Kiwiblog

Bernard Hickey has a blog post on how office rentals in Wellington have increased by 14% in the last year. This is around four times the rate of inflation and well above the rate of increase in Auckland. Why?

[Wellington] office vacancy rates are around historic lows. Encouragingly, vacancies are low across the board with the prime and secondary vacancy rate at 1.4% and 3.5%, although some low quality buildings are struggling to find new tenants after being vacated by large government occupiers.

Bernard explains this means they are going from $197 a square metre buildings into $330 a square metre ones.

This is not a one off either, rents have gone up a staggering 66% in the last five years. Why? Because of the massive growth in the public service.

There are few people who qualify better for the label rich prick, than Wellington commercial property owners. And one of them told me a few months ago that since Labour came to power he had made $400 million just in Wellington.  Yes $400 million. He said it was almost enough to make him vote Labour!

The sad thing is these massive profits have not just come from the taxpayer, but all business owners in Wellington are getting clobbered as rentals keep increasing.

I suspect there is also a flow on effect to the costs of residential tenancies in the inner city as property owners can convert from business to residential and vice versa.

For that long Sunday afternoon:

The NZ Book Council have a very cool website to encourage reading. They’ve done it as a Windows operating system.

Scrubone does a fisking of No Right Turn’s outrage at National over citizen juries. Also on that issue, Russel Norman at Frog Blog agrees with some of my suggestions around Citizen’s Juries – specifically the need for multi-partisan agreement not narrow agreement.

Paul Walker responds to Matt McCarten’s hysteria over the Business Roundtable.

Whale Oil likes his stats comparison with Kiwiblog. Obviously girls and guns work

Craig Foss looks at how Dr Cullen is financing his tax cuts – he is borrowing $6.4 billion and also selling $6.4 billion of financial assets breaking one of his four tests. This last one is particularly cunning as it allows him to claim gross debt remains on track. This si why net debt is the better indicator.

Colin Espiner reviews the Reserve Bank MPS and the polls.

Bernard Hickey believes Alan Bollard has gone soft on inflation, as does the Westpac Chief Economist.

Tony Milne links to a CNN piece of possible Vice-Presidential candidates.

On the Republican side I think Minnesota Governor Tim Rawlenty would be a good pick. He is a popular Republican Governor in a Democrat leaning state. The convention is in Minnesota

Not PC has a very comprehensive round-up of the work done by Trevor Loudon on Barack Obama. He describes Obama as “Keith Locke with charisma”

Bernard Hickey has graphs of petrol pump prices, and how much goes to the producers, the local oil companies and the Government. The local company margin is currently close to 20c – a three year low.

Phil U at Whoar finds Jeremy Clarkson’s best and worst cars.

The worst is the Tata Nano and the best is the Nissan GT-R.

Bernard Hickey is strongly disapproving of the budget:

Talk about going out on a low note. …

The result of pulling all the levers in the wrong direction (tax cuts and spending increases) was the destruction of the budget surplus that Dr Cullen had spent the last eight years building up and protecting. Blown in one last desperate act. Dr Cullen and Ms Clark have now said they will fund the cash deficit after investments by running down the Reserve Bank’s reserves and issuing more bonds.

It is the equivalent of throwing it all on the roulette table.

Whatever happened to their mantra that they wouldn’t pay for tax cuts by running up debts? Their (quite powerful) argument that it wasn’t right for National to pay for tax cuts with debt is now dead as the proverbial. Their rebuttal that the debt is only paying for infrastructure is, strictly speaking, true, but debt wouldn’t have to be raised without the tax cuts. There’s no getting away from this. They are raiding the Reserve Bank’s cookie jar and borrowing from foreigners for an irresponsible spending and tax cutting budget.

The Labour line of not borrowing for tax cuts is dead and discredited.  Now as I have said, I actually do not have a problem with borrowing for capital investment so long as the operating surplus (OBEGAL) remains positive and large enough to cover the Cullen Fund and a buffer on top of that. But OBEGAL will not be high enough to even cover the Cullen Fund until 2016.

Also, their argument that only National will fund big tax cuts with big cuts in government spending is also dead. Buried in the budget is a line about unspecified spending cuts totalling NZ$1 billion over the next four years that Labour will have to find to help pay for the tax cuts. Dr Cullen flat out refused to answer my question in the lockup about what type of spending cuts they would be. The only answer he could have given is that he hasn’t dreamt them up yet. We can be sure he won’t enlighten us before the election.

Indeed, Labour is wailing in the House about how John Key will cut spending, and have cut $1.5 billion over three years themselves. They really have no shame.

Any of the last vestiges of Dr Cullen’s hard-won reputation for fiscal conservatism went down into that kitchen sink of pre-election goodies. This is a tragedy for a finance minister who could rightly say until today that he had been one of the most level-headed and careful of economic guardians in our history.

It really has been from Jekyll to Hyde.

Financial markets are greedy, reactive and selfish at the best of times. But they often cut to the nub of an announcement in a flash. Within minutes yesterday, they judged this budget as inflationary enough to make the Reserve Bank’s inflation-fighting task more difficult and therefore likely to delay interest rate cuts.

The New Zealand dollar surged over 78.5 US cents and wholesale interest rates rose sharply.

If Bollard cuts rates now, he’ll deserve to be sacked for repeatedly missing his target.

Here’s Helen Kevans from JP Morgan:

The significant loosening of fiscal policy via larger than expected income tax relief delivered in Budget 2008, and the significant increase in government spending, will leave little scope for the RBNZ to cut interest rates in coming months. Futures market pricing implies rate cuts could come as early as next month, but this now looks much less likely.

And here’s Khoon Goh, ANZ National’s senior economist and interest rate strategist:

This is the largest fiscal stimulus since the 1997 tax cuts. Even with the deteriorating economic outlook, such a sizable package will have the RBNZ on notice. Not enough for them to hike, but certainly enough for them to be wary of the potential reflationary role fiscal policy could play.

Any smidgen of satisfaction or hope from Cullen and Clark that this budget might be able to rise above our stagflationary morass was wiped out in an instant.

This rise in the currency and interest rates will hurt us all and almost immediately. This is another kick in the guts for exporters. Businesses relying on variable interest rates are likely to pay almost immediately, either in the form of higher interest rates or in interest rate cuts that now won’t eventuate.

And at the end of the day it is about growing the national income, not just how to spend it.

It all seems so pointless now. This Budget aimed to put between $12 and $28 a week of tax cuts into wage earners’ pay packets from October 1, a few weeks before the election. However, any taxpayer with a $200,000 mortgage who misses out on a 0.5% cut in interest rates will miss out on $19 a week in lower interest payments. About $40 billion of fixed rate mortgages will roll over between now and the election. The interest rates on those will be around 9.5%, up from around the 8% they fixed at two years ago. That’s nearly $60 a week in extra interest costs. Let’s not forget the $60 to $70 extra in food and petrol costs too for most families.

They giveth with one hand and taketh with the other.

Dr Cullen and Miss Clark have failed the central challenge of our times. We must throw the kitchen sink at beating inflation and turning around a slide into stagflation. Leaders take tough decisions in tough times and we respect them for it. The tax cuts should have been postponed and government spending should have been restrained. Any new spending should have been focused on infrastructure and productivity increases.

This Budget was collectively the most expedient, shortsighted and venal decision in nine years of this Labour government.

It will be their last.

No-one can accuse Bernard of mincing his words. But he is right to be concerned. This budget may give us stagflation for several years if we are not careful – high inflation, high interest rates and low economic growth.

Some commentators have speculated that this could be deliberate. That Labour know they will probably lose in 2008, but that they can reduce National to a one term Government if they leave them a stagflating economy, as people always blame the Government in power. Bill English will have his work cut out repairing the damage.

Bernard Hickey reacts to news that a Hong Kong company is buying the Wellington electricity network by blogging that the Government has a choice between hypocrisy or stupidity.

The government now has to choose between blocking the deal, which would be stupid and dangerous, or approving the deal, which would expose the government’s recent comments on foreign ownership of strategic assets as politically motivated and opportunistic hypocrisy. I suspect it will choose hypocrisy and hope no one notices.

Indeed, they appear to be doing so. They have this magical invisible list of strategic assets which they won’t let anyone else see. And whether or not an asset is strategic or not seems to be pure political whim.

But let us look at the difference between Auckland Airport and the Wellington power lines:

1. Electricity is arguably the most vital utility
2. Every Wellingtonians uses electricity everyday, while relatively few Aucklanders use the airport every day
3. While inconvenient there are other airports Aucklanders could use, while Wellingtonians have no other option for getting electricity to their homes.
4. There are alternatives to air travel such as car, bus, train and boat. There is no real alternative to electricity

So how on Earth you must wonder does a Government deem a Canadian pension fund buying a 24.9% voting stake in Auckland Airport an evil evil takeover which must be stopped at all cost, yet having the richest man in Hong Kong buy 100% of Wellington’s electricity network not even worth a pause for consideration?

Is this the same Prime Minister who declared at her Congress that asset sales were a defining issue? WHat has happened to the lofty rhetoric in just two weeks?

Now please don’t think I against the sale. I think foreign investment is good and necessary in New Zealand. Without it we would be a lot poorer than we are. I would not stop either deal. But the Government’s hypocrisy is massive.

Bernard looks at the issue further:

Just a few weeks ago two junior ministers in the government decided to block a deal to sell a significant stake in Auckland Airport to a Canadian pension fund. They did so after Finance Minister Michael Cullen shifted the goalposts near the end of the bidding process by saying the Overseas Investment Office should consider blocking foreign acquisitions of strategic assets on sensitive land. This cost Auckland Airport shareholders dearly and damaged New Zealand’s reputation as a reliable place for foreign fund managers to invest. It was a blatantly opportunistic, political decision with little rhyme or reason apart from it helped Labour in the polls, marginally.

So the question now is: Do Michael Cullen and Helen Clark believe that Wellington’s power network is a strategic asset on sensitive land?

The availability of power to the nation’s capital sounds strategic. Would the Beehive work without power? What about the Ministries of Defence, Foreign Affairs, Agriculture (Biosecurity), Education and Health? Sounds important and strategic to me. What about the Reserve Bank of New Zealand and Treasury? Don’t they manage our financial system and wouldn’t they be our crisis managers in a financial crisis? Then there’s a mere trifle of around a tenth of the population needing that network to keep working and living.

Bernard also points out the proposed buyer has connections to the Chinese military, and there have been official warnings in the US about him. So the question again is:

But will our government judge a man who was considered by the US government to be a security threat as safer than bunch of Canadian pension fund managers to run a network supplying power to the heart of the nation? Looks like they will. …

This just shows the naked hypocrisy of the Auckland Airport decision. If Auckland Airport is a strategic asset on sensitive land then surely Vector’s Wellington power network is too. If so, the government should reject this latest deal.

Having said that, I think the government should choose hypocrisy over stupidity. We need the money and we can’t afford to damage our reputation as a safe place for international investment any more than it already has been.

I agree hypocrisy is preferable over stupidity in this case, but people should be in doubt the total lack of consistency in the two cases, and that Auckland Airport was merely about polls, not what is good for New Zealand or even a honest belief for or against foreign investment. I can respect people who honestly believe foreign investment is bad. The trouble with Helen and Michael is they know it is good (otherwise would block this deal), but when down in the polls revert to xenophobia to ramp up hysteria against foreigners investing in NZ.

Bernard Hickey blogs that home affordability got worse in March – to an all time low in the Fairfax Media home loan affordability series.

The median house price increased slightly in March, and interest rates crept up another 10 basis points to produce the worse ever result:

The proportion of median take home pay required to service the mortgage on a median house rose to 83.1% in March from 80.2% in February and surpassed the record 83.0% seen in November last year when house prices hit their peak.

This is also worse than the 77.8% seen in March last year and almost double the 44.2% seen in March 2003 when housing was seen as only just affordable. Most bankers believe anything more than 40% of after tax pay is unaffordable.

In Wellington it is even dimmer. One would need to spend 90.7% of your take home pay to service a mortgage on the median house. In Auckland 96.8%.

Nationally one needs an after tax income of $1,421.76 a week to have only 40% of your take-home pay go on the mortgage. That is $2,100.95 gross a week or $109,549.50 annually.

So if you earn less than $110,000 a year you can’t afford the median house unless you devote more than 40% of your net income to the mortgage.

No Right Turn blogs that he believes the NZ First advertisements do breach the Electoral Finance Act as “a reasonable person would regard it as an encouragement to vote for NZ First”. I agree. As Idiot/Savant says it is not a survey, it lays out policy and encourages approval of it.

Poneke has more on the BBC story on climate change which got modified. The reporter denied he did it under pressure, but an activist has blogged she successfully pressured him to change it.

The visible hand in economics looks at fixed vs floating exchange rates.

The DAFT Party has a solution for China over Tibet. It is to rename China to Tibet, and declare they are all Tibetians. The PRC Government should see the sense of this now they are running a market economy – you replace a tarnished brand with a more positive brand!

Bernard Hickey has video and a blog post on Alan Bollard’s speech suggesting we are talking ourselves into a recession. Bernard says we’re not, and if we do have a recession, it is because we deserve it! Them’s fighting words! It’s a lengthy excellent post with many graphs.

Very welcome news on Monday that Kordia is going to invest in a new fibre cable between New Zealand and Australia. Initially it will have 240 Gb/s of capacity. But it it not just the capacity that is welcpome, but the competition it will provide to Southern Cross Cable and Telstra who have pretty much all the international bandwidth.

Southern Cross Cable has also announced a boost in capacity to 860 Gb/s so we will in a few years have 1 Tb/s capacity. But that only allows 125,000 to be using the Internet at the same time at 8 Mb/s or 1 MB/s.  The SCC has 2.5Tb/s maximum capacity but new technology may push this even further.

The other fibre that has been in the news had been the NZ Institute’s proposal for how to get fibre rolled out to 75% of premises by 2018.  Basically they propose the creation of a dedicated fibe company which will do the last mile fibre to homes, and provide open access to all providers at a regulated price. They estimate this will cost between $4 and $5 billion based on 25,000 kms of fibre duct at $150,000 per km.

They also estimate that $3 to $4 billion of that can be met by private investment and that a Government commitment of $1 billion over ten years ($100 million a year) is needed to reach 75% of the population.

Bernard Hickey supports the plan and says:

The goverment has already posted a budget surplus before accounting gains and losses of $3.649 billion in the seven months to the end of January. That’s an average of $521 million a month.

Meanwhile our productivity growth keeps slowing, as this chart on the left shows. Just imagine if many of us could work from home with much faster connections and we could access overseas markets more easily.

Surely it’s time our government did something useful with that money to invest in the nation’s future. I can think of nothing better than spending $1 billion of public money to build a broadband network that would generate around $4 billion a year in economic benefits. It would pay for itself in extra tax revenues within a year or two. Just imagine if the government had done this three years ago instead of wasting money with its nutty free student loans (bribe).

I’ve yet to fully get to grip with the pros and cons of the NZ Institute proposal, but I think it is an excellent contribution to the debate, and am trying to learn more about it.

Rod Drury has also blogged in support of it:

The FibreCo solution is very logical and I think takes into account the concerns of the many stakeholders around this issue. Some very smart people took the time to really think about this.

I like that it balances private and public sector needs. It builds on what we learned as a country in the 70’s, 80’s and 90’s. It is a savvy financial solution.

I think there is going to be a lot of discussion this year on fibre.

Poneke has a vigorous debate on his blog about a BBC story that cast doubt on the extent of global warming, and how the BBC then changed its story.

Bernard Hickey writes on why the Reserve Bank should not yet lower the cash rate. I agree with him that there remain domestic inflationary pressures.

Bridget Saunders has an amusing blog on who are the real men. She names as real men – Richard Sigley, Rodney Hide, Matthew Ridge, Pat Rippin and Dave Henderson. Non real men are Brent Todd, Tea Ropati, Daniel Moyes, Helen Clark and Julie Christie.

Politico look at the possible VP choices for Obama.

Bernard Hickey blogs on what the latest Wall Street panic means for us, and it isn’t pretty.

JPMorgan Chase has moved to purchase Bear Sterns, but for only US$2 a share, which is a total value of just $236 million. On March the 14th the shares were trading for $30 a share, which valued the company at US$3.54 billion. A year ago they were worth $10 billion. Their annual turnover is $16.2 billion so $236 million is almost saying they are worthless.

I got e-mailed this graphic from a contact who got it from a staffer at the International Monetary Fund.  I think it may have been in the Washington Post, and it is a useful guide to what happened.

Anyway back to Bernard:

The news coming out of Wall St this morning is simply shocking and is something every New Zealander should understand and care about.

Put simply, panic and fear rule in the world’s financial capitals right now and it will cost us all in one way or another and sooner or later. …

Translation: This is big, don’t think it won’t affect you.

In the last five years since our debt-fuelled consumption and housing boom started in January 2003, we have borrowed around NZ$39.6 billion from foreign investors.

Translation: We owe a lot of money overseas and are vulnerable to anything that may impact what those investors do.

The moment we lose the confidence of these housewives and dentists is the moment our interest rates rise and our currency collapses. This has been referred to as the Uridashi Tsunami. We know it’s coming. We just don’t know when.

Translation: Start getting off the beach now, not once you can see the tsunami about to hit.

All this means that wholesale interest rates are likely to keep rising. That means mortgage rates are likely to keep rising. Maybe not this week, but maybe next month and the month after that. Oil prices are likely to keep rising because they rise when the US dollar falls. The Fed’s desperate moves to pump money into the markets will simply increase inflationary pressures globally. Petrol and food prices are likely to rise further.

The squeeze on disposable incomes for anyone with a big mortgage will get tighter and tighter.  Our economy will slow and may even fall into a recession. That is stagflation.

Translation: We may get the worse of both worlds. High interest rates, high prices and low economic growth.

Bernard Hickey looks behind the headlines in the Crown accounts. Forget the investment write-downs he says:

Government spending is growing at a rate of 9.8%, which was more than twice as fast as revenue growth at 4.5% and twice as fast as estimated nominal GDP growth at around 5%. The government is eating the economy.

Watch the OBEGAL. It is barking that the government is spending too much and taxing too much and employing too many bureaucrats. It is biting us with low productivity growth because our best and brightest are becoming highly paid bureaucrats who now call themselves senior policy analysts. We’re all paying for this with higher wages costs, higher inflation and lower GDP growth.

Ignore this month’s deficit. Pay attention to a government eating the economy.

Eating the economy. A very nice way of putting it.

Hat Tip: The Hive

The Government’s decision to change overnight without warning the rules around overseas investment into NZ is surely a sign of poll panic leading to a desperate attempt at populism.

This is not just about Auckland Airport.  That deal was looking shaky anyway.  It is about having consistent rules that are not changed halfway through a process. And it is also about having a degree of objectivity about over investment decisions.

Financial journalist Bernard Hickey blogs:

The government’s decision overnight to invent a new rule that allows it to block the sale of Auckland Airport is a stunning turnaround of decades of official policy. It will hurt our ability to encourage foreign investors to come here and help us pay for our current account deficit. It is also another sign that the government is on its last legs. Fearing it may not be in power for too much longer, it is showing its true colours and is embedding its naturally anti-foreign-investment instincts into law. 

Suddenly the government has decided that selling the Auckland Airport is a bad idea. It has invented a rule that says it can block any sale of ”strategically important infrastructure on sensitive land” …

I believe there could be a lot of sensitive land out there that needs to be protected from foreign investors. After all, this land could be insulted or bruised in many ways. Are you confident that a minister of the crown can decide this for the nation without reference to Parliament or voters in an election? And will foreign investors give our government the benefit of the doubt whenever they’re considering buying an asset here on “sensitive land”?  

There are a hundred of these types of assets on this type of land. What about our banking system? There is no more strategic asset. Should the buildings with the servers hosting all our accounts be seized back by the government? I jest just a little here, but it shows the absurdity of this decision and how it could be extrapolated by an even more insensitive and insane government. For example, what about the assets of Fletcher Building. It is held in large part by foreign investors and is responsible for a good chunk of New Zealand’s public and private infrastructure building. Sounds a good enough reason to stop foreigners from owning it.

Read Bernard’s full column.  It is justifiably scathing.  This is a kneejerk abandonment of a decades old policy. And it is not a reversal after public consultation, and careful policy analysis. It is poll driven panic politics. Bernard goes on:

And finally, what was the government of a debtor nation with a current account deficit of around 8% of GDP thinking? That it doesn’t matter if we discourage foreign investment? That the foreign institutional investors will understand if we change our minds about the fundamental rules of the game right at the end of a bidding war? That they won’t mind? This is a plainly dumb thing to do when we need foreign investors to keep funding our way of life and building up our infrastructure. We spend more than we earn. We need to borrow from foreigners to do that or we need to encourage foreign investment.

What will turning off foreign investors mean for voters? It will mean higher interest rates on mortgages. When foreign investors believe we are a riskier proposition, they will increase the risk premium they demand for the money they lend us. That will increase wholesale interest rates and that will be passed on (as we’ve found in recent weeks) to us in the form of higher mortgage rates.

What on earth was the government thinking? Clearly, it was not thinking clearly at all.

And NBR Editor Nevil Gibson writes:

The simple take from the government’s decision to tighten overseas investment rules is that the country’s ports and airports will be run more by political whim than business strategy.

In a sudden move, taken a year after the first move by overseas interests to take control of Auckland International Airport, the new rules extend the ‘importance of local control’ to the approval process.

Under the Overseas Investment Act regime, two cabinet ministers have to approve changes of ownership of ‘sensitive land.’ In other words, political imperatives are paramount to business ones.

Even if one agrees with the rule change, the way the Government has gone about it is atrocious. The Canadian Pension Fund could have saved millions of dollars if it was told a year ago, the Government will not allow the airport to be sold.  They could have announced an intention a year ago to change to the rules and consult on them.  Investors – both domestic and foreign – will be very wary of a Government which acts so capriciously. And as Bernard Hickey says – the price may come in higher interest rates.