The Organisation for Economic Co-operation and Development, the ‘rich countries club’, conducts an economic survey of its members. They just published their latest (2017) edition for New Zealand, which makes for some interesting reading.

While the OECD’s reviews reflect its own views about what’s going right and wrong in its members’ economies, it sends staff to check out things on the ground. This usually involves working with government departments in the host country and holding a lot of meetings with local experts and interested parties. (For instance, in a professional capacity, I attended a workshop for the OECD’s most recent environmental review last year.)

As a result, the OECD’s findings are usually inflected by local perceptions of problems and opportunities. This year’s review has a strong focus on New Zealand’s cities: in particular, around the need to improve housing affordability and strengthen opportunities for agglomeration economies.

Here’s their one-page headline summary of what’s going on in the New Zealand economy:

New Zealand continues to enjoy a strong, broad-based economic expansion

Strong economic growth is being driven by booming tourism, strong net inward migration, solid construction activity, and supportive monetary policy. The fiscal position is sound, with low public debt and a balanced budget. The major vulnerability facing the economy is high levels of household debt associated with rapid house price increases, particularly in Auckland. New Zealand is also exposed to protectionist trade policies abroad and to slowing Chinese economic growth. While the short-term economic outlook is strong, there are long-term challenges from low productivity growth and a changing labour market.

Productivity remains well below that of leading OECD countries

Labour productivity is well below leading OECD countries, restraining living standards and well-being. Productivity is held back by a lack of international connections, agglomeration economies and scale; weak competitive pressures; low rates of capital investment; and meagre research and development activity. Opportunities to address these factors include reducing barriers to foreign direct investment, lowering the corporate tax rate, expanding infrastructure funding options to increase housing supply (preferably through densification), reviewing the insolvency regime and the current provisions for misuse of market power, and increasing support for business innovation.

Employment has been shifting towards high-skilled occupations

Employment has shifted towards high-skilled occupations, a trend that is likely to continue with further diffusion of digital technologies, including Artificial Intelligence. New Zealand has high levels of skills but also high levels of mismatch between jobs and qualifications. As in other countries, people will need to acquire more initial education in fields in demand and upgrade or reorient their skills during their working lives. Improving education achievement in mathematics would provide more young people with good job prospects in fields such as engineering and computing. With more workers likely to be displaced over the next 10-20 years, there may be a need to strengthen New Zealand’s limited arrangements for supporting displaced workers.

So there’s some things to like and some things to be worried about. We’re not in a bad position, but we should work to be in a better one.

Rather than running through the whole story, I wanted to highlight a few things that the OECD has to say that are more directly related to Greater Auckland’s aims.

The first is about housing affordability, which is a major weakness of the New Zealand economy right now. Alongside its economic review, two OECD economists wrote a blog post entitled “The downsides of New Zealand’s inflated house prices“, which sets out the argument pretty clearly. Here’s what they had to say:

Price increases have been most pronounced in Auckland. Around half of all new migrants settle in Auckland, exceeding its (one third) share of the national population. Since 2008, new housing construction in Auckland has failed to keep pace with population growth. Prices in the rest of New Zealand, on the other hand, have risen despite little or no increase in the population-to-dwelling ratio. Throughout the country, record low interest rates have magnified house price increases.

The long-term solution, for Auckland in particular, is to address supply constraints. The recent Auckland Unitary Plan will allow greater densification and some expansion of urban development limits. However, insufficient infrastructure has constrained the extent to which densification is possible in central parts of Auckland. As in other parts of the country, infrastructure provision is primarily the responsibility of local governments, which face financial constraints and weak incentives to invest in amenities to facilitate growth. Options to broaden funding sources for public infrastructure should be explored, including more user charging, targeted property taxes, more cost-reflective developer contributions, sharing in a tax base linked to local economic activity and further recourse to alternative delivery models such as public-private partnerships. Reforms to the urban planning system are also needed – recommendations from the OECD’s Environmental Performance Review and the Productivity Commission’s Inquiry into Land Use Planning should be considered in order to deliver a more responsive and efficient planning system.

Relieving supply constraints takes time, however, so demand-side measures are also important to address financial stability risks. The Reserve Bank has progressively tightened restrictions on loan-to-value ratios, constraining the maximum amount that banks can lend to most customers. House price increases have moderated since the last round of tightening in October 2016. Debt-to-income restrictions, which complement loan-to-value ratios by limiting further debt as house prices increase relative to incomes, may be necessary if house price increases resume, and should be added to the Reserve Bank’s toolkit following analysis demonstrating that benefits would outweigh costs.

The OECD also had some words about competition and productivity in the construction sector – see Box 1.4 on page 100 of the full survey.

The second point is around the role of agglomeration economies in lifting New Zealand’s productivity. Here, the OECD is very good at highlighting how better urban planning policies and better infrastructure pricing and provision can enable higher productivity growth:

Exploiting benefits from agglomeration by reforming urban planning and infrastructure funding

Agglomeration economies generated by cities and industrial clusters are an important source of productivity growth (Glaeser, 2010). New Zealand’s small population limits such economies. Even so, the urban planning system and a lack of land transport and water infrastructure have been barriers to agglomeration by preventing increases in housing supply from meeting demand, boosting housing costs and inhibiting people from moving into economically successful, highly productive urban areas. Land prices inside Auckland’s urban boundary are nearly 10 times higher than outside, while a suite of complex and restrictive land-use rules (including maximum building heights, minimum lot sizes and parking requirements) has made development more difficult and expensive (OECD, 2017c), although many of these practices have been reduced or removed through the Auckland Unitary Plan (as described below). Rapid population growth due to high immigration is placing additional pressures on infrastructure. The inability of water supply infrastructure to keep pace with demand has restricted developers’ ability to deliver new housing in a timely manner (NZPC, 2017a), and transport congestion is likely to worsen (Auckland Transport Alignment Project, 2016).

The recent Auckland Unitary Plan will allow greater densification and some expansion of urban development limits. It represents a major step forward in spatial planning, integrating land use, housing, transport, infrastructure and other urban planning issues. Nevertheless, permitted housing density follows a U-shape, with a fall in density in areas close to the city centre but higher density further out, which contrasts with the more usual linear decline in density as distance from the centre increases. This form is partly the result of insufficient infrastructure in areas close to the city centre. Large investments are being made to rectify this problem, which should permit the Plan to be revisited in the future to permit greater densification, provided that opposition from vested interests can be overcome.

While infrastructure investments have been stepped up in Auckland, they still appear to be lagging behind the requirements of such a rapidly growing population. A major problem is that the Auckland Council, like others in New Zealand, has weak incentives to invest in amenities to facilitate growth, as local ratepayers bear much of their cost, but the fiscal benefits flow mainly to central government. To mitigate this problem a number of avenues for diversifying revenue sources should be considered, as discussed in the 2015 Survey (Table 6). These include: making greater use of tolls to fund local and national roads and of Public-Private Partnerships where that could increase efficiency (see Chapter 1); introducing volumetric charges for water outside the few councils, such as Auckland, that already have them; ensuring that housing development contributions (one-off levies imposed by local authorities on developers to finance parts of the capital costs associated with new development) reflect costs; and increasing the Council’s debt-servicing capacity so that it could issue more debt to finance infrastructure. Options for increasing this capacity include sharing in a revenue base linked to local economic activity, such as GST, and using targeted rates to tax the windfall gains that accrue to local landowners from the provision of new amenities. Property owners should lose underground property rights that unnecessarily add to the costs of infrastructure provision, as with Auckland’s underground rail line.

Overall, it seemed like a pretty balanced review that should (hopefully) strengthen the case to push on positive changes to our policy settings.

What do you make of the OECD’s economic review?

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41 comments

  1. This is at the heart of the problem at a practical level:

    ‘A major problem is that the Auckland Council, like others in New Zealand, has weak incentives to invest in amenities to facilitate growth, as local ratepayers bear much of their cost, but the fiscal benefits flow mainly to central government.’

    The direct financial benefit of both population growth and the tourism boom flow directly to central government (especially via gst), while most costs fall locally. Almost all misalignment of investment and growth, therefore, is because of poor central government policy.

    1. This report from an outside source is further evidence that New Zealand’s current system of funding transport infrastructure is broken. Add to that the present Government’s transport project selection based overwhelmingly on roading expenditure especially in Auckland means that car dominance is adversely affecting good urban design something the Government seem to have no awareness of.

      A thorough reform of funding for all forms of transport is clearly needed so that we get best value tor money and especially for Auckland, best city design outcome.

      1. I agree Patrick and Warren. Having come back to NZ from Europe in 2012 it is obvious that NZ’s city infrastructure is massively inferior to pretty much anywhere in Europe. Even worse, the cost and standard of housing in NZ is a joke. These factors are a massive disincentive for young kiwis trying to get ahead. The annoying part is that if these two issues were fixed, NZ is in a fantastic position for the first time in my life to build up a head of steam (or at least catch-up productivity/income wise) without losing masses of kiwis to much stronger economies in Australia, Britain, US, Europe….

        1. Absolutely agreed. Having spent my first 25 years in Auckland, and the last 10 years in the UK, I don’t see any realistic prospect of ever being able to return. If I sold my house here I could maybe buy a tumble down shack in Wellsford or Port Waikato and just about make ends meet. My house here though is very comfortable, well insulated, built from permanent materials, and has a nice little private garden. The section is so small I’m sure it would be impossible to build a house like it in Auckland, but that’s a whole other issue. It suits me just fine. It’s also a 5 minute walk to the train station that gets me to work each day, and next door to the highly rated local primary school and nursery/kindergarten for the kids. My mortgage here was a fraction over 3x times my income, and interest rates are a fraction over 1%. Who can complain about that.
          Even with the punitive post financial crisis tax rates in the UK, a move home to Auckland wouldn’t make any sense.
          Not wanting to belittle the status of genuine refugees from places such as Syria who are forced to flee their homes, but I feel like a refugee of the Auckland housing crisis in that I may be prevented from ever returning home. What a debacle for Auckland and New Zealand this whole mess is, and what really grates is that the whole thing was so preventable.

    2. Yes. Wealth flows from renters to owners, from young to old.
      Costs fall on local government and revenue flows to central government.
      Central govt then directs money and favour back to the old and property owning who vote them back into power to repeat the cycle and continue to ignore the problems.

  2. An interesting read, and it’s good to see that the OECD anwer’s to Auckland Council’s limited income is to diversifying the income so the cost is not just on ratepayers and not to sell assets like the Port.
    If only the Government would actually read this, but National are ideologically focused they will not look at any other view regardless of the evidence.
    Labour and the Greens seem to be far less ideological driven than the National party – it’s just people don’t seem to be notice or believe it.
    Auckland Council need extra funding stream’s.

    And I really like the putting of cost on water in other council’s. Auckland has the lowest water usage compared to the rest of the country, and it all started when a cost was put on water usage and not a flat fee. Water is a resource just like oil & gas and even gravel and people should pay for it.

  3. “Labour productivity is well below leading OECD countries, restraining living standards and well-being. Productivity is held back by……… low rates of capital investment”
    Why do we have such low rates of capital investment? It is because we are one of the most neo-liberal nations in the world thanks to extreme policies enacted by Rogernomics and Ruthenasia in particular but continued on by Key/English. Why would a business invest in improving productivity when they can have a plentiful source of cheap labour imported at the highest rate in the OECD in the form of immigrants?
    Productivity is how you become a wealthy country – working smarter not harder (or just doing more low-end work with cheap labour). That is just the productivity issues – not even getting into the housing and infrastructure issues caused by a huge influx of people.

      1. +1 the opportunity cost of putting all this countries capital into bidding ever higher on existing assets may have a large part to do with it.

      2. +1 Sailor Boy. Investment needs to be diverted from “investment properties” into business etc. But with lax tax-laws on this and ever increasing numbers of immigrants pushing up demand and prices, property investors are laughing all the way to the bank in having their mortgage paid, taxes reduced, and capital gains through the roof. In the meantime private debt is skyrocketing due to the need for ever larger mortgages to pay these crazy house prices.

    1. Productivity has always being an issue in New Zealand – well before the reforms of the 1980s. However, I do agree that cheap labour is part of the problem but is also the consequence of low productivity. One of the key issues is our business leaders. Too many of our companies are run by accountants who know the cost of everything but the value of nothing.

  4. I don’t really know if the OECD is the last word on how an economy should progress or our best friend.

    Our public debt is much higher than 9 years ago and sits at $96.9 billion. That is scary. And that is with Bill’s blind ideology of shrinking government. Room for tax cuts?? Whatever.

    Local government – $17.27 billion debt. Councils and ratepayers cannot continue to shoulder infrastructure development without central government stepping up. It is holding us back!

    Business debt including agriculture is around $165 billion.

    Worse is private debt at a cool one quarter trillion dollars. Less government means a transference of debt to the private sector and in my experience it is less efficient to heap all that spending on to the private sector because of profit motives.

    New Zealand is now in debt in excess of half a trillion dollars and we are at quite a risk of things turning very bad because of something as small as interest rate rises..

    But apparently our economy is the envy of others. Somalia perhaps?

    And this is from the Herald http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11873204

    1. Debt is debt, the difference between public and private debt is what exactly?

      My answer is that public debt is collectively held debt that has been generated to improve outcomes for society.

      However it’s still the same people who are going to pay it, either through taxes (public) or income (private), quibbling over the category of the debt won’t help reduce it, or improve our collectively ability to pay it.

  5. “Relieving supply constraints takes time, however, so demand-side measures are also important to address financial stability risks. The Reserve Bank has progressively tightened restrictions on loan-to-value ratios, constraining the maximum amount that banks can lend to most customers. ”

    Interested in your views on these LVR settings Peter. It’s one thing to restrict demand, but it will also impact on supply. For example, I know of a couple of developers who are pulling back on development now, one of the key reasons is falling demand due to LVR settings. Unintended consequence?

    Lastly, I think the market is absolutely broke in terms of housing in Auckland, for a number of reasons. I see no solution that does not involve large scale government backed house building.

    1. “I see no solution that does not involve large scale government backed house building.”

      +1,000

      Anyone who thinks we can fix this without the government (or a better funded council) building tens of thousands of houses is lying to themselves.

    2. It is my opinion that the Reserve Bank in the 2000’s did most of the heavy lifting to stop the then inflationary pressures from an immigration driven housing/economic boom. They increased interest rates to I think to 10% in 2007, which did remove demand for housing -unfortunately it also destroyed the housing construction sector, especially when combined with the GFC in 2008.

      In the 2010’s in response to another housing price boom and another increase in the cyclical net immigration rate, the Reserve Bank has progressively tightened credit lending to the housing sector with Macroprudential tools -loan to value ratios etc. This is something that the government has at times encouraged the Reserve Bank to do http://www.stuff.co.nz/national/politics/81781832/PM-sends-signal-Reserve-Bank-should-extend-restrictions-on-lending-to-curb-house-prices and at others times discouraged -when Steven Joyce as the new Finance Minister declined the Reserve Bank’s request for a debt to income credit restriction tool.

      If NZ had a more responsive housing development/ construction market -where increases in demand led to more supply, not higher prices, then the Reserve Bank would not need to tighten lending restrictions or increase interest rates.

      What do others think? Peter?

    3. Germany doesn’t have large scale public housing and they get along fine with very good housing. Heck, no-one even works on sundays, except maybe nurses and their economy does well.

      Just fix the tax system that favours housing speculation. A very simple fix, but not an easy one. Housing should be a commodity, not an investment. Tax all capital and it will flow to the most productive sectors of the economy (away from housing). Currently capital is mostly sitting in unproductive housing because the tax advantages are huge. I own some houses and rent the place I live in because the tax advantages are too good to pass up. Tax capital and it will limit the growth in property value and allow wages to eventually catch up in 30 years.

      I think half the problem is that kiwis just put up with crap housing/rentals because we are too isolated/ignorant to know/demand better.

      1. 10 years ago fixing the tax system would have been enough, the problem has gone too far now and requires state building. Both tax reform and state intervention are necessary to resolve the housing crisis, neither are sufficient on their own.

        1. Sailor Boy – totally agree. If the Unitary Plan had come in 10 years ago, we would probably have been OK too. The old ARC and legacy councils totally failed, introducing the Growth Strategy in 1999 and then getting totally insufficient results in terms of the necessary upzoning.
          The market is totally broke (note – I was once a big believer in the market solution to housing, but the failure to sufficiently enable it earlier has left us where we are)

    4. So if the government interfered with the bread market legislating who can bake bread, what ingredients they can use, where they can bake it, how long it must last, how big it must be, etc, and then the price of bread became unaffordable, you think the only fix would be for the government to bake bread?

          1. Ok, so we both recognise that your analogy stands up like a house of cards in Wellington.

          2. Not really. What difference does it make if its perishable (notwithstanding that for both bread and housing there are some regulations that are required – like safety)

          3. Housing is not consumed and, for all intents and purposes does not perish after it is purchased (if maintained). Neither of those things are true for bread. This means that all bread is turned over on at most a monthly timetable. Housing turns over every 50-100 years.

            Historic under-supply does not impact current bread prices beyond a few months after full supply is restored. This is not true of housing, where an under supply will inflate prices until second order effects (such as reduced population growth, due to housing costs making a city unattractive or increased building due to higher profits) lead to a reduction in price.

            If demand for bread was 150m loaves a year but we had only produced half of that for the last decade, prices would still fall back to the prior cost distribution, inflation adjusted, within months of the government lifting the onerous regulations. This is because a full supply of bread has been restored.

            If we had produced 15,000 homes a year for the last 10 years there would be no housing crisis, however, we only produced half of that. The housing crisis won’t go away unless we build significantly more than 15,000 houses a year. Because there are now ~75,000 houses too few.

            This is why house prices didn’t drop last year when we finally built approximately enough houses in that year and the council had removed many of the onerous planning regulations.

          4. There is still a ton of regulation. I’ve just extended our house and 15 inspections, untold licensed trades organised, and 6 months of extreme stress later we are almost ready for our final. And then there is a ton of paperwork to get compliance. All this for a simple timber framed one story structure that is incredibly unlikely to ever be a safety concern no matter how badly it was built. One inspection would have been enough to ensure it was safe.
            I honestly don’t know how how we are building as many houses as we are!

          5. And even with the unitary plan there are way too many unnecessary rules. Forcing the people of Epsom to have 600 m2 sections is as stupid as forcing them to eat caviar for dinner. Forcing the people of gray Lynn to have a heritage house is as stupid as forcing them to have a heritage car. People know what is best for them, they don’t need the government or their neighbors deciding for them. Get rid of the unnecessary rules and get rid of the unnecessary problem.

          6. JimboJones
            I have some sympathy for what you are saying.
            However… we live in a democracy, and that democracy has given us the unitary plan, the process of which had to juggle many competing values and views. It’s not perfect at all, but much better than what came before. For every person like you (or even me) that thinks that 600 sq m lot sizes are abhorrent, there is another person (or 2 or 3) that thinks that is necessary.
            The big problem is that it came 10 years too late, and too much damage has been done already.
            Government (central and local) largely created the problem, it now needs to build its way out of the problem.

  6. I don’t disagree but that would still not be without unintended consequences. Again, disincentivisation of property investment could have serious knock ons to housing supply.
    So I keep coming back to the need for big government investment.

  7. “The OECD also had some words about competition and productivity in the construction sector – see Box 1.4 on page 100 of the full survey.”

    Basically, we have lower levels of both than our comparison countries.

    That box 1.4 on Page 100 and it continues on to page 101 paints a picture of low competition and productivity in residential and large infrastructure sectors with evidence of higher than usual profit margins in the large construction sector. And Governments turning blind eyes to the issues.

    It also notes that NZs long vertically integrated building supplies market is ripe for collusion, hidden rebates and tied/bundled of products [i.e. Buy X, Y and Z from our sister companies/related group suppliers or we won’t supply you with any of A B or C].

    All of which do little else but reduce productivity while lining the pockets of these conglomerates shareholders.

    It should be obvious that the present “status quo” with a few tweaks simply ain’t gonna keep on working this time around.

    Not only do we need to change what and where we build, we need to change the how.

    And we also need to change how we plan, build and finance it. As well as how we regulate and monitor the industries.

    While our small size and “closed shop” construction/building sectors does preclude many of the larger entrants from overseas from “having a go” here, its also doesn’t mean we need to go carte blanche and allow every wanna be construction firm from wherever to come in, and give it crack.

    Unlike cars, clothes or consumer goods.
    The buildings we build today will be around in some form for decades to come.
    They need to be built to last the distance and be efficient, both during their construction and also in their
    decades long operation.

    Cheap and nasty, more of the same in the whops? No thanks.

    Cheaper, yet better designed with more choice? Yes please!

    So, the OECD report is welcome, but its mostly telling us what we [and more to the point, central Government] already knows to be true.

    Whats it needs now is actions – not just evermore words.

  8. Greg N,
    What is the action?
    For many years we have had ad nauseum rhetoric around the lack of competitiveness and productivity in the construction sector.
    I’m afraid that our small size will be a fundamental barrier to gains in these areas. Another barrier to gains is the volatile nature of construction markets.
    The only solution to these matters is large scale government intervention in house building.
    Although still insufficient, Labour’s Kiwibuild is a big step in the right direction.

    1. What KiwiBuild needs to do is create 6+ (the min number economic theory says is needed to avoid monopolistic cartel behaviour) separate, but vertically integrated construction corporate groups that can both compete against each other, but are large enough to have economies of scale. The combination of competition and economies of scale will drive down construction costs, improve quality and innovation.

      Supporting one company, like Fletchers, which is what the first Labour government did in the 1930s will not work in the long term.

    2. We have a (busy) body called BRANZ in NZ that regulates all building materials. It is expensive to get stuff appraised and without appraisal it can’t be used even if it is allowed in Aus, US, etc. you can get a lot of materials about half price in other countries but can’t use it here because we know better.
      We also had (I think still have) tariffs on the likes of Gib board. Unbelievable.

  9. “reducing barriers to foreign direct investment”, aside from housing investment restrictions I’m not sure what barriers are left?
    “lowering the corporate tax rate”, this is likely to happen inline with Australia lowering theirs.
    “Improving education achievement in mathematics”, generally young peoples ability to do mental arithmetic is not what it used to be. I’d suspect the way it is taught in schools today doesn’t suit the majority

    1. Possibly mathematics needs to be taught more closely with physics, so that both are understood better. And physics teachers need to be teaching the junior science classes to inspire more kids to take physics later (which will help with the mathematics). But there aren’t enough physics teachers for this, so the biology teachers and sometimes chemistry teachers are taking the junior science classes.

      This year there are 6 or 7 students training to be physics teachers at UoA. Doesn’t really cut it.

      1. I’ve always wondered why the Universities ended up running teacher training. Most Academics care about publishing papers and securing grants, which to me makes them like roading contractors.

        Whereas teachers both primary and secondary are about engaging the brains of students, so that they gain a thirst for learning.

  10. Actually I think the teachers’ college (UoA) seems to be a bright light in the world of education, from the little I’ve seen of it.

  11. The future of teaching in Auckland could be its own post.
    Listened to a piece this morning on RNZ about how overworked and under-resourced so many principals and teachers are, plus the teaching workforce is ageing.
    Throw in population growth and the need for more and more schools in the next 20 years, and the high housing costs, how will this be addressed?
    For me it comes back to more govt backed housing, and quite probably higher Auckland wages for teachers.
    I’ve been saying it for a year or two – we are on the precipice of an education crisis in Auckland, that to a significant extent is a by-product of the housing crisis.
    It needs to be urgently addressed now, otherwise it’s going to hit this city like a torrent within the next 5-10 years.
    It doesn’t really seem to be on the radar

  12. Why do we always have such round a bout ways of solving problems.

    Why not simply ban foreigners from owning property?
    Why not have the Reserve Bank instruct commercial banks that lending is to be to first home buyers or those trading up and that no more than 15% of their lending can be to property investors?
    Why not require that residential property beyond the family home must be owned by a company. That way any gain on asset sales would be classed as taxable income?

    These would be far more directive than random taxes.

  13. At my partners intermediate school 7 staff have moved out of Auckland this year because they want to try and buy their first homes and they are tired of the congestion. They have left completely and now live in the Waikato. Other staff are now commuting from KawaKawa and even Thames with a view to moving shortly. Schools on the north shore are considering housing packages for teachers. When people in what are referred to as the professional classes find it unsustainable it points to major shortages of service workers moving forward.

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