CTU Monthly Economic Bulletin
No. 72 (August 2006)

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Comment
Housing affordability is a major issue. An international survey by Demographia released early this year used data from September 2005 compared the median household income in an area to the median house price. For a market to be rated affordable the median price had to be 3.0 or less times the median income. Markets where the median multiple was between 3.1 and 4.0 were rated moderately unaffordable, those with a multiple between 4.1 and 5.0 seriously unaffordable and those above 5.1 severely unaffordable. Auckland had a median multiple of 6.6 - based on a median income of $57,800 and median price of $383,300. Christchurch had a 5.9 multiple - income $46,500, price $275,000 and Wellington had a 5.2 multiple with income of $57,400 and a median price of $296,500. The Reserve Bank has noted that “the outstanding debt of households has increased strongly since 1990, quadrupling in dollar terms and more than doubling as a percentage of households' disposable income”. Household debt as a proportion of annual household disposable income has gone from 60% in 1991 to just under 160% today. Of course household values have also increased but this does not help those trying to buy a home.

A separate study is the New Zealand Home Affordability Index which uses house prices, mortgage interest rates and wages to develop a measure of home affordability. This index has shown a decline in home affordability for the last 16 quarters with an 11.2% decline in the index in the last year. For instance, in the most recent period, the New Zealand Median Dwelling Price moved from $295,000 to finish the June quarter at an all time high of $305,000, a lift of 3.4%. This price increase, combined with a continued upward creep in interest rates, offset a 2.3% lift in wages over the quarter. The 2001 Census showed a drop from 74% in 1996 to 68% in the rate of home ownership. There was also a somewhat controversial survey by ACNielson which found home ownership numbers had fallen 12% to the year ended March. The Household Expenditure Survey showed that households owning their own house with a mortgage spent 16.7% more on mortgage payments in 2003/04 than in 2000/01. Expenditure on housing contributed the most to total household expenditure, averaging 24 cents in every dollar spent. For households that rented, average weekly household expenditure on rent increased by 10%, to $185 in 2003/04. Rent payments accounted for 25% of the total average weekly expenditure of households who pay rent. This comes on top of the fact that the proportion of household income paid out as rent doubled between 1981 and 2001.

More recent statistics show that property values increased by 11.1% in the July 2006 quarter compared with the same period in 2005. The average New Zealand sale price was $336,272 for this period. The trend is for property prices to rise but at a lower rate in the last 6 months to what we have seen in recent years when we have had annual increases well over 20% in some years. This is also affecting local body rates. The accumulated effect of this sort of increase means it is no surprise that Barfoot & Thompson report that the average Auckland house price for this month jumped was $487,229. The trend is also for more people to rent. Professor Bob Hargreaves from Massey University says the number of new tenancy bonds has increased an average of 4% a year over the past 10 years.

What can be done about this situation? A capital gains tax on all but primary residences would help. The changes in income related rents have assisted. The mortgage insurance scheme helps some people. Accommodation supplement payments reduce the burden for others. Better town planning to ensure available land is in good supply might reduce land values over a period. An increase in state and local government housing would be beneficial. The KiwiSaver scheme home deposit assistance when it comes on stream could mean a couple could get $10,000 from the Government. That will be a significant contribution. Mortgage interest payments may come down a bit next year and a have a flow on effect into fixed mortgages in 2008. More investment in building trades may help the supply of tradespersons and slow the rate of costs increase.

But all these factors are, in my opinion, less significant than the fact that home affordability can only improve if real wages grow significantly each year. So – like many other problems in our economy – low wages are a major factor. This does not mean that all other measures should not be considered. But there is a limit to the extent the Government can produce schemes that make housing more affordable when low wages are at the core of the problem. As the Demographia survey shows – it is not so much that median house prices are not high in many other cities around the world. But their median wages are also high.

Consensus forecasts (note1)  published by NZIER 
The consensus forecasts were updated in June 2006.  

Economic Snapshot
Consumer prices rose by 1.5% in the June 2006 quarter and were up by 4% annually. Food prices were up by 3.4% in the July 2006 year. The next CPI update is on 25th October 2006. Unemployment is at 3.6%. M?ori unemployment is 8.2% and Pacific peoples’ unemployment is at 5.9% compared with 2.4% for European/P?keh?. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey (note 2) for June 2006 were up annually by 4.4% (4.9% in the private sector and 2.0% in the public sector). The QES showed that the average ordinary time wage is now $21.84 ($20.39 private, $27.45 public). The female rate of $20.06 is 86.1% of the male rate of $23.30. The Labour Cost Index shows that ordinary time wages went up by 3.3% (3.0% private, 4.2% public). The key statistic for unions to note probably is that the LCI shows that where there were wage increases in the last measured quarter, the average rate of increase was 4.9% and the median increase was 4.0% (the average for the year was 5.4% and the median was 4.2%). The next update of wages data is on 6th November. Economic activity (GDP) increased by 0.7% in the March 2006 quarter and was up by 2.2% for the March 2006 year. The next GDP update is on 29th September, 2006. The official cash rate set by the Reserve Bank is 7.25%.

Wages
Wages continue to show much better increases than a few years back but the comment by John Edwards of HSBC was typical of economists when he said that “from these numbers it is quite evident that New Zealand wages growth is not accelerating”. Salary and ordinary time wages, as measured by the Labour Cost Index (LCI), increased by 0.7% in the June 2006 quarter and by 3.3% for the June 2006 year. In the public sector the increase was 4.2% compared with 3.0% in the private sector. In the year to the end of the June 2006 quarter, 60% of salary and ordinary time wages in the surveyed sample increased. For those who actually got an increase, the median increase in the last quarter was 4.0% and the average was 4.9%. However for the June 2006 year the median increase was 4.2% (4.1% in the private sector and 4.3% in the public sector) and the average increase was 5.4% (in both public and private sector). Of the 60% who got an increase in the last year, 21% got more than a 5% rise, compared with 7% in the June 2000 year and 12% in the June 2004 year. There were 25% who got more than 3% but less than 5%, compared with 6% in the June 2000 year and 18% in the June 2004 year. Statistics NZ also publishes an unofficial unadjusted Labour Cost Index. The adjusted LCI measures wages based on specific job descriptions so does not measure increases due to promotion, grading changes, new job categories and so forth. Before adjustment, the annual increase was 5.5% for the last year.

The Quarterly Employment Survey (QES) shows that total gross earnings increased by 7.7% for the June 2006 year. This includes the effect of wage increases, more hours, and more jobs. Ordinary time wages increased by 4.4% for the June 2006 year compared with 5.3% and 5.4% for the two previous years. The 4.4% increase in the June 2006 year comprised 4.9% in the private sector and 2.0% in the public sector. The average ordinary time hourly rate is $21.84. It is $20.39 in the private sector and $27.45 in the public sector. The female ordinary hourly wage of $20.06 is 86.1% of the male rate of $23.30.

Employment
The Quarterly Employment Survey shows that full-time-equivalent employment increased by 4.0% for the June 2006 year. Unemployment has reduced to 3.6%, second lowest in the OECD. The Household Labour Force Survey showed that employment grew by 22,000 in the quarter to reach 2,129,000. Over the year the HLFS shows a 3.0% increase which is 63,000 more jobs. Unemployment is 3.2% for men and 4.0% for women. The unemployment rate for those aged 15 to 19 years is 13.6% and 5.5% for those aged 20-24. This compares with 1.6% for those aged 50-54 years. P?keh? unemployment is at 2.4% compared with M?ori at 8.2%, Pacific peoples at 5.9%, and other ethnic groups also at 5.9%. No region has an unemployment rate over 5%. M?ori youth unemployment statistics are not directly reported but information from the Census and Statistics NZ shows that M?ori youth unemployment is at 26.8% compared with 31.8% in 1999 and 42.8% in 1991. For M?ori aged 20-24 the unemployment rate is 13.2% compared with 24.4% in 1999 and 31.9% in 1991. While this reflects in part the fact that there are proportionately more young M?ori than P?keh? in the labour market, it also shows ongoing disadvantage and discrimination.

The overall number unemployed is 79,000. Those underemployed (wanting more hours) number  68,100 (compared with 107,600 five years ago) and the number of jobless (this adds to the official unemployed those who are seeking work but not currently available, or are available but are discouraged or not actively seeking work) is 137,200 – down from 161,200 in March 2006. It is still a ‘tight’ labour market but according to the Quarterly Survey of Business Opinion (QSBO) there is now a net 25% of firms having more difficulty finding skilled staff at June 2006 (down from a net 61% at December 2004).

Worker Turnover
We have previously advised that the Linked Employer Employee Data (LEED) series shows that there are just under 300,000 instances each 3 months when a worker starts a new job. The IRD now advise that they calculate that on current figures 700,000 workers will change jobs a total of 1.2 million times in a 12 month period. Statistics NZ have also been looking at LEED data from last year and note that in the year to June 2005, an average of 29,180 employees per quarter in the agriculture, forestry and fishing industry began work with a new employer and 28,830 left an employer. This resulted in the highest average quarterly worker turnover rate (33.2%), which was well above the all industries average of 17.4%. The high rate is attributable to the significant seasonal nature of employment in this industry. Bay of Plenty (41.8%) had the highest average quarterly worker turnover rate in that industry while the lowest was in the Taranaki region (23.6%).

Food Prices
Food prices rose 0.8% in July alone and 3.4% for the year to July 2006. The most significant increase was in fruit and vegetables (up 16.4%).

Producer Prices
Both output and input prices in the Producers Price Index (PPI) rose 2.7% during the June 2006 quarter with increased fuel and energy prices the main driver. On an annual basis, the PPI outputs index rose 5.6% and the PPI inputs index rose 7.8%.

Population
Our population has reached 4.14 million.

Trade
The trade figures continue to look ugly. The huge increase in the cost of petrol imports is a significant reason. This is being partly offset by lower vehicle imports. But exports are also up so it is not all doom and gloom. If the cost of oil imports reduces and export values keep rising then we may see a slow climb out of the current situation. However, the current account deficit is still at around 9% of GDP driven to a large extent by our investment income deficit. The trade balance for July 2006, was a deficit of $745 million, the largest ever recorded for a July month. This was exacerbated by a one-off import item of $244 million. Exports and imports are up 24.2% and 23.2% respectively on July 2005. The monthly trade balance for July 2006 was a deficit of $745 million (24.7% of exports), the largest ever recorded in a July month. The annual trade balance for the year ended July 2006 was a deficit of $6.7 billion (20.4% of exports). Imports of merchandise goods for the year ended July 2006 were valued at $39.7 billion, up $3.8 billion (10.4%) on the July 2005 year. The commodities contributing most to the increase were petroleum and products (up $1.5 billion) and aircraft and parts (up $1.4 billion). Exports of merchandise goods for the year ended July 2006 were valued at $33.0 billion, up $2.4 billion (8.0%) on the July 2005 year. The main contributor to the higher exports value was milk powder, butter and cheese (up $940 million). The New Zealand dollar, as measured by the Reserve Bank's Trade Weighted Index was 10.2% lower in July 2006 than in July 2005.

Migration
In the year ended July 2006, there were 80,700 permanent and long-term arrivals, up 2,100 (3%) on the July 2005 year. Over the same period, departures decreased by 3,100 (4%) to reach 68,600. The overall result was a net migration gain of 12,100 in the July 2006 year, which is up on the net inflow of 6,900 people in the previous July year. In the year ended July 2006, there was a net inflow of 10,600 from the United Kingdom, up 15% on the July 2005 year figure (9,200). This is the highest net inflow from the United Kingdom for the last 30 years. There were also increased net inflows from Fiji (2,400), India (2,100), Japan (1,800), Germany (1,500), China (1,500), Philippines (1,400) and South Africa (1,300). The net inflow from Asia increased from 6,300 in the July 2005 year to 9,300 in the July 2006 year. The highest net inflows from Asia in recent July years were recorded in 2002 and 2003 (both 30,100). The annual net outflow to Australia increased from 19,900 in the July 2005 year, to 20,500 in the July 2006 year. This is still well below the net outflow of 30,000 to Australia in the July 2001 year. This level was similar to the net outflow of 28,000 in 1979 and 33,400 in 1988.

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

Note 1 - Average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand, and Treasury. This forecast gets overtaken by more recent ones as the quarter continues but is included because it is a consensus forecast.
Note 2 - The QES as a measure has “compositional problems” meaning that if there is more employment of workers in a higher than average wage part of the labour market, this shows up in the QES as an increase in average wages. So the labour cost index is a better measure. However, it tends to miss increases in pay due to promotion or new job categories.