Infrastructure and housing could still be handbrakes in a post-Covid world

Saturday, 27 February 2021

Reserve Bank Governor Adrian Orr says targeted government policy could do much more for the property market than monetary policy can. (First published November 2020)

As the exchange of passive-aggressive notes between Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr seems to be reaching its end, some attention is finally turning to the bigger question of ‘what next?’

Economists and policy wonks will attend a conference at the University of Waikato on Wednesday and Thursday to chart a course at the 2021 NZ Economics Forum themed Economics for Tumultuous Times – Finding the right policy mix in the post-Covid world.

Some will no doubt be nursing their wounds over overly-pessimistic predictions, which thankfully turned out to be wrong, but there’ll also be a dash of hope.

Continue on this track and our country might escape the worst of Covid-19 and emerge in a good position relative to others.

* Finance Minister Grant Robertson says Government isn't kicking housing problems to Reserve Bank

* Government's slow crawl on housing continues

* Evidence 'inconclusive' that lower interest rates are increasing inequality, says Adrian Orr

Leaving the country opens all sorts of opportunities to “build back better”.

Raf Manji says New Zealand could market itself as a manufacturing ‘backup’ to countries around the world.

So will we leverage our brand of excellent Covid-management to reel in new higher-value businesses and tourists?

Or, will the country lapse back into its old practices of luring foreigners in with the prospect of residency then changing its mind once they’ve spent a decade or so settling in?

Strategy and Risk consultant Raf Manji suggests one opportunity might lie in flipping those global supply-chain disruptions on their head and selling them as a strength.

Why not market the country to the world as the ultimate backup for your supply chain? Similar to financial trading-houses which used to have alternate dealing rooms waiting in the wings as a backup if the main one went down.

“Can we use this opportunity to say, ‘look, we reacted well to this we could shut down our borders’.

“The UK is also an island, but they couldn’t. There’s too many entry points, it’s too difficult to do. Whereas we’ve got basically two to three entry points.”

“We should be doing that with India. India’s producing a big percentage of the world’s serums. We should be saying why don’t you manufacture here? We’ll provide facilities and you start to build redundancy.

Supply chain issues caused by shipping backlogs have been a feature of the pandemic around the globe.

“So you see New Zealand as a sort of redundancy outpost for when the s… hits the fan.”

Great idea, but won’t we need new pipes for all these factories we’ll be adding? If we want to become a backup manufacturing and design hub for the world won’t we need to bring in new people?

And if we bring in new people won’t we need to house them or give them some way to get around our cities, which doesn’t add to carbon dioxide emissions?

In short, won’t we need all the things we’re already struggling to provide now?

Infrastructure and housing issues have long been highlighted as problems holding back NZ Inc.

“I mean, you’re right, so it kind of sounds like a great pitch, and then it’s like ‘oh you don’t have the people, your housing costs are too high’ and all that kind of stuff,” Manji replies.

“So, we’re kind of stuck… our policy settings have kind of stuffed us.”

Which is why our country is like a used car driving around with the handbrake on.

We can technically inch along in any direction we choose, but it’ll be a struggle unless we take that handbrake off.

NZ Initiative chief economist Eric Crampton (who will be on a panel at the forum) sees one of those policy settings which has “stuffed” the country as a stubborn unwillingness of central government to incentivise councils to provide infrastructure.

Crampton spent part of last year attending town hall meetings in Khandallah, Wellington, where residents had all sorts of horrified reactions to their council’s upzoning and intensification plans for increasing housing supply.

Eric Crampton fears the pandemic has made us more hostile to immigrants and immigration.

“There are infrastructure upgrades that need to happen to facilitate it and council doesn’t get any money to be able to do that.

“They’ll get a small increase in ratings base. So they have a capacity to apportion a budget over a slightly larger number of households, but the upfront cost is really big for councils.”

So, why not simply never re-open the border? Pull up the drawbridge, train our own and live with low debt and the infrastructure we have.

Crampton sees a danger that this is exactly what could happen. The pandemic has changed our attitudes towards foreigners with even returning New Zealanders being perceived as a bit of a danger.

We might not be as open to welcoming everybody in as we were in the past, and this attitude isn’t likely to bring us any closer to solving our infrastructure problems either.

Even if we embrace a population policy which assumes no migration the random fluctuations of citizens and permanent residents who move in and out of the country could end up causing the same issues.

And if the housing issues don’t go away there’s the problem of interest rates.

Shamubeel Eaqub asks if “inflation targeting” has done its dash.

Low interest rates were supposed to bump up house prices, inflation and encourage people to spend.

However, with housing supply so constrained and interest rates so low money flooded into property investments, but didn’t necessarily trickle down and stimulate spending in what economist Shamubeel Eaqub calls the “real economy”.

“I think there is a big question of what next for monetary policy because I think inflation-targeting is a tool that's done its dash.

“And if not, then what?”

He argues interest rates have become a good tool for discouraging spending, but not so great for encouraging it.

Part of it is because fewer people own houses. Meaning a boost to homeowner wealth isn’t pumping up the economy and spending the way it used to.

“I think it’s the distinction between the real economy and asset markets.

“For the last 10 years they've been trying and failing to generate inflation in the consumer market, but we’ve had no problem generating inflation when it comes to the asset market.”

Eaqub believes we will eventually have to discuss measures to force capital to go to the places we want it to go.

Manji says the problem is decision-makers are still stuck reading their textbooks from the 1980s and hung up on the theory low interest rates automatically lead to more bank lending for business investment, which in turn supports employment.

“That’s the last place anybody's going to put any money because of the risk.”

Low interest rates should lead to more spending and higher inflation, but right now consumer inflation is more affected by supply chain issues than it is by interest rates, he says.

And lower interest rates are simply encouraging people with idle cash to purchase assets like shares and property because of the poor returns they get from leaving their money in the bank.

Alternatively, people are just using those low rates to leverage existing assets and invest even more in the property market.

“Those people are not rushing down to the supermarket [to spend],” Manji says.

“I mean they might come down to Moore Wilson’s and buy an extra tub of Duck Island, but they’re not going down to Pak N’ Save and pushing up the price of rice.”