The Labour Factor – what will the impact be on property prices in New Zealand?

by Alan Henderson, Director

NB: Since writing this article the RBNZ (as predicted) has announced easing of LVR rules effective 1 January 2018.

We have a new government in NZ, finally a decision, and now the burning question is what will the Labour impact be in general and specifically on property prices?

Perspective

Another Labour govt, we’ve had them before and we know the world doesn’t end. Some things are going to change, and change for a lot of people is not comfortable. But it doesn’t mean the result will be economic collapse. The economy is in good shape and the books are healthy as a result of Bill English being born with a super saver gene. If I think back to the GFC a lot of people ran around telling me the world was going to end. Most of them are still alive. It’s a matter of perspective.

Labour will spend money and by the time they exit, and if history repeats itself, National will probably have some fiscal clean up to do. But in the meantime, the economy gets the benefit of some much needed spending – let’s hope it is in the right areas and gets results.

Infrastructure Spend

We can expect Labour will spend money. National tightened the purse strings and Labour thinks they were too tight.  National was hardly liberal with its infrastructure spend – could they have spent more in the third term? We need infrastructure and the early signs of Labour following through are there with the announcement of light rail in Auckland, to be funded through a petrol tax. Light rail is good in my opinion – Auckland will self-destruct if we don’t fix the traffic woes, we need infrastructure to support growth. Sir Dove Myer Robinson would be happy – if you don’t know about him google ‘Sir Dove Myer Robinson rail’ – perhaps light rail should have happened years ago. And more widely, if they do spend, it should stimulate economic activity and more economic activity means businesses spend more and then consumer spending lifts, which means the ability to pay more for housing.

Will a petrol tax work? Well, one journo pointed out that we are going electric and that before we know it there will be no petrol to tax.

Immigration

National created domestic activity by opening immigration to all and sundry and as a result we have had record levels of immigration. Well, that’s only part of the story, in reality a lot of the immigration has been fueled by Kiwis returning from Australia given the economic slow down there. Either way, this has absolutely fueled demand for housing. Winston Peters wants to cut immigration from 70k per annum to 30k of skilled labour. He can set policy, however what Kiwis decide to do has a major influence. Kiwis returning from offshore is tapering off, so we are likely to see a tapering of net migration anyway.

Will that turn off demand for housing?  We have a shortfall in Auckland of about 30,000 houses – and positive net migration, even if it is only 30k per annum. That means pent up and growing demand for housing. History tells us that house sales volumes closely track net migration. However, in the last few years that trend has been bucked – we’ve had record levels net migration, but house sales volumes have not followed suit. Why? Because the stock levels simply aren’t there – REINZ data tells us stock levels are a long way below historical averages. While immigration might slow up for the next few years, on the other side we have a lot of pent up demand to satisfy. Let’s do the sums – in Auckland we have at least a 30k shortfall, we are consenting about 10k per annum, although that is not built housing. Statistics NZ tells us that 2/3 of immigration will end up in Auckland.

Lets do the math over 3 years for Auckland:

• Demand = 30k + (2/3 of immigration = 20k x 3) = 90k houses needed over the next 3 years.
• Supply – lets be generous and assume we can build 10k houses each year (but not sure how if costs are escalating and we don’t have enough labour). So that would mean we will create, on a very good day, 30,000 houses in Aklover the next 3 years.
• Demand less supply = 90,000 – 30,000
• Answer = 60,000 shortfall at the end of the 3 years

Of course the flip side is that if you ratchet down immigration we won’t have the people to build the houses we need right now.

What about Labour’s KiwiBuild plan? 100,000 new homes in 10 years, 50% of which will be in Auckland. The devil in is in the detail – achieving this is a three-pronged strategy; buy into developments underway; buy off the plan apartment units; run their own developments. Exactly how the first two strategies increase supply is beyond me, in fact doesn’t that just increase demand and therefore make the whole problem worse? Curiously part of the reason the government wants to do this is to help the market supply affordable houses around the $500k mark. Really? If its $500k in Auckland it’s probably a shoe box apartment in the suburbs, which is hardly helping first home buyers – the neediest segment of the market.

The way to fix the supply issue? Allow supply to get to market more quickly and with less council cost. You can open up all the land you want in Huntly, but who wants to live there? Sorry Huntlytonians. It has to be the cities. So that takes us back to infrastructure. The government has to step in and help council fix major infrastructure projects like water, waste and transport. At the moment the council is trying to load these costs on developers and rate payers. Then look at the length of time it takes to get something through council with the Resource Management Act. Once you finally get a resource consent through and you are ready to build, good luck finding a builder – tradespeople are not plentiful and that is not about to get easier. Fix infrastructure, fix the RMA, fix labour and then we might get somewhere with supply.

At the end of the day, it all comes back to the balance of supply and demand. We are under supplied now, we can’t get labour to build what we need, cost of building makes it hard for developers to get projects to stack – it’s hard to see how dropping immigration to 30k is going to suddenly result in an oversupply of property. And therefore, I’d conclude that this time round it’s hard to argue that a drop in immigration is going to result in prices dropping.

Bob: Hi Jacinda, Bob the Builder here, so how are we going to catch up with all this building? 

Jacinda: We’ll let’s put more labour into it. 

Bob: But Jacinda, there is no labour and your deputy has stopped me bringing labour in.

Jacinda: I’ll give you a temporary work visa. 

Bob: Oh I see – not an immigrant that has to be counted, but a temporary worker.  Thanks Jacinda.

Increase Exports

Winston wants to see more exports. Great – but lifting the minimum wage to $20 per hour over a few years is going to hurt manufacturers and not help exporters. Will manufacturing slow down? Perhaps in some parts – but then will we see an offset of this with the increased infrastructure spend? And for the workers that earn $20 per hour then they can afford better housing. That’s good for society. It also means rents can go up.

But let’s be honest, the real growth will be in innovation and digital disruption. Apple just bought a kiwi company who has designed a wireless charging device. Isn’t that where any significant export growth will come from, and therefore a conversation around the impact of minimum wage on the economy might be a bit irrelevant – in a macro economic sense. And… NZ and Auckland in particular is an expensive place to live. Is $20 per hour that unreasonable?

Restrictions on Foreign Ownership

Labour wants to restrain foreign ownership of property. Firstly many other countries have similar restrictions – and it doesn’t mean house markets collapse. Secondly the devil is in the detail. It has been confirmed that Aussies won’t be restricted, just as Kiwis aren’t restricted from buying in Aussie. We also know that foreigners won’t be restricted from buying land or new property once that contributes to additional supply.

No cause for panic.

Property Tax

Labour firmly stated in campaigning that they won’t touch property tax in this 3 year term. So I don’t think we’ll see anything passed into law this term. But will we see them start the discussion half way through the term. Could do. But what’s the impact? Say a capital gains tax. Well they would be very, very unlikely to apply it retrospectively. So all the more reason to get in now before a change. How will it impact prices – just look at other countries. Does it halt price growth? Not much evidence it will.

Conclusion

Whether I agree with Labour’s policies or not, nothing about them at the moment is making me think there could be a massive drop in property prices. However, the devil is in the detail.

Labour will absolutely make change. But here are some parting comments for consideration:

• Marked house price adjustments come from massive over supply or lending policies that result in many property owners being stretched in an economic downturn. I don’t think we have either.
• Labour has been in the political wilderness for a long time. They will not want to be a one term wonder.
• Think needs versus wants. Some of what labour wants may not be what the NZ economy needs – will their policies get diluted?
• NZ is a small economy and therefore pretty nimble. It has the ability to respond quickly (check out Spore based Kiwi economist David Skilling). If Labour screws up – if the coalition starts falling apart and we get a snap election in 2 years – we can respond quickly.
• What would I do? I would buy property because I seriously doubt property in key areas of NZ is going to get cheaper than it is today. Also, if you believe in making decisions based on fundamentals, which is what we encourage clients to do, then we suggest looking closely at the balance of supply and demand. On balance, we don’t think any of the Labour policies are going to create more supply, and if anything demand will only lift.