THE RESERVE BANK OF NEW ZEALAND has issued a public statement backing a capital gains tax (CGT) as a way of correcting an over-heated Auckland housing market. It is the most persuasive indicator so far that the Reserve Bank’s preferences are out-of-step with current Government policy.

Throughout 2014 and early 2015 Finance Minister Bill English ruled out a capital gains tax as a prudent policy response to Auckland’s problematic housing market. During the 2014 General Election, the Prime Minister also insisted a CGT was not needed and Labour’s backing of it as a Reserve Bank tool was ridiculed.

But today, in a speech to Rotorua’s Chamber of Commerce, the Reserve Bank’s deputy governor, Grant Spencer, laid bare the Reserve Bank’s thinking.

Spencer suggested a CGT is now needed to ease investor demand that is currently, in tandem with other factors, driving Auckland house prices up at unsustainable rates. (Ref. LiveNews.co.nz)Spencer underscored how attempts to cool the market, through increasing supply – medium to long term remedies that may lift the number of houses on the market, the unlocking of green fields land, and, an intention to break the back of local government bureaucracy through Resource Management Act reform – have proven to be problematic.

But Spencer’s message also suggests the Government must act on demand and roll out a response that is specifically designed to ease demand on Auckland’s current housing stock.

When reading Spencer’s Reserve Bank speech, it is clear, there now exists a significant risk to the New Zealand economy.

The Government’s reticence to address investor/speculator demand – whether it be foreign in origin or domestic – has permitted paper values to climb beyond real value and beyond sustainable limits. It reminds us of International Monetary Fund warnings that the New Zealand dollar was around 15 percent above true value and OECD cautions that Auckland’s house prices were bloated above comparative markets offshore.

Today, Grant Spencer said: “Irrespective of the mix of demand and supply-based factors, the longer the excess demand persists, the further prices will depart from their underlying fundamental determinants, and the greater the potential for a disruptive correction.”

That disruptive correction is economic-speak for a broad-based implosion of New Zealand’s domestic economy caused by an imbalance between Auckland and out-of-Auckland housing values and the negative effect such an occurrence will have on our banking system.

The situation exposes the Government to accusations that it places its ideology (that the market will correct itself) ahead of a pragmatic solution. The Government is also exposed to its lack of policy that connects to demand – or specifically investor demand.

The Government’s reticence to roll out a policy response to 2015’s economic environment is fast branding it (as one National Party contact suggested) a Cabinet that is tired, that resembles an end-of-the-run 12-year vintage government rather than the third-term reality.

The solution-vacuum has created an environment where investors, domestic or foreign, can make huge profits without attracting real and proportional taxation liability.

So what are the solutions to this reality check? In its 2015 Budget, the Government could address its demand-side policy vacuum by targeting a narrow but significant driver of housing demand – investors.

The Reserve Bank suggests a CGT is the best way to target this group – that targeting investors is preferable than implementing migration policies designed to restrict the purchasing power of immigrants. As Grant Spencer said today “there are practical difficulties in using migration policies to manage the housing cycle”.

It’s important to note here, Spencer’s comment does not rule out regulating against foreign-based investors (as the Australians do now – something Finance Minister Bill English indicated was on his peripheral vision), but suggests against easing back in migration, or applying time, location, and/or residency regulations against migrant investment. Spencer underscores a view that such a policy would, in isolation, no longer have the desired effect.

Rather, the Reserve Bank suggests the Government ought to plug the taxation-loop-hole that is currently being exploited. And that solution seems reasonable.

In short, the compelling logic of this debate urges the Government to put ideology aside, prevent investors from getting away with millions of dollars of untaxed profits – money that arguably is used to ratchet up Auckland prices in some sort of awful pyramid or Ponzi scheme, money (that once it is artificially acquired) is in part siphoned offshore leaving in its wake only risk and no-added-value to New Zealand economically.

Grant Spencer highlighted that policy responses to the problem, including increasing the supply of houses, and loan-to-value ratio restrictions (LVRs), have not and will not remove market pressures that push prices upward. Nor will these policies remove the risk of a collapse, or downward correction in house prices, occurring.

If you heed the Reserve Bank’s warning, then it is reasonable to argue that if the Government does not address the demand side of the problem, beyond the LVR (which penalises young New Zealanders while benefiting domestic and foreign investors), then the identifiable risks to the New Zealand economy and to our banking sector will intensify. The facts speak for themselves. Unprecedented demand is driving prices up. Investor demand is a dominant factor in the equation.

The market can no longer be left to correct itself. Intervention is required. Policy that opens greenfield land to fast-track construction in an attempt to increase supply is a medium and long-term remedy. It has failed to cool the intensifying demand for Auckland homes.

The Reserve Bank alludes to new apartment developments in Auckland as short-term remedies.

But again, this grouped together with legislation intended to liberalise Resource Management Act (RMA) compliance is problematic. Economically, for this strategy to have a broad beneficial impact, vast estates of prime high-value waterfront development will need to be fast-tracked.

This solution will clearly cause resistance among National Party’s constituents – a reality that will cause political inertia.

But then, the Auckland Council’s preference for apartment development along the city’s rail corridors will not cut it in measure to have a positive impact. Such remedies, in isolation, will fail to avert a looming economic crisis from occurring.

Today’s Reserve Bank statement indicates the risks born within this economic environment have intensified since the September 2014 General Election.

It’s a political dilemma for the Government.

The Reserve Bank warns that the longer these risks are left without remedy the “greater the potential for a disruptive correction”. Grant Spencer: “Since late 2014, housing market imbalances have become more accentuated, particularly in Auckland where the supply shortage is greatest, and house prices are particularly stretched, having increased by three times since the start of 2002.”

The Reserve Bank deputy governor said that with 60 percent of its lending in residential mortgages, the New Zealand banking system “could be put under severe pressure in such a downturn.

The resulting contraction in credit would amplify the impact to the domestic economy and financial system, making it more difficult to avoid a severe downturn”. For the record here are the salient quotes from Grant Spencer’s statement:

“The Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially housing investment. “Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.” Mr Spencer said that macro-prudential policy is a potential instrument to help restrain credit-based demand pressures and improve the resilience of bank balance sheets to a potential housing downturn. “The introduction of loan-to-value ratio restrictions (LVRs) in October 2013 helped to moderate housing market pressures despite strong net inward migration and the ongoing shortage of housing. The LVR restrictions have also improved the resilience of bank balance sheets. They will be removed or modified as market conditions allow. “Other macro-prudential options are being assessed, including in relation to investor lending. However, such tools are not a panacea – their impact is inevitably smaller than the main drivers of the current housing market imbalance.”

Conclusion: Now is the time for the Finance Minister and the Prime Minister to put ideology and political ‘gotcha moments’ aside and intervene, in the nation’s interest.

— Listen also to Selwyn Manning discussing this issue on FiveAA Australia.

TODAY IN NEW YORK the chief prosecutor for the International Criminal Court began lobbying diplomats based at the United Nations to agree to lobby for it to investigate crimes against humanity – crimes committed on a grand scale by ISIS within Iraq and Syria – within territory which the ICC has no jurisdiction.

The International Criminal Court (ICC)’s chief prosecutor Judge Fatou Bensouda’s plea lays bare how member states of the UN Security Council have to permit the international body to begin an investigation into crimes, it describes as “of unspeakable cruelty”. (ref. ForeignAffairs.co.nz)

The (International Criminal) Court may only exercise jurisdiction over international crimes if (I) its jurisdiction has been accepted by the State on the territory of which the crime was committed, (ii) its jurisdiction has been accepted by the State of which the person accused is a national, or (iii) the situation is referred to the Prosecutor by the Security Council acting under Chapter VII of the UN Charter.

That’s where New Zealand can play a progressive part. As a member of the UN Security Council New Zealand has the power to argue for the Security Council to refer these crimes to the ICC so it can begin a large-scale investigation into these (and the crimes of others inside Iraq and Syria).

New Zealand was appointed to the UN Security Council on the basis of its advocacy for human rights and justice. One cannot imagine a more grave issue developing that advocates a large-scale and coordinated international policing and judicial response.

New Zealand Government ought to be mindful, that victims of these crimes may not be exclusive to citizens of other countries, that New Zealander/s too could be shown to have fallen to the perpetrators of these crimes. It isn’t as if the International Criminal Court is shying away from doing what it was set up to do.

The ICC’s chief prosecutor, Fatou Bensouda, said today: “As Prosecutor of the ICC, I stand ready to play my part, in an independent and impartial manner, in accordance with the legal framework of the Rome statute.”

Taking this on board, surely the ISIS crimes, and those of other militia in this retched theatre, ought to compel the New Zealand Government to make use of its proud history of advocacy for human rights and justice.

As such, New Zealand ought to bare a burden here and speak to the world’s powers via its membership of the UN Security Council and argue that in times of war, victims – whether in memory or in fact, whether in person or on their behalf – especially deserve recourse to international courts of justice. The New Zealand Government has an opportunity to mean something here. If it chooses to, it can:

• Stand up as a newly appointed member of the UN Security Council
• Declare the actions of ISIS as gross crimes against humanity
• Speak to the ideals of recourse, investigation, identification, and conviction
• Demand that the UN Security Council refer the matter to the International Criminal Court prosecutor so that an international judicial response be initiated.

New Zealand would not be alone on this matter. Already France and Switzerland have lobbied for the UNSC to authorise an ICC response. (ref. See today’s New York Times) It is an absurdity that the New Zealand Government has not done this already. It is after all a signatory to the ICC Rome Statute, and part of the very body that can order judicial process to progress. If the New Zealand Government refuses to do so, the question remains as to why it was appointed to the UN Security Council in the first place.

The ICC has opened investigations in:

Uganda; Democratic Republic of the Congo; Darfur, Sudan; Central African Republic; Kenya; Libya; Côte d’Ivoire and Mali. The Office is also conducting preliminary examinations relating to the situations in Afghanistan, Colombia, Georgia, Guinea, Honduras, Iraq (alleged abuses by UK forces), Nigeria, Palestine and Ukraine.

New Zealand First positions to export its rural New Zealand representation brand.

AFTER THE NORTHLAND POLLING BOOTHS HAD CLOSED a well positioned National Party insider text messaged me from inside one of the Party’s election night functions.He said: “The mood from some is explosive tonight. The campaign was a disaster with the Sabin bomb still ticking.

All the National list MPs will be watching, and Nats in provincial seats, with reasonable majorities, will be a tad shaken too. A 13,000 vote turnaround in six months…” He added National would likely “concede Northland in 2017. Shocking”.

He feared: “We should lose East Coast, Tukituki, Wairarapa, Whanganui, Otaki and Invercargill in 2017. But it will be tough for Labour to win unless Little allows Nash to find candidates to run there.” That’s the reality-check Northland delivered to National’s true-blue loyalists.

The only uncertainty is whether New Zealand First has the infrastructure to become our version of rural Australia’s the Nationals – the conservative, monarchist, rural-based counterbalance to urban-political-dominance across the ditch. And, whether Labour leader Andrew Little has the courage to let Stuart Nash loose to develop the take-back-the-provinces plan.

AS SOON AS NEW ZEALAND FIRST leader Winston Peters scented the mood in Northland he knew a political vacuum was in evidence – that rural New Zealand, beyond the borders of the Far North, was angry and suffering from a lack of political representation. But can New Zealand First export the win from its Northland base to become the rural New Zealand voter’s option? To achieve this, the party will need an infrastructure robust enough at ground-zero to attract quality representatives who are already recognised for driving solutions to challenges specific to their region. The pressures on New Zealand First – the Party as opposed to its Parliamentary extension – will be considerable. If the Party is to succeed in realising its potential, it must sustain a recruitment drive on a grand scale, all-the-while delivering, from Wellington, solutions for those it seeks to represent.

Cause and Effect: Politically, the Northland result shows rural New Zealand has been promised much only to see its fortunes dwindle.

During the 2014 General Election the National Party’s message to farmers was to expect to receive their bounty from the ‘white gold’ they produced and exported from their gates. Those working within the farming support and service sector picked up the message too.

The promise was: a decent slice of the domestic economy pie-graph was coming, that farmers were going to reap huge rewards, that rural communities and New Zealand as a whole, was about to bask in trickle-down wealth of unprecedented proportions.

But as farmers arose in early Autumn, the Governing party’s promises ran hollow and nothing emitting from Wellington could arrest the reality – the bank balances were turning red.

As Winston Peters said on March 26 prior to the by-election “… Fonterra’s latest downwards revision in the 2014/15 forecast… for a fully-shared up farmer, can be blamed on an urban focused government that is not putting farmers first.

This will hurt Northland’s 801 farm owner/operators and 291 share-milkers given nine percent of New Zealand’s herds are in the region”. (ref. ForeignAffairs.co.nz)

For Northland a reality had broken the day before. When Fonterra returns are in free-fall, whole communities are starved of income. And when the costs of milk production are higher than Fonterra’s Farm-gate Milk Price of $4.70 per kgMS (as announced on March 25), then, the farmers, the rural dependent sectors, workers, families, and communities… hurt.

During the September 2014 campaign, the National Party leader John Key told all of New Zealand we were on the cusp of something very big, something special – the implication was rural New Zealand, and especially farmers, should expect to be rewarded for their farming expertise, investment, and high quality, high levels of production.

But after the election, commodity milk and powder prices could not sustain global downward pressures. The trade-weighted GlobalDairyTrade price index hit a five-year low in December, and by degrees, Fonterra, the co-operative dairy exporting giant, began reducing the value of returns to farmers.

At first, the newly elected National Government insisted returns to farmers remained sound, that the overall trend was positive. But farmers are not fools. Nor are the communities that work with them. Northland voters, like their rural counterparts all over New Zealand, knew their farmers were in trouble – despite producing more milk per head of cow, more milk per hectare of land, they were getting less back for it.

By March 27 2015 Fonterra delivered a forecasts no one wanted to hear. Its interim report detailed:

• Forecast Cash Payout for the 2014/15 Season of $4.90 – $5.00
• – Forecast Farm-gate Milk Price $4.70 per kgMS
• – Estimated full year dividend of 20-30 cents per share
• – Revenue $9.7 billion, down 14 per cent
• – Reported EBIT $483 million, up 16 per cent
• – Normalised EBIT $376 million, down 7 per cent
• – Net profit after tax (NPAT) $183 million, down 16 per cent
• – Interim dividend of 10 cents per share.

(ref. ForeignAffairs.co.nz) In the forecast statement, Fonterra’s Chairman John Wilson said that given the results achieved in the first half of the year, and the continued volatility in international prices “the Co-operative was holding its forecast Farm-gate Milk Price at $4.70 per kgMS.”

Wilson added: “Our half-year results are a snapshot of tough conditions in dairy with variable production, demand and pricing.  There was also the challenge of generating profit from inventory made in the previous financial year when the cost of milk was higher, but sold in the first quarter of the financial year when global dairy prices were falling.”

Put simply, supply outweighed demand and buyers undervalued milk, which was reflected in prices that declined to unsustainable levels.

Wilson: “Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December.” (ref. ForeignAffairs.co.nz)

That’s another reality which Winston Peters (the morning after his landslide Northland win) spoke to the nation about.

He highlighted how some farmers were having to borrow hard to sustain themselves through this downward cycle. Add to this the uncertainty factor: no one knows how long the commodity price downturn will last.

That affects the cost of borrowing from banks, pushes interest rates upward to reflect the significance of uncertainty.

Peters pushed for Government support stating it would provide some clarity at a time when confidence in the sector’s performance was being exhausted.

On TVNZ’s Q+A programme (ref. Q+A) Peters questioned why this was a negative. He claimed an honourability to his willingness to help out rural New Zealand and compared this to the dishonourable practice of corporate welfare dished out by the Key Government to SkyCity casino and the $1.7b+ bailout of South Canterbury Finance (ref. Stuff.co.nz).

It was classic Peters politics – compare one sector to another to drive home the divide between commonsense and ridiculousness.

But politically, it drove home a message to rural voters beyond Northland, who will be well aware their National Party MPs will not advocate their interests like this.

They will not go into bat for farmers over their party – at least, not in public. For rural New Zealand, it must have been music to their ears.

For others it exposed the broad-tent National Party’s biggest weakness: party loyalties are supreme. The regions, as opposed to the provincial cities, are New Zealand First’s for the taking.

While Winston Peters has the leadership, the zest, and the tenacity to achieve it, the New Zealand First party has yet to show it has the infrastructure to reach deep into rural New Zealand and turn out candidates that are leaders of their regions.

But, as the National Party insider said to me on Northland by-election night: “The Northland example does show that Joyce’s economic development record is a weak spot.”

If New Zealand First can’t foot it, then Labour will continue to galvanise its connection with Peters, present a good governance rural/provincial/regional development brand, and seek stronger candidates to take East Coast, Tukituki, Wairarapa, Whanganui, Otaki, West Coast, and Invercargill in 2017.

Under this scenario, New Zealand First would anchor in with Northland and urge true-blue party voters to swing its way.

However to achieve this Labour’s leader Andrew Little would be wise to scent the air and promote Napier’s MP Stuart Nash to the front-bench.

It would send the right signals to provincial New Zealand, acknowledge Nash as a regional specialist, provide him with a mandate to develop policy, a much needed campaign plan, and a key role in attracting quality candidates for 2017.

Add to this the angle where Labour positions to really represent share-milkers.

That would drive a wedge between this under-represented group and their farm land owners who remain loyal to National, and potentially foot it with New Zealand First for swing votes in heartland National seats. Recently, there have been some signals on this from Labour.

Take Labour’s West Coast specialist Damien O’Connor this week stating on April 2: “Dairy farmers throughout New Zealand are currently frustrated by the low pay-out from their co-operative company.

Many are concerned that Fonterra has been too busy focusing on satisfying the demands of its investors rather than meeting the needs of farmer supplier shareholders.” (ref. ForeignAffairs.co.nz)

At this stage, National’s arrogance appears to be blinding it to the ‘up you’ message the Northland voters delivered via Peters. These people want solutions, not politics and National’s performance in the House since votes were counted suggests its arrogance-factor has not waned.

See Also:

State Of It: Factional Fractures In Evidence As National Loss In Northland Looms

IRRESPECTIVE OF THE FINAL COUNT, Auckland-based National Party insiders say there will be three losers once the by-election votes are counted, and they are: John Key, Steven Joyce and the National Party itself. That’s the scornful assessment by some well positioned National Party conservatives who insist fractional fractures are in evidence among National Party loyalists as Northland voters prepare go to the polls in the Peters versus National by-election.

They say many have become disillusioned with the Party’s leadership: most recently, with the party’s campaign strategy, and formerly, with the values and judgment calls by their leader John Key. Only a week ago, National contacts in Auckland were still hopeful of a victory. But that hope began to ebb after campaign manager Steven Joyce, and his team led by Jo de Joux and Chris Bishop, decided to deploy a posse of ‘flash Harry’ Auckland-based urban Nats to the far north for a ‘shack-door-knocking’ drive.

Fourteen days ago, Steven Joyce’s message to the campaign team was, they had 10 days to turn a National Party loss into a win. Despite a huge telephone-canvassing effort in recent days, teams of shack-door-knockers deployed to the region on the weekend, and an unprecedented effort to where high-profile MPs and Ministers descended on Northland “within the comfort of their Ministerial cars”, Joyce above all others looks set to take the blame for a loss of a once safe Tory seat.

On Wednesday evening the 3News Reid Poll tweaked National’s fears. The poll recorded Winston Peters on 54 percent, “well ahead of his closest rival – National’s Mark Osborne, who’s stranded on 34 percent”. The 3News poll confirmed what pundits were hearing about National’s own internal polls, which, two weeks ago, hinted that the campaign was too close to call. But as polling day loomed, National’s polling suggested Peters was pulling ahead and despite National’s efforts, a preferential shift in favour of Peters was observed. So John Key made an early return from his trip to South Korea and Japan and headed straight to Northland. But as Fairfax’s Tracey Watkins reported:

Prime Minister John Key has faced a rocky start to his Northland by-election tour. Key arrived in Dargaville just hours after touching down in Auckland from Japan. But within minutes of hitting the streets in Dargaville, Key was confronted by locals complaining about issues including local court services.

Reasons For The Loyalty Shift:

The reasons for the shift in loyalties has National’s “conservative rump” angry. For years, big local issues have been either ignored or treated as trivial or low priority.

One National Party insider told me Joyce’s strategies underscore the perception of arrogance displayed by National MPs. He said Joyce’s strategies are failing.

Primary among the failures was to send urban campaigners to an estranged rural seat: “That was foolish. That tactic looked sure to inspire a solid turnout of voters, but few of them will be voting National,” he said.

He added that Joyce’s decision to swamp Northland with suits and ministerial cars has become a metaphor for how distant the National Party leadership team has become from the real world.

Two weeks ago, a National Party contact said: “I suspect we are in a fairly poor state in Northland, it won’t be easily held, it could be very close or maybe even a loss. “Steven Joyce has thrown everything into it, his ‘groupies’ Chris Bishop and Jo de Joux are running the show.

If Winston wins it will create recriminations that will linger for a long time and damage the Prime Minister’s reputation. I suspect Willow-Jean Prime’s vote will collapse.”

Two weeks later that contact said: “The conservative rump in National is quite scornful of the party’s performance in Northland. This is the Joyce show. Grant McCallum, the board member who got stitched up in the selection is very bitter.

He won’t be around for long.” The comment speaks of political vendettas that have been dealt. During the candidate selection process prior to the 2014 General Election, Grant McCallum was believed by National insiders to have blocked candidates in the greater Auckland region who were loyal to Judith Collins and her faction.

McCullum’s power-base is Northland. And Collins loyalists bided their time and blocked him from getting his way during the National Party Northland candidacy selections.

The most Machiavellian of them suggest a loss in Northland will diminish Steven Joyce’s power, create instability for the leader John Key, and demonstrate that they cannot control the party outside of Wellington.

In simple terms, National is demonstrating third term disconnect, division among its factions, and pomposity and arrogance – something the newly re-elected Prime Minister John Key warned his party about in his post-election speeches.

Another contact said on the weekend: “The campaign is going better now but two weeks ago it was mayhem. And ministerial limos racing Ministers around Northland doesn’t help.”

He added: “Cunning Winston has a big blue bus.” He pointed out: “The Peters whanau is well respected there (in Northland). Its also married into the equally well respected Bruce Gregory whanau.”

And Labour’s more centrist leaning networks, who are loyal to Dover Samuels et al “will repay Winston for his endorsement of Kelvin Davis (Peters gave the nod to Davis in the latter stages of the 2014 Te Tai Tokerau General Election).

A Question of Values and Judgment: The National Party insiders say there are “many questions” circulating among the Nats, including: (a) John Key’s judgment and credibility after the 2014 win particularly his promotion of former MP Mike Sabin to chair the Law and Order Select Committee. (b) Joyce’s “diabolical mismanagement of the Northland by-election campaign”.

Regarding Joyce: “There are really brutal comments flowing from some quarters.”

But the estrangement between John Key and significant power-brokers within the Party’s Auckland factions is surprising.

One contact said: “John Key’s judgment is now being questioned, specifically with Key giving Sabin a safe harbour (post election) and support for his 2014 selection… despite the swirl of rumour concerning those matters that are now subject to a police investigation and charges.”

He insisted: The Judith Collins/Maurice Williamson faction will be watching this.”

Accordingly, among the Auckland-based Nats, Collins and Williamson are both of a view that Key has become soft when handling politically delicate matters among those who remain loyal to him.

A week ago, one contact said: “This goes to judgment, and the PM’s judgment will cost him.

New Zealand First will be empowered even if it loses.” By Thursday (two days before polls close in on the by-election), the contact said: “The polls in Northland aren’t great. But National’s ground-game will suffer a shocking result.

“I still think the result will be relatively close, but the problem is the legacy of Sabin and the loss of trust. This goes back a long way and relates to 9th floor conduct, cynical party behaviour, the Joyce-approach to campaigns and the divisions within the party.

“The basic problem is the party has taken a pounding over Sabin and years of neglect in Northland,” he said. He hopes “the ground-game” will keep the result a bit tighter for National. But he adds: “Winston and Andrew Little have out-foxed Joyce.” And that fact, irrespective of who wins on Saturday night spells a LOSS in capital letters for Steven Joyce and John Key.

See Also:

State Of It: Politics, Yes. Leadership, Yes. But Does NZ First Have the Infrastructure to Become the Rural Bloc Option?