Economics and Immigration

New Zealand Centre for Political Research

The New Zealand Centre for Political Research is a web-based think tank that takes a research-based approach to public policy matters and encourages the free and open debate of political issues.

Last Thursday, the Governor of the Reserve Bank Graeme Wheeler lowered the Official Cash Rate by 25 base points from 3.5 percent to 3.25 percent. With New Zealand’s inflation rate running close to zero, factors influencing his decision included a 55 percent decline in the oil price from June last year, and a 55 percent drop in dairy prices.

While he expects the resulting interest rate drop and exchange rate decline will help to cushion the dairy sector and provincial New Zealand to some extent, concerns have been raised that the lower cost of borrowing may drive up demand for housing in the already over-heated Auckland property market.

Auckland’s problems are the result of the demand for housing outstripping supply. It is a massive market failure caused, to a large extent, by councils adopting radical environmentally-driven land use restrictions to prevent urban sprawl. This has resulted in the amount of land being released for housing development being insufficient to keep up with population growth.

The Housing Minister Nick Smith also blames the Resource Management Act, saying it has added as much as $30 billion to the cost of building new homes, and stopped as many as 40,000 houses being built over the past decade.

With lending on housing making up around half of all bank lending in this country, and with a home being a family’s single largest asset, the Reserve Bank has identified the housing market as a potential risk to New Zealand‘s financial stability.

Record levels of net migration, caused by fewer Kiwis leaving the country and more returning home – as economic conditions in New Zealand outstrip those in Australia – have led the Reserve Bank and the Government to become increasingly concerned that the growing demand for housing in Auckland could destabilise the economy. As a result, they have introduced a number of major policy changes.

The Bank has singled out property investors as an ‘asset class’ that have a higher risk of default than owner-occupiers in the event of a market correction. They are therefore requiring banks to hold more capital against property investor loans. This move could potentially result in higher interest rates for higher risk investors.

Borrowers with less than 20 percent deposit for the purchase of a residential property have also been deemed to be high-risk, and as a result, banks have been required to restrict their lending to these high Loan-to-Value Ratio (LVR) borrowers to no more than 10 percent of the dollar value of all new residential mortgage lending – except for loans on new housing.

However, in recognition of the fact that housing markets outside of Auckland are lacklustre, the Reserve Bank is now lifting LVR restrictions in those areas from 10 to 15 percent – while leaving the rate at 10 percent for Auckland.

Furthermore, “to improve the resilience of the banking system to a potential downturn in the Auckland housing market”, from October, new LVR limits on lending to property investors in the Auckland Council area will be introduced. This will require borrowers to have at least a 30 percent deposit on a new residential property.

The Government has also introduced new measures to dampen Auckland’s housing market. They have tightened up the ‘intention’ test, so that any gain from a residential property sale – apart from a family home – within two years of purchase, will be taxable as income at the taxpayer’s marginal rate.

New rules around foreign purchasers have also been introduced whereby non-resident property investors will be required to open a New Zealand bank account, acquire an IRD number, and provide passport and home country tax details. Where international data sharing arrangements apply, these changes are expected to expose investors to scrutiny by taxation authorities in their home countries. The changes will also force non-residents to comply with the requirements of the Anti-money Laundering and Countering Financing of Terrorism Act, which came into effect in 2013.

These measures, when combined with the fast-tracking of house building that is currently being undertaken by the Government and the Auckland Council, to deliver thousands of new homes into the market over the next few years, are expected to substantially reduce the pressure on the Auckland property market.

Market corrections are notoriously difficult at the best of times, and the unintended consequences can be significant. In Auckland’s case, if the new restrictions prove to be too onerous, there is a risk that the city could be left with an oversupply of housing and declining property values.

Last week also saw the release of the OECD’s biannual report on New Zealand. Essentially, while it found that our economy was faring much better than most other OECD countries, it also highlighted a number of challenges.

One of the factors identified as contributing, not only to our strong economic growth, but also to Auckland housing crisis, is immigration.

New Zealand’s well documented “brain drain”, which is responsible for up to a million New Zealanders living abroad, has been offset to a large degree by immigration over the years. The OECD points out that the present high level of net migration has increased the strength of the labour market, adding to the economy’s productive capacity and reducing wage pressure.

The report found that while skilled migrants often find their employment prospects fall below expectations when they first arrive, within ten years any differentials with locals are usually insignificant. As a result, the OECD recommends that ensuring migrants speak English well is the best way to improve this situation – by increasing the weighting given to English language proficiency in the selection process.

The report also outlines the success of the Canterbury Skills and Employment Hub, which is focussed on speeding up labour market matching for semi-skilled and unskilled jobs. It operates by ensuring New Zealand jobseekers, including beneficiaries, are first matched with employers, before migrant workers can be considered. Only if no suitable New Zealander or permanent resident is identified, can a migrant be hired. The OECD recommends that the scheme should be used all around the country.

Immigration plays a key role in maintaining the stability of our labour market, but the rates are high by OECD standards, because of the large number of Kiwis who usually leave the country each year.

This week’s NZCPR Guest Commentator, Dr Roger Bowden, formerly of Victoria University’s School of Economics and Finance, points out that while there are clear positive gains from immigration, there are also significant downsides:

“The economic gains from immigration have been well documented. Properly regulated, it augments the nation’s human capital. If we get it right, the immigrants can be a source of financial capital.  Immigration is a terrific economic stimulus in itself; right now it is helping NZ ride out our own commodity price downturn. And let’s not forget the education industry, large slices of which are bottom feeding off South East Asian students. A cynical view, not too far from the truth, is that we’re not selling the quality of our education so much as the right to look for a job here afterwards, get residence; and bring Mum and Dad over as permanent residents as well, something you can’t do in most other countries.

“But there are downsides to immigration. Local resentment from being locked out of the Auckland housing market by high prices, some of it fuelled, directly or indirectly, by endemic South East Asian corruption. And as an ‘oldie whose taxes, and the hard work of my forebears, have helped to pay for our infrastructure, it grates a bit to a have wealthy immigrants enjoy it all scot free. And then there’s the exposure to criminal activity from poor screening, including circumventable investment qualification regimes.”

From time to time the criminal activities of immigrants hit the headlines, but few could be worse than the case of Van Thanh Tran, who was on the unemployment benefit from immigrating to New Zealand in 1993 until 2012. According to the Herald, Mt Tran was one of six high rollers at SkyCity casino under surveillance by the Police. Operation Ghost targeted an organised crime syndicate smuggling large shipments of pseudoephedrine from China into Auckland. Mr Tran was the ‘boss’. SkyCity records show that over the years, the amount of money won and lost was $67 million.

The fact that Mr Tan was able to remain on an unemployment benefit for almost 20 years raises serious questions about how well migrants are monitored once they arrive in New Zealand.

In the UK, not only are welfare payments to migrants restricted until they have lived in the country for four years, but if they haven’t found a job within six months, they are required to leave.

With immigration being an issue of huge concern in Britain, where foreign workers flood into the country under the European Union open doors policy, taking jobs from locals, newly re-elected Prime Minister David Cameron has pledged major change.

First and foremost will be a crackdown on illegal immigrants. Illegal working will become a criminal offence, which means employers hiring illegal immigrants will be breaking the law. Landlords will be asked to check whether their tenants are illegal immigrants, and if they are the process for evicting them will be fast-tracked. Banks will be required to close down accounts held by illegal immigrants. And the “deport first, appeal later” rule that is already used for foreign criminals will be applied to illegal immigrants as well.

According to figures provided by our Immigration Minister Michael Woodhouse, while New Zealand had more than 14,000 illegal immigrants in 2013, only 757 people had been deported in 2012.

David Cameron is also committed to reducing the demand for skilled immigrants in the UK through better training of locals:  “For too long we’ve had a shortage of workers in certain roles. Engineers, nurses, teachers, chefs – we haven’t had enough Brits trained in these areas and companies have had to fill the gaps with people from overseas. Some professions are on the Shortage Occupation List year after year and nothing is being done about it. So we will seek to limit the length of time professions can be classed as having shortages. Sectors that have become over-reliant on migrant workers will be encouraged to train Brits instead. What’s more, we’ll make it illegal for employment agencies to recruit solely from abroad without advertising those jobs in Britain and in English.”

The fact that New Zealand’s long-term skills shortage list includes chefs, database administrators, food technologists, surveyors, engineers, diesel mechanics, nurses, vets, physiotherapists, and social workers, does raise serious questions about how well our education sector is readying our young people for future careers in this country.

David Cameron is also planning severe penalties for employers who exploit foreign workers. Similar measures have just been introduced here. Under the new 2015 Immigration Amendment Act, any employer who is found to be exploiting temporary migrant workers will face a jail term of up to seven years and a fine up to $100,000. If such employers hold a residence visa, they will be liable for deportation if the offence was committed within 10 years of gaining residence.

Historically, immigration has filled skills gaps when Kiwis go to live abroad. While there will always be tensions when foreigners move to a new country, in time, most will adapt and become good citizens. However, the numbers have increased over recent years, and questions are now being asked as to whether we need to follow the UK’s lead in cracking down on illegal immigrants and improving the training of New Zealanders to reduce the demand for skilled migrants.


Should there be better training for locals to reduce the demand for skilled migrants?


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