New Zealand Initiative on immigration: Part 5 House prices

The New Zealand Initiative starts their discussion of the implications of immigration for house prices in a quite reasonable manner.

Rising house prices is an increasingly discussed topic. Fast growing populations, particularly in urban areas, have increased the mean demand for housing. Migration is a major contributor to urban population growth. In an ideal world, the underlying market systems would automatically adjust, such that as demand for accommodation rose and prices increased, developers built more houses. Likewise, cities would invest in infrastructure to accommodate more people.

However, that house prices have not stopped rising for a number of years means New Zealand has not reached this ideal place, and the system is not geared to cope with demographic shifts. The effect is most acute in Auckland, where about a third of the country’s population lives.

Thus far, I imagine everyone is on much the same page.  It was consistent enough with the lines from the Introduction that I quoted earlier in the week

Economists consider housing to be affordable when the median multiple is 3 or lower. In 2013, Auckland’s median multiple was 6.4, and in 2016 Demographia put it at 9.7.  The Initiative’s housing research blames restrictive planning policy and resistance to urban development. However, against a policy-induced, near-fixed supply, additional demand for housing must contribute to rising prices.

It is pretty much ECON101: if the supply of something is largely fixed, at least in the near-term, and there is an increase in  demand (especially an unforecast increase in demand), the price will increase.  Quite how much will depend on the elasticity of demand.   And the immigration contribution to population growth (and demand for accommodation) has been really large over the last 25 years, just as the land-use restrictions enabled by things like the Resource Management Act appear to have become more constraining.  The Initiative regularly, and rightly in my view, inveighs against those restrictions.  Without them, higher demand wouldn’t result in higher (real) prices for houses and urban land.

I also get that the Initiative favours large scale non-citizen immigration, but what I don’t get is why they won’t just be straightforward and say something like, “in the presence of land use restrictions, we recognise that high rates of immigration have been markedly increasing house and land prices, especially in Auckland.  But our best professional judgement is that the longer-term gains to New Zealanders from high immigration are sufficiently large, that we should overlook the distortions and arbitrary wealth redistributions that the high house prices, associated with high immigration have resulted in”

Perhaps there is a case to be made along those lines. It is, mostly, implicitly what the Initiative is saying.  But they won’t come out and say it directly, and instead have tried to shelter behind a short piece from a couple of MBIE-funded academics, Cochrane and Poot, who attempt to interpret the existing evidence to suggest that really immigration isn’t much of a factor in (Auckland) house prices at all.

MBIE is responsible to the ministers for immigration and housing (and, of course, has institutional bureaucratic incentives to maintain a large scale immigration programme).  Both ministers were presumably coming under pressure a year or so ago, and so MBIE commissioned Bill Cochrane and Jacques Poot to do a short review of the existing literature on immigration and house prices, and to draw some conclusions about what might have been going on in the last few years (as distinct, say, from the last 25).  That report was released in April 2016.  Some of it also appears to have been motivated by political concerns around non-resident purchases of New Zealand residential property, but as Cochrane and Poot note, the existing data don’t shed much light on that issue at all.

The New Zealand Initiative summarise the conclusions of the Cochrane and Poot report, with no sign of any caveats or concerns, as follows

Economists Bill Cochrane and Jacques Poot surveyed available evidence on the impact of net migration in New Zealand, and suggest migrants are not to blame for Auckland’s housing woes, rather New Zealanders are.

Personally, I hope no one wants to blame individuals at all –  migrants or New Zealanders. The issues are about policy and big picture forces, not about individuals acting in their best interests given those policies.

What is important to bear in mind is that there is a handful of formal studies that everyone tries to make sense of.   The Reserve Bank –  which historically has no dog in the fight about whether or not immigration is “a good thing”; they just want “the facts” –  has produced several studies over the years, each of which suggested really quite large impacts on house prices as a result of unexpected changes in migration.  And, on the other hand, Stillman and Mare produced a paper suggesting, using quite different techniques, that the effects are quite small.  That is the formal relevant New Zealand literature.   There is also a variety of results across these papers on which flows might have matter more (eg NZ citizens vs foreigners, arrivals vs departures etc).   On my reading the studies aren’t very conclusive: many people who’ve thought the issues through probably think the various RB estimates seem a bit large (up to 10 per cent increases in national house prices for a one per cent change in population) and the Stillman and Mare ones are a bit small.

In her Treasury working paper on macroeconomic performance in 2014, Julie Fry summarised her take as follows:

On balance, the available evidence suggests that migration, in conjunction with sluggish supply of new housing and associated land use restrictions, may have had a significant effect on house prices in New Zealand.

Cochrane and Poot read, or report, things a bit differently.  But it is important to remember that their mandate was to focus on the “last few years” –  whereas the New Zealand Initiative generalise it to apply to our longer-term house price issues.   And it is certainly true, that if we look at the big swing in overall PLT immigration in the last few years, a substantial chunk of that was about New Zealanders (net) not leaving at such a great rate, rather than about a change in immigration policy (ie the bit that governs foreign arrivals).  Their summary is as follows (emphasis added):

Overall we find that the literature and the available data on population change suggest that visa-controlled immigration into New Zealand, and specifically into Auckland, in the recent past has had a relatively small impact on house prices compared to other demand factors, such as the strongly cyclical changes in the emigration of New Zealanders, low interest rates, investor demand and capital gains expectations. Consequently, changes in immigration  policy, which can impact only on visa-controlled immigration, are unlikely to have much impact on the housing market.

There is quite a lot to unpick there.

First, it is a specific observation about the “recent past” –  when immigration policy (affecting foreigners) didn’t change much, and New Zealanders’ behaviour did.

Second, to talk of “investor demand and capital gains expectations” as distinctive factors is rather disingenuous.  Presumably, investor demand was partly a response to increased underlying demand for accommodation, and capital gains expectations partly a response to the actual interaction of increased demand pressures  in the face of restricted supply?

Third, if interest rates –  which aren’t some random variable, but have been low for a reason –  were a major independent factor, we wouldn’t have seen Auckland house prices rising so much more rapidly than those in most of the rest of the country (bits that mostly haven’t seen the same population pressures).

Fourth, the policy sentence is, literally, a non sequitur.  It simply doesn’t follow from what went before.  If immigration policy hadn’t been changed in the period they looked at –  and it mostly hadn’t –  it gives you no empirical basis for concluding that a future change in immigration policy would have no effect on house and land prices.  In fairness to the authors, in their text they elaborate, and highlight the lags in the process, and that short-term variations in immigration policy aren’t a very reliable means of managing overall net PLT flows. I totally agree with them on that, and oppose such short-term immigration management, but it is a quite different issue.

But even over Cochrane and Poot’s own period, it isn’t clear that they have the emphasis right.  Here are net PLT flows with New Zealanders and non New Zealanders shown separately.


Over the period from around 2006 to around 2013 most of the variability was in the New Zealand citizen net flows.  And specifically, from around 2012 to 2014 much of the pickup in PLT inflows was the change in New Zealanders’ behaviour –  nothing about immigration policy –  but over the last couple of years, there has also a huge increase in the net inflow of non-citizens, almost all of which is visa-controlled.  It all represents additional demand for accommodation.

Cochrane and Poot note that much of the increase in non-citizen net arrivals has been from people without approval to stay permanently (ie students, and people on work visas).

the growth in inward migration has been particularly in temporary visa-controlled immigration (e.g. international students, temporary workers – including working holiday makers), as could be seen in Figure 9.  The latter types of international migration flows are likely to have had a quantitatively  smaller impact on house prices and to have contributed little to house price increases observed recently. The lesser demand on the housing market of temporary migrants has  been shown with respect to students by BERL (2008).  Generally, research on the differential impact on housing markets between those arriving and staying on temporary visas, compared with those arriving on, or subsequently obtaining, permanent visas still needs to be undertaken.

Most students probably aren’t buying a house.  Most work visa arrivals aren’t either.  But they all need a roof over their head, and add to the overall demand for accommodation, especially in Auckland.    The authors play down this effect, noting that rents have increased much less than house prices have, but as I’ve illustrated previously, this divergence can be explained by the substantial fall in interest rates.  When long-term interest rates fall, rental yields should be expected to fall.  Absent population pressure, and in the presence of a well-functioning housing supply market, nominal yields should probably have fallen.   Presumably expected demand for accommodation from students and short-term workers influences the willingness of investors to bid for properties, in turn pushing house price upwards.   Population pressures don’t affect prices simply dependent on whether or not the new arrivals (or non-departures) choose to buy rather than rent.

One of the big challenges in modelling house prices is the so-called endogenity issue.  A thriving city might see rising wages, and new people being drawn to that city.  In the context, is it the immigration or the general prosperity that is raising house prices (given supply restrictions  –  real house prices tend not to rise for long without them)?   It is an important in the short-term, but I’m less convinced that it is over longer-term horizons –  eg the sort of 25 year period over which our immigration inflows and land-use restrictions have been interacting.  Perhaps prosperity draws additional migrants in, but it simply isn’t likely that house prices would have risen much and for long on prosperity alone, without the additional people.

An ideal test –  for economists anyway –  would probably involve repeated surprise changes in long-term immigration policy.  We could do a clean test if, say, every few years a random number generator decided how many residence approvals to grant to non-citizens each year.  This year it might be 45000 (the actual target), another years 75000, another year 10000, and so on.  We could then study the response of house prices in the wake of that clearly exogenous change in policy.

When it comes to New Zealand immigration policy, there simply haven’t been those sorts of changes researchers could study –  other perhaps than the gradual opening up from the late 1980s to the mid 1990s, a one-time event.  Here is the chart of residence approvals each year that MBIE provides the data for, back to 1997/98.

There hadn’t been a change in the target for 15 years until the very small cut announced late last year.  And the actual variability in the approvals granted from year to year is mostly cyclical, and endogenous –  dipping a bit when our unemployment rate was high, and then recovering lately.   Econometricians use various clever tricks to try to deal with endogeneity, but the fact remains that at a policy level there have been hardly any exogenous changes at all.  Just a very large net inward flow, varying a little from year to year, as a result of substantially unchanged policies.  Trying to correct for endogeneity using recent data in particular might be a fool’s errand

Those residence approvals over 19 years added up to 817231 people.  As I showed yesterday, the data suggest that perhaps 60 per cent of foreign arrivals settle in Auckland –  that would be around 490000 people.  Not all of them stay, of course, but even if only 80 per cent stay in the long term that is still almost 400000 people, adding to the demand for accommodation in Auckland in 19 years, as a direct result of immigration policy.    Yes, there is lots of variability in the NZ citizen flow –  Cochrane and Poot’s point –  but over that 19 years, around 160000 New Zealand citizens (net) left Auckland for overseas.   Again, as Cochrane and Poot point out, there has been considerable natural increase in Auckland’s population too.  But immigration policy –  visa-controlled almost all of it –  will have boosted Auckland’s population in that time by almost 400000 people.  And in a country – and city – which as they acknowledge does not have very responsive housing/land supply, that simply cannot have done other than put considerable pressure on Auckland house and land prices.

I’m still not sure why the New Zealand Initiative wants to avoid simply acknowledging that.

It is not as if this view is some contrarian Reddell-ite view held by no respectable or serious person.      Read the speeches and reports of the Governor of the Reserve Bank and his staff, or those of the Treasury.  Look at the analysis and reports of the IMF and the OECD –  both generally supporters of immigration.  It isn’t even treated as contentious that immigration has played a material role in house price inflation, in places where land use restrictions are in place.  Go across the Tasman, and listen to the Reserve Bank of Australia for example –  a nice recent example is here –  or look at the IMF/OECD reports on Australia too (with a similar mix of rapid population growth and land use restrictions).  When supply is substantially restricted and demand for housing increases, house/land prices will rise.  Population growth is a key source of additional demand, and immigration  –  whether exogenously influenced, or endogenous to the economic cycle –  is a huge component of population growth, especially in Auckland.

Flows of New Zealanders matter just as much as those of foreigners, and are often much more variable in the short-term (because less controlled by policy).  Immigration policy  –  affecting foreigners –  can’t sensibly attempt to stabilise housing market pressures in the short-term, but it can  –  and does – make a huge difference to housing demand over the medium-term.  In a system with quite tight land use controls, that affect over the last couple of decades has been almost entirely deleterious –  driving up house and land prices, and skewing wealth from the young to the old, the have-nots to the haves, and so on.  Yes, we should fix land use regulations, but don’t pretend –  as the Initiative tries to in this report –  that knowing continuation of high rates of non-citizen immigration, in the presence of those land use restrictions, isn’t knowingly allowing urban house and land prices to be driven progressively further upwards, in Auckland especially, but not of course exclusively.


New Zealand Initiative on immigration: Part 4 Fiscal implications

The next couple of chapters of the New Zealand Initiative’s immigration advocacy report cover material closer to the core expertise of the Initiative and its staff –  economics.  Chapter 3 is headed “Population Pressures” and looks at the impact of New Zealand immigration on three areas:

  • government finances more broadly,
  • house prices, and
  • the impact of an ageing population (ie improving life expectancy).

I want to focus today on the first two, but first some brief remarks about the ageing population issue.

The New Zealand Initiative tend to mischaracterise this issue.  There are some specific fiscal pressures that arise from changing birth rates through time.  Low birth rates in the 1930s, for example, gave us a considerable fiscal dividend for quite a while in the 1990s and 2000s –  there just weren’t that many people becoming eligible for NZS.  On the other hand, high birth rates from after World War Two to the early 1960s mean that since around 2011 there has been quite a big increase in the numbers claiming NZS.   But those effects tend to wash through over time.   The much bigger issue –  a cause for celebration mostly, even if it should prompt reassessment of some government spending choices –  is the strong trend increase in life expectancy (I had some thoughts on this issue here).  The issue isn’t about baby-boomers, selfish or otherwise, but about the fact that we can expect to live much  longer than our grandparents did (at a rate of improvement of towards two years a decade), and we might reasonably expect our grandchildren to live much longer than we do.    There are technically simple appropriate policy responses to those trends –  notably, it simply doesn’t make sense now to be paying universal retirement benefits to people at 65, and the age of entitlement should probably be indexed to further trend improvements in life expectancy, as various other countries have started to do.      When they aren’t trying to defend immigration policy, the able people at the New Zealand Initiative know all this, and make these sorts of points themselves.  And they (rightly) celebrate things like the gains in life expectancy.    So what are they doing making over the top claims like this

policymakers need it [immigration] as the fiscal implications of baby boomer retirement become more acute

Not even a nice-to-have, but a need.

As it happens,  in their more reflective moments even they are more hesitant

Although replacing the exiting workforce with migrants has merit, the idea should be treated with caution. International competition for skilled workers will increase as
the world becomes more interconnected and the ageing problem worsens in developed countries. New Zealand, while an attractive destination in its own right, will struggle to compete with markets offering higher financial and lifestyle rewards.

If we take lots of migrants we should do so because they increase the productivity and living standards of existing New Zealanders, not because they might temporarily help us avoid taking overdue sensible decisions on what proportion of the human lifespan we pay universal benefits to people for.   We should bring in ever more people (since this isn’t just a one-off issue) from elsewhere simply to ease pressures to change internal policy that almost everyone now knows are overdue for change?  I think not.  And nor, generally, would the Initiative.  They are usually much better than that.

What of government finances more generally?

Here the Initiative is very confident.   In the section headed “Fiscal Discipline”, while acknowledging that in other countries immigration does seem to lead to net fiscal pressures, in writing about New Zealand they begin

Migrants tend to have a positive impact on the fiscal side of the government ledger.

They base this claim on MBIE-funded work carried out by BERL.  In that exercise, BERL take some aspects of government review and spending,  and allocate them –  quite carefully –  across New Zealand-born and foreign born residents of New Zealand.  On this snapshot basis, and on these components of government finances, they estimate that in 2013 the average foreign-born person contributed $2653 to government finances in 2013, and the average New Zealand born person contributed $172 to government finances.  Overall, of course, in 2013 the New Zealand government was running quite a substantial fiscal deficit.

It is quite surprising that an economics-based think tank like the Initiative simply accepts and presents these results at face value.    The BERL report –  one of a series done over the last 15 years –  has its own value (comparable data through time).  But it isn’t state-of-the-art in estimating fiscal impacts of immigration (as the authors note, they weren’t paid for a literature review, but simply to slot new numbers into the existing methodology).  It doesn’t even cover quite a few major areas of government revenue and spending.  And in a technical appendix to the report (obtained from BERL –  it doesn’t appear to be online), the authors explicitly note that

In addition, the estimates do not allow for life-cycle impacts of migrant characteristics. That is, the calculations are of a ‘snap-shot’ single year. Issues such as migrants’ varying contributions and expenditure claims over their lifetime are not captured. Dynamic micro simulation might be used to establish the lifetime contribution of a particular type of migrant, but such a technique is beyond the scope of this project.

Bring in a whole bunch of 25 year olds, and of course they won’t involve much government health, welfare or education spending.  But over time, they’ll have children, and age.  Bring in 50 year olds, and they’ll (soon) be eligible for health and NZS spending, but won’t typically have paid that much New Zealand tax over their lifetimes

I’m not criticising the New Zealand Initiative for not producing state-of-the-art estimates themselves (that is a very substantial project) but for not at least acknowledging some of the limitations of the estimates they choose to rely on.

I’ve commented previously on the BERL estimates, when Nigel Latta made great play of them in his TV documentary last year on immigration.  Here are some of the points I made then.

But even in what it does look at, there are some quite severe limitations:

  • recall that the report estimates that both NZ born and immigrants made a net positive fiscal contribution to the government’s accounts.  Perhaps, but recall that in 2013 (the year studied) the government was still running quite a large fiscal deficit.  In other words, even if the study is roughly accurately capturing the relative contributions of immigrants and the native-born, it isn’t remotely accurately capturing the absolute contribution.
  • The BERL exercise does not appear to recognize at all that much of the demand for increased government capital spending now arises from the immigration programme itself (as it notes, between 2001 and 2013, the New Zealand born population aged 25 to 64 actually fell slightly while the foreign born population of that age increased by 222000 people).  Over those 12 years, 80 per cent of the total population growth has been among the foreign-born.   Assign much of the (above-depreciation) government capex to the immigration programme and suddenly even the fiscal numbers will look quite different.
  • These are snapshot effects rather than inter-generational ones.  It is hardly surprising that an immigration programme that brings in relatively young people involves less government operating spending (per capita) than for natives –  people that age are typically young and fit –  but if we want to think about even the fiscal impact of the immigration programme as a whole it would be important to look at the impact not just of the immigrants in the couple of decades post-arrival, but (for example) at the impact as those people age, and the impact of their own children (many of whom will be New Zealand citizens, but still a consequence of the immigration programme).
  • perhaps most importantly, any sort of exercise like this is only meaningful if it deals with very small changes (when one can keep the rest of the economy held constant).  By contrast, the potential for a large scale immigration programme to affect real interest rates, the real exchange rate, and the underlying structure of the economy, means these fiscal exercises offer no insight at all on the overall impact of immigration even on the fiscal accounts, let alone the wider economy.

In addition, I think there are at least two other points worth making.

First, company tax revenue (and, I think, trust income) isn’t included in the calculations at all.  On the sort of snapshot basis used here, this is likely to skew the results against the native-born, because it is likely that the capital stock is disproportionately owned by natives rather than immigrants.  (This is, in a sense, simply the flipside to the fact that the average migrant is younger than the average native).  Perhaps as importantly, there is a reasonable argument that revenue that results from New Zealand’s natural resources should be assigned to natives, rather than (implicitly spread across both natives and migrants).  Those revenues  –  from farming or fishing or gas extraction etc –  would have arisen regardless of whether we had any material level of immigration in the last few decades, and are unlikely to have been enhanced by the much-increased population (indeed, if my concerns about the real exchange rate are correct, they may have been reduced).

And second, it is important to remember that BERL is comparing the NZ born and foreign born populations in total.  Although they do undertake some decompositions, it isn’t really an attempt at a marginal analysis –  looking at (ideally) the lifetime impact of the next 1 per cent of the population that comes in as migrants.  The foreign-born of New Zealand today includes old people who came in the 1950s, the small numbers who came in the 1980s, as well as the huge numbers who have come in the last couple of decades.  Research evidence –  summarised in Julie Fry’s 2014 Treasury working paper – shows that, for example, migrants for the Pacific and Asia take much longer than, say, migrants from the UK to reach native-born levels of income (and presumably tax contribution) for any given set of qualifications etc.  Moreover, even with the pool of migrants we take each year, there is wide range of skills and capabilities –  some will end up making a big positive (economic and) fiscal contribution, and others –  especially, say, the parent approvals –  will be a substantial fiscal drain.   Since the policy argument now isn’t about the stock of people already here, but about who, and how many, we should let in going forward, a more appropriate analysis –  for current policy purposes – would focus on trying to better understand what level of immigration, of what sort of people, would maximise any fiscal gains, or minimise any fiscal costs.  The BERL report doesn’t attempt that sort of thing, and the New Zealand Initiative don’t even note the relevance of the perspective.

For all these specific points, I’ve never made much of the fiscal issues around immigration in New Zealand.  The comment I made a few months ago still reflects my position.

I’ve never made much of the fiscal issues around immigration.  By international standards our residence programme , if large, isn’t bad  –  if it doesn’t attract many very skilled people, at least it does successfully focus on getting people quickly into the labour market.  But precisely because in the end we are largely bringing lots of people quite like us –  who can readily get jobs –  it is very unlikely that in the long-run there will be much net difference in the fiscal effects between the contributions of those whose ancestors have been here for generations and more recent arrivals.

With an immigration programme like ours, the fiscal impact probably isn’t much of an argument one way or the other.  Although if there are fiscal gains on offer, we could probably maximise them with more demanding entry criteria than those we currently use.

On reflection, this post has got long enough.  I’ll tackle the housing issues in a separate post later in the day.

Another perspective on the New Zealand Initiative report

I will be resuming today my own series of posts on aspects of the New Zealand Initiative’s report on immigration.    However, some readers might also be interested in a new 29 page paper reviewing the New Zealand Initiative’s report by my former colleague Ian Harrison, now of Tail Risk Economics.

Ian focuses his comments on some of more formal research papers the New Zealand Initiative authors cite in support of their case.  There is some overlap with the material I’ll be presenting here, but in some areas Ian takes a more specifically technical approach to his critique.   On the other hand, sometimes his approach is a little more “in your face” than one I might typically adopt.

Here is some of the Introduction to his paper

Recently the New Zealand Initiative has released a report ‘The New Zealanders’ on the immigration issue.  The stated purpose is ‘To give the most up-to-date information to the public. To stack up these social, economic and nationhood fears against the available data and research.  It is claimed that the evidence on the economics is positive and fairly conclusive.

By and large, economists favour immigration as migrants benefit the countries they move to through knowledge spill-overs and global connectedness. Growing the population through immigration also produces ‘economies of agglomeration’ (i.e. the abilities of larger, denser populations to support more commerce and knowledge exchange).
All this is presented as a solid, objective assessment “While we could deduce the objective economic effects ….’

We disagree.  The economic ‘facts’ had a distinct ‘alternative’ whiff to them.  The arguments were at best thin, and the paper did not seriously engage with some of the key issues. It is easy to cherry-pick the (mostly) foreign literature to find an article that supports an assertion. It is much harder to convey a fair overall sense of the state of the economics of immigration, and critically, its relevance to New Zealand. The report does not do this, and the reader is left with the impression that nearly all economists support high levels of immigration, and that there is compelling support for this in the literature.

This paper presents an alternative view. But first let us define the scope of the debate. First, It is not about stopping all immigration or reversing what has happened. Most people are relaxed about genuinely high skilled immigration.  And we can continue to enjoy the ‘soft benefits’ of diversity from the existing stock of migrants.  The debate is about whether we continue the policy of large-scale medium/low skilled immigration. Second, it is not about whether immigration will generate a bigger economy. It will.  The issue is whether it will make current New Zealanders better off. The ‘New Zealanders’ is somewhat ambivalent on this point, but it is the broadly accepted test.

Our alterative economic narrative addresses the major shortcoming in the paper. It did not seriously engage with the critical structural features of the New Zealand economy.   That is, New Zealand economy is, more than any other advanced economy, land based and isolated. Other things being equal we would expect a large influx of immigrant labour to drive down average incomes as a larger labour force has to seek out more labour intensive low income jobs.  Thus the foreign literature, even if robust, may not be a good guide to New Zealand outcomes

And, on the other hand, this from his conclusion

To be fair, we found much in the report that was very useful, in particular the taxonomy of beliefs about migration. The report certainly challenged some of our preconceptions and it provides a good starting point for a debate that has to include what people really feel and believe about some sensitive issues.

The taxonomy of possible beliefs about immigration appears quite late in the report.  I agree that it provides a useful framework for helping to think carefully about the issues, and will be discussing it later in my series.