Looking for a successful outward-oriented economic strategy 

I could bore you with thoughts on (a) Supreme Court rulings on the duties of trustees to disclose material to members/beneficiaries, or (b) even more recondite rulings on severability (the conditions under which, having inserted an invalid and unenforceable provision into a deed, the discovery of that invalid provision invalidates (or not) the rest of the deed).  Doing so might help straighten out my thinking for a meeting this afternoon, but it would bore you witless.

Instead, I’ll just leave with a link to a piece I wrote that appeared on the New Zealand Centre for Political Research website over the weekend.

A month or so ago, on the day the new government was to be sworn in, I wrote a post here about the apparent tension between the government’s stated ambition to increase the outward-orientation of the New Zealand economy (including the appointment of a Minister for Export Growth) and various specific policies the new government seeemed committed to, which seemed likely to reduce exports as a share of GDP (all else equal).  In some cases, those policies represented overdue elimination of explicit or (more often) implicit subsidies.  In other cases, no doubt some sort of case could be made for each of the policies on their own merits.  Nonetheless, taken together they looked likely to continue to shrink the foreign trade share of the New Zealand economy (the actual outcome under the previous government, despite the regularly restated goal to substantially increase exports as a share of GDP.

In that earlier post, I included this chart, of exports and imports as a share of GDP, back to 1971/72.

trade shares

There are some data revisions due out later this week.  It would be very surprising if they changed the broad picture.  Foreign trade has been becoming less important as a share of New Zealand’s economy, even though every successful case of economic transformation I’m aware of has involved getting the preconditions right that result in more domestic firms successfully taking on the world market.

There are some unavoidable factors that explain a temporary diversion of resources towards the domestic economy: the repair and rebuild process after the Cantervury earthquakes being the most obvious. But the peak of that process has passed, and yet Treasury’s advice in the PREFU was that the downward trend (in exports/GDP) would continue.  The problems look structural.

A few days after that earlier post I was mildly encouraged to see references in the Speech from the Throne to the need to lift productivity in New Zealand.  Exports were highlighted in this paragraph

This means working smarter, with new technologies, reducing the export of raw commodities and adding more value in New Zealand. For example, by securing the supply for forestry processing, greater investment in fishing and aquaculture, increasing skills and training, and more research and development to add value to dairy and other products and to create new technologies.

I couldn’t track down old Speeches from the Throne, but it did strike me as the sort of stuff almost any government could have (and probably did) say for at least the last 50 years.   The previous government, for example, claimed to be keen on aquaculture, and removing regulatory roadblocks to it.  Forest processing as a big theme in the 1950s when the government led the formation of Tasman Pulp and Paper (and my old hometown of Kawerau).  And so on.

And yet, as the old line has it, if one does the same stuff over and over again, why would one expect a different result?  We’ve been drifting behind the rest of the advanced world –  and have had no productivity growth at all in the last five years –  and foreign trade as a share of GDP hasn’t been sustainably increased for 25 years now.

Muriel Newman, former ACT MP, at NZ CPR saw that earlier post and asked if I’d like to do something shorter, and a bit more policy-focused for their newsletter.    The result is here.

I noted that there are lots of things that could be dealt with to lift our economic performance

I hope that the new ministers are going to turn their minds pretty quickly to how they might achieve the sort of reorientation in the economy that their own campaign recognised is needed. Regional development funds aren’t likely to be the answer; in fact, over the last 15 years, “the regions” have generally done better than “the cities”.   Auckland has been the laggard (again in per capita terms).

There are plenty of things that could be done to lift the competitiveness of the New Zealand economy.  For example, we now have a company tax rate that is above that of the median OECD country.   Lower taxes on the returns to business investment are one of best ways of getting more such investment.   We also already have one of the highest minimum wages rate, relative to median incomes, of any OECD countries.  Reforming our land use and planning laws could markedly lower the cost of housing, and help ensure that people and businesses can locate in the best locations.

In response, Muriel Newman asked a bunch of other regulatory issues.  I noted that I agreed that there was plenty of room for improvement on many fronts

But it is worth remembering that things on the regulatory front are typically not worse here than in most other advanced countries (indeed, we often score a little better than average on summary measures).   There is a lot we could do to remove roadblocks in these areas, but if we are to understand why NZ has continued to do badly relative to other advanced countries, i think we need to focus on things that are different here than abroad.  As per the column, our company tax rate is now high, and our minimum wage is high (both relative to other OECD countries).  But we are also very remote, in an era when personal connections seem to matter more than ever, and we have an immigration policy that is very unusual by international standards.  Of other OECD countries, only Australia and Canada come close to our target inflow (and Israel will take any Jewis person who wants to come –  that is a different issue).

And to revert to the concluding paragraphs of the NZCPR article

Defenders of our very high target rate of immigration talk constantly about skill shortages.  But OECD data show that New Zealand workers are already among the most skilled around.  We don’t need more workers – skilled or otherwise.  In fact, because of how difficult it is to base internationally competitive businesses here, there is an almost irreconcilable tension between continuing to drive the population up, wanting to deal with the pressing environmental issues associated with natural resource exports, and still wanting First World living standards.  The best way to square the circle would be to cut back sharply on the target rates of non-citizen immigration.

There isn’t anything necessarily wrong, in principle, with a growing population.  But successive governments have been putting the cart before the horse – driving the population up in the idle hope that a bigger population might somehow spark higher productivity growth.  In a location that isn’t a natural home to lots of people, that was never very likely.  Instead, we need to focus instead on the able people we already have – and to heed the wisdom of the New Zealanders who’ve been leaving.   Without a change of course, we seem set to slowly drift ever further behind other advanced countries, increasingly unable to offer our people the world-leading living standards we once delivered and could, with the right policies, once again aspire to.

It is a shame that the new government shows no interest in tackling our anomalous, and deeply unfit-for–this-location, immigration policy (indeed, there are now reports they are in no hurry even to fix the manifest problems around student visas and associated work rights).  Unless they do so –  and in the process achieve a substantial sustained reduction in the real exchange rate –  it is very difficult to see a path through which the Minister for Export Growth will get to the end of his term and be able to point to a sustainable turnaround in performance, and a trajectory for exports (and imports) as a share of GDP that might offer some hope of New Zealand one day catching up with the rest of the advanced world again.

39 thoughts on “Looking for a successful outward-oriented economic strategy 

  1. You have been arguing this same point about immigration ever since I discovered your blog.

    In a small country there really will be a need for importing experts. For example some surgical procedures could only be performed by a limited number of practitioners so one surgeon in a road accident could leave many Kiwis waiting excessively for surgery. Or a software house decides it needs world leading expertise in say a specific area of AI – the need critical to launching a new export product.
    Our current system of Immigration often create delays for urgent highly skilled valuable immigrants. Delays the lower skilled immigrants are willing to endure but we may be losing genuine world class talent.

    Your arguments convinced me a long time ago so I truly hope you are wrong when you write “”It is a shame that the new government shows no interest in tackling our anomalous, and deeply unfit-for–this-location, immigration policy (indeed, there are now reports they are in no hurry even to fix the manifest problems around student visas and associated work rights). “”
    I suspect and hope our new government is making adjustments quietly to reduce immigration to sensible levels and ensuring every immigrant adds substantial value to NZ. Quietly because any statement about immigration is immediately interpreted as racism (rather weirdly since there has always been a target so if any immigration control is racism then we have always been racist). It is interpreted as racism by people who want to see their property investments increase and who enjoy a cappuccino poured by low wage immigrants.

    A government that boasts of its concerns about social justice and does nothing about the widespread worker exploitation identified by Associate Professor Christina Stringer deserves to die of shame.

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    • On the government, they did not even mention the residence approvals numbers in their immigration policy, and certainly gave no hint of being willing to reduce that target.

      On the education side, what gives me reason for unease is (a) the new academic year isn’t far away, and there have been no policy announcements (even tho things in this area don’t require legislation, and (b) comments like those described in this press release https://www.national.org.nz/govt_u_turn_coming_on_international_students. it is, of course, from the Opposition, but there has been so suggestion I’ve seen that Hipkins suggests he was misquoted or misrepresented.

      As I wrote in this post https://croakingcassandra.com/2017/10/25/the-new-governments-immigration-policy/
      at present there seems no reason not to conclude that this govt is just another one in the stream of “big NZ” governments going back at least 25 years. I’d be delighted to be wrong, but at present there is no evidence.

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      • Targetting 30,000 international students, off the cuff Captains call by Jacinda Ardern after realising that Andrew Little’s cut of 30,000 Foreign workers was obviously dumb when you want to build 10,000 houses a year.

        As I have said before, the most International student Visas are issued a year ago for the next year’s intake so it is already too late for next year.

        Anyway 30,000 is more than an entire years of new student intake for every single institute, university, polytechnic and private institutes in New Zealand. Laughable targets. Targets can be aggressive but there is a difference between difficult but achievable targets and a clowns antics.

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      • Neither this blog nor Labour have suggested 30,000 fewer students next year. The concept proposed is that students should be attracted by study not opportunities for permanent residency. If that causes some reduction in next years student intake it would still not reduce students doing their 2nd or 3rd year studies.

        All rational proposals for tightening immigration rules have been for a gradual reduction thus making it easy to reverse if the economic arguments are proven wrong. Certainly seventy years of high immigration is a policy that is not making us wealthier so maybe a change of direction is worth experimenting with.

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      • “In an interview with The Nation on Saturday morning, when asked where the “sweet spot” was in the contentious issue, the Prime Minister-elect said: “You’ll see Labour’s policy remains absolutely unchanged as a result of these negotiations.”

        Under that policy, Labour estimates net migration will fall by 20,000 to 30,000 a year, mostly by limiting the number of people granted student and work visas.”

        https://www.stuff.co.nz/national/politics/98119199/jacina-ardern-labour-hasnt-budged-on-its-immigration-policy

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    • “the real villains behind New Zealand’s deteriorating water quality are still at large: cows. Scrub where sheep once grazed is being given over to intensive dairy farms—some of them irrigated to help the pasture grow. Some 6.6m cattle are now squeezed into the country of 4.7m people.”

      https://www.economist.com/news/asia/21731435-government-data-suggests-60-rivers-and-lakes-are-unswimmable-dairy-farming-polluting-new

      Its not about too many people. Its very plain and simple that it is about too many cows. The Economist left out the meat cows and the mother and baby calfs. Add that and our herd size is 10 million cows squeezed into a country with 4.7 million people. We export 95% of the produce which is an abysmal $14 billion in export GDP. Only a small number of 1.5 million people in Auckland generate a GDP of $75 billion. In effect we are wasting huge resources for so little gain because we are effectively subsiding the worlds food production.

      Liked by 1 person

      • Having lived in the Scottish highlands where there was ample evidence of people being replaced by sheep about 200 years ago you may have a point about relative priorities people -v- livestock. On the other hand cows do not need schools, universities, hospitals, teachers, doctors, nurses, superannuation and their underpasses are cheaper than Waterview.

        Do you recommend the Netherlands culls its 4m cows?

        Liked by 1 person

      • Netherlands have 17.2 million people. They need the 4 million cows to feed their people. We do not need 10 million cows to feed our 4.7 million people. So effectively we are wasting resources that could have gone into more productive resources and are just subsidising the worlds bad eating habits.

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      • Only a small number of 1.5 million people in Auckland generate a GDP of $75 billion.

        Yeh well thats part of the problem. They don’t generate much that adds to our productivity but they are a big consumer of imported goods.

        We would be better off without them. Cut the North loose at Bombay. They don’t know we exist south of there anyway.

        Liked by 1 person

      • Bob, if you adopt the Netherlands model which is fine. It says with either have 17,6 million people and 4 million cows which means we either increase our population size or we reduce the number of cows. This means we are over invested in cows because if we adopt a similar proportion our effective cow numbers should be 1.2 million for a population of 4.7 million.

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      • All this consumption and pressure on resources has really nothing to do with the 1.5 million residents in Auckland. All that activity and consumption is by the 19 million inbound and outbound tourists, domestic and international that keep using our ratepayer roads and ratepayer hospitals and ratepayer rail and mess up our ratepayer parks and public toilets who then hire all these low skilled labour to service these 19 million passengers every 12 months.

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  2. Bermuda

    Bermuda is a very small country. It is a tax-haven. It has a population of 65,000. It has a tax base of 0 (zero) percent. Many multi-nationals have their headquarters domiciled there. The sum of the published annual profits of those multi-nationals is $100 billion. The published GDP of Bermuda is $6 billion.

    Do you see any of those multi-nationals leaping in and setting up their business activities there. Doesn’t seem like it

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    • Plenty of multi-national legal and accounting firms……(not huge numbers of people, but they boost the living standards of Bermudans).

      And, on the other hand (to your anecdote), there is Ireland

      As I’ve said before, I think the evidence is pretty clear that much of any capital taxes are borne by wage earners (ie they really do affect investment), but you’ll note that I’m not arguing that lower capital taxes are some sort of panacea – if anything, quite the contrary. Our location is much less propitious than that of Ireland.

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      • We did have a excellent and budding tax dodging Financial Trust structure industry which would have meant more highly paid accountants and lawyers until the Panama Papers blew a hole in our opportunity to increase NZ GDP in financial services and skills/wages for our people. If you believe Singapore is not up to their eyeballs in murky and dodgy financial dealings and reaping the financial rewards then you have got to be blind.

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  3. I have said this before – it is self-evident – if we keep importing migrants into NZ without ensuring the productive component of the influx is directed into the tradeable sector then the tradeable share of GDP must decrease – it has to – the mathematics tell you
    https://croakingcassandra.com/2017/09/26/a-problem-awaiting-the-new-government/comment-page-1/#comment-18808

    If anyone can offer a probabilistic explanation that says otherwise – please do

    In 2008 National Government set a visionary goal of an export share of 40% of GDP when Actuals were 33%. Last time it was measured after 7 years of a National led government that share had dropped down to 27%. Unfortunately the National led government had a tendency to self-sabotage – often.

    Encouraging and facilitating a mass-migration program without targeting and accepting only those who added to export activities the government guaranteed it would never achieve its vision. What makes it difficult to swallow is the government cannot quantify the actual generation of GDP by migrants year by year. It is not an impossible task

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    • You have got the cart before the horse. The government does not have any hidden agenda with regards to high population or high immigration. They do have an agenda to increase the tourist numbers with the subsidies for the Hobbit movies and marketing NZ as MiddleEarth and in 2017 the government will spendup $178 million in the budget. Plan for another $190 million for the Americas Cup as Phil Goff dithers over spending any Ratepayers money because he wants it spent on rail which is also a waste of ratepayers money.

      The largest industry now in NZ is tourism with $11 billion in GDP and currently 3.7 million visitors with 19 million inbound and outbound passengers out of Auckland Airport.

      The driver is tourism not the government. The government merely responded to business needs and the tourism industry needs workers. Lots and lots of workers.Remember that it is a service industry and service means more people not less.

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      • As inflation is very low and competition is very tough, in order to get a margin you either have to increase productivity or reduce costs. In a service industry you cant reduce people as poor service equates to lost business and lost revenue.

        Of course you could market like Gucci where each day people have to line up and queue to buy a sought after premium product with only bare minimum staff, also a good way of eliminating the cost of shoplifting but they do pay for additional security. I guess it is unique shopping experience where after you queue for an hour and you get the pleasure of most of a empty store to serve your every need. Personally I think those sort of buyers need their heads for the onset of dementia.

        Thats where migrants and stident workers come into the picture driven by a business need. Government responds to that business driven need. Reduced migrant labour costs equates for higher margins and profitability for shareholders. You have to remember that in many small businesses the bosses work 7 day weeks and 80 hour weeks and their take home pay may be just $10 an hour or even less but they are expected to pay their staff minimum wage of $16 an hour. Once upon a time we had a youth rate and that allowed for lower cost service staff to be handled and paid for by youth workers. Then they got rid of that youth rate. Now we have 90,000 unemployed youth and Andrew Little asks why?? The youth rate allows inexperienced workers to get experience. If you are paying $16 an hour you want a person that already have work experience, no training required and hit the road running.

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  4. quote – “There are reports the Coalition is in no hurry to fix the problems around student visas and associated work rights”

    Is that from reliable sources, or chatter, or whispers

    Liked by 1 person

  5. Well Phil the Twyford is certainly suffering from delusions of grandeur. He has now doubled the number of houses they are going to build. Next week it will be tripple.

    We will need all those immigrants to fill up the houses let alone build them.

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    • The plan now is Kiwibuild 1,000 and Kiwibuy 9,000. The total is 10,000. The art of smoke and mirrors. So we should change the name to Kiwibuy rather than Kiwibuild.

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  6. Where did we ever have a say on which countries brats we should include in our taxpayer education system or that we should subsidize via various colleges via a student visa. Because there can be no doubt that those on any student Visa ever pay the real cost of their education in NZ.

    For that to happen we would need to collect a huge sum from them before they came. A sum that covered the extra costs to the taxpayer and the ratepayer of them being in NZ. Someone more clever than I could probably calculate these costs. Housing and its extra cost to Kiwi’s, food, transport, inteest rates and so on.

    So if we are wondering why our productivity is poor then we need to ask why we are spending vast sums of OPM running this failing business model. More so when those that are denied entry to live here go away taking that cheap education and providing a benefit to wherever else in the world they go to live. Is it a Kiwi’s job to pay taxes to run this rort.

    Worse is that there are mote and more of them as the worlds population get younger. We are a soft touch.

    Want to make a difference then teach them via the internet. We should get the best teachers in any given subject and make the vidie’s for them to learn from and then sell the teaching off shore. That would make a difference and is way more productive. We should stop propping up people who have left teaching after ears of taxpayer training and suggest the fill the vacancies that we currently have available.
    My guess is that if we removed the right of schools to suck in the worlds brats we would not have a teacher shortage nor a school shortage plus accommodation would be much better for Kiwi’s.

    We are not the only suckers as other countries do the same. Its a fools game educating people from countries that can afford to do that themselves.

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    • In a world where there is competition we have to provide either a better product that people will buy or we incentivise so that people do buy an inferior product. The International student market contributes now $4.5 billion to export GDP. Seems to be growing rather than shrinking because most of this year I thought it was closer to $4 billion. Our closest competitor which is Australia, this is a $25 billion Australian export GDP and they provide work visas and a path to residency. We either compete and have a similar product although Michael would insist that our Universities are somewhat inferior. Therefore an inferior product should have even more incentives to be competitive. I think most international people/prospective students would judge we have an equivalent product to Australia and the work visas and path to residency is no different than what Australia offers.

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      • Can you calculate how much that is per student? Is there any way of calculating costs per student – I mean it must cost something to supply lecture theatres and qualified instructors.
        Would we make more money with less hassle by getting rid of these costs and just having a dutch auction for permanent residency?

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      • Depends entirely on what the product is

        Is it

        (a) A degree from a NZ University
        (b) A piece of paper from a borderline PTE
        (c) A path to residency in NZ
        (d) A path to obtaining an NZ passport, which in turn provides
        (e) A counterfeit backdoor entry into Australia

        Liked by 1 person

      • Iconoclast: we could sell each separately. Of course (a) does require study and passing exams and (e) could only honestly be sold by Australia.

        Assuming (c) means permanent residency then I’m guessing this would sell at highest price with (b) lowest. It would be good to untangle the product or we will keep having the same $4.5b argument with post graduate medical students lined up to prove how lucky NZ is to have such a great system.

        Quite seriously I would be interested in a dutch auction for NZ permanent residency (say restricted to 20 entries – criminal and health records checked ). I suspect some of those who spend a fortune to take the high risk of being smuggled by boat into Europe or Australia would offer $500,000 or more.

        I do know in 2003 when I read the form to apply for NZ residency I saw a requirement for $200,000 and assumed it was a fee not just proof that I was a fairly wealthy old programmer. [Those were the days when $200,000 bought a North Shore 3-bedroom house].

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      • Looks like your quota is already filled with Jacinda’s refugee target of 2,000 a year who will have to be trained in our Universities at our cost plus living expenses. The first 150 from Manus Island to arrive soon as Malcolm Turnbull softens under International pressure.

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      • I wouldn’t be too sure about the advantage provided by Australian Universities. That advantage has to be traded off against very definite and overt hostility towards international students – particularly in Melbourne – among the natives

        I was in Melbourne at the time of the following events
        https://www.google.co.nz/search?q=melbourne+indian+students+abused+killed&sourceid=ie7&rls=com.microsoft:en-AU:IE-Address&ie=&oe=&gfe_rd=cr&dcr=0&ei=4YMTWobENpHr8wfThYbgDg

        The International Students in Melbourne was running at about 170,000 in 2010
        In the following years the numbers fell by half

        PS: one product that was omitted was the financial clubbing together by the family to sponsor the international student with the intention of obtaining permanent residency to be followed by exponential family re-unions galore

        Another Product incentive is Welfare and Superannuation for the elders after 10 years

        Liked by 1 person

      • Iconoclast, you are very seriously out of touch with the Australian Student numbers.

        “The number of international students in Australia hit a record high last year with more than half a million choosing to study here. Figures from the federal Education Department show there were 554,179 full-fee paying international students in 2016, an increase of more than 10 per cent on the previous year.Feb 21, 2017”

        http://www.abc.net.au/news/2017-02-22/record-number-of-international-students-in-australia-in-2016/8291284

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      • you didn’t answer my question. why should we bother unless we charge sufficient to compensate the Kiwi’s for the investment we make in allowing this to happen?

        Simple question.
        Its has been clear that we haven’t given the financial burden placed in exisiting Kiwi’s via house prices and higher interest rates.

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      • Vikingonmars, what financial burden? It is only a minority segment of New Zealanders that have a financial burden. For the majority of New Zealanders who have businesses and properties, a huge financial wealth boost. Due to the big money boost to the economy provided by international students and foreign workers, my kiwi born boss has been really happy, giving me large pay rises over the years, a poor migrant who only arrived with $200 in my pocket.

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    • A comment noted a couple of months ago about a Syrian refugee family – what the government will never do is keep and publish a running tally of the cost of these programs – the success of the program is dependent on keeping the masses un-informed

      “Listening to a discussion last week about a Syrian refugee family who arrived into Dunedin with a bunch of other Syrian refugees and settled into a house somewhere in Dunedin, possibly a state house. They just got their first electricity bill for one month of $900. They don’t how they’re going to pay for it”

      https://www.interest.co.nz/news/89473/treasurys-pre-election-fiscal-update-throws-curve-ball-election-2017-better-government#comment-947072

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      • These Syrians are just going to grow up hating us for providing them with leaking, cold and mouldy houses to live in. Unfortunately with atmosphere moisture levels in NZ usually around 95% and above, cold, damp and mouldy houses are actually normal in NZ. The stupidity of Andrew Little’s Warrant of Fitness means that we will have to put in air conditioning systems like heat pumps or run dehumdifiers into homes because people do not usually open windows to let cold air in, to air the house regularly.

        Liked by 1 person

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