Under the leadership of New Zealand Prime Minister Jacinda Ardern, the Labour Party has secured the first absolute parliamentary majority since the country introduced its proportional electoral system in 1996. Ardern now has a free hand, but is unlikely to extract her country from a political-economic straitjacket strapped tighter by the economic fallout of a global pandemic.
Australians can sense the relative weakness of the Kiwi economy in the prevalence of flattened vowels heard on their streets. In 2018, there were about 570,000 New Zealanders living in Australia, up from fewer than 300,000 in 1990.
Migration is the unsurprising effect of an economy that generates 20 per cent less output per worker than Australia and 38 per cent less than the United States, and has been losing ground on this front for 30 years. As Polish plumbers move to Britain and British doctors move to America, New Zealand baristas move to Oz.
For those remaining at home, however, economic stagnation has been combined with the most ferocious increase in housing costs in the world. According to The Economist, real house prices in New Zealand increased by 453 per cent from 1980-2016, far surpassing even the dramatic rises seen in Australia and Britain and leading to a dramatic wealth divide between those who own real estate and those who do not.
House price inflation in New Zealand has proved resilient to relative economic decline. It has been caused by a classic combination of under-supply and over-demand. Constraints on home-building are significant, and while Kiwis have been moving to Australia many more folks from overseas have been moving in. Net migration was running at about 60,000 a year in 2017 and increased to more than 91,000 in the year ended March 2020.
It is in this decades-long combination of a spluttering economy and surging real estate prices that the roots of Ardern’s 2017 election result can be found. Thrown into party leadership weeks before the election, lacking specific policy proposals but armed with a promise to build 100,000 affordable homes in a decade, the Labour leader won enough votes to govern in a coalition with the nationalist New Zealand First Party and the Greens.
In February 2020, on the eve of the global COVID-19 pandemic, Ardern had failed to deliver on her promise to address economic and generational inequality in New Zealand. Only 393 homes had been constructed under the KiwiBuild scheme and Labour’s plans for a capital gains tax had been abandoned in the face of political opposition.
NEW ZEALAND’S COVID-19 RESPONSE HAS SUPERCHARGED THE TREND OF SLUGGISH GROWTH AND HOUSE PRICE APPRECIATION.
Then the pandemic upended the political agenda. Ardern implemented one of the world’s harshest lockdowns and effectively sealed off the archipelago from the wider world to stamp out COVID-19. Kiwi voters emphatically rewarded her for this strategy on Saturday.
It is a bitter irony that after three years without progress on the core of its policy agenda, but after a historic electoral victory and with a commanding parliamentary majority, Ardern’s Labour Party now faces greater obstacles to generating economic growth and moderating wealth inequality than when first taking power in 2017.
The loss of international tourist and student dollars is a bitter blow for the New Zealand economy, and an unavoidable consequence of the pandemic. Tourism, transport and education loom large in the country’s tradable service sector and will take years to recover to pre-COVID-19 levels.
Despite state support that will cause Crown debt to almost triple to 54 per cent of GDP by 2024, a difficult restructuring process will begin as emergency government programs are inevitably wound down. Bankruptcies and lay-offs in these and other sectors affected by the lockdowns can be postponed for only so long, especially under a Labour government determined to increase taxes.
Meanwhile, the Reserve Bank of New Zealand has responded to the pandemic by cutting its benchmark official cash rate from 1 per cent to 0.25 per cent, promising to purchase $100 million of government bonds over the next two years, and is committed to pushing interest rates even lower.
This surge of liquidity has immediately affected the New Zealand real estate market, with sales up 37 per cent year on year in September and new price records being set in all major markets. New Zealand’s property have-nots are being permanently left behind as the home ownership train speeds further out of reach.