In today's email we look at what yesterday's announcement from the new Government means for foreign home buyers and our free trade agreements.
1. A fast foreign buyers ban
Slightly more than 50 percent of New Zealanders voted for a change in policies around migration, foreign ownership and housing, and now they're getting it in a hurry.
Jacinda Ardern held her first formal post-cabinet news conference as Prime Minister yesterday afternoon and came straight out of the blocks with a surprise on the foreign ownership issue that she could portray as killing two birds with one policy advice stone.
The previous National Government had argued a ban on foreign buyers would force rewrites of the South Korea trade agreement and the almost in-force Trans Pacific Partnership agreements, creating the potentially ugly choice within weeks for the new Government of abandoning either the ban or the TPP.
But Ardern said the new Labour-led Government had been advised that a simple tweak to the existing Overseas Investment Act to label residential property as 'sensitive' assets meant the ban could be enforced without a breach of trade agreements (except for one with Singapore).
That meant New Zealand could have the TPP and a foreign buyers' ban at the same time, she said, although she said the new Government would still push hard for concessions on Investor State Dispute Settlement (ISDS) rules.
However, Ardern and the plan's architect, David Parker, said the change to the OIA would have to be done quickly and before the TPP came into force to ensure it did not breach the TPP.
"If you don't do it now, you can never do it. Because if TPP is entered into, New Zealand will have lost the policy space to protect the New Zealand housing market for New Zealanders," Parker told RNZ's Susie Ferguson this morning.
Only the Singapore agreement would need renegotiating, and it was due for renegotiation anyway.
Ardern and Parker said the ban on foreign buyers did not apply to bare residential land, but added that the Government would look at the issue of land banking further down the track.
The ban allows residents who are not citizens to buy property here and citizens who are not resident in New Zealand to buy property while living overseas. But anyone who is a non-resident foreigner would not be allowed to buy an existing house.
They said conveyancers and solicitors would have to certify that any buyer was not a non-resident or non-citizen when documenting a sale and purchase and land transfer agreement. Anyone in breach of the amended law would face prosecution, they said. Australians would be exempt from the ban, as New Zealanders are exempt from a similar ban in Australia.
Ardern said the Government aimed to introduce legislation into Parliament before Christmas and have it passed and operative early in the new year, and before the TPP 11 comes into force.
Parker was asked if the Government had taken advice on the economic impact of a ban, but he said there had not been reliable data collected on foreign buying, given much of the buying had been through companies and trusts. He said conveyancers and solicitors would have to verify the identity of the ultimate buyer.
He also said the extent of any effect on prices would be determined by what stage of the cycle the housing market was in.
Stephen Jacobi, the executive director of the New Zealand International Business Forum, said the Government’s proposal was a “neat solution” and would not appear to cause too many difficulties with existing trade agreements and the TPP.
“I’m interested it’s only Singapore where it’s a problem - obviously they’ve been satisfied around Korea, that’s good.”
Jacobi believed it would not be too difficult to renegotiate the Singapore FTA to account for the new policy.
“Trade agreements always provide flexibility for governments, and they just need to sit down with their advisers to work out how these things can be done.”
2. 'Half cooked and full of loopholes'
National Finance spokesman Steven Joyce criticised the announcement as "half cooked" and "full of loopholes," and he argued for the retention of the status quo.
"It's an interesting idea with what appears to be lots of fish hooks," Joyce told reporters in Parliament.
He denied that National had misled voters and Labour about the impact of a ban on New Zealand's Free Trade Agreements, although he said the Government had looked at the option of altering the OIA to make housing 'sensitive land'.
"If you look at a very straightforward reading of the agreement between New Zealand and South Korea, it’s a requirement that the parties have to give each other’s investors the same benefit as other investors into their market," he said.
Joyce said it appeared many of the details had yet to be decided and announced.
"You get a one-page press release and then told that a lot of decisions are yet to be made, definitional decisions, how they would work, all those would suggest to me it’s not ready for prime time," he said.
He described the plan as bureaucratic and adding compliance costs.
"Imagine if you have a foreign sounding name and you want to buy a house, you would effectively have to go to the real estate agent and prove your citizenship before you would be able to buy a house under this proposal, or else how do they check it?"
He rejected the implication that foreign buyers had increased house prices, pointing to house prices in Australia.
"The minister actually has to make the decision on sensitive land or sales. The minister would have to sit there with their rubber stamp and decide for 1,500 sales a quarter whether they’re actually going to let them go through or not under the sensitive land test," he said.
Joyce also pointed to definitional issues.
"Is an apartment on the fourth floor of a building ‘sensitive land’? Is a two hectare property with two houses on it that’s being sold for development able to be sold to an international investor?" he asked.
Parker later told Morning Report that commercial property was not covered, even if it included some residential property, and that Government would consider exempting long term non-permanent residents.
3. Will it drive prices down?
The jury is out on whether the ban will do much to slow Auckland's rampant house price inflation of the last decade, or whether it might accelerate the slight fall (1-3 percent) seen over the last year.
The simple answer is that no one knows exactly how much overseas capital has flowed into Auckland and how much of an impact it has had on prices, alongside the pressures of record high net migration and the lowest house building rate in history.
Land Information New Zealand created a data set in 2015 measuring the number and percentage of property transfers involving non-residents for tax purposes. This was done after the Government announced a withholding tax on non-resident buyers of rental properties that forces buyers to declare whether they are residents for tax purposes.
That's not necessarily the same as people who are non residents. People with temporary work or student visas often register to pay income and other tax, but are not permanent residents. People also often buy properties through corporate or business entities, where the ultimate residency of the beneficial owner is not declared.
LINZ reported that five percent of buyers of 12,951 Auckland properties in the June quarter were not New Zealand tax residents, while 20 percent of properties were bought by 2,637 corporate or business entities. All but six of those entities stated they were resident in New Zealand for tax purposes.
So the actual percentage of properties that could involve people without permanent residency could range between five percent and 20 percent. The data itself is therefore not useful in determining the actual scale of the foreign buying.
Many providers of foreign capital buy homes in Auckland through friends, family members and corporate entities that would evade both the existing data collection methods and the planned legislation to declare residential properties 'sensitive'.
The key questions will be around the certificate that conveyancers and solicitors have to sign declaring that the buyer is a non-resident, including whether it forces them to specify and guarantee the ultimate beneficial ownership of the buyer is a non-resident. It could be argued new Anti-Money Laundering rules coming into force next year could force them to do that anyway.
It is also still possible that a buyer could apply for an exemption under the OIA to the Overseas Investment Office. Given up to 2,600 properties in Auckland could involve foreign owners every three months, there is the potential for the OIO and the minister responsible for signing off application to be over-whelmed.
The OIO processed four applications in August, it reported.
4. How to swallow the ISDS dead rat
Newsroom's Sam Sachdeva took a deeper look at the announcements about the new Government's stance on Investors State Dispute Settlement (ISDS) in the upcoming TPP negotiations, and future trade negotiations.
Ardern said she would do her utmost to amend the ISDS mechanisms in TPP discussions at the APEC summit in Vietnam later next week.
But Sam reports the Government faces real hurdles to get those changes.
Stephen Jacobi, the executive director of the New Zealand International Business Forum, says he is more concerned about the Government’s opposition to the ISDS than its ban on foreign home purchases.
“They’re going to have to make a big call…[the ISDS] is something that’s a core aspect of the agreement, it’s one that would benefit New Zealand companies.”
Jacobi says the intent of the ISDS is not give foreign companies greater rights than New Zealand companies but the same rights, and vice versa overseas, given judicial systems in some countries often discriminate against foreign companies.
“That wouldn’t be the case in New Zealand, I understand that, but it is often the case overseas.”
Jacobi is sceptical that New Zealand could win any meaningful changes, given the advanced stage of talks and the fear that the deal could fall over if exceptions start to be made.
“I’m very doubtful, because nobody will want to open up the negotiation and indeed it wouldn’t be in our interest to do so.”
One potential option for New Zealand is to write to each of the other TPP members, asking them to agree that the ISDS provisions would not apply between them.
That was what the previous Government did with Australia: a side letter between the two countries, signed at the same time as the main TPP deal, agreed that investors from either Australia or New Zealand would not be able to use the ISDS against their respective countries.
With Ardern and Parker indicating other countries may share New Zealand’s concerns, that may the best route to win carve-outs without requiring a full renegotiation.
However, Jacobi says it is far from clear whether other countries may be willing to follow in Australia’s footsteps.
“I just don’t know the answer to that - it’s conceivable they may, but it’s probably unlikely."
5. 'One plus one does not equal one'
Sam reports after meeting with an EU delegation that the idea of flexible meat export quotas for the soon-to-be-separated Britain and EU are not acceptable to the EU at least.
Bernd Lange, the chairman of the European Parliament’s international trade committee, downplayed the prospect for a New Zealand proposal for a flexible combination of EU and UK quotas after Brexit.
Both sides would need to find a middle ground during negotiations, he said.
“At the moment both sides are cooking the water quite hot, and then we’re going to the negotiating table," Lange said.
“Of course some European producers have some doubt, beef producers in Ireland for example, but I’m really convinced there will be balanced agreement - of course we’ll find some compromise in the agriculture sectors, and in the other sectors we’ll also need some compromise.”
One issue causing tension between the EU and New Zealand at the moment is proposed changes to its tariff rate quotas as a result of Brexit negotiations with the UK.
Kiwi exporters fear the proposed methodology for redistributing the quotas will leave them worse off, but Lange said the issue would need to be solved through the World Trade Organisation.
“We want to have a solution in principle covering all quotas and all products, not negotiating all items separately,” he said.
As for a public suggestion from MFAT’s deputy secretary of trade and economic issues Vangelis Vitalis for a “1+1=1” approach, where both the UK and the remaining EU states would separately retain their existing quotas but third-party countries would ensure their overall combined exports did not exceed the original volume, Lange was dismissive.
“I learned at school that one plus one is two.”
The quota changes would not have a significant impact on New Zealand’s access to the EU, still “a big market of over 400 million consumers”, and were a result of the UK’s decision to leave.
“With some partners, the flexibility is gone, but this is related to the decision in the UK.”
The European Parliament last week voted 440 votes to 122 to set guidelines for negotiations with New Zealand, with discussions set to start by the end of the new year.
See Sam's full report from the interview here on Newsroom Pro, where it was published first yesterday.
6. Briefly in the political economy...
Marooned in Parliament - The Minister for Workplace Relations and Safety Iain Lees-Galloway and the Minister for Women Julie Anne Genter announced this morning the new Government would halt the Employment (Pay Equity and Equal Pay) Bill that passed its first reading just before the election. Here's our backgrounder on the issue from August.
Consents stalling - Statistics New Zealand reported yesterday that 2,770 dwelling consents were issued nationally in September, which was down from 3,166 in August and up from 2,614 in September a year ago. Auckland consented 868 dwellings in September, down from 1,184 the previous month and up from 816 in the same month a year ago. There was a seasonally adjusted fall of 2.3 percent nationally in the month.
Confidence hit - ANZ reported its Business Outlook survey found confidence about the wider economy fell 24 percentage points to a two-year low in the month of October as government-forming negotiations dragged on and a change of Government was eventually agreed. A net 10 percent of businesses saw a worse outlook for the economy over the year ahead. However, businesses remained confident about their own businesses, with a net 22.2 percent seeing a positive outlook, down from a net 29.6 percent positive outlook in September.
Staffing up - The Green Party yesterday announced Andrew Campbell would take up the role of Chief Strategist in the Party’s Parliamentary team from December. Campbell formerly worked as the Party’s Chief of Staff and Director of Communications, and was also a member of the Party’s government negotiation team. Previously he worked for the New Zealand Rugby Union.
7. Coming up...
Prime Minister Jacinda Ardern will travel briefly to Sydney on Sunday to meet Australian Prime Minister Malcolm Turnbull.
Germany's President Frank-Walter Steinmeier will make a state visit to Auckland and Wellington from Sunday to Tuesday next week, including a state dinner at Government House in Wellington.
Statistics New Zealand is scheduled to report jobs and wages data for the September quarter later this morning. The biggest focus will be on whether the pay equity settlement for aged care workers is beginning to warm up wage inflation.
8. One fun thing
Let's go overseas again for a laugh at the expense of Theresa May and Donald Trump.
Otto English: "Theresa May condemns #Catalonia nationalists for reckless act of separatism that risks casting their people into wholly unnecessary calamity."
Tweeter in response: "The Irony Lady."
Palmer Report: "Plot twist: Donald Trump is going to prison because of Hillary's emails."
Have a great day.
A couple of things before I sign off. I mistook Papakura for Pukekohe yesterday in my points about electrification. The electrification is planned to go all the way out to Pukekohe. I also called the expected new Federal Reserve Governor Jerome Taylor. He is of course Jerome Powell. My apologies and thank you to our eagle-eyed readers.