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Briefing Papers 6: “The Problem With Migration”

AUT’s Briefing Papers initiative has kindly allowed us to syndicate their recent series on housing. The sixth paper is by economic commentator Bernard Hickey:

We’re now having a fractious debate about foreign buying of houses, but the more important and tougher debate we should be having is about migration.

Does it actually generate the right type of long term economic growth, or does it just pump up house prices and interest rates, suppress wages and reduce the incentives for New Zealanders to obtain the necessary skills for a modern economy?

Neither of the three biggest parties, National, Labour or Green, have challenged the consensus of at least the last 15 years that New Zealand needs plenty of skilled and unskilled migrants to juice the economy along.

There are plenty of employers who regularly argue that they need both types of migrants to keep their businesses, hospitals, hotels and farms running and growing. The Government has a target of allowing around 45,000 to 50,000 new permanent residents each year, including around 60% who are skilled migrants, over 32% who are family reunifications and over 7% who are approved for humanitarian reasons.

It may argue that one reason for high net migration is the uncontrollable movements of New Zealanders and Australians (who are often ex-pat New Zealanders), but that’s not the whole truth. The Government does control that Residence Programme and various schemes for international students, working holiday visas and seasonal workers.

Over 300,000 migrants have arrived over the last 15 years encompassing the current National and the last Labour Governments.

Understandably, New Zealanders see themselves as the descendants of migrants in one form or another who have an open and welcoming approach to new migrants. That is all good.

But migration that is too fast can put a strain on the economic system and the key variables of interest rates, the exchange rate, house prices and unemployment show the stresses involved of the latest migration surge. When there are restraints on the supply of houses, schools, motorways and hospitals, as there are in Auckland, then prices and interest rates respond.

Former Reserve Bank economist Michael Reddell pointed last week to Reserve Bank modelling showing a 1% rise in population will lead to a 10% rise in house prices. Last year Reserve Bank and Treasury separately forecast that a surge in net migration to over 45,200 and over 41,500 respectively would increase the Official Cash rate by between 50 to 100 basis points and increase nationwide house price inflation by four percentage points.


graph-11

Net migration alone is increasing New Zealand’s population by more than 1% per year at the moment and that’s before natural population growth adds to the pressures.

“Rapid population growth and a low responsiveness of supply have led to housing and urban infrastructure constraints,” the OECD concluded in its report on New Zealand earlier this year.

All this creates costs for taxpayers and ratepayers alike because the infrastructure costs and rent subsidies triggered by net migration has to be paid for with higher rates and taxes. Auckland’s ratepayers may blame the Auckland Council for their near-10% rates increase this year, but they could just as easily blame New Zealand’s migration policy makers.

The other costs are borne by the rest of New Zealand’s businesses and exporters through interest rates and the exchange rate being higher than they otherwise would need to be. New Zealand has had strangely high long and short term interest rates over the last 20 years relative to the rest of the world and there’s a strong case that our high migration is at least partly to blame.

The other losers are resident workers and the unemployed because the high net migration has helped suppress wage growth and kept unemployment stubbornly high at over 146,000 or 5.8% of the workforce. This may be as good as it gets.

The latest migration tweaks announced last weekend show how responsive the Government has been to the calls from employers to make it easier to solve their labour shortages by importing workers. The rule change to allow long term migrants on temporary work visas in the South Island to apply for permanent residency is one example.

Wage growth has been much lower than everyone expected in the last two years, which is at least partially due to strong net migration soaking up the pressure that would otherwise have been applied to wages.

It also begs the question: why can’t we train or educate some of those 146,000 unemployed for these jobs? Is the Government and society collectively taking the easy option of migration to avoid the much crunchier problem of ensuring kids graduate from schools and tertiary institutions with the literacy, numeracy and life skills needed for these jobs?

Turning full circle, the migration debate is also inevitably intertwined with the debate about foreign buying of houses. New Zealand may discover after October 1 when the tax residency status of buyers will be recorded that much of the money being pumped in from overseas is going through the accounts of new migrants, students and those on short term work visas, all of which would be recorded as local buying.

Ultimately, taking pressure off house prices, interest rates and unemployment will require lots of hard work to improve the supply of houses and skills, but in the short term a debate about the number of migrants is needed.

48 comments to Briefing Papers 6: “The Problem With Migration”

  • Realist

    Excellent article proving that immigration is not “all good”. As someone who works with greenfield areas it is abundantly clear that the government doesnt understand the infrastructure costs of allowing 50, 000 people in each year. At the moment these costs are being subsidised by existing ratepayers and there is still a huge funding gap that is unaddressed.

  • unaha-closp

    We could allow more houses to be built – this would offer jobs to the semi-skilled, reduce unemployment and increase wage growth.

  • The problem isn’t immigration per say. It is the readiness of the country and its infrastructure to provide for new / more people entering the economy.

    Perhaps the government needs to re-think its current immigration policies vis-a-vis the state of the current infrastructure especially in Auckland and slow it down.

    Immigrants bring far more value to a country they migrate to, than not. You have the exceptions but then you have the exceptions in the native population as well.

  • mfwic

    He is spot on. Immigration is used by Governments to give the impression of improved living standards. It results in a direct lift in GDP but does nothing to help GDP per person. The stylised facts of growth suggest population growth decreases GDP/person.

    • Realist

      Yes its the political language used. Growth is needed. Growth is always good.

      What is growth? What are the tangible benefits? Rising house prices are not a benefit to society.

      The discourse needs to be changed to more meaningful concepts like – more jobs, higher incomes, better work life balance. On all those measure I believe rampant migration would fail.

      • Martin

        Growth?

        Read further income for the haves at the expense of the have nots.

        UK is having the exact same issue but to a far greater scale and here it is heaving at the seams, especially for the local bodies in the South East of England and Birmingham.

  • Bruce

    Bernard almost always writes clear well thought out pieces that cut away the PC BS that has become prevalent in NZ.
    Immigration to an extent is good (we are all descended from immigrants at one point or other after all). But having immigration coming in at a rate exceeding 1% per annum is excessive, damaging, and just idiotic!
    Tighten up on the family reunification (this is after all usually unskilled people who couldn’t otherwise get in coming in on the coattails of someone else), cut back on the phoney student visa scam (most are here to apply for permanent residency rather than to be an education export industry for NZ), and finally do as Australia and other countries have done and require investors to actually invest in riskier growth industries/businesses etc rather than just plonking their cash into housing and driving prices up for everyone else!
    30,000pa (half what we currently have) would go a long way to resolving issues we have in this country. I also think that the costs for visas/permanent residency (exceptions for people who are married to NZ born citizens) should be increased as a way of helping to fund infrastructure that will be needed.

    Of course the government isn’t interested in this as high immigration gives a short term boost to GDP figures.

    • wsomc

      The house prices rose at 25% per year in NZ$. But for oversees investors the gain would be less because the NZ$ has lost quite some value during the past months.

      I wonder if those silly increases in house prices last year are somehow connected to that NZ$ depreciation.

  • Ari

    Yes we need migrants, but not too many and not all in Auckland. The problem is that we can’t control where people live unless we legislate them to live outside of Auckland but i’m sure that will have unforeseen consequences.
    Buying a rental property or sticking your money in the bank to loan to people buying a rental property should not count as investment.

    • Realist

      Its called a visa condition. “The visa holder must not reside in Auckland”.

      Break the visa condition boot the immigrant out and fine the employer who gave them a job.

      All quite simple really, just needs some effort and fortitude on the part of govt and Immigration NZ.

      • Ricardo

        Impossible to police.

        • Martin

          Hi Ricardo, a collegue of mine at British Airways has just been granted a kiwi visa and the stipulation on it is that he has to live in the lower north island or in the south island. He is required to prove it too so that his (skilled) migrant visa is not cancelled.

          Note he is a Aeronautical Engineer, like myself, something NZ is desperately short of as there is very little advanced Aeronautical design engineering in NZ.

          • RB

            How long is he tithed to the location? I’m guessing it can’t be forever. Once he gets citizenship I suspect he can go where he likes?

  • Excellent article, thank you. I think one of the unstated principles of the current Government is to encourage immigration, so as to provide a source of labour ie taxpayers, so that Superannuation funds don’t run out. It surely has to be one of the answers as to why Key won’t consider raising the retirement age.

  • there is a direct subsidy of approximately $200,000 cost for additional infrastructure for every new household created in Auckland ($80bn of infrastructure for the next 1million/3 for households) and that is the official figure which are usually pitifully short of reality. This is a transfer directly from the pockets of NZ ratepayers and taxpayers and it simply fuels more consumption, does little to increase productivity while it drives up property prices and supresses wages – how can this be good for NZ?

    Subsidies are anathema to this government when it comes to investing in our productive sectors but they will blow billions on dead assets so non-nzers can move here – we now have the Chinese government investing in Silver Fern farms – because they can see the value where as our own bunch of idiots would rather argue about a flag

    no one seems to have figured out why it is the capitalist countries that have a vast and unrepayable debt burden while it is the communists who are the creditors – maybe there is something wrong with our ideology or maybe their politicians are just smarter than ours.

    • Peter Nunns

      Could you cite a source for that figure, please? I’m not aware of any work that’s put the cost of infrastructure at $200,000 per household.

      Auckland Council’s recent Cost of Residential Servicing study found that infrastructure costs for 12 new (infill and greenfield) developments ranged from $25-50,000 per dwelling.

      And the Council’s Future Urban Land Supply Strategy found that network infrastructure for the next three decades of greenfield subdivisions would cost more like $14bn to accommodate around 1/3 of the city’s expected population growth. That’s certainly not cheap, but it’s not $80bn.

      • Nick Smith said it forecasted the biggest construction boom the country had seen for decades.
        Mr Smith said every region was expected to see growth in construction activity, but Auckland and Christchurch would have the highest levels.
        “Of that $100 billion, $52 billion of that is in the residential construction sector, a large portion of which is in Auckland, that’s very much needed given the under-investment in housing.
        “And the other $48 billion is infrastructure projects through the country.”
        He said in Auckland, the rapid rate of growth would be driven by residential building, which he said showed the success of the Government’s Housing Accord with the city council

        but in truth no body really knows

        the simple fact is that most infrastructure required in Auckland is required to provide services for citizens who are yet to arrive and that will be largely paid for by the citizens who are here already – ie it is a transfer of wealth or a subsidy

        • Nick R

          2/3 of Auckland’s growth is from natural replacement, only 1/3 migration. So no, not most by any means. “Most” is for Aucklanders children. Perhaps you’d better focus your angst on more contraception and campaigns promoting bachelors and spinsterhood?

      • mfwic

        Peter 68% of all statistics are just made up.

  • unaha-closp

    Actually that figure was generated by the ratepayers to extort a subsidy out of the taxpayers, so the figure is probably on the high side.

  • unaha-closp

    The EU is currently having a very vigorous debate about immigration, very similar to what Bernard Hickey suggests we should be having here.

  • Bruce

    Further to this we are still letting in a lot of immigrants that are over 50! How in the flying f**k is that supposed to help with the superannuation problem?! (does the opposite because after 10 years they are able to access NZ super! – ridiculous!).

  • Immigration: a “critical economic enabler” or a deeply-troubled programme?

    The papers repeatedly tell ministers that immigration is a “good thing”, serving not just economic ends but a whole variety of other goals. And yet across all the papers there is hardly a shred of evidence advanced to support the belief – for belief is all it seems to be – that, in the specific circumstances of New Zealand, as the New Zealand immigration system has actually been run over the last 25 years, that there have been any real economic gains for New Zealanders.

    So, 25 years of history shows no net benefit for NZ from immigration and possibly net detriment. This is, of course, completely at odds from what we’re told by the politicians who keep telling us that we need more people. Considering the figures and that they must know those figures we have to ask why they keep telling us that we need more.

    • Peter Nunns

      I think Reddell’s conclusions aren’t totally borne out by analysis. It seems to boil down to two things:

      1. Evaluations of specific migration policies have shown they are poorly managed. Fair enough. There will always be some cases where policies are badly designed or badly implemented. That doesn’t mean that all policy in that area is bad.

      2. A claim that NZ’s productivity growth would have been higher if it weren’t for high migration. Frankly, Reddell doesn’t prove this point. The causes of NZ’s low productivity growth since the 1970s are multifarious. It’s not at all clear that migration has been a net drag – it’s possible that things would have been worse without migration. I’d also point out that migration into NZ was proportionately much higher during the 1950s-1960s, when productivity and incomes were growing faster.

      • I’d also point out that migration into NZ was proportionately much higher during the 1950s-1960s, when productivity and incomes were growing faster.

        And when we were still a closed economy and productivity gains from simple mechanisation was still high. Things don’t remain the same.

  • kelvin

    Immigration increase our population size, and large population yield large economic of scale.

    City with higher population will yield better amenity, choice and vibrancy.

    We should increase supply instead of supress demand.

  • Why do we need population growth? – Auckland is self-inflicted and heavily subsidised problem for the entire economy.

    This issue is also an effect of and not the cause of the problem. The problems of Auckland and the overvalued housing stock first started to really bite in the 1980’s the same time as the Douglas reforms got rid of the Ministry of Works Town and Country planning group and councils were amalgamated – the country lost its strategic capability to plan for urban growth at a national level.

    At the same time the banks were sold to the Australians. The banks make money from growing their loan book – they are utterly parasitic and driven by the need to achieve ever growing profits and the only way they can do this is to fuel inflation of the property market – you will regularly see them boasting of the increase in loans they have made – and this si confimermed by the fact that property debt to our overall debt has grown from 10% of national debt to 50% used to buy homes since the 1980’s – and they can only grow their loan book at a rate greater than the rate of housing stock growth through property price inflation – they use this to pump money out of the market – and out of the country.

    Housing price inflation is also greatly aided by Reserve Bank Act – this Act is founded on an economic perversity – that we need to put the price of debt up to reduce its supply – now everywhere else the law of supply and demand says that if you put the price up you increase supply and decrease demand – but only if demand is elastic – and demand for housing where prices are inflating is not only inelastic it has an inverted demand relationship – the more the price goes up the more people want to buy. The reserve bank act has been the single most destructive element of the Douglas reforms – increased interest rates simply increase supply of debt and because we have had increases in property prices generally running well ahead of interest rates over the past 30 years (other than for the odd downturn) and because capital gains aren’t taxed it is only the mugs who aren’t putting money into property – that is the reserve bank has not simply been ineffective in suppressing property price inflation but it has actively rewarded lenders for fuelling it – we have been paying several percent more for our debt than has been historically available in Australia and japan etc – so money has poured into NZ looking for the premium that the RBA guarantees (even now we are paying above Aus and the US and Japan) This is stupid and destructive because it means business across nz and people living in areas where property price inflation aren’t an issue have been paying excessive amounts of interest – it is this that is the single most damaging change that Douglas introduced – it also means that our exchange rate has been artificially kept high with the capital flowing into the country and that has meant that our export earners are doubly penalised.

  • So if we want affordable house we need to …

    A: Reform the Reserve Bank Act
    B nationalise the mortgage market – there is absolutely no need for a cent of foreign cash to be funding property lending – in fact foreign investment in property is our single biggest economic problem and costs NZ more in foreign exchange earnings than the dairy industry brings in.
    C: We need to re-institute a national level Ministry of Planning – the problems with planning in NZ are rooted in the lack of any national capacity – we have 76 councils each individually interpreting the RMA and no useful national framework for them to work within -= or to be accountable to.
    D re assess the value/level of immigration to the economy – it is costing us a fortune – nothing else in the economy is subsidised to anything remotely like the extent that immigration driven growth in Auckland is- it get a direct subsidy of $200,000 per additional household created – and this is consumptive investment not productive – it means that as the city gets bigger it consumes more but it doesn’t necessarily produce more – we don’t put a cent into making meat processing more effective or into Hillside workshops to train the next generation of engineers both of which increase the nation’s ability to earn overseas income to pay for our wanton consumption but we don’t bat an eyelid at dumping tens of billions on roads and urban transport and new housing for more households to consume more – though it seems interesting that the money heading into Silver Firms farms from China is actually coming (at least in part) from government investment funds not private investors – so their government sees the sense in this sort of investment but ours doesn’t.

    In my lifetime the nation’s population has doubled while our oversees earnings (what pays for our lifestyle) has flat lined – we depend on the sheep and the cow just as heavily as we ever did and each sheep and cow has to feed twice as many people as if did when I was born – and we wonder why our lifestyle is declining (and why our rivers are turning to crap) because farming is having to work ever harder to fund the urban lifestyle – put simply our balance of payments makes it pretty clear that all this population growth is doing tiddly squat when it comes to building a wealthy nation but it is doing a great job of creating an indebted one.

    • Peter Nunns

      “In my lifetime the nation’s population has doubled while our oversees earnings (what pays for our lifestyle) has flat lined”

      This just isn’t true. Exports as a percent of GDP have been pretty flat for a few decades, but real GDP (and real GDP per capita) have grown, so the total value of overseas earnings has also increased. Exports have also diversified significantly since the 1970s, although they certainly could have done better.

      • Bruce

        and the per capita figure would be a lot higher without these huge levels of immigration (the total GDP figure would of course be less although without all these extra costs NZer’s probably would have had a slightly higher birth rate as having children would also be cheaper).

      • I think you will find you are very wrong peter – apart from aluminium oil and tourism we still rely on sheep beef and milk and horticulture to pay about 70% of our way in the world and that is dependent on a fixed number of hectares of land = oil has taken a hit lately and aluminium is likely to disappear from the list – Auckland produces virtually nothing in the way of exports but consumes a heap – it is not paying its way it could even be argued that tourism is an agricultural product as most of it is based on rural scenery
        over the past five years we have a our best terms of trade ever and yet our public overseas indebtedness has climbed to from $10 billion to 80billion – it has skyrocketed – our rock star economy is nothing more than a debt fuelled spending binge driven by consumption in Auckland – it is unwise in the extreme to mistake GDP for productivity – same as looking at all household spending when calculating family wealth – it is earning that counts not earning + borrowing + spending

  • What a bunch of nationalist crap in this thread. I’m proud to be in favour of open borders.

    • the simple fact of numbers is that we double our population we halve our per capita well being – if you want to buy petrol for a TV you need someone in the economy to earn money overseas to pay for it – we have doubled our population but we have not doubled our earning capacity so we are going backwards – If you really want 100million people living in NZ I suggest you move to Tokyo or Bangladesh for a while to see how lucky we are now and what we would look like if your stupid idea prevailed

      • Peter Nunns

        No. That’s complete bullshit. It bears no relationship with what has actually happened in the real world. According to World Bank statistics, since 1990:
        * NZ’s population has risen by around 30%
        * real GDP per capita has increased by almost 50% – meaning that living standards are 50% higher now than they were 25 years ago
        * the real value of exports has increased by over 120% – meaning that we’re exporting considerably more per capita.

        If you want economic autarky and poorly thought out xenophobia, I suggest you move to Communist Albania. Your policy recommendations are as bad as your grasp of the statistics.

    • Owen Thompson

      So those that have destroyed their own countries can do the same here?

    • Peter Nunns

      Agreed. This topic really does bring out an ugly side of people.

    • Realist

      “Nationalist crap”. I take it from that comment that you’re an internationalist and dont believe in the need for countries? Because if you’re not going to act in the interests of your own citizens there is really is little point in being a country.

    • It’s not nationalism but reality. Open borders would fuck up NZ real fast as we go from a population of 4.5m to 100m+ in a few years. We’d very rapidly become worse off than Bangladesh.

  • Matthew W

    The problem with migration is it is in tension with minimum wages, universal welfare and restrictive planning laws. Well actually it’s the other way around but you know what I mean

  • Evan James

    Dark Horse is right about the start of the current inflation in housing prices starting in the 1980s. The upwards climb started in 1981, with prices doubling between May and August – something which doesn’t even happen today. Okay, prices were still low by today’s standards, but so were wages. There was an article in the Herald at the time claiming that if the rate of increase was sustained, houses costing $50,000 at the time would cost more than $1 million by the year 2000 – the author wasn’t far wrong. A land agent friend of mine told me at the time that one of the catalysts for the big jump in house prices in the 1980s was the government buying up houses in established suburbs to turn into state houses, and to induce the owners to sell they were offering prices far in excess of the market value at the time. They concentrated on houses within the more popular grammar school zones, the reason being to give the children a lift in life that they would have otherwise have missed out on. I know one such family that lives in such a house, a villa just down the road from a major grammar school, and the children have done very well in their chosen careers, one being a branch manager of a major bank.

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