8 things at 8 am: A tale of two New Zealands; FujiXero suspends Govt contracts; Vero's Tower bid blocked

The bottom 10 percent of income earners under the age of 65 now spend around half of their income on housing costs. Photo: Lynn Grieveson

In todays' email we look at a new report which provides a stark contrast to yesterday's NBR Rich List.

1. A tale of two New Zealands

The big news in Wellington yesterday was the release by the Ministry of Social Development of its annual Household Incomes report, which is known around Government circles as the Perry Report after its author Bryan Perry.

It is the authoritative report
on income inequality and social welfare generally. It again showed income inequality before housing costs has been broadly unchanged for 20 years after worsening substantially in the late 1980s and early 1990s. But the picture is less benign after taking into account housing costs and housing quality.

Real incomes for the poorest 10 percent of households are still lower now than they were in the mid 1980s because of high housing costs. The report highlights that 75,000 children are also living in damp, mouldy and cold homes, most of which are rental properties.

The Perry report contrasts with the NBR Rich List released on Monday. The two reports neatly summarised the state of New Zealand right now. They showed the wealth of the richest sprinting ahead with property values, while the poorest are struggling with stubbornly low wages and fast-rising housing costs.

The Rich List found the wealth of New Zealanders worth more than $50 million each rose by 10 percent over the last year to $80 billion. It detailed the growing fortunes of a rarified group of 207 households, but the bigger increase in wealth happened for those owning their own and other homes.

The value of New Zealand's homes rose $141 billion or 16 percent in 2016 to $1.014 trillion. This wider group of asset owners (about 60 percent of households) are doing very well.

Meanwhile, the Perry report found the poorest renters and their children are struggling to cope with the rents in their mouldy and cold private rentals that are rising much faster than wages.

It portrays a group of New Zealanders in the bottom 10 percent who can barely pay the rent and are no better in real terms after paying the rent than they were nearly 30 years ago. It finds real incomes for beneficiaries have been flat to falling between 2008 and 2015, although the data doesn't include last year's real benefit increase or the Government's family incomes package announced in the Budget in May that begins on April 1 next year.

The report found that over the last 10 years around 15 percent of households have been spending more than 40 percent of their incomes on housing costs. That's up from five percent of households having to spend that high a proportion on housing in the late 1980s.

The poorest households with children who rent are in the worst position. The Perry report found that the bottom 10 percent of income earners under the age of 65 now spend around half of their income on housing costs. That's up from an average of 29 percent in the 1980s. That's because real incomes for beneficiaries are adjusted for Consumer Price Inflation, which has risen much slower than housing costs. Incomes for superannuitants rise much faster than for beneficiaries because New Zealand Superannuation is indexed to average wages, which have risen faster than inflation since the mid 1980s.

The combination of low income growth for poor working familes and beneficiaries and high rent growth, particularly of private rentals, has proven toxic, as has the poor quality of rentals.

The Perry report found 10 percent of households with children reported a major problem with dampness and mould, while 13 percent of households with children reported problems keeping their homes warm in winter. Around 75,000 children were in households reporting problems with damp, mouldy and cold homes. About 70 percent of those reporting major problems with housing quality were in rental properties, with 45 percent in private rentals, 25 percent in Housing New Zealand houses and the rest living in their own homes.

About half of the children living in such homes and in rental stress live in families with one working parent, while the other half live in beneficiary households.

2. So why aren't wages rising much?

One feature of the Perry report highlighted by the Government was the relative strength of real incomes for most in recent years because of low inflation.

The median household income before housing costs rose three percent per year on average in real terms over the five years to 2016. Across the income spectrum, real incomes before housing costs rose 11-13 percent in real terms over the full five years.

But that doesn't take into account the rise in rents and that real income growth is set to slow dramatically. Treasury forecast in the May Budget that real wages would rise just 0.6 percent over the five years from 2017 to 2021 because of slow wage growth and a rebound in inflation to around 2.1 percent.

Strangely, the Government continues to point to strong real wage growth when arguing that its policies are not suppressing wages when that real income growth is forecast to end.

The Reserve Bank and opposition parties have pointed to the record high numbers of working age and low skilled migrants as a factor holding wage growth back.

In April, the Government appeared to acknowledge this and the political risks of further record high migration, announcing a toughening of the rules around low skilled temporary migrants. But there has been a backlash from employers, forcing a rethink.

3. Woodhouse at odds with Treasury

Immigration and Workplace Relations Minister Michael Woodhouse told me yesterday wages were still growing strongly relative to inflation, despite Treasury's forecasts to the contrary in the May Budget.

"We’ve got wages growing strongly," he said when asked whether record high net migration was suppressing wage inflation.

Treasury forecast nominal wage growth of 1.2 percent in the year to June 2017, while CPI inflation was 1.7 percent, meaning real wages fell 0.5 percent in the last year. Treasury forecast real wage inflation of 1.0 percent, 0.2 percent, 0.0 percent and 0.0 percent in the following four years.

Woodhouse said the Government was listening to concerns from employers that they could not find workers at their current wage rates within New Zealand, and needed to recruit from overseas.

"My concern is to make sure that we have an appropriate supply of labour in the right places with the right skills and the right time and that’s what these policies will do," he said.

"The reality is it is a mathematical certainty that unless we have some labour coming in from overseas the 10,000 jobs (per month) that are being created by this growing economy simply won’t be filled, and I don’t think this Government wants to leave business out in the lurch like that."

The issue remains, however, that Treasury is forecasting real wages are set to be flat over the next four and a half years despite the creation of 215,000 jobs. Treasury is also forecasting net migration of 212,000 over the next four and a half years.

4. Plan Change 5 in trouble

One of the hottest topics bubbling under the surface in the political economy at the moment is the topic of how to deal with all the nutrients leaching into waterways from the doubling of cow numbers in the last 20 years to 6.5 million.

This is a particular issue in those recently converted dairying areas with fast-draining stony soils such as Canterbury and Otago, where there has been a land grab of sorts by converters racing to put high stock numbers in place before the regulation arrives.

Now the regulation has arrived, the question is how to 'grandfather' this nutrient leaching down without killing the golden goose of New Zealand's second largest export earner.

The biggest test case of this delicate task is playing out in Canterbury, where Environment Canterbury unveiled its 'Plan Change Five' last month to much fanfare and hope that it could use a tweaked version of the 'Overseer' nutrient modelling software to change behaviours.

Newsroom's Lynn Grieveson has taken a deeper look at what has happened to Plan Change Five. She find years of collaboration between dairy farmers, environmentalists and Environment Canterbury aimed at improving water quality has collapsed into a court battle.

ECan had hoped its attempts at toughening up nutrient loss limits on dairy farms would be able to nudge farmers into better practices by using a modified of Overseer. Instead, farmers are accusing the authority of botching the modelling and are now challenging the closely-watched 'Plan Change 5' in the High Court.

Here's Lynn's report in full on Newsroom Pro, where it was published first yesterday.

5. Quotes of the day:

Today's quotes are a bit of a Boris Johnson special because he just can't help himself.

Here's a Tui billboard moment from the British Foreign Secretary when asked about Tory party infighting:

"I don’t wish in any way to sound complacent, but I’ve been travelling in Japan and now in beautiful New Zealand, and any such activities completely pass me by, nor am I aware - no-one has sent me news of any such infighting."

Boris Johnson accidentally explained in this RNZ interview one of the great features of our poor economic performance over the last 30 years, relative to others in the OECD:

"New Zealand is one of the great exporters of human capital and we massively value it. Obviously we're going to be looking at doing a deal that is going to make sure that we are going to be able to maintain and maximise those advantages."

Boris Johnson also had fun with Maggie Barry at the Zealandia bird sanctuary in Karori, handling a tuatara and taking pictures of a takahe. He congratulated Barry on the one year anniversary of her "campaign of slaughter" to make New Zealand predator free by 2050.

Spying the takahe, he said (as reported by Fairfax's Henry Cooke):

"I don't want to be disobliging to the takahe, but it's not surprising given that they dispensed with their wings, that they are now finding life tough. It's a bit of a lesson for us all isn't it? It's like you know nuclear weapons, if you disarm.."

Newsroom's Foreign Affairs Editor Sam Sachdeva covered Johnson's news conference with Gerry Brownlee, in which the British Foreign Secretary said New Zealanders would be no worse off in any post-Brexit deals. Here's Sam's full story, which was published first on Newsroom Pro yesterday.

New White House Communication Director Anthony Scaramucci took the Donald Trump approach to HR overnight:

“I’m going to fire everybody, that’s how I’m going to do it. You’re either going to stop leaking or you’re going to get fired.” (Washington Post)

6. While you were sleeping

MBIE announced this morning that Fuji Xerox New Zealand had agreed a voluntary suspension from all current All-of-Government contracts.

"Effective from today, this suspension gives the Ministry of Business, Innovation, and Employment (the Ministry) time to understand the full implications of the report from FUJIFILM Holdings into irregular accounting practices at FXNZ," MBIE said.

The suspension prevented Fuji Xerox from proactively seeking new business from public sector agencies, which includes sales and marketing activities, it said, adding the suspension would be reviewed six weeks after the release of the translated report.

The Commerce Commission rejected Vero's bid to take over Tower this morning, arguing the merger would have combined the second and third largest insurers for domestic house, contents and private motor vehicle insurance and left only two substantial competitors in the market.

7. Coming up...

The Education and Science, Finance and Expenditure, Health and Social Services select committees will receive submissions this morning in Parliament.

Reserve Bank Assistant Governor and Head of Economics John McDermott will give a speech on economic trends and the bank's flexible inflation targeting framework this morning.

Tertiary Education Minister Paul Goldsmith will launch the Government’s response to the Productivity Commission report on new models of tertiary education at midday today.

US Supreme Court Chief Justice John Roberts is scheduled to appear at an event this evening "in conversation with Victoria University’s Pro Vice-Chancellor and Dean of Law, Professor Mark Hickford." Details are here.

The Reserve Bank will publish its new residential lending figures for June at 3 pm today.

8. Two fun things

This a beautiful piece of video editing courtesy of The Daily Show. It shows new White House Communications Director Anthony 'The Mooch' Scaramucci mimicking Donald Trump with his hand gestures.

After Todd Barclay was ushered into National's caucus meeting yesterday by Judith 'Crusher' Collins, NewstalkZB's Gia Garrick tweeted this:

"Judith Collins would be my first choice of bodyguard too, tbh."