Immigration policy: 106 per cent of net new housing demand

I’ve just read Shamubeel and Serena Eaqub’s book Generation Rent¸one of the Bridget Williams Books series of short, often stimulating, books on New Zealand issues.    Housing is perhaps the ultimate topical issue, and I hope the Eaqubs’ contribution is widely read.

There is plenty in that I agree with, as well as quite a bit that I disagree with.  I might come back to the rest of the book when I have a bit more time, but today I wanted to focus on just one “framing” issue.   How one frames an issue often influences how readers think about it.

The Eaqubs have collected the data from old Yearbooks, and censuses, to show where population-based pressures on housing demand have arisen from over last fifty years (strictly, from the 1961 Census to the 2013 Census).  They present the influences under the following headings:

  • Natural increase,
  • Change in average household size, and
  • Net migration

Under this decomposition 61 per cent of the increase in the number of households has arisen from natural increase, 30 per cent from a reduction in average household size.  The remaining 9 per cent results from net migration.

Put that way, it allows them to present migration (and, hence migration policy) as a fairly minor issue, only really material in a short-term or cyclical sense. As we know net migration is quite variable and not particularly forecastable in the short-term.

But there is another way to look at the numbers.  The New Zealand government has no ability to control the movements of New Zealand citizens, inwards or outwards, so discussions of the role of immigration policy really should focus on the movement of non-New Zealand citizens.   Non-citizens can only come and live in New Zealand with the permission of the New Zealand government –  active permission is required in most cases, while policy allows Australian citizens to come and stay without prior approval.    There are lags in the system, and not everyone who is approved actually comes (or stays) but by and large we can think of the net flow of non-NZ citizens as the contribution of immigration policy.  Since 1960, there has been a net inflow of non-New Zealand citizens every (March) year except 1979.  If economic conditions here are poor, non-New Zealand citizens can leave again too.  In that sense the net inflow of non-New Zealand citizens understate the role of immigration policy in boosting demand for housing.

So what has the impact of non-NZ citizen net migration to New Zealand been?   In the 52 years from April 1961 to March 2013 there was a net inflow of 1139351 non-New Zealanders.  Over the same period (between the two censuses), the number of private occupied dwellings in New Zealand has increased by 918000.  With around 2.7 people per dwelling, the net inflow of non-New Zealand citizens has contributed 46 per cent of the total increase in the demand for houses since 1961.

The impact doesn’t happen all at once –  in 1961, people didn’t live at 2.7 per dwelling, but they do now.  And, of course, many of the non-New Zealanders who migrated in 1960s will have died by now.  But most of them will have had children or grandchildren since they moved to New Zealand –  and since the average birth rate in New Zealand has been above replacement, the effective contribution to housing demand from immigration policy is likely to have been higher than suggested by the raw numbers.  As birth rates have dropped, that may not be so in future.

Since 1961 there has been a variety of changes in immigration policy.  From the late 1970s to the late 1980s, inflows of non-New Zealanders were very small.  But what about the most recent since immigration policy was changed to actively pursue much larger inflows (at present, policy aims at 135000 to 150000 permanent residence approvals on a three year rolling basis)?

From 1991 to 2013, non-New Zealand citizen immigration accounted for around 71 per cent of the change in the number of households (or dwellings required).  For the last two intercensal periods the contributions of non-New Zealand citizen net immigration were as follows:

  • 2001 to 2006        70 per cent
  • 2006 to 2013       106 per cent

Even I was a little taken aback by the last number but, of course, it just reflects two things:

  • The chart I showed the other day illustrating that with no (or much lower) non-citizen immigration New Zealand’s population would now be flat or slightly falling
  • No change in the average person per dwelling number between 2006 and 2013.

non citizen plt to households

These numbers aren’t precise.  It is quite possible that new immigrants start off with a higher than average persons per dwelling –  as, on average, non-New Zealand immigrants are poorer than the average resident population.  And the number of people per dwelling is itself partly endogenous to house prices –  if house prices had not been so high, more people would have been able to fulfil their desire to, for example, live on their own.  It is also possible that without the high level of non-New Zealand inflow, the outflow of New Zealanders (which, all else equal, massively reduced the demand for housing) would have been a bit smaller.

But what the numbers do make clear is that immigration policy choices made by successive New Zealand governments account for a very large share of the new household formation, and housing demand, in New Zealand.  If anything, that share has been rising as natural increase slowed.

And, of course, these numbers also tell us nothing about what the appropriate target rate of non-citizen immigration is.  But, unless we can construct a regulatory environment in which the supply of housing and urban land are hugely more responsive to demand than they have been in recent decades, then any conversations around demand influences, and the potential influence of policy on them, needs to engage seriously with the role of immigration policy.  At present –  given what it is knows about supply responsiveness – the government’s immigration policy is actively driving house prices, especially in Auckland, at the reach of too many of those who would like to buy –  citizen or not.

ISDS provisions

In his column in the latest New Yorker James Surowecki looks at Investor-State Dispute Settlement (ISDS) provisions that feature in many bilateral and multilateral trade and investment agreements.  These provisions allow individual investors in some circumstances to seek redress against domestic governments not just in domestic courts, but before an international arbitration tribunal (most commonly the ICSID, which is based at the World Bank).

As Surowecki notes, “these provisions have been opposed by an unusual coalition of progressives and conservatives”.

Advocates argue that ISDS provisions help to encourage foreign investment.  For some of the opponents, that would almost be enough of an argument itself.  For them, foreign investment itself is threatening.   But plenty of people who are generally keen on pretty open foreign investment are also somewhat wary.  I reckon that regulatory obstacles, and screening regimes, in respect of foreign investment  in New Zealand should be materially reduced, but partly because I think foreign investment should be treated as similarly to domestic investment as possible, I’m not sure why we should be providing separate remedies, and separate quasi-judicial fora, for disputes taken by foreign investors.  If we do need greater protection for investors, and for citizens, against arbitrary actions of governments lets have that debate domestically, amend our domestic laws accordingly, and provide equal protection to all.

The first such ISDS provision apparently dates back only to a Germany-Pakistan agreement in 1959.  And, of course, a great deal of foreign investment happened before then – in fact, the whole first great age of globalisation, prior to World War One,  Huge amounts of debt and equity finance went abroad from Europe (the UK in particular) into colonies of settlement in particular.  That included countries with pretty good legal institutions from the start (such as New Zealand) as well as places like the new, and often shaky, states of central and south America.  And it wasn’t just colonies of settlement  –  destinations included Turkey, Persia and China.

Last week I was reading a fascinating older book about just these sorts of issues.  Finance, Trade, and Politics: British Foreign Policy 1815-1914 by D C M Platt, who went on to become a pretty eminent economic historian, looks in detail at how the British government dealt with the interests abroad of British lenders and investors (be they debt holders or concessionionaires or….).  The short answer is that, unless there were really pressing political considerations involved, or the initial obligations themselves arose out of an inter-governmental agreement, the British government took the stance, and held to it pretty firmly, that difficulties with foreign governments were mattered to be dealt with by the investors themselves in the courts, tribunals, and political processes of the country concerned.

The government, and Foreign Office officials, were constantly lobbied to provide additional support to British investors, and the pretty consistent response was “no”.  Governments were typically sympathetic, but they took the view that investors dealing in foreign countries needed to look after themselves.  This, recall, was the government of the strongest power at the time, the government of the country that was, by far, the largest source of foreign debt and equity finance.  And it was a great age of financial globalisation.  And not an ISDS in sight.  If the approach wasn’t followed perfectly, it still looks to me like a pretty good model, that worked pretty well.  Surowecki suggests that “in the old days, aggrieved American investors would call in the Navy to protect their interests”.  If so, it certainly wasn’t how the British did things.

A common argument from defenders of ISDS provisions is that very few claims are lodged, and in very few cases do ruling go against national governments.  But Surowecki notes that ‘nearly 100 have been filed in the past two years, as against some five hundred in the previous quarter century before that”, presumably partly a reflection of that fact that such provisions are becoming more common, but also (perhaps) of a greater degree of activism. He reports that investor-protection is an increasingly prominent part of US law-school curricula.

The other argument is that inclusion of ISDS provisions helps encourage foreign investment.  But the evidence I’ve read suggests, unsurprisingly, that this is true only for recipient countries that have had poor quality domestic legal systems.  For them, the offer of ISDS provisions is a credibility-enhancing device, designed to provide potential investors greater reason for confidence in the security of their investment.  The evidence also suggests that there are few or no gains in foreign investment flows between pairs of countries (eg US and UK) that already have perfectly good domestic legal systems.

From a New Zealand perspective, one argument might be “we have a good legal system, so there might be no gain, but there is no probable cost either”.  I’m not entirely convinced.  After all, Philip Morris is pursuing an ISDS case against Australia over plain-packaging of cigarettes, a remedy that would presumably not be open to them under Australian domestic law.  I’m not expressing (and don’t have) a strong view on that, as yet unresolved, case, but it seems to me that advocates of such ISDS provisions need to make a stronger case for why different remedies should be opened up to foreign investors, and why the domestic courts and domestic political process –  on which the rest of us must rely –  are not sufficient.  There may be such a case, but I’ve not yet seen it.

The unease should be heightened when we recognise the limitations of the ISDS process.  There are a couple of useful backgrounders on ISDS issues by Gary Clive Hufbauer on the Peterson Institute website (eg here).  Hufbauer is a supporter of ISDS provisions, but he draws attention to both the lack of appeal provisions in ISDS tribunals, and the lack of transparency (“ICSID does not require parties to post their briefs and arbitration decisions on the web so that the public knows the arguments and the rationale for any award”.   Appeal provisions are pretty fundamental to our system of justice.

Perhaps the argument for New Zealand signing up to such provisions, whether in TPP or other agreements, is that it helps New Zealand firms investing abroad.  But at a pragmatic level, the countries we are negotiating TPP with now almost all have pretty good domestic legal systems.  And why does the New Zealand government think it is part of its role to negotiate provisions to allow New Zealand investors more rights in respect of investment in overseas countries than those countries provide to their own domestic investors?   The hands-off approach was good enough for Palmerston, Gladstone, and generations of their contemporaries.

ISDS provisions are probably not the most important aspect of TPP, or other similar agreements.  But there doesn’t seem to be much else on offer.  Countries like New Zealand seem fairly certain to be losers from extended intellectual property protections, and the comments from John Key and Tim Groser still don’t suggest any prospect of great movement on dairy protectionism.  And if the strongest argument for TPP really is something like strengthening the US relative to China (a goal which I have no particular problem with),the longer-term success of any such strategy depends on perceptions of legitimacy.  Given the unease many people seem to feel about ISDS provisions, which can look (whether or not they are) like something that is “designed to put corporate interests above public ones”, and the limited evidence of any real economic gains from such provisions, it isn’t obvious why ISDS provisions serve the interests of ordinary citizens or governments, in democratic countries with robust legal and political systems. In the words of a contributor at Forbes, (not, probably, high on Jane Kelsey’s regular reading list) ISDS provisions seem disconcertingly like a “subsidy to business that comes at the expense of domestic investment and the rule of law”