CTU Economic Bulletin No. 53

October, 2004

Comment

The proportion of New Zealanders owning their own home is falling. Home ownership rates were down from 72% in 1981 to 68% in 2001 . The rate of home ownership for M?ori has fallen in that period from 48% to 44% and for Pacific peoples from 39% to 35%. Median house prices are up by 16.3% in the September year (a drop from the over 20% figures from earlier this year) whereas private sector wages are up by 2.2%. But this has been a trend for a number of years. For instance, in the year ending August 2003, house prices in New Zealand increased by 16% and rents increased by about 8%. A typical low-income worker needs about 20 hours a week to cover rent (27 hours in Auckland). In the last decade, there has been a 44% decline in the 25-44 age group of home-buyers. In the past two years, the proportion of first home buyers who are under 30 in New Zealand has fallen from 48% to 39%. This is primarily due to: increased competition between first home buyers and property investors, house prices rising faster than incomes, casualisation affecting income security, student debt, removal of specific assistance for entry into home ownership, and changing family arrangements as the number of households increases but the size of households is falling.

This is the context for debate on forms of assistance for first-home buyers. There is no shortage of suggestions. A Submission from the Campaign for Affordable Housing suggested: low interest loans, shared equity (social housing), sweat equity, suspensory loans, low start mortgages, and relaxed lending criteria. They were also very critical of the way the Accommodation Supplement ends up subsidising private landlords. The ability to buy a home or pay rent also depends crucially on income levels so the minimum wage rate and ability to bargain collectively are also relevant. A significant increase in the state housing stock could directly address the demand for housing and indirectly influence house prices (at least in some areas). Local government and community housing could also be increased. The mortgage insurance scheme (through Kiwibank) should be improved. Home savings incentives could be introduced where the Government tops up those saving for a first home. There are various suggestions about capitalising benefit payments. It is hard to capitalise something that people need for day to day expenses. Also if the new in-work payment was able to be capitalised there could be problems with the status of this when a worker loses their job and the in-work payment. If the accommodation supplement was capitalised then it is hard to see how mortgage payments would be made when the AS is often used for that purpose. Capitalisation is much easier with a universal benefit.

If these approaches are not used, then it may be best to investigate a stand-alone grant to first homebuyers. In Australia there is a $7000 (NZ$7450) first home buyer grant and some concessions on duty.

Although the falling rate of home ownership is a symptom of low-incomes, simply increasing the proportion who own their own home is not the sole answer. A Government discussion document on housing strategy noted that "Home ownership does not always protect people from poverty. A recent study in the United Kingdom found that 50% of households in poverty are home owners". But there is no doubt that a new scheme is required to assist those on low incomes into home ownership.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.6% in the September 2004 quarter and were up by 2.5% annually. Food prices increased by 1.3% in the September 2004 year. Unemployment is at 4.0%. The minimum wage is $9.00 for those aged 18 years and over and $7.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey for June 2004 were up annually by 4.2% in the private sector and 4.1% in the public sector. The average ordinary-time-hourly wage as measured by the QES is $20.20. For the private sector it was $19.02 and for the public sector it was $24.57. For females it was $18.54, for males $21.57. The Labour Cost Index (for June 2004) showed private sector wages up 2.2% for the year, with public sector wages up by 2.6%. The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last measured quarter, the average rate of increase was 4.1% and the median increase was 3%. Economic activity (GDP) increased by 0.9% in the June 2004 quarter and 4.4% for the June 2004 year. The official cash rate set by the Reserve Bank is 6.50%.

Consumer Price Index

Consumer prices rose by 0.6% in the September 2004 quarter and were up by 2.5% annually. The most significant upward contributions to the CPI came from housing, tobacco and alcohol for the quarter and for the annual change construction prices (up 9.0%) and petrol (up 11.9%) were the main factors. I have already sent out a table of CPI increases since 1987 and the updated CTU real wage calculator. The BNZ are picking a 1% increase in December quarter CPI driven mainly by higher food prices. This will mean an annual figure of 2.8%. The CPI could briefly go above 3% during 2005. The September CPI Consensus (average of 11 agencies such as Banks, Economic Consultants, Treasury, RBNZ) is for annual inflation of 2.7% for the year to March 2005 and 2.5% for the following year.

Interest Rates

The official cash rate has now been lifted to 6.5%. The signal is that further increases this year are unlikely. But this is the sixth rise this year and means interest rates here are the highest in the Western world. The damage done to productive investment, the demoralising effect on those trying to buy a house, the disparity between small wage rises and significant increases in mortgage interest payments, and the risk of a much sharper dip in economic activity next year are all good reasons to have avoided this most recent increase.

Employment

The ANZ Survey of Job Advertisements showed a rise of 0.9% in September bringing the annual rate to 15.4%. Internet advertising and high demand for labour in rural areas are the key drivers along with underlying labour shortages.

Work Stoppages

Seven work stoppages ended in the June 2004 quarter, comprising five complete strikes, one partial strike and one lockout. There were 35 stoppages in the June 2004 year. This comprised 12 from manufacturing, 6 in community and health services, 5 in education and 12 in other industries combined.

Hours of Work

A recent ILO Report called Working Time and Worker's Preference in Industrialised Countries: Finding the Balance found that 20% or more of the workforce in the United States, Australia, New Zealand (21.3%) and Japan work at least 50 hours a week, compared with fewer than 10% in most European countries. The report found that there are groups of workers with excessively long hours who would prefer to work less, and at the same time, there is a sizeable group of workers whose hours of work are significantly shorter than they would prefer.

Annual Enterprise Survey

The provisional Annual Enterprise Survey shows a 3.7% increase in income in the 2003 financial year for industries surveyed. A higher New Zealand dollar resulted in increased consumer spending on cheaper imports. Inflows of permanent and long-term migrants resulted in many industries recording increases in total income. Industries such as construction (up 13.1%), property and business services (up 10.5%), and retail trade (up 8.2%), recorded strong growth. The stronger dollar and falling international commodity prices adversely affected several export-oriented industries.

Trade

The August 2004 year saw a trade deficit of $3.83 billion, up $1.01 billion on August 2003. The August month deficit was $718 million, or 30.3% of exports. The estimated trade balance for the September 2004 month is a deficit of $1,020 million, or 47.4% of exports with an annual deficit of $4.09 billion. The ANZ Bank world Commodity Price Index rose 0.3% in September and is up by 22.2% from a year ago. In New Zealand dollar terms Commodity Prices dipped 0.5% in September but are 10.3% up from a year ago. Fonterra has announced a 20c lift in its forecast payout from $3.85 per kilogram of milk solids to $4.05. Meanwhile, the BNZ is forecasting that, a year from now, the current account deficit will go above 6.0% of GDP and within two years could be back to the level in the late 1980s when the deficit went higher than 8.0% of GDP. The basis for their concern is that in the last 12 months, even though export prices have increased 3.5% while import prices have dropped 3.9%, the balance of trade has nevertheless moved from an annual peak surplus of $3.7 billion (3.1% of GDP) in the year ended September 2001 to a large deficit this year.

Retail Sales

Retail sales did not increase in August. The latest figure on the annual increase in sales is just over 6%.

Tourism Figures Improve

161,200 visitors came to New Zealand in September 2004, which was 9% up on the same month last year.

Housing

The median house price was $250,000 in September. The Auckland median house price was $337,000 and the average $414,000. Auckland house prices have fallen for 4 months in a row. Consents for 2,291 new dwelling units were issued in September 2004, down 712 units (24%) compared with September 2003. The trend for the number of new dwelling units has been declining since January 2004. But consents for non-residential buildings was $366 million in September 2004, up $108 million (42%) compared with September 2003.

We're all getting older . . .

In 1991, half of the labour force was aged over 36 years. The median age of the labour force is currently 40 years and is projected to reach 42 years in 2014. The proportion of the population aged 65 years and over who are in the labour force increased from 6% in 1991 to 8% in 2001 and is on track to reach 13% in 2011.

Tax Comparisons

A recent OECD survey shows that for someone on the average wage, the gap between gross wages and take home pay is 21% compared with 24% in Australia and 25% in the OECD generally. Company tax at 33% is above the OECD average of 30.8% but 15 OECD countries have a higher company tax rate.

Migration

In the year ended September 2004, there were 81,800 permanent and long- term arrivals, down 13,700 (14%) on the September 2003 year. Over the same period, departures increased by 9,000 (16%) to reach 64,100. The overall result was a net migration gain of 17,800 in the September 2004 year, 56% lower than the net inflow of 40,400 people in the previous September year. In the year ended September 2004, there was a net inflow of 9,300 from the United Kingdom, down 3% on the September 2003 year figure (9,600). There was also a net inflow from China of 3,700, down from 13,000 in the September 2003 year. Overall, net inflow from Asia has reduced considerably, from 27,800 in the September 2003 year, to 11,600 in the September 2004 year. There was a net outflow to Australia of 13,600 in the September 2004 year.

Future of Work?

The robots aren't just coming. They're here. Falling or stable robot prices, increasing labour costs and continuously improved technology are leading to much greater use of robots in the home and industry. Japan uses about 320 robots of all sorts per 10,000 employees, while Germany uses 148 industrial robots per 10,000 employees, Italy 116, Sweden 99 and between 50 and 80 each in the United States, Finland, France, Spain, Austria, Denmark and Belgium, the Netherlands and Luxembourg. In the car industry, there is one robot per 10 workers in Japan, Italy and Germany.

Wage Increase Measures

I have been asked to explain why there are such significant differences in the two statistics that measure wage increases. I have commented on this above but will go into more detail here. The Quarterly Employment Survey (QES) comes from a survey of 18,000 businesses. The QES does not provide a reliable measure of wage increases as it is not possible to distinguish between increases in the numbers of employees and paid hours from pure wage increases. The QES collects total payout information for each business in the survey. An increase in total payout does not necessarily indicate that there has been an increase in wages. Total payout for a firm could have increased because more people were employed, more hours were worked, more qualified people were employed, more full-time workers were employed, etc.

However, wage increases excluding these (compositional) effects are measured by the Labour Cost Index (LCI). The LCI is a postal survey of employers and measures movements in salary and wage rates for a fixed quality and quantity of work, and is therefore a better measure of pure wage inflation. Service increments, merit promotions and increases (and decreases) relating to the performance of employees are not shown in the LCI. One-off payments in lieu of pay rises are also excluded, as they do not result in changes to pay rates. Remember also that not all workers get a wage increase in a quarter or a year. So when the LCI shows a 2% wage increase for a year, it may mean a 4% average increase for 50% of workers and nothing for the other 50%. What unionists are more interested in is the trend where wages are increased rather than an average that includes all the zeros. In summary, neither of these surveys are precise measures of wage increases. The QES tends to overstate wage increases and the LCI tends to understate them. In recent years, the median quarterly increase in the LCI seems to be the figure that corresponds most closely with wage increases reported by unions. That figure at the moment is 3%.

For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz