New Zealand for sale

News and views from New Zealand – Dennis Dorney

At the risk of being boring I must again mention the struggles of the Reserve Bank of NZ in trying to contain the ongoing housing bubble caused by successive Governments neglecting to build enough houses. I had predicted previously that the outcome could only be to encourage speculators at the expense of first home buyers.

Its September home mortgage figures showed that the banks lent $4.2 billion of which only 10% went to first-home buyers and over 25% went to property investors.

Meanwhile Westpac looks set to offer thirty year interest-only loans, which can only fan the flames and leaves the loan holders as tenants in their own homes, virtually for life.

Coincidentally direct lending to business was only $67 million, which suggests that the much-vaunted ‘rock star economy’ is either fiction, or is happening in spite of our government, not because of it. When banks are asked to justify their existence, they invariably point to their essential role in bankrolling the nation’s capital requirements. Instead their risk-averse policies simply bid up the price of housing in Auckland, while creating very few jobs. This cannot be for long a sustainable tactic.

The latest idea from the Reserve Bank is to control lending to landlords (i.e speculators) with the objective of reducing total demand. Unfortunately due to the drop in our major export (Kiwis migrating to Australia to find work) and the resulting net immigration figures (45,414 last year), the Reserve Bank’s manoeuvres look futile.

Kiwis are not, officially at least, our main export. That honour goes overwhelmingly to dairy produce. October figures for trade with China, our major trading partner, show a deficit of $0.9 billion, mainly because dairy auction prices have fallen dramatic-ally after last year’s record prices.

This is worrying because the present government has stated its ambition to double total exports by 2025. That is optimistic for manufactures (which have fallen by about 15% in a decade) and foolish, regarding dairy produce, because the benefits are disputable.

Dairy farms are heavily in debt. The Reserve Bank says the diminishing forecast payouts may remove at least $5 billion from the economy next year (about the annual cost of rebuilding Christchurch) and could result in rising loan defaults if the trend persists.

Farming is a relatively poor users of labour, so the income is only part of a more complex picture. The farms also have a detrimental effect on the environment, especially water quality, which is spoiling our “Clean, green” image.

This may affect our tourist industry, which is second only to the dairy industry in terms of foreign exchange earnings. It is labour intensive, requires little capital investment and is very important to towns like Dunedin, which together with its University, largely keep the town afloat. For them the governments cavalier attitude to the environment is of real concern.

The present vulnerability of some debt- burdened farmers and the importance, and relative cheapness, of our tourist businesses has attracted a large number of overseas investors to purchase land, houses, farms and tourist-related businesses. Because the Chinese are the biggest buyers, opponents of these sales are accused of racism but that is not true. NZ is one of the easiest nations in the world in which to buy land, so there are investors from around the world. The Chinese are simply the biggest and most co-ordinated.

The question needs to be asked “Are such purchases good for NZ in the long term?” Free Market supporters will say that we need the capital investment and expertise that these speculators bring. In the case of high-tech companies that might be true but, as I showed at the beginning, there is not a lack of capital available in NZ – it is simply misallocated. As for expertise, I always understood that New Zealand farmers have more expertise than most competitors. New Zealand raised its wine industry up from scratch and it became respected for its quality. That’s when the investors moved in. Australia can tell a similar story.

In the last year a Chinese investment company, Shanghai Pengxin, bought out a farm group, Crafars Farms (8000ha), which was in receivership. It followed up by buying the vast Lochinvar Station (13,843ha) and has a controlling interest in SFL Holdings, which has bought 4000ha from Synlait Farms.

Historically NZ has concentrated on selling milk solids, which has little value-added content, even though the profits from value-added products are higher.

Synlait is building a plant to produce finished infant formula for the Chinese market, so the Chinese interest here looks like an ambition for vertical integration, in which case the following news snippet may be highly relevant:-

“Inner Mongolia Yili Industrial Group Co Ltd has announced that its Oceania production base in Waimate, south of Timaru, into which they have already spent 1.2 billion yuan ($240 million), will be the largest integrated dairy production base in the world”. Interesting.

And the interest in tourism? Not long ago a Chinese company failed to convince the Dunedin Council that it needed a 27 storey hotel. Undeterred by this Shanghai Pengxin (again) is now the owner of the Queenstown Hilton Hotel for an undisclosed amount.

While all this serious stuff is going on, Kiwis are rivetted by the possibility of a referendum on a new NZ flag. If we wait just a few years I think I can guess what that flag will look like.

Dennis Dorney is an ERA member living in New Zealand