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19
FEB 15

State of the Nation and Housing




The political year was back in full swing last week as National and Labour leaders delivered their state of the nation addresses - both different in their content and stated purpose.

Andrew Little’s speech aimed to set the direction of the party going forward, while staying away from policy detail. The focus was on jobs, claiming “the next Labour government will make sure that New Zealand has the lowest rate of unemployment in the developed world.” He tried to connect with business, emphasising the importance of business and government working together, in particular small business’s role in creating jobs and growth.

Inequality was another theme, pointing to the OECD report which claimed our growth had suffered due to growing inequality. Rising inequality has a wider effect on everyone, and targeting this can improve growth and importantly for business, increase the level of skills and education in our workforce. He also talked about the need to create highly skilled jobs, while committing to removing zero hour contracts if in Government.

He reiterated Labour’s focus on the manufacturing sector, and plans to expand on this in upcoming speeches. We hope they will continue to consider the recommendations from the Manufacturing Inquiry in 2013 in their policy platform. Lack of policy makes this speech hard to judge, but it has a lot of the right sentiment; in the end what matters is how the policy develops.

John Key focused on housing, providing some details of their plans to increase the stock of social housing, through selling Housing New Zealand stock and enabling more community housing providers - 1,000 to 2,000 houses will be sold over the next year, leaving open the possibility for more sales in future. They are extending income-related rent to include community providers, where a person pays a percentage of their income (usually 25%) and government pays the difference, aiming to increase the number of subsidies by 3000 by 2017/18.

They will be reviewing 5,000 Housing New Zealand tenancies over the next two years, aiming to move many who can to private accommodation. He discussed new housing developments to increase supply but under a more diverse ownership model, saying the changes will increase social housing availability in Auckland.

The housing issue is more connected to conditions for manufacturers and exporters than you might think. Currently our overheated housing market is keeping interest rates far above the rest of the developed world, putting pressure on manufacturers and exporters through a higher exchange rate reducing margins and competitiveness and increased borrowing costs for investment.

In normal circumstances, if an economy has inflation below their target over the medium term the decision to cut interest rates is relatively simple. However, if at the same time the housing market is overheating, cutting interest rates can add fuel to the fire and form a bubble that can threaten financial stability; an outcome which has been witnessed many times around the world.

Our situation has contradictory aims: the need to hold or raise interest rates to deal with housing and asset price inflation, on the other hand needing to cut interest rates to correct our high exchange rate and boost growth. These two aims cannot be addressed by interest rates alone.

The issue requires a multifaceted approach from both the RBNZ and Government. National’s social housing policy could be a positive contribution if it succeeds in increasing the supply of housing for those in need, reducing pressure in the market. However the Government needs to do more to address asset speculation and tax treatment, in addition to increasing supply. Finally, the RBNZ can use other interventions to directly curtail lending, as they did with the LVR policy.

Tackling the housing issue is vital, not only for everyone who needs an affordable home, but also due to its effect on our whole economy.
 


tags: rbnz, housing, andrew little, key, sme, jobs, manufacturing, labour, national
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