock us out of our comfort zone, as we not only rely on house prices to make us feel good about the world; we are way too invested in our houses. Wallis underscores our record levels of mortgage debt. The OECD highlighted 70% of Kiwi mortgages are set to come up for renewal in the next few years – meaning homeowners are vulnerable to movements in interest rates. The Reserve Bank has been warning us to look out for rates to rise, potentially up around 8%, but apart from a slight creep up in retail rates, the hike hasn’t eventuated and Wallis says it won’t happen in this economic cycle.

The problem with owing a lot – or 168% household debt to to be precise – is that even small rates increases can be big numbers. If you already owe $1.68 for every dollar you earn, finances can get out of kilter quickly.

For this reason Wallis is warning Kiwis not to start chucking more debt on the credit card, or to purchase a depreciating asset like a new car. She says car finance companies are back in the market after many washed out in the finance company collapses, but it’s a very competitive field due to the number of car dealers that can offer consumers’ cheap debt. We are yet to see car repossessions here, and it’s certainly nowhere near GFC levels in the US, Wallis says, but buyer beware.

It’s not all happy camping for the Kiwi economy, however. The OECD report on the state of our economic nation found while we’ve done rather well post the global financial crisis, we are just a bit average when it comes to some important measures.

Labour leader Jacinda Ardern created a bit of an economic moment this campaign, with her rhetoric around our flabby productivity. But are we really that unproductive, why does it matter and how can we fix it?

The economic development agency found that despite having “productivity friendly policies” we’ve been lagging in productivity growth for decades.

Which is not to say that we’re lazy – Kiwis have held up our productivity numbers by working longer hours. The 2013 Productivity Commission report lauded our work ethic – we are “among the hardest working people in the OECD”. But is all our hard work for nowt? We may be racking up hours behind the desk, working 15% longer than the OECD average, but we produce 20% less output, per person. The latest data from Statistics New Zealand rubs it in; more of us are working more, but we’re not efficient.

Wallis says one reason could be our relatively small market, and simple distance from everywhere else. But that excuse only goes so far; she says a rising level of interconnectedness thanks to technology should have benefited our economy more than it appears to have done.

“Research has suggested that NZ would benefit from investing in more productive assets – one way to do this may be to look at equalling the playing field for taxation of different asset classes, including housing,” Wallis says.

And yep, migrants are involved in this story too. They have propped up productivity numbers, but more people working may be working against us, as the OECD found our lagging productivity is partly due to a high labour growth rate.

Despite the denials emanating out of Wellington, the OECD gave it to us straight: net migration has also been a “major factor” boosting house prices in Auckland.

The economist is keeping a close eye on both the housing market and migration, with, of course, a little thing called the election just around the bend. Depending on who we have forming a government later this month, we could see changes to migration policy. Won’t someone think of the houses?


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