From the beach 2018
This year is shaping up to be one of change for the New Zealand economy. Our annual dispatch From the Beach for 2018 concentrates on seven major areas of policy shift and how much change the Labour-led government might achieve in the next 12 months.
Kicking migration as it goes down
Labour’s proposed alterations to migration rules only require directives to Immigration NZ about its approval criteria, rather than any legislative changes that must go through parliament. As a result, the administration for these changes is minimal. However, the changes themselves will take a few years to have their full effect.
In aiming to bring down net migration by 20,000-30,000 people per annum, about three-quarters of that targeted change is focused on foreign students. With almost half of the annual foreign student total arriving in January, February, and July, any significant effect from rule changes will not be seen before mid-2018, and probably not before the first quarter of 2019.
Even within its stated measures to reduce the immigration of foreign students, the bulk of Labour’s anticipated reduction comes through making it more difficult for lower-level students to transition into work (and presumably, later, residency). Although this change might make it less attractive for these students to come here in the first place, the biggest effect is potentially two years down the track when students who have already been studying here find they are unable to stay and work. In other words, we’re unlikely to see the bulk of this policy’s effect until the final year of the government’s term.
The fact is that net migration peaked in July last year and was already starting to ease. Prior to the election result being determined, we had been forecasting a drop of about 6,000 in net migration by the end of 2018 thanks to National’s previous rules changes. With the real effects of Labour’s policy changes unlikely to start coming through until 2019, we’ll probably still be waiting for the steep drop-off in net migration this time next year.
Tertiary institutions reliant on funding from international students have already been feeling the squeeze over the last couple of years. Between February 2016 and May 2017, the annual total of migrant arrivals on student visas dropped 16%. Private training establishments (PTEs) have borne the brunt, with full-time equivalent foreign student numbers falling by 6.3% for 2016 and likely to have fallen further during 2017. With renewed downward pressure on international student numbers next year, the squeeze is probably not over for PTEs yet.
At the same time as the foreign student tap is being turned off, Labour’s introduction of a year’s free tertiary education seems guaranteed to boost the number of young people undertaking study. Labour’s confirmation of free study from 2018 will probably have come too late to have a big effect this year, but the change will almost certainly boost student numbers next year, despite the total number of secondary school leavers being on the decline.
Although Labour’s policy extends across universities, polytechnics, and apprenticeships, we expect it to disproportionately boost university study. We have written about the negative implications and probable skills mismatch in Fees-free tertiary education: right problem, wrong answer?
Foreign house buyers sent packing
Like migration, housing was another area where things were cooling before Labour came to power. Investor demand was dropping off due to:
· the Reserve Bank’s tough loan-to-value ratio (LVR) requirements for investors
· an unwillingness among NZ-based banks to lend to foreign buyers
· tighter restrictions on capital being taken out of China.
The LVR restrictions and affordability problems had also capped owner-occupier demand and seen annual house price inflation ease from 16%pa in May 2016 to 2.7%pa by August last year.
The government’s bill to effectively ban foreign buyers is expected to be passed into law within the next couple of months. There might be a small rush of foreign purchases ahead of the change, with sales likely to be lower over subsequent months as the pool of potential buyers for property shrinks.
At the same time, the housing market has been given mouth-to-mouth by the Reserve Bank’s decision to ease its LVR restrictions from the beginning of 2018. At this stage, we do not view these changes as being sufficient to rekindle the property market and lead to a renewed acceleration in house price inflation.
However, we also note a 3.6% rebound in seasonally adjusted house prices in Auckland between July and November 2016. Outrageous though it might seem, the persistent shortage of housing in Auckland means that another bout of house price rises in the region cannot be completely discounted.
Will KiwiBuild really boost construction?
Phil Twyford, the Minister of Housing and Urban Development, has been sending confusing messages about exactly what Labour’s KiwiBuild programme means for the construction industry. The Reserve Bank’s November Monetary Policy Statement included the assumption that half of the government’s proposed increase in house building would simply crowd out private sector work that would otherwise have occurred. In response, Mr Twyford said that “there may be some offset but I doubt it will amount to very much.”
But at the same time, Labour has stated that KiwiBuild will include “purchasing … new homes off the plans in private developments.” It is unclear what proportion of Labour’s target of 10,000 houses per year will be delivered via the purchasing channel. However, we would argue that the purchase or underwriting of any houses that the private sector would have built anyway makes it impossible for the government to argue that it will boost the residential build rate to the full extent that it is claiming. And with labour capacity problems already critical in Auckland’s residential construction industry, we think the level of crowding out could be as high as 80-85%.
The government is looking to deliver 1,000 houses in KiwiBuild’s first year, ramping up to 10,000 houses by 2020. We note that data from Statistics NZ shows that central government has been responsible for 1,304 new dwelling consents over the last 12 months – the highest total in 28 years. So a target of 1,000 dwellings is no more than central government has contributed to consent numbers over the last year, implying a negligible effect from KiwiBuild on residential building activity during 2018.
All change at the Reserve Bank
The appointment of Adrian Orr as Reserve Bank Governor from late March will be accompanied by a new Policy Targets Agreement, with a reviewed Reserve Bank Act coming into play later this year.
Iain Rennie’s 2017 review of the Reserve Bank, ordered by the previous National government and released last week, supported Labour’s push for committee-based decision making. But the biggest question about the future of monetary policy is whether Labour’s planned addition of full employment to the Bank’s policy targets could result in higher inflation outcomes over the medium term.
Logic states that there is no “free lunch” – that an additional target cannot be included without losing some focus on the existing inflation target. However, it is likely that there would have only been small differences in monetary settings over the last decade if full employment had already been included as a target for the Bank. At most, taking greater notice of labour market conditions might have discouraged the Reserve Bank from lifting interest rates quite so soon in 2010 and/or 2014.
As the unemployment rate currently at 4.6% and is forecast to hold at 4.0-5.0% over the medium term, the Reserve Bank currently does not need to change its monetary policy settings to achieve the dual goals of low inflation and full employment.
Pumping up minimum wages
If there’s one government policy that could add to inflation outcomes over the medium term, it is the push to get the minimum wage up to $20/hr by April 2021. Assuming this target is reached, it would result in a 27% lift in the minimum wage over four years, the largest increase since the 2005-09 period.
After adjusting for consumer price inflation, the minimum wage has risen 53% since the end of 1999, having been fairly static over its previous history since 1946. Labour’s proposed increases would result in the real minimum wage having increased 80% between 1999 and 2021.
Our discussions with businesses indicate a level of concern about the cost implications of minimum wage rises over coming years. As with most of the other policies touched on in this article, 2018 will be too soon to assess the policy’s side effects.
Modifying the infrastructure blueprint
One area where we might see the early implications of Labour’s policies this year is infrastructure. We have briefly covered this issue Wanting to spend, but needing to plan. In essence, the changed emphasis in transport infrastructure from road to rail will potentially lead to a hole in spending during 2018 and 2019. Whereas several roading projects, such as Auckland’s East-West Link, were well advanced in terms of planning and design, rail projects are largely starting from scratch. We expect it to take longer to complete the planning, design, and consent phases for light rail to Auckland Airport, for example.
Unlike the residential and non-residential subindustries, infrastructure activity has struggled to grow over the last few years. A lack of projects over the next couple of years could result in difficult conditions for businesses operating in this area, while also having the potential to detract from economic growth.