BusinessJuly 17, 2018

As the provinces go from strength to strength, will Aucklanders up sticks?

Auckland has long been NZ’s economic engine, but these days the rest of the country’s doing pretty well too – and maybe even better, says Kiwibank’s chief economist Jarrod Kerr.

In Auckland, things are starting to get a little chilly, not just in terms of the weather, but economically too – migration is cooling and so is growth. But the regions have started to pick up speed, demonstrating that despite the chilly outlook in the City of Sails, the regions are actually developing rather well.

How do we know this? To get a comprehensive sense of how the regions were developing, we tapped into Kiwibank’s regional networks to develop two scores: an ‘economic score’ based on hard data, and a ‘feels like’ score based on anecdotal evidence. The scores work on an upwards sliding scale of temperatures, with 1 meaning ‘frozen’ (poor economic prospects) and 10 meaning ‘scorching hot’ (excellent economic prospects). Auckland, for instance, received a lukewarm economic score of 5 and a somewhat chilly ‘feels like’ score of just 4 due to factors like fuel prices, house prices, traffic and cooling business confidence.

In many of the regions, however, our local networks indicate that things are a lot more optimistic. Waikato, for instance, scored an economic score of 5 but a ‘feels like’ score of 6, citing a general increase in confidence supported by strong tourism, housing growth, and a reduction in vacancies of retail, office, commercial and industrial space. In the Bay of Plenty, the region scored a 5 but a ‘feels like’ score of 7 as the completion of the Waikato University campus next year is expected to bring in an influx of students, leading to flow on effects such as proposals for large high-rise student accommodation and more people for retailers to take advantage of in the CBD.

Further down south, Hawke’s Bay scored a hawkish economic score of 7 and a confident ‘feels like’ score of 8 as both its apple and tourism industries remain strong. Meanwhile, despite sub-par employment growth, Southland scored a 7 for both indicators citing positive performances in retail sales and guest nights, with the housing market bucking the slowing trend seen in much of the country.

However, our ‘green map’ also shows that growth is slower compared to 2016, meaning that the near-term outlook is mixed. But we believe the long-term outlook is much better – our strengthening ties to Asia will bring more demand for everything from food and education, to tourism and housing.

Housing: what’s hot and what’s not?

While housing market activity remain subdued, we believe it has gradually recovered from the lows seen in mid-2017. In the City of Sails, the housing market has officially cooled after a period of phenomenal activity; in the regions, house price gains are notably higher as other parts of the country play catch-up to Auckland. The ‘hot’ areas right now include parts of Gisborne, Rotorua, Hawke’s Bay, and Manawatu-Whanganui, confirming the feverish feeling on the ground with houses spending a shorter time on the market.

There’s been a flood of interest from northerners (mostly Aucklanders) on a pilgrimage in search of cheaper dwellings. Mangawhai in Northland, for example, has experienced a surge of Aucklanders willing to live just beyond the boundaries of the supercity and commute the vast distance there and back. Agents on the ground say that around 500 people a day commute from Mangawhai to Auckland, spending a good one-and-a-half to two hours in the car each way (at least they fall outside Auckland’s petrol levy).

Housing market performance has translated to construction

High demand for housing is evident across the country. Unfortunately, capacity constraints, a cooling market, changes in government policy, and difficulty in accessing credit has limited construction activity. Regions that benefitted from the glow of Auckland a few years ago, such as the Waikato and Bay of Plenty, have seen a fall in building consents more recently. In May, for instance, the 338 residential consents issued in the Waikato were 10% lower than the same time last year.

In contrast, consents issued in Auckland have started to pick-up once again. In May, there was a spike in the number of consents to 1,530 – the highest recorded since late 2002. But questions remain about the capacity to keep this level of building up in a region that has a significant shortfall of housing.

Yet in other regions, consents mirror optimism in their local housing markets. In Manawatu and Whanganui the level of residential consents have surged to levels last seen in the buoyancy just prior to the GFC. The region’s housing market is currently one of the most resilient in the country.

Tourism is strong in the south, and expected to grow all over

The Canterbury region has seen a solid acceleration in total guest nights (a proxy for tourism activity) since the start of 2017. Guest nights were up 14% in the four months to April compared to the same period last year.

Canterbury is a gateway to the South Island so an increase in accommodation demand is a positive sign for the tourism sector in all southern regions. In fact, almost all regions in the South Island (excluding Nelson, Tasman and Marlborough) experienced a lift a guest nights since January.

We expect the tourism sector to be a star performer across many regions in the years to come. Our currency has depreciated and we expect the Kiwi dollar to remain lower for longer, which means New Zealand is offering a discount to all foreign tourists. We’re a cheaper place to travel compared to last year, and we’re attracting more and more Asian visitors.

The rise of the Asian middle class is a story captured in our agricultural exports, our education industry, and our tourism sector. China is the obvious hotspot and India will be next. It’s a numbers game, and they have more numbers than most.

The labour market was strongest in the south

The labour market performed well in the March quarter with the unemployment rate hitting a nine-year low of 4.4%. Employment looked to be particularly strong in the tourism-weighted south with Otago (including the Queenstown-Lakes District) experiencing an almost 10% jump in employment year-on-year. However, this is also a region that’s seen a solid 2.3% lift in population in 2017 – similar to growth rates in the upper North Island.

The Tasman, Nelson, Marlborough, and West Coast regions also experienced a decent 4.8% year-on-year increase in employment, while the far north and east coast regions in the North Island have also had decent increases in job numbers. The Manawatu/Whanganui region, however, experienced a heavy 6.2% year-on-year fall in the quarter, although this was really the only dull spot for an otherwise well-performing region.

So, what are the risks?

The risks to New Zealand’s economic prospects are mainly foreign, as the risk of a trade war continues to escalate. A full-blown trade war is still an unlikely outcome, but it’s important to note that our largest trading partner, China, is deeply involved in the scuffle, while our second largest trading partner, Australia, is even more leveraged to China than we are. So in a downturn, we could get hit both directly and indirectly.

So, what does that mean for the regions? For now, not much. Every part of the country will react differently to foreign distress, but we’re all impacted by a severe slowdown in foreign trade. We need to focus on what’s actually happening, and for now, that’s good enough.

Jeremy Couchman, Kiwibank senior economist, contributed to this story.

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