The Bank's other stuff

Yesterday's Monetary Policy Statement went entirely as expected - no change to the Official Cash Rate (still 0.25%), no change to the Large Scale Asset Purchasing Programme (still capped at $100 billion), and the introduction of the signalled Funding for Lending Programme, intended to provide a new source of cheap funding to lenders (three year funding at the OCR rate). 

If used fully, the new FLP would amount to $28 billion. In Australia, the equivalent Term Funding Facility, which has been going since April, has a capacity of some A$200 billion, or about NZ$212 billion. Divide by 7 as a rough pro rata rule of thumb and the Aussie TFF would be a NZ$30 billion or so programme here, so the good news is that we've introduced a similar-sized stimulus.

There is a line of thinking that providing extra funding for lending might be the proverbial 'pushing on a string' if, in still unsettled Covid conditions, borrowers aren't much minded to take on more debt or banks aren't much minded to take on more risk, and it's true that (as of early November) the Aussie one has seen only A$83 billion taken up, or some 40% of the total available. But as the RBNZ said in the Statement, the actual take-up may not matter so much if the new FLP gets the cost of borrowing down, or as the Bank put it (p21)

The key success metric of the FLP will be whether it results in declines in funding costs, and encourages recent declines in these costs to be passed through to lower household and business borrowing costs. We could see a scenario where FLP funds are only drawn down in small amounts, but its availability encourages a broad decline in interest rates. We would consider this scenario successful, even though actual use of the FLP would seem minimal.

There's always interesting stuff in the body of the Statement and this time round I was especially interested in what the RBNZ had found as it went around the business traps, and in its comments on house prices.

"Many businesses", the Statement said (p18), "expressed concern about finding required staff. Some firms noted that re-deploying staff from one industry to another can be difficult, particularly for skilled jobs. Many firms rely on hiring skilled workers from abroad, which they have been unable to do because of the border closure". 

Granted, the large numbers at risk of losing their jobs in the most affected sectors - the Statement reckoned that pre-Covid international tourism and education made up 6% of GDP - won't always be a good fit for the vacancies available elsewhere, and labour market policy is always going to struggle to assist the transition. "Active" labour market policies (like these successful ones) try to ease the process, but you do wonder whether we've got enough of them. And the reported dependence on overseas skills again makes you wonder how well our labour market is working to match up the demand for skills with the supply of them.

House prices have grabbed everyone's attention, not least because the latest resurgence wasn't supposed to happen in a world where (supposedly) shell-shocked households were hunkering down, not trading up the house. It got a fair bit of attention at the media conference at the Bank after the Statement (tune in around the 29:25 mark, and stay with the rest of the video). But the Bank was quite right to say that it's not its ever-lower interest rates that are the big moving part in the house price increases. As it - completely correctly - said in the Statement (p28):

High house prices in New Zealand largely reflect structural and regulatory issues in New Zealand’s housing market. In particular, land use restrictions, such as urban planning rules, limit the land available for housing and how intensively it can be used. These land use restrictions impede the ability of the market to increase the supply of houses when demand for houses increases. As a result, house prices tend to increase more than otherwise in response to higher housing demand. Other supply-side issues include infrastructure  planning, the building consent process, and the cost of building.

You can berate the Bank all you like, and launch market studies into the building materials trade till you're blue in the face. They're all in the twopenny halfpenny place. Nothing's going to happen to high house prices until the supply side of the market starts to work a lot, lot better.

Did Special Housing Areas help?

A while back I went and had a looksie at some local Special Housing Areas near me in Auckland.

I wasn't hugely impressed. At the first one I went to look at, I felt that designating it an SHA didn't seem to have made any material difference either way. On the left, by the way, is the very latest state of play on that first SHA site I visited. Still a long way from being finished - no dramas, it's the developers' prerogative to set whatever schedule best suits them - but not an obvious example of SHA status moving things along.

On a follow-up visit I had more doubts, noting that non-SHA apartment blocks were going up all over the place but the SHA sites were somnolent. "I'd like to believe", I said, that "Special Housing Areas greased the wheels of the housing planning process, and either accelerated or increased new construction, or both ... But how will anyone definitively know? ... I'm hoping that someone - an economic consultant with an interest in housing, maybe? - will be asked to turn their minds to a proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas, and checking to see if the SHA ones outperformed in speed or quantity".

Another visit left me asking the same questions. "it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why. Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated".

Lo and behold, someone's actually done exactly that "proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas". It's just been published in the online version of New Zealand Economic Papers as "Price effects of the special housing areas in Auckland": the abstract is here and if you've got access to NZEP online, here's the link to the full article. It's by Mario Fernandez of Auckland Council's Research and Monitoring Unit and two co-authors, Gonzalo Sánchez at ESPOL in Ecuador and Santiago Bucaram at the Inter-American Development Bank.

They used a difference-in-differences approach which looked at what happened to house prices in SHAs compared to those in nearby non-SHA areas. Before the SHA experiment, prices in both areas had been rising at about the same rates: assuming (I think reasonably) that those trends would have carried on absent the SHA cunning plan, you can attribute any subsequent differences between SHAs and non-SHAs to the effect of the SHA policy.

The SHA initiative did not scrub up well:

Our findings indicate that the SHA programme caused price increases (inside SHAs) amounting about 5% on dwelling prices and 4% on the price per square metre, and had no effect on the probability of affordable transactions to occur but actually increased the probability of costly transactions. These results cast doubts on the reliability of the SHAs as a housing policy aimed at improving affordability (p11) ... the findings of this paper suggest that the effectiveness of the SHAs on improving affordability was questionable or negligible (p13)

The findings were robust to the usual econometric tyre kicking (eg allowing for the possibility that developers and buyers saw the SHAs coming and might have changed their behaviour accordingly, and making the comparisons only on SHAs and non-SHA areas that are very close neighbours).

The authors say, "the policy questions that arise are: what weakened the SHA programme? or why
were the affordability requirements not binding to developers?".

On the first, one possibility (they say) is that "the fast-tracking of the consenting process [the SHA deal was faster consents, in exchange for agreeing to build an element of affordable housing] resulted with the developers being able to offer an additional attribute to their products: rapid delivery of new constructions ... Hence, the SHA programme simply allowed developers to offer new homes with an additional attribute (a shorter delivery time), which consequently implied higher prices" (p12).

On the second, there was an element of gaming the system. Developers had the option of waiting to see what planning options might become available under the Auckland Unitary Plan, rather than forging ahead with their SHA consents: "there were expectations of greater profits under the rules of the AUP rather than the SHA programme. Therefore, this could explain why prices did not decrease inside the SHAs as the timing of development may have relied on building first the more profitable (and expensive) houses and later (or never) the affordable" (p12). Scuttlebutt I picked up at the time fits with this explanation.

I'm not going to bag the designers of the SHA: I'm more in the 'let a thousand flowers bloom' camp when it comes to policy experiments, and anything that sounded plausible (the faster consent / affordability combo) was worth a go. I think we all knew that it wasn't going to make much of a difference compared to the impact, say, of a large expansion in the supply of housing-zoned land. But at the margin it might have been a small help.

It wasn't. People more familiar than me with the intricacies of the housing market can carry on the conversation about why not. My takeaway from the whole exercise is that any policy experiment ought to automatically come with follow-up provisions to see how it went. Not rocket science, you'd think, but it's routinely ignored all over the place: we're throwing money in the air, and not checking to see where it drifts or who picks it up. It's time to realise that 'evidence based policy' isn't just about designing a plausible initiative: it also means seeing if it lived up to expectations, and if not, why not.

Unintended consequences?

The bill that aims to rein in non-residents buying New Zealand houses - the Overseas Investment Amendment Bill - is currently before the Finance and Expenditure Committee.

It's had a lot of submissions - 239 of them, available here - and hopefully this point will already have been registered by the Committee, but if not I'd like to alert the members to the reality of housing development in our neck of the woods.

We live on Auckland's North Shore. It's an established area, which means that any extra housing comes from infill redevelopment. I can't speak for the whole of the North Shore, still less for Auckland more widely, but in our East Coast Bays the reality is that this redevelopment is largely being done by Asian developers with Asian crews. The typical projects aren't large - an existing house on a large section bowled and replaced with three new ones, two adjoining houses bought at the same time and their combined back gardens used for three new houses (both real examples) - but their aggregate contribution to expanding housing supply is significant.

There is provision in the Bill (sections 16C and 16D) for this sort of activity to continue, by way of approval from the Overseas Investment Office. But how many developers are going to go this route, which involves both uncertainty around an eventually positive vetting outcome and possibly some significant delay in the interim while the OIO mulls the decision?

My guess would be, not many. Maybe New Zealanders will end up better off in some affordability sense if foreign buying demand is taken out of the North Shore equation. But the evidence of my own lying eyes is that foreign supply is also being taken out of the market, and in our area at least it's not obvious that New Zealand will be the winner in any sense at all.

And what's true here may be true more widely. As the submission from the New Zealand Institute of Economic Research puts it

as well as preventing single-purchase investments by overseas persons, the Bill also makes it more difficult for foreign investors, including New Zealand-domiciled companies with more than 25% foreign ownership, to invest in large-scale residential projects. This is at a time when New Zealand has relatively few large-scale property development companies and New Zealand banks are increasingly tightening up on development funding.

This will reduce the supply of housing beneath what it might otherwise have been, pushing up prices for New Zealand resident and citizen buyers, including first home buyers. The Bill could therefore have precisely the opposite effect of what is intended. 

What did we learn?

Earlier this month I posted what I hope will be my last tiki tour of some Special Housing Areas (SHAs) near our place. And at the time I said I'd have a go at trying to put some figures on the effectiveness or otherwise of the whole SHA experiment.

I've had a look, and there's good news and bad news.

The bad news is that, using MBIE's latest Auckland Housing Accord Monitoring report (available here, with all the previous ones), I can't tell whether the SHA experiment made a difference.

There were 5,527 building consents in the SHAs over the October '13 to June '17 period covered by the report. That made up 16.4% of the total 33,639 consents issued. But whether you should think about this as 'big' or 'small' isn't obvious, because you don't know how many of these SHA approvals would have happened in any event, and were merely shifted from one box (ordinary consent) to another (SHA consent).

You can't tell whether there was any net addition from the SHA initiative. Nor can you tell (although this was one of its objectives) whether the SHA consent process sped up development. To date, 3,105 dwellings have been completed in the SHAs: the report says "The 154 Special Housing Areas are expected to eventually supply over 66,000 dwellings or sections over 20-25 years". At the risk of sounding snarky, this doesn't look like lightning progress towards that target.

I'm prepared to believe that SHAs may have facilitated some particular, large projects. As the graph below shows, more than half (56.6%) of all the SHA consents were in just 8 of the 154 SHAs (the 8 with more than 300 consents). If they were instrumental in getting the Hobsonvilles underway, excellent. But again it's hard to know whether the counterfactual is that Hobsonville would have gone ahead anyway, or faster without jumping through the SHA hoops.

If I was facing a firing squad and had to guess to save my life, I would guess that the SHAs were an intrinsically nifty idea (faster consents for helping with social objectives) but that (a) the planning streamlining may have been more apparent than real (b) the dollar give-up by developers to meet the social objective became too expensive in a roaring bull market and (c) some developers weren't going to be swayed by anything (SHAs included) until they saw how the Auckland Unitary Plan played out. Goodish plan, somewhat sidelined by events. Story of all our lives.

And the good news?

People gave a new idea a go, in an area that badly needed moving along. It was an experiment. And we need more experiments like it, in housing and across the board. Not that our oppositional political structures are well suited to running them: we haven't exactly got a system that tolerates "mistakes" or "failures", when in reality they're nothing of the kind. They're opportunities to find out what works and what doesn't.

In that light, though, if you're going to run experiments, as you should, you have to figure out beforehand, in some detail, how you'll know whether the experiment was a success or not. Sometimes it's obvious - the laboratory explodes - but often it isn't. In the case of the Auckland Housing Accord, progress towards consent targets was not an adequate metric. It needed some sort of control group comparing SHA and non-SHA volumes and speeds. My little trek around Browns Bay but writ larger, and with a budget. And it would have been useful to get inside developers' heads to see exactly what mattered most to them.

Special?

Almost two years ago now, I went and had a look at a Special Housing Area (SHA) that had been set up a few Ks away in Browns Bay. Oddly, there was nothing happening at the supposedly fast-tracked SHA, while all around it non-SHA apartment blocks were sprouting like mushrooms.

I went back three months later. Still nothing at the SHA (and nothing happening at another one on East Coast Road that I also went and sussed out). Still full speed ahead on the non-SHA sites, though.

And a year ago I went back yet again. Signs had just gone up on the Browns Bay SHA site saying a very smart looking apartment block was planned, but there was no sign of any construction. Nor at the other SHA on East Coast Road. Meanwhile the non-SHA projects were all progressing nicely.

And today - you guessed it - I went and had another shufti.

Here's the SHA in Browns Bay. Best you can say is that at least it's started, though as you can see it's only at the very earliest stage of construction.

Meanwhile the non-HSA apartment blocks on the same street are all finished. Here are two I snapped before, 'The Pines' at 25 Bute Road...

...and the 'Norfolk' at 19-21 Bute Road. Both already have people living in them, though The Pines is still looking for tenants for its streetfront office/retail space.

And at the other SHA on East Coast Road? Nada. Still looks the same as ever. It hasn't made the original target, which was to have 39 apartments finished by "the early part of 2017", according to the blurb on the Auckland Council SHA site (it's the 'East Coast Road, Pinehill' one in Tranche 4).

And finally I thought I'd go and look at another SHA, currently the site of The Brownzy pub on the corner of Beach Road and Bute Road. Nope: nothing underway there yet either, which is a shame as it's a decent-sized pozzie. The Council write-up ('Beach Road, Browns Bay', in Tranche 10) says it will eventually carry 66 homes, with the first ones available by the middle of next year. Can the developers wind up the (still operating) pub, knock it down, and put the new housing up in seven months? We'll see.

Let me finish by saying (as I've said before) that I'm not criticising the owners of these sites in any way. They can develop - or not develop - their own properties to whatever schedule they damn well like, and good luck to them. And as an economist I'm congenitally inclined to believe that they know their own interests better than any outsiders, and it's highly likely - subject to the current capacity shortages in the Auckland building trades - that they'll be making the most efficient use possible of these valuable properties.

But as for the Special Housing Areas as a policy experiment?

My working hypothesis is that they've been an almost complete dud. And I wouldn't rule out that they may even have been counter-productive, when you see the non-SHA sites have gone ahead at full speed while the SHAs have just been sitting there.

Guesses, sure. Small sample size, absolutely. And I'll try and put some numbers around the whole SHA scheme when I have half a mo, and see if I can substantiate what I suspect. But for now, who am I going to believe: the original hype, or my own lying eyes?

Can it keep going?

There was good news today about the volume of new housing consents in Auckland: as Stats pointed out in the release, "Monthly building consents for new homes reached a 13-year-high in August 2017, driven by a spike in apartments and retirement village units in Auckland...Some 10,265 new homes were consented in Auckland region in the August 2017 year. This compares with a peak of 12,937 new homes consented in the June 2004 year (the highest number since the series began in 1991)".

Stats included long-term graphs which put the latest numbers in some perspective, but I've gone back a bit further again (as far as the data series go on Stats' Infoshare database). Here's what the story looks like.

The 'actual' numbers in the graph are an excitable series, mainly because of chunky apartment block consents  turning up in some months but not others. They're volatile enough to turn the seasonally adjusted and trend series into best stabs at what's going on behind the noise, rather than definitive sightings of the underlying reality, so you can't be entirely sure they're on the right track. But after some wavering around the start of this year the trend series (also shown in the graph) now looks to be definitely heading in the right direction.

I've been trying to guess - no stronger - whether the numbers tell us anything about whether we can up the pace any further or whether we've hit capacity constraints. 

On the downside, over the past 25 years we've only briefly been able to keep up 1,000+ periods of monthly consenting.  Something or other has always knocked it back again. Either we've hit some sort of capacity constraint, or the business cycle has put the kibosh on it, with the GFC in particular decimating activity. The latest ANZ business survey wasn't much fun in that regard: only one month, the election and all that, but I particularly didn't like the finding that "A net 26% of businesses expect it to be tougher to get credit". That's bad news for housing developers.

On the plus side, the Auckland labour force has grown quite a bit, and there are more people around these days with building trades skills. Here's what the Household Labour Force Survey shows for people employed in construction in Auckland since 2009 (as far back as Infoshare went, and I haven't time to fossick the Census if it's got longer/better figures).

There wasn't a lot of movement till 2014, but since then employment has lifted from around 50,000 to around 80,000. Recent immigration probably plays some part in this (and maybe people shifting back from Canterbury building sites): where we live on Auckland's North Shore, a good deal of the in-fill development is by Asian developers with Asian crews, including the one literally across the road.

The unknown unknown is probably the impact of the planning process. I've no idea whether the number of consent-approvers is keeping pace with consent applications; I can surmise that (certainly over a time-scale of 25 years) the regulatory requirements to get a consent have risen; I would bet that land-use constraints have got a lot tighter. Net net - who knows, but I'd lean towards a view that planning is at a minimum no less a constraint than previously.

Overall, I'm glad to see the recent pick-up in consents to over 1,000 a month, and it might be a bit curmudgeonly to add "at long bleeding last": it's here, and it's something. But I'm not exactly jumping for joy yet. At this pace (12,000 dwelling units a year) we're still a little adrift of the numbers (14,000-ish?) that people think we need to meet new demand, let along eat into the existing shortfall (20,000-ish?). And while I'd be pleased to be proved wrong this time round, our recent track record suggests we can't keep delivering, or are blown off course from delivering, before we get the job fully done.

Another part of the house price story

Housing is understandably high on the political agenda at the moment. But amidst all the blame-seeking and potential policy responses, one of the big drivers of our high house prices seems to be largely ignored, in part because it doesn't give the pollies any room to point the finger at their opponents.

The reason it doesn't is because it's a circumstance almost completely out of our own hands: the cost of our longer-term fixed rate mortgages is very low by historical standards, and that's almost completely because of international trends. We essentially import world bond yields - as the RBNZ's economists documented here - plus a risk premium for being New Zealand, and the banks onlend to fixed rate borrowers at that rate plus a commercial margin.

Here's a chart of current benchmark (10 year) bond yields across a range of the developed economies, using data from the Financial Times.

Long term interest rates are unusually low mainly because four of the major central banks - in the US, the Eurozone, Japan and the UK - have been keeping them very low by buying bonds (sending their price up and hence their yield down), a policy often known as 'quantitative easing' or QE. It's been part of their plan to give post-GFC monetary policy more oomph: traditionally, central banks have only bothered with short-term interest rates, whereas QE also gives them a good deal of control over longer term ones as well. Low yields in the QE countries have had knock-on effects on yields in non-QE ones like Switzerland.

And 'unusually low' doesn't even begin to describe the outcome. There are now literally trillions of dollars' worth of bonds (some US$9 trillion according to the FT) trading on negative yields: you pay the borrower for the privilege of investing in its debt. You can see in the chart, for example, that the Swiss and Japanese governments can borrow money for as long as 10 years where the investors end up paying the government. Just this week the Austrian government raised five year debt at a 'cost' of -0.165% a year.

We know that our own central bank is keeping short-term rates low - "Monetary policy will remain accommodative for a considerable period" as the latest policy decision put it - and that has been one of the elements in the recent price boom. As floating rates linked to the RBNZ's policy dropped, and household incomes kept growing, there was a surge in mortgage serviceability, which has been one of the big moving parts in the consequent boom in prices. But you knew that.

What's been less emphasised if that even if the RBNZ hadn't cut short term rates to where it has, the rest of the world's central banks dealt us substantially lower longer-term fixed rate mortgages in any event. And that boost to the demand side of the market isn't going away anytime soon. In the US the Fed is getting close to easing back on the scale of its QE (still buying bonds, but not as many), and the Bank of England and the European Central Bank may start heading the same way later this year or (more likely) next, while Japan looks set to keep its current QE going into the indefinite future. Whatever unwinding of QE that eventually materialises is going to be a slow, careful, gradual, medium-term process. There could well be local five year fixed rate mortgages around the 6% mark for quite a while yet.

There's another element to this imported easy monetary policy. Around the world there's been what the investment professionals have been calling "the hunt for yield" or, in more purple moments, "the craze for yield". The traditional widows-and-orphans assets of money in the bank and government bonds have been yielding little or nothing (indeed, US$9 trillion worth of less than nothing). So even conservative investors have been forced either to swallow the unattractive terms on their usual fare - this week Austria sold €3.5 billion of bonds with a hundred year maturity on a preposterously low 2.1% yield - or instead to head into income-yielding assets like property that offer something better.

The local  investor is making the same calculation. Even at current high prices you can still get a 3.5% to 4.0% rental yield on an Auckland house, according to the (very useful) data compiled by interest.co.nz. It's not what a conservative investor would normally be looking for from an investment property, but it beats the bank deposit and government stock alternatives. In our own little way we've got the same hunt for yield: it's not as extreme as in some places  - as the graph shows, our bond yields haven't dropped to Japanese or Eurozone levels - but it's another part of the picture.

And if you think the link between loose overseas monetary policy and New Zealand house prices sounds like the abstract reasoning only an economist could come up with, then you haven't paid enough attention to the Irish house price boom and bust. Ireland, which had been growing like topsy, was gifted eurozone interest rates that were too low for its circumstances. House prices exploded.

Speaking of adding fuel to flames, why would you increase subsidies for first home buyers? As an elementary bit of sketching supply and demand curves on the back of a shopping receipt would show you, the only immediate effect of subsidising the demand for something in fixed supply is to raise its price by the full amount of the subsidy. And it's not only ineffective, it's regressive - a straight transfer from the taxpayer (including all the low earners who pay tax from dollar one) to the house owner. In the longer run, it fattens the margins from housing development, so it could encourage more supply (assuming the binding constraint isn't land-use planning or construction capacity, and it might be), but in the long run we have all joined the bleeding choir invisible, we have snuffed it, we are no more. As a short-term policy it's worse than useless.

But that's this election for you. I'd thought we'd got past the worst of elections as they used to be, but this all-party lollyscramble, with its side dishes of daftness and deceit, is pure 1970s.

Bums on diggers

The other day I was poring over the NZIER's latest compilation of consensus forecasts - an invaluable resource from many perspectives, not least for establishing the base scenario underpinning current financial market pricing - and I came across something really interesting*, which I've highlighted in the table below. It's the one that helpfully shows not only the consensus expectation, but also the high and low stabs at each variable.

That's a pretty remarkable range of views on the outlook for housebuilding. At one extreme you've got a scenario where - I'm abstracting here, but I think it's okay - the wind-down of the Canterbury rebuild will outweigh new housing starts in Auckland, detracting from overall GDP, while at the other end the Auckland market will go gangbusters, growing far more than Canterbury will contract, and boosting GDP.

To put some numerical perspective on it, the cumulative difference between the bullish and bearish housebuilding scenarios is $4.9 billion by March '20, which is equivalent to 2.1% of our current annual GDP. That's the difference between an expansion that's vigorous enough to keep the unemployment rate trending down, and one that would see it drift back up again.

If we assume that the wind-down in Canterbury is the relatively predictable moving part, then much of the forecast uncertainty boils down to differing views about the likely strength of house construction in Auckland. Presumably the bearish view is based on either low starts to begin with, or capacity constraints of one kind or another (labour, land, planning chokepoints) preventing potentially higher numbers of starts from getting underway.

And then this morning I saw MBIE has just published the latest vacancies data. Here it is, showing vacancies by occupation (there's a similar pattern by skill level). There's strong and rapidly increasing demand for the occupations you'd likely be looking for on the building site.

It could be that employers are having no trouble filling these vacancies: all we know for sure is that the hiring signs are out, and we don't know whether they're actually finding the people they're advertising for. And so far the Auckland numbers aren't flashing red lights: as the table below shows, Auckland is in the middle of the pack for year on year increases in vacancies.

It's also encouraging (although it was a few months back now) that the NZIER's March quarter Quarterly Survey of Business Opinion found that

Building firms...report a continued easing in the shortage of unskilled labour, although skilled labour remains very difficult to find. With the surge in net migration driven by an increase in the numbers of people coming in on work visas in the trades profession, this is helping to alleviate some of the labour shortages as construction activity continues to grow.

Though the QSBO can be read different ways: as the Reserve Bank put it in its latest Monetary Policy Statement (p21)

As suggested by the March Quarterly Survey of Business Opinion (QSBO), capacity constraints are tightening. Firms are reporting labour shortages and, more recently, some increased difficulty in obtaining finance. This appears to be related to the tightening in bank lending standards for residential property development and pressures created by rising construction costs

My instinct is that capacity constraints in Auckland are likely to be a worry. I'm not temperamentally inclined to restrict immigration in the first place, but if people are minded to, they ought to be careful about the risk of impeding the housing build we need to do, and the equally necessary infrastructure build, which calls on much the same labour force skills.

The Labour Party in its latest immigration policy at least had the wit, albeit in a clunky Gordon Brownish micromanagement way, to realise there's a potential issue here. It proposed that

Residential construction firms could hire a skilled tradesperson on a three-year work visa without having to meet the Labour Market Test if they pay a living wage and take on an apprentice for each overseas worker they hire. The number of places will be limited to 1,000 to 1,500 at a given time, which we expect will be additional to the construction work visas issued under the existing rules.

At the moment, I wouldn't give two hoots about Labour Market Tests and apprenticeship quotas. If there's an Irish lad on his gap year after secondary school, or anybody else prepared to get the roof on the house or pour the cement on a road, bring it on.

*Bearing in mind that this is an economist's idea of  'interesting'

Take advice? Moi?

Most years - they skipped 2016 - the OECD comes out with one of its Going For Growth reports. They're a big thing for the OECD: its Director General says that "Going for Growth is the OECD’s flagship publication on structural policies. Its purpose is to help policymakers set reform agendas for the wellbeing of their citizens and to achieve strong, sustainable, balanced and inclusive growth".

Don't know why they bother, frankly, if New Zealand's reactions are typical. We give the reports close to zero coverage in the media, and our governments sleepwalk on, taking too little heed of the OECD's advice. From time to time we do some patchwork or catch-up improvements, but rarely if ever deal to the issues properly. All of the recommendations in the 2013 version, for example, were still there in the 2015 one (if you want to see previous years, they're here).

And that's a real shame, because if you're in New Zealand's position, where we seem to be doing quite a lot of good things but getting little payoff by way of faster productivity growth, you'd think that we would be lapping up informed ideas on how to get more traction.

So, what are they saying we should do?

The OECD's got two approaches. One is a "what everyone should do" piece, which you can read here, and the other is a country-specific piece, which for New Zealand is here.

At the "everyone" level, the OECD has a long shopping list, some of which don't apply a lot to us, because - while we've still things left undone - we did a pretty good reform job in the Eighties and Nineties. But some do, and I was especially interested in their recommendations on infrastructure. As I've mentioned before, we're currently chronically unable to roll out enough infrastructure in good time: the OECD says that

The most direct contribution of policy to growth of the whole-economy capital stock comes from public investment and recent empirical work suggests a large positive effect on productivity. Solving infrastructure bottlenecks, such as those in transport, can also contribute to stronger labour utilisation, through enhanced labour mobility, and to better environment protection, through lower carbon emissions. Considering the post-crisis fall of government investment as a share of GDP...and the current macroeconomic context, enhancing core public capital, and in particular the capacity and regulation of infrastructure, is a priority for both member and non-member countries.

Everything we do (and we're not alone in this) is a dollar short and at least a decade late, and I have a strong suspicion that it's one of the bigger reasons for our relatively poor productivity performance by international standards (have a look here). With financing costs at historically low levels, we ought to be getting on with it in any event, but it would be nice to think that the OECD's advice will give a further rark up to the government's Budget plans on the infrastructure spend.

For New Zealand, the shopping list is:

• Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors
• Improve housing policies [a new one added since the 2015 report, and no surprise given what's happened to house prices]
• Reduce educational underachievement among specific groups
• Improve health sector efficiency and outcomes among specific groups
• Raise effectiveness of R&D support

There are detailed policy recommendations under each of the headings. On housing, for example, the report says by way of preface that "Reducing the scope for vested interests to thwart land rezoning and development that is in the public interest would result in greater agglomeration economies and housing affordability, which would disproportionately benefit lower-income households", and it says we should

Implement the Productivity Commission’s recommendations on improving urban planning, including: adopting different regulatory approaches for the natural and built environments; making clearer government’s priorities concerning land use regulation and infrastructure provision; making the planning system more responsive in providing key infrastructure; adopting a more restrained approach to land regulation; strengthening local and central government emphasis on rigorous analysis of policy options and planning proposals; implementing pricing to reduce urban road congestion; and diversifying urban infrastructure funding sources.

That's a pretty good summary of the choke points - each of us might emphasise one rather than another, but they're all there - and of what to do to relieve them, and the same goes for their other detailed recommendations.

But our track record on responding quickly and fully is, sadly, poor. Oscar Wilde said he could resist anything except temptation: New Zealand governments can take anything except advice.

Postscript (March 24): Michael Reddell has also written about this latest Going for Growth report in his post, 'What does the OECD really have to offer us?'. As his title suggests, he's less enthused about the OECD's ideas. And that's okay: opinions make markets.

Are interest rates really biting?

"Increasing mortgage interest rates", the Reserve Bank said on page 18 of its latest Monetary Policy Statement, "combined with a tightening of loan-to-value ratio (LVR) restrictions in late 2016, have contributed to a slowing in the housing market".

Moderating the heat of the housing market may be welcome - though previously low interest rates are far from being the only thing that's been inflaming the market - but otherwise I got a bit worried that higher rates might be crimping the economic outlook. If the average or marginal household is now carrying a bigger mortgage, and mortgage interest rates go up, the impact on already cramped family budgets could see unpleasant things happening (via consequent necessary cutbacks in household spending) to the currently strong state of the economy.

And then I thought, hang on a sec. Yes, it's true that some mortgage interest rates have started to increase. The chain of events is, US bond yields have risen, especially after Trump was elected; NZ bond yields and other local long term interest rates have gone up as well (they tend to track the US rates plus a credit premium); and this has fed through with a lag (via higher funding costs for the banks) to higher fixed mortgage rates. The graph below shows the past year's trends for some of these rates*. Rates bottomed out around the middle of last year and have risen a bit since.

But how much these increases have been contributing to a slower housing market (or indeed slower anything else) is debatable. The first time borrower may be finding it slightly tougher going. But for existing borrowers, most folks these days are on fixed rates - at the end of December last, there were $182 billion worth of fixed rate mortgages compared to $53 billion of floating rate - and they won't have noticed anything, because they haven't come to the end of their existing fixed rate arrangement.

And then I wondered, well, what happens when they do roll over from their existing fixed rate? Will they roll over into something that will have the household worried about how to balance its books?

Quite the reverse, actually. Here's what a borrower who took out an x-year fixed rate mortgage x years ago would pay to roll over into another x-year fixed rate mortgage today (or at least at the end of December, the  latest available RBNZ data, though today's rates are very similar).

Other than for the 1-year fixed rate, where it's effectively the same, the household with an expiring fixed rate mortgage will be rolling over into a lower borrowing cost for another mortgage of the same maturity as before. Large falls in fixed rates in recent years dominate the small increases in the last few months. For most borrowers in coming months, the mortgage rollover will boost disposable income, not restrain it.

There's also the possibility, though, that local fixed rates will keep on rising and upset the calculation. Let's suppose that US interest rates rise by 0.5% during the course of this year (roughly in line with what the latest, February, Wall Street Journal poll of US forecasters expects for US 10-year yields). And let's assume all local rates rise by the same amount. By the end of this year, 3-, 4- and 5-year fixed borrowers would still be rolling over into cheaper loans, but 1- and 2-year borrowers would be paying a bit more, as would first time borrowers. Overall, this wouldn't represent a big squeeze (or possible any squeeze) on household budgets.

So I'm inclined to think that rising mortgage rates will not be any near-term threat to the economic outlook, and somewhat unconvinced that they can have have played much part to date in a slowing housing market. There may be other reasons for a national cyclical slowdown - the latest BusinessNZ/Bank of New Zealand survey of manufacturing had a hint of the construction sector hitting capacity constraints, though on the other hand the equivalent survey of services showed there is still "swift, broad-based, growth occurring in the services sector" - but interest rates, to date, don't look like much of an actual or potential brake.

*Local fixed rate mortgage rates come from the RBNZ's site, but they're not where might think they are (you'd likely expect in 'Statistics', 'Exchange and interest rates', 'B3: Retail interest rates on lending and deposits'). However you can find the full range of fixed mortgage rates in 'Statistics, 'Registered Banks', 'S8: Banks' mortgage lending ($mn)'; they're in section E6. For the very latest rates, if you go to the bottom of the 'Mortgage Rates Table' in the 'Mortgages' part of the Good Returns website, you'll find the up to date median floating and fixed (1,2 and 3 year) rates.

Has planning been worth it?

There was a big turnout on Tuesday night in Auckland at the latest Law and Economics Association of New Zealand (LEANZ) event - a panel discussion featuring three members of the Auckland Unitary Plan Independent Hearings Panel. In fine interdisciplinary LEANZ style, they were Judge David Kirkpatrick (the Panel chair), planner Jan Crawford, and economist Stuart Shepherd.

Chatham House rules, so I can't say anything specific about who said what, but I can safely say that all three were very good speakers - informed, persuasive, congenial, thoughtful, and able to put technical stuff into plain (or at least a good deal plainer) English. So full marks to the organisers, Richard Meade (AUT and Cognitus Advisory) and Andreas Heuser (Treasury) for putting it all together. Special thanks to Simpson Grierson who kindly hosted the event: the LEANZ caravan would be unable to travel on without these corporate oases.Though you can help, too: here's that LEANZ site again, so you can pay your $75 sub ($50 for students).

So, noting again that these are my views and not what the presenters may or may not have said, what did I take away from it?

Clearly the members of the Panel did the best they could with the machinery they had to drive, and in particular they aimed to get the availability of housing land up to where it needs to be (though there may be a developing, and less known, shortage of land for business purposes). And they had the added complexity of having to amalgamate the previous jumble of territorial authority plans into one overall plan for the new one-city Auckland, as well as being lumbered with a process not of their choosing. In the circumstances, they did a fine job.

But it's also clear that the planning process for Auckland has become enormously top-heavy and inefficient. Like other parts of our regulatory apparatus (such as the price control 'Part Four' bits of the Commerce Act) it badly needs paring back to something quicker, more targeted, cheaper, and more efficient.

In part the current clunkiness comes from importing an industrial-strength First World planning policy infrastructure, without paying enough mind to what might work for a small distant economy with not-quite-First-World incomes to pay for it. And in part it's because plans have been allowed to become voluminous grab-bags of miscellaneous agendas (price control, income redistribution, architectural design preferences). I've written previously about one bonkers 'food security' provision, where growing vegetables was prioritised over housing development.

The complexity largely speaks for itself, but here, as just one tiny example, is the legend you'll need to understand the Unitary Plan maps.

Six kinds of residential zone. Five kinds of 'open space'. Ten - ten! - kinds of business zone. Five kinds of rural zone (not counting the Waitakeres and the Hunuas, which are two more zones of their own). And seven kinds of coastal zone. 'Micromanagement' doesn't even begin to describe it.

And it's not just a matter of economic inefficiency, though the purely economic costs must surely be substantial: a fair slab of potential housing development, for example, reportedly got put on hold until the Unitary Plan finally saw the light of day at the end of a nearly three year process. It also carries social costs. The process is now so cumbersome and protracted that it is very difficult for non-experts to have their say - a level of difficulty that could threaten to undermine the perceived legitimacy of the outcome amongst the wider public. .

I'm also not sure that the planning process has fully got to grips with what you would imagine would be one of the core outputs of any plan: integrating the plan, infrastructure provision, and the intentions of owners/developers of resources. All three need to be aligned for anything significant to happen. Nor are enough people making even back of an envelope attempts to estimate the net benefits (widely defined) of plan provisions. What about those 'volcanic viewshafts', for example, which protect people's ability to see (say) Mount Wellington from their home? I wonder how Tokyo would have got on if it had to be designed so everyone could see Mount Fuji: not very well at all, I'd say. And if people were given the choice of their kids getting houses (say) $200,000 cheaper but without a view of Mount Albert, which would they pick?

Which brings me to my final point - the role of markets. Yes, we all know that plans may be needed to help address the externalities and coordination issues that can crop up in dense conurbations. But the role of markets and prices (and indeed economic analysis) hasn't been so much assisted as largely displaced. In particular, the housing market has been distorted and suppressed.

The Salvation Army's latest State of the Nation Report, for example, says (p50) that

based on an average occupancy of three people per dwelling...and given that Auckland’s population grew by an estimated 45,000 people for the year to 30 September 2016, accommodating this number of people required 15,000 additional dwellings. Consents for new dwellings over the same period lagged this number by 5000.

Over the past five years, the cumulative shortfall in new housing to cater for Auckland’s population growth is estimated to be almost 18,000 dwellings. 

The Sallies snarked that the recent level of consents (10,000 a year) "has been celebrated as proof that Auckland’s housing problems are being resolved by the market", but that "in a slightly longer context this record is, however, not remarkable". The reality isn't that the market has delivered, but inadequately. The reality is that the market has not been allowed to work properly, or, for some places and activities, not allowed at all.

In sum, on the one side, you have an uncertain quantum of planning benefits, and on the other, clearer and large costs. I wonder what the net outcome has been?

How strong is strong?

The economy's ticking along nicely. Tomorrow's GDP numbers for the September quarter are expected to show an 0.8% increase for the quarter, which would make it 3.6% for the year. And virtually all the recent data have been solid to robust. On the solid side, for example, there's the December quarter Westpac McDermott Miller consumer confidence index ("New Zealand households are in the mood to celebrate. However, it looks like the party will be more of a relaxing family barbeque, rather than a fullblown rager") while down the robust end we've had the latest (November) BusinessNZ/BNZ Performance of Services Index ("a picture of strength"). In per capita terms, it's not the boomer it might look like at first sight, and I'll come to that, but it's still a pretty picture.

Unsurprisingly, forecasters have been upping their estimates of what's down the track. The latest (December) quarterly consensus forecasts collated by the NZ Institute of Economic Research showed that likely GDP growth in the year to next March is now reckoned to be 3.5% (the September quarter consensus had picked 3.2%) and there has been a marked revision upwards for likely employment growth, which is now expected to be a stonking 4.8% compared with the 3.2% that seemed the best guess back in September. Forecasts for growth and employment over the three years to March '20 have been nudged a bit higher, and there isn't a single forecaster (out of the 9 polled) prepared to call a recession over that period.

But you knew that. What's my point? It's this: I reckon the short-term outlook may be even stronger than people currently expect.

Recently I've been playing around with my little Excel forecasting model, and I can't easily get the GDP growth numbers for the next year much below 4%. I've assumed there will be some kind of wealth effect on consumer spending, and I've assumed that there is enough capacity in the building trades to allow for another reasonably substantial rise in housebuilding. If that's your view of the world, numbers north of 4% start shimmering into view. Interestingly, according to the ANZ confidence surveys (for example, here), "Our confidence composite gauge (which combines business and consumer sentiment) is pointing to GDP growth accelerating to north of 4%. Capacity constraints (getting skilled labour) will put a dampener on that but we like the spirit".

I could easily be wrong. Perhaps New Zealand households have suddenly had an outbreak of financial prudence, or as RBNZ governor Graeme Wheeler put it in a recent speech, "Growth in real consumption per capita has averaged 1.6 percent pa in the current economic cycle – about ½ percentage point below the post-1993 average growth rate of 2.1 percent, despite the rapid increase in housing wealth...This more cautious consumer behaviour may reflect a reassessment of the ‘permanency’ of capital gains from household assets, and greater caution about the level and durability of future income growth".

Maybe. But I'd still be rather surprised if families, sitting on the biggest financial bonus of their lifetimes (especially in Auckland), continued to spend more slowly than usual. They may well (sensibly) discount the scale and the ultimate bankability of their winnings. But I don't see some wealth-related spendup being delayed for ever. Sure, some of it won't flow through to the GDP numbers: the new car and the trip to Melbourne go into the 'imports' box. But some of it will.

And on the capacity side, things are certainly tighter than they were: you could certainly read Stats' numbers on the recent slowdown in the growth of housebuilding (and of construction on general) as evidence that it's getting harder to assemble the crew for the next project. But on the other hand residential construction as a percentage of GDP isn't even up to past levels yet, as the chart below shows, and given the intense profit incentives to get houses onto the market, you'd expect us to go past previous peaks. My guess is that there's a dance in the old dame yet. And I also suspect (based on the technical economic methodology of Walking With Your Eyes Open Around The North Shore) that houses are going up quicker, which will help.

An economy that could well grow by 4.0% to 4.5% rather than the 3.5% that most analysts see in the cards would also part-explain a bit of an oddity - our low per capita GDP growth. In the June quarter our GDP (expenditure basis) was 3.8% up on a year earlier - but up by only 1.7% on a per capita basis. That was because the population grew by 2.1% (a natural increase of 28,200 plus net immigration of 69,100).

You look at that 1.7% per capita growth, and you could think two things. One is that it carries on our run of relatively slow productivity growth, and that's got to be right to some extent. But you could also think: hang on a sec. This isn't an economy with the look and feel of distinctly modest per capita growth. I appreciate that's an impressionistic judgement call, but I suspect the other leg to the apparently low per capita growth numbers is that they're a bit behind the actual pace of where the economy is (and is heading next).

It doesn't mean we've suddenly solved our slow-growth productivity problems. If anything, our reliance on construction in this cycle points them up: what we gonna do when the houses are up and the earthquake damage is fixed? And it doesn't mean that tomorrow's GDP number is going to be a little purler (any single quarter tends to have lumps in it). And 2016 was the year that gave us Brexit and Trump, so who knows what the next madness will be or what it might do to us.  But net net net, it wouldn't be too surprising if the next six to twelve months turned out rather better than currently expected.

Good ideas - but now what?

Yesterday's report from the Productivity Commission, 'Achieving New Zealand's Productivity Potential' (press release here, overview here, whole thing here), is full of good ideas.

In the housing market, for example, their proposals would have the happy outcome of pressing both the equity and efficiency buttons at once. In addition to dealing to people sleeping in cars, a better functioning market would lift productivity: "A housing market that responds to demand pressures facilitates labour mobility and improves productivity by allowing firms access to a deeper labour market, as well as more opportunities for specialisation, innovation and technology spillovers. For workers, being able to live in places where their skills are most valued improves their incomes" (p65).

The Commission is big enough and bad enough to push its own barrow, so I'm not going to recycle its full list of proposals, but I would like to add a little bit of support for its competition ideas.

As the report says, "Lifting competitive intensity is key to improving services sector performance...Increasing competition would energise market selection effects, making it less likely that productive resources – including skills and intellectual property – get trapped in lagging slow-growing incumbents and, instead, flow to innovative new entrants" (p69). And trapped they are: as the report overview notes (p7),  "a relatively long and persistent tail of productivity underperformance exists in New Zealand", with not enough competitive pressure on it to either lift its game or get off the pitch.

The Commission has two suggestions, and I'm fully behind both of them (though I should disclose that I may be a teeny bit involved in helping to get the second one on the agenda).

The first one is reform of s36 of our Commerce Act. Life has moved on, particularly in Australia, since the Commission started running with this, so here's the Commission's latest take (p69):

In its inquiry into boosting services sector productivity, the Productivity Commission found that Section 36 of the Commerce Act – taking advantage of market power – is impractical and needs to be reviewed. Under this Act, abuse of dominance cases are assessed using a “purpose test” that the conduct had an anti-competitive purpose and a “counterfactual test” that the conduct could not have occurred in the absence of market power.

This approach is increasingly out of step internationally, with competition law in almost all other OECD countries focussing on whether a dominant firm’s behaviour creates demonstrable harm to consumers (OECD, 2005). Following the Harper Review on competition policy in Australia – which recommended shifting to an effects-based test of abuse of dominance – the New Zealand approach is looking increasingly unusual and unworkable.

The second is proactive kicking the tyres ("market studies") where there might be competition problems (p70):

Much of the debate on competition in New Zealand has been from a legal perspective and very little is known about the economic impact of competition in New Zealand markets. Given signs of weak competition in conjunction with high rates of return in some parts of the economy, policy-relevant research aimed at better understanding the role of competition in the economy would be highly beneficial.

For example, the advocacy role of the Commerce Commission in promoting competition as means to enhanced economic efficiency and wellbeing could be improved. Specifically, the Commerce Commission should be able to conduct market studies without reference to a merger application or other investigation, as is the case in Australia. These changes would help strengthen the competition culture among policymakers and the public. For example, the ability to conduct market studies would allow the Commerce Commission to investigate potential barriers to competition in poorly performing but highly profitable industries.

A policy combo aimed at effectively policing any Big Beasts impeding the competitive process, and at looking to see whether poor outcomes but high profits are down to a lack of effective competition, sounds like an excellent double header to me. And I'd stress that this is not from any anti-business perspective: as the Commission points out (pp67-8), it is other businesses that wear the input costs of whatever old Spanish practices may be operating in the cosier corners of the economy.

Which is where MBIE could usefully do its bit to improve the labour productivity of the economy by letting us know what it's going to recommend on s36 and market studies. It's just over a year now since MBIE started down this path, and the final round of submissions and cross-submissions closed four months ago.

It's time to hear from you, guys.

Finally...

At last.

Last month, workers arrived and started to put advertising hoarding up...

...announcing that this former New World supermarket in Browns Bay...

...is going to be transformed into this (artist's image) very snazzy apartment block...

...of 56 apartments and 8 penthouses, with "impressive sea views" (and they will be) from level 2 up. A much needed boost to the housing supply and a much better use of prime land.

Finally.

And I say 'finally' because this is one of those Special Housing Areas where development was meant to be expedited, but where there has actually been a lag of over a year between designation as a Special Housing Area, in August 2015, and anything at all happening on the ground. The pretty pictures have been put up, and there's a sales office opened around the corner, but not a sod has yet been turned by way of actual construction.

And as I mentioned in previous posts (here, here and here) the delay in the supposedly fast-track site is all the odder, because non-Special-Housing-Area apartment blocks have been going up like billy-o in Browns Bay, including down the same street.

Now, I don't have any beef with the developers. It's their precious, and they can take their own good time to do whatever they want with it, and it looks like they're going to deliver something very nice indeed. And as we learned today (from pages 24-5 of the latest Monetary Policy Statement), there are severe capacity constraints in the Auckland building trade:

The construction industry is reportedly facing several constraints that may impede future activity, such as access to labour, materials, and funding. Most contacts are struggling to find labour to fill a wide range of positions. The labour shortage is reportedly most acute in Auckland,where high living costs are deterring construction workers from relocating from Canterbury or immigrating from overseas.

Contacts note that it is also becoming increasingly difficult to access construction materials, with shortages becoming acute for some materials. This is leading to some construction firms facing long wait-times and cost increases.

There has recently been a tightening in credit availability in the construction industry, constraining some firms’ ability to increase activity.Contacts note that new and small firms, as well as apartment developers,have been impacted most severely 

So maybe the developers couldn't have got it going any faster, even if they were dead keen to. And as I've said before, this is a sample of one, and maybe other Special Housing Areas have been bounding along faster than their non-SHA counterparts.

But it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why.

Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated - not a good enough approach to one of our most pressing national issues.

Auckland and Canterbury housing: what next?

The latest statistics on building consents came out this morning, and I've been keeping an eye on them mainly because Auckland housing consents at the start of this year actually declined for a while - a deeply worrying development, given that consents even before they dipped were not keeping pace with new demand for accommodation, let alone eating into the backlog of existing unfulfilled demand.

Here are the latest data for Auckland dwelling consents. I've included the 'actual' data and the 'trend' data': the 'trend' version is Stats' best effort to abstract from the (quite considerable) month to month volatility and to show us the underlying picture. I've gone back to 1995, partly because that's where the 'trend' series starts in Stats' database and partly to put the current rate of building into context.

It's good news as far as it goes. That dip has gone away, and it's onwards and upwards in recent months. It's still not clear why we had that earlier dip: some people I've spoken to said that developers were waiting to see the shape of the Auckland Unitary Plan, and maybe that's true. But it's somewhat at odds with the recent rises, which predate the publication of the Plan (it went public on July 22 and was only signed off by the Council on August 19). Perhaps there'll be another hiatus as the Plan is appealed, or maybe developers aren't fixated on the Plan at all: we'll have to wait and see.

Another possibility is that the trend-detecting algorithm at Stats had a temporary hissy fit and is now back on track, though the downside of that thought is that if it detected dips when there weren't any, maybe it's finding surges when there aren't any, either. And yet another possibility is that the month to month numbers (especially for apartment blocks) are just too volatile to find a reliable signal in all the noise, even if your trend-spotting software is up to scratch.

But in any event, let's bank it - as far as it goes, which isn't far enough. You can see for yourself that this recent rate of consenting is getting closer but still isn't back up to the levels of the early 2000s, and on a per capita basis it's still well adrift: urban Auckland's population was around 1.2 million in the early 2000s, and it's nearer 1.5 million today.

And it's not just an Auckland problem, either: nationally we seem to have had increasing difficulty in getting homebuilding activity up to the level it needs to reach. This chart (from Stats' info release today) shows that we are currently consenting some 30,000 dwellings a year (and that's inflated quite a bit by the Canterbury rebuild), but we were regularly clocking 30,000 and more in the early 1970s when the population was only around 3 million compared to today's 4.7 million. There are more sophisticated ways of measuring it, but I doubt if they'd shake the basic conclusion, which is that we need to get the supply side of the market operating a good deal more responsively.

I hadn't been following the Canterbury rebuild numbers closely: I had a vague impression that peak rebuild was somewhere around now. And indeed it is, on these figures from the June Building Activity Survey: the total value of building work in the Canterbury region is still going up a bit, but looks like it is plateauing.

Within the overall total, the housing rebuild is actually past its peak, which was back in late 2014 and early 2015, while the non-housing rebuild is still growing.

Today's dwelling consents figures for Canterbury show the same picture: consents also peaked back in the second half of 2014.

There's still a lot of housebuilding going on in Canterbury, and self-evidently the job can't be finished, but hopefully the recent modest drop in activity is a signal that the bulk of the demand has been met and there's less left in the pipeline still to do. 

The other thought that emerges from these data is that as far as the impact on overall GDP growth is concerned, the boost from the Canterbury rebuild has largely run its course. Ideally the construction sector would swing more or less smoothly from meeting demand in Canterbury to meeting demand in Auckland, though as noted above our national ability to meet demand has become progressively creakier. We could even see further GDP growth if the Auckland build started to become larger than Canterbury's. But overall it's beginning to look as if we're going to find something else to do with our resources if we want to keep 3% growth going.

Interesting detail from today's Monetary Policy Statement

There is some really interesting material in today's Monetary Policy Statement (pdf file).

On the downside, there's an analysis of world dairy production, which shows (in the graph below) a strong and probably ongoing surge in world dairy supply. We can't see the demand curve as easily, but it may not be strong enough to absorb this new supply: as the MPS said, "While demand for dairy products is expected to be supported in the long term by growth in emerging markets, high global production is likely to weigh on prices in the medium term. These factors have led the Bank to revise down its medium-term assumption for whole milk powder prices". I'm no expert on dairying, but unless there is some quick and large fall in the NZ$, I'd say the already high levels of financial stress on our dairy farmers are going to be stronger, for longer. Not good at all.

Housing is top of mind for a lot of people at the moment. Here's a fascinating graph: look at that black line in the graph showing house price inflation ex Auckland and ex Canterbury. Basically it shows that quite a few people have been saying, "My house in Pakuranga is worth $1.5 million? Sold, it's yours, I'm off to Nelson", and quite a few other people have been saying, "Here come those jafas. Jack the price up".

Is it all going to fall over anytime soon? No, says the RBNZ. It has house prices still rising, at a national level, over the next few years, though rising at a far slower rate. We'll see.

If I parted company with the RBNZ over any of its analysis, it's over net migration and our output gap. On migration, the RBNZ has net migration dropping away quite a lot, and reasonably quickly. They could be right, but I'm more inclined to believe any drop-off will be more modest than that. There seems to be a political anti-immigration head of steam building up which might curtail inflows, but if that doesn't eventuate, our relative cyclical positioning in the global economy seems to me to be more consistent with net immigration holding up more than the Bank is picking.

The output gap - is there lots of spare capacity (a "negative" output gap, and so little domestic inflation), or very little (a "positive" gap, with stronger inflationary pressure) - is a key variable. Measuring it is inherently iffy, but the RBNZ's best guess is that the economy is currently roughly at capacity: the output gap is neither strongly positive nor strongly negative. As the graph below shows, the Bank believes the output gap will turn increasingly positive in the next couple of years, helping to push prices up.

I'm not quite there myself. On a very basic calculation, if the labour force keeps growing at its current 1.7%, and business investment grows by 6% (the Bank's forecast), the economy has the potential to grow by around 3.1% (two-thirds weight on labour, one-third on capital), plus throw in some modest overall productivity gain, and you get to 3.3% or 3.4% growth in the country's output capacity. If the economy actually grows at around the same rate - which is the Bank's forecast - then the output gap doesn't change at all, and domestic price pressures don't build up like the Bank expects. Its job of getting inflation back to 2% will be harder than it thinks it is.

But we knew that.