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Tony Alexander’s Weekly Economic Overview 14 April 2016

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Economic Analysis by Tony Alexander.

Thursday April 14th 2016

[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] There is widespread awareness now of the way regional housing markets are rising strongly, and that Auckland has not finished its push higher. With the Reserve Bank expected to cut interest rates later this month and again in June there will clearly be more property demand coming soon from investors – maybe less so first home buyers for whom the problem is not really the interest rate but the property cost and getting a deposit together. For the interests of those contemplating the regions we include a set of graphs published in the Weekly Overview a number of times over the past one and a half decades comparing regional house prices with the NZ average. You can form your own view of whether a region looks like it is due to kick up – but keep in mind projected population growth. Experience of previous cycles tells us that people often over-estimate how many Aucklanders and retiring people will go to the regions.

For the full analysis, continue reading below or click the link to Download the full document (pdf 540kb)

School Holidays Almost Here No great inspiration struck me this week and nothing substantial enough has happened anywhere to greatly alter the NZ or global outlook, so the Overview is on the short side apart from some space filling graphs in the housing section. Enjoy but watch for the Reserve Bank to potentially impose more housing credit controls as they cut interest rates most probably later this month and again toward the middle of June. Housing Housing markets around New Zealand are chugging along, driven to various degrees by Auckland buyers looking for yield and lower mortgages outside of our biggest city, locals jumping onto their local bandwagons now that they see outsiders buying in, low interest rates set to go lower, record net migration inflows, and foreign buyers previously postponing purchases in order to get IRD numbers now having those numbers and back in the market again. This latter effect explains why Auckland saw a lull in sales, prices, and lengthening of days taken to sell a dwelling from October last year. But as noted here four weeks ago that lull seems to have ended in February and March was strong as well. The period of a “paused” Auckland housing market responding to regulatory changes has ended and young buyers who did not take advantage of this window of opportunity to go to auctions and face fewer competing buyers have missed out. Again. In Auckland in March the average sales price adjusted for changes in the mix of properties sold jumped by 4.3% after rising 5.5% in February. That price measure fell in total by 3.3% between September and January. The latest measure represents a rise of 13.3% from a year ago or 12% when comparing the March quarter with March quarter 2015. On average in March it took 31 days to sell a house in Auckland which was 1.4 days faster than average, slightly less strong than February’s 3.7 days faster than average outcome, but the second strongest result since September. In Wellington prices in March were 12.8% ahead of a year ago and for the entire March quarter (a better measure) were up 10% from March quarter last year. Prices are now 19% above early-2009 levels versus a 92% rise for Auckland and 44% rise for Christchurch. Wellington is in the huge catch-up phase written about here last year. Houses sold 8.3 days faster than average compared with slower than average sales days for most months since the end of 2007. In Waikato/Bay of Plenty price changes for the month and quarter on a year ago respectively were 22% and 17.2%, Hawkes Bay 12.7% and 13%, Nelson etc. 15.1% and 10.3%, Central Otago Lakes 26.5% and 17.4%. Elsewhere price changes were positive but not as startling. How long will the surge in the regions last? All we can do is invite you to take your own stab at an answer by comparing where prices sit now with where they have sat versus the NZ average for the past couple of decades. Good luck. But before you get too het up about the likes of Northland and Manawatu/Wanganui, do take a look at the table following the graphs showing projected regional population changes from Statistics NZ. Over-optimism regarding regional population growth is a key cause of investor error.
 
Last housing cycle we saw a lot of people lose money as minimally regulated finance companies raised money and lent it for large developments which failed to produce the returns promised. With interest rates low and headed lower, and an increasing number of people searching for extra yield, one would expect more and more people to be actively searching out the new version of those finance companies so they can get higher promised returns. But such vehicles for gathering little investors’ funds and advancing them on grandiose projects are not there this time around and look unlikely to appear. The Reserve Bank has sharply extended its supervision of such businesses since failing to adequately monitor finance companies, and there are so many requirements which such companies need to meet now that setting up and running something akin to those 2000s enterprises is almost impossible. This means that the rise in dwelling construction this time around will be more spread out than last cycle, and the risk of a correction caused by excess physical supply a lot lot less. This is a positive thing because when the cycle turns there will be harm to fewer uninformed investors chasing risks they have not properly priced. But the absence of investment vehicles for gathering small deposits does not alter the demand from people for property exposure to deliver extra yield. So what will they do? Many will seek to do their own investing, perhaps by purchasing a property with subdivision potential. That is one reason why investor demand is so strong in Auckland and property prices so high. People are investing in land able to be developed as intensification intensifies. People are not just buying expecting the price of what they have to go up. They are also buying expecting the price of what can be done to their property to go up in an environment where it is very unlikely that widespread moves will be made to reduce intensification. Hence the strong concern of some property owners over moves by other owners in their leafy suburbs to prevent the Auckland Unitary Plan allowing intensification. These are two powerful groups, (nimbies, potential developers), but only one group is growing in size and gaining more influence over time – the latter. Intensification will come. It’s inevitable, which is why people will keep buying for future potential development driven by population growth pressures. The Kiwi dollar has ended today unchanged from last week at 68.4 cents with an earlier rise to 69.5 cents assisted by good economic data in China (exports up 11.5%) and higher oil prices making investors slightly less risk averse. But our currency has pulled back today to sit unchanged from where it was last week. Global financial and economic conditions remain vulnerable to changing attitudes toward a very wide range of significant factors. These include how much the Chinese economy is slowing down (not that the data can be at all believed), whether the UK votes on June 23 to leave the EU (probably they will) and what the impact will be, US monetary policy (especially with the markets only pricing a 50% chance of one rate rise this year while the Fed talk in terms of two or three), ongoing weakness in emerging economies like Russia and Brazil, and commodity prices. These uncertainties stand in contrast to the support for growth in NZ coming from booming non-dairy exports, construction and migration which will tend to keep the NZD firm even as the Reserve Bank cuts rates probably two more times. You will find current spot rates here. http://www.xe.com/currency/nzd-new-zealand-dollar If I Were A Borrower What Would I Do? Nothing much new really. Keep 20% – 25% floating and fix the rest probably for two years. If I Were An Investor … I’d see a BNZ Private Banker The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting Nada.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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Bryce Edwards’ Political Roundup: The War on wealth

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Political Roundup by Dr Bryce Edwards.

[caption id="attachment_4808" align="alignleft" width="150"]Dr Bryce Edwards. Dr Bryce Edwards.[/caption]

The War on wealth: The explosive revelations of the Panama paper leaks are resonating strongly around the world, largely because in a post-global financial crisis, ordinary people are angry at the rich elite. This is now playing out in New Zealand politics in a way that makes John Key and National vulnerable.

Yesterday I spoke with a member of the public who thought he may have uncovered damning evidence about the Prime Minister’s financial dealings. He had been digging around in Hawaii’s property purchases registry online, and found the deed of sale for John Key’s $6m Maui apartment, which indicated the politician had only paid $10 for the property in early 2008 when he was Leader of the Opposition. Further investigation suggested that there was nothing sinister or corrupt about the transaction, and the trust arrangements document was part of longer process that squared up with how things are normally done.

The story nicely illustrates the heat of the new “war on wealth” that is going on at the political level both in New Zealand and globally. All politicians and elites are under suspicion, and increasingly their assets will be scrutinised and used against them. This is largely because we have entered a post-global financial crisis period when the wider public is especially sensitive to issues of economic inequality and notions of elites exploiting society. 

National’s vulnerability on wealth

The Prime Minister and National Government has handled the Panama papers controversy relatively poorly so far. And it’s an issue they are incredibly vulnerable on, depending on how well the Opposition parties handle the opportunity.

For perhaps the strongest argument about the potency of this issue, see journalist (and John Key’s biographer) John Roughan’s column, They all should be paying a fair share. In this he explains how the wider public – including himself – are infuriated by the rich exploiting the system and “not paying their whack.” He urges Andrew Little and the Labour Party to go hard on the issue, even if the topic of foreign trusts is “tedious and the technicalities don’t make riveting politics.” Roughan complains that National have done nothing about fixing such issues, and tax avoidance in general could give “the country a reason to change horses.”

Of course, Labour has tried numerous times to impugn Key’s reputation through connecting him with the mega-rich of the world and their various financial management mechanisms. In the past it hasn’t worked, but Vernon Small suggests that it could be different this time around, especially since Key has been making mistakes on the issue: “But by appearing to side with the so-called “1 per cent” he handed a cudgel to his opponents to beat him with. It is the very characterisation of Key that they have tried – and struggled – to make stick; the rich former money trader whose sympathies rest with the world’s big money and corporates to the detriment of the “battlers”.  Labour, the Greens and NZ First deserve credit for making Key look weak on an issue where he is, for once, clearly on the wrong side of public disquiet” – see: Panama Papers: New Zealand’s trusted reputation demands changes to foreign trust rules

Small suggests today that Key has done little to assuage public concerns about the trusts and New Zealand, and about Key’s own connection to the industry – see: Ten days down the road on Panama papers and NZ is still stalled. According to Small, “the same questions are still begging to be answered”, and there’s a lingering perception that the PM “uses a firm that specialises in setting up foreign trusts and makes the very arguments for New Zealand’s statutory regime that have drawn scrutiny – our tax rate and the level of secrecy we offer.”

He also says that “Overall, Key has fumbled badly over the issue, starting with that tin-eared initial defence. It was simply not enough to say he did not hold a candle for these kinds of trusts. He also stumbled by not spotting in advance the media focus on his links with Antipodes. There also have to be questions about the wisdom of appointing Shewan.”

Key’s performance might not be enough in this era of anti-elites. As Joe Bennett cleverly writes, we are all quite delighted by the Panama Papers: “Absolutely. Me too. And hands up if you’re keen for ever greater revelations of wrongdoing, greed and malpractice. Oh, we are siblings in schadenfreude” – see: Calling out all the brazen and brash cash stashers

And there are plenty of other columnists railing against the easy ride that the multinationals and mega-rich apparently get in this country. For example, Heather du Plessis-Allan says “If ever you needed a truth test on the myth that New Zealand is an egalitarian country, this is it.  We run two tax systems: one for most of us, another for people with money and power.  Most of us have to pay tax…. And now this Government isn’t going to stop rich foreigners using New Zealand as a tax haven. Instead, this Government is smiling and waving to tax-dodging celebrities on the other side of the world while it uses the Panama papers leak as some sort of international advert” – see: Tax for the goose and the gander

It’s not just Key’s past as a money trader that could associate him with the mechanisms that the mega-rich use to escape taxes, but also his previous advocacy for New Zealand to become the “Jersey of the South Pacific”. This was recorded in an interesting 2005 interview with Fran O’Sullivan – see: Key chases luck o’ the Irish. And for an update on this, see Isaac Davison’s Panama Papers: Key defends offshore banking comments.

Fran O’Sullivan also published – just prior to the Panama papers leak – another report on Key’s latest ambitions for New Zealand to attract the wealthy – see: Key’s vision – Switzerland south

So why doesn’t Key understand the strong public reaction to the Panama papers, or detect the new hostility to the mega-rich? According to Chris Trotter, alluding to Key’s estimated fortune, “There are 55 million answers to that question. For a long time now John Key’s fortune has dulled his otherwise acute political judgement” – see: Shrugging-Off The Panama Papers.

Trotter points to earlier statements and defences of wealth in New Zealand by Key, and argues that “In the light of this earlier demonstration of Key’s deep belief in the superiority of the very rich; and in the very different measures that must be taken of their needs and deeds; should we really be surprised when he struggles to understand exactly what the persons exposed by the Panama Papers have done wrong?  If you believed as strongly as John Key does that the very rich are better than you and me; and subject to a very different set of rules; then you would probably shrug-off the Panama Papers too.”

The Government’s overtly “relaxed” position could start to be seen as complacency, or worse. And so, if National is not careful, then columns such as Bryan Gould’s hard-hitting Govt serving interests of the rich might start to resonate much more widely. 

Key out sync with opinion leaders

John Key has been very clear in his judgement that New Zealand is not a tax haven. But plenty of editorials, commentators, and experts disagree with him. For the most colourful survey of the expert dissidents, see Toby Manhire & Toby Morris’ The Panama Papers, NZ and ‘tax haven’ ridiculousness. Similarly, see Hamish Fletcher’s Leak leaves stain on New Zealand’s name.

Shamubeel Eaqub has a hard-hitting analysis of the issue in his column, Panama Papers show NZ is complicit in criminal behaviour. Eaqub gives National a black mark for its reaction to the controversy: “It is no good pretending some moral high ground and aloofness from corruption as a country. The Panama files show that New Zealand is complicit in shady, dishonest and criminal behaviour.  Our reaction should be to urgently stop this from happening, not deny there is a problem.”

Transparency International New Zealand is also calling the revelations a “huge blow” to the country’s low-corruption status – see Dan Satherley’s Panama Papers called ‘huge blow’ to NZ’s reputation

And some commentators are even calling for the trust regime to be abolished – see Larry Williams’ Govt must close down offshore trust rort

Newspaper editorials seem to be running strongly against National on the issue. After Key first reacted to the Panama papers leak, the New Zealand Herald argued that his position was likely to become “increasingly indefensible” – see: PM on shaky ground over weak tax rules. The newspaper also said: “Key might feel immune from the mounting international clamour against the activities of the super-wealthy, but the fact remains that the exploitation of loopholes is often at the expense of ordinary taxpayers because it deprives the public accounts of revenue to invest in education, health and social services.”

The Herald subsequently ran another editorial complaining that “The Government has chosen not to act alone against those shifting taxable profits out of this country, preferring an international agreement, but it has no good reason not to take unilateral action against the use of our law to set up tax-avoidance trusts here” – see: Govt can help put boot into tax dodgers

It’s been a similar story with other newspapers. See for example, the Southland Times’ Gimmee tax shelter

But there are some commentators defending the National Government, and downplaying the importance of the controversies. For example, Mike Hosking: says “I think we can be relatively comfortable that we are not a tax haven or a slush fund”, and considers the revelations unsurprising (“Tell me something we didn’t already know”) – see his two-minute video, Mike’s Minute: The Panama Papers.

Also at Newstalk ZB, Tim Fookes calls the whole controversy a Media Beat Up. Fookes says the portrayal of the Panama papers issues has been dishonest, particularly in terms of John Key’s involvement: “We’re being conned, we’re being hoodwinked, and the media’s to blame”. Fookes says it’s being “being whipped up by the opposition and their blind hatred for John Key”, and “Sadly, the media is going along with it, and dishonestly.  On days like this, I’m embarrassed to say I’m part of the media.”

Others have also made arguments that the tax haven debate doesn’t apply to New Zealand. See for example David Farrar’s NZ is not a tax haven

Finally, for some humour on the controversy, see Andrew Gunn’s PM poo-poos Panama Papers, Raybon Kan’s Welcome to NZ – 100% Pure tax haven, and Steve Braunias’ Secret Diary of The Panama Papers

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