Michael Reddell says reshaping our immigration policy would end Auckland house price inflation, lower our interest rates, and drop our exchange rate. And he says it would raise average incomes

This article was first published on AUT’s Briefing Papers series. It is here with permission.

By Michael Reddell*

Of the biggest cities in each advanced economy, Auckland has been one of the fastest growing.

Just in the last 15 years, Auckland’s population has grown by 30 per cent, while the population in the rest of the country has risen by 13 per cent.

Many argue that big cities are the way of the future, and that we should be actively promoting the growth of our one moderately- large city. And most of Auckland’s population growth these days results from our immigration policy choices.

The official aim is to bring in 45,000 to 50,000 non New Zealanders as new residents each year. It is one of the largest active immigration programmes anywhere in the world.

But recent new regional GDP data cast real doubt on whether the strategy is working. The absurdly high house prices in Auckland grab the headlines. But that problem can be fixed. Plenty of fast-growing cities in the United States have very affordable house prices, by making it easy for land to be used for housing.

Incomes are another matter. Over the 15 years for which Statistics NZ produces data, average (nominal) GDP per capita has grown much more slowly in Auckland than in the rest of the country.  Auckland average incomes were 12 per cent above those in the rest of New Zealand in 2015, but they had been 24 per cent higher in 2000.

If policymakers had thought harder about New Zealand’s characteristics, this shouldn’t have been such a surprise. Probably 85 per cent of all our exports are natural resource based (not just farm produce, but fish, oil, wine, and tourism – it is the landscape the tourists mostly come for). New Zealand is very remote, when personal connections seem to matter more than ever. Few successful companies are likely to base themselves in New Zealand in the long-term, unless they are built around the natural resource base. Using immigration policy to drive up Auckland’s population growth increasingly looks like this generation’s Think Big strategy. The 1980s version was a costly disaster. After 25 years, the Think Big isn’t shaping up well.

New Zealand can offer an excellent standard of living for a small population, based primarily on applying the skills and talents of our people to the natural resources. But that natural resource base is largely fixed. And our location makes it really hard to generate economic opportunities for lots of immigrants in ways that benefit us all. New Zealanders have implicitly recognised the limitations for decades. Huge numbers have pursued better opportunities in Australia.

It would be much better to reshape our immigration policy. We should lower the annual target to around 15000 really able people (per capita, that would be around the rate of legal immigration to the United States). That change alone would largely end the craziness of Auckland house prices. But it would also put an end to us having persistently higher interest rates than the rest of the world. And our real exchange rate would fall materially. That would create a much better climate for investment by firms that successfully take on the rest of the world, not just meet the local needs of a fast-growing domestic population. In turn, that opens up the prospect of catching up once again with average incomes in the rest of the advanced world. Perhaps then more of our people will come back to stay.

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Michael Reddell is a Wellington-based independent economist and commentator on economic and financial affairs, blogging at www.croakingcassandra.com. He recently left the Reserve Bank where he had held various economics and management positions over many years, including Head of Financial Markets and manager responsible for economic forecasting. This article was first published on AUT’s Briefing Papers series. It is here with permission.