Tony Alexander: 119,000 reasons for an early rate cut ... but there's a downside too

ANALYSIS: An extra 119,000 people have to live somewhere. New Zealand needs about 43,000 houses at an average occupancy rate to house the record inflow our country is now receiving, predominantly of people coming from China, India, the Philippines, South Africa, and the Pacific Islands.

For employers, the 2.3% boost to our population from these flows is a positive thing because it makes finding new staff easier and acts as a disincentive for existing staff to demand higher wages. This means the migration boom can place downward pressure on the pace of wages growth, which is still much too high at an average rise above 7% in the past year, according to Stats NZ data.

If wages growth does truly slowdown, then this will provide good scope for the Reserve Bank to cut interest rates next year and that also will be a positive thing for the pace of growth in the economy and the housing market.

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There is already a positive economic boost in place from these migrants purchasing food, bedding and so on. But there are negatives.

There is rapidly growing pressure on the country’s infrastructure. This covers the health system, electricity, roading, public transport, water waste and water supply. There is also some extra upward pressure on house prices, which will worsen housing affordability for many people.

I have previously mentioned here the swift change in the rental market associated with the migration boom. At the end of last year a net 8% of property investors responding in a monthly survey I run with Crockers Property Management said that they were finding it hard to get a good tenant. Now, a net 26% say it is easy.

Upward pressure on the rate of growth in rents is so far fairly mild. But the soaring pace of rents growth in Australia, which is also experiencing a record net migration boom, suggests that rent rises here risk surprising on the high side in the next 1-2 years.

Independent economist Tony Alexander: "There is also some extra upward pressure on house prices, which will worsen housing affordability for many people." Photo / Fiona Goodall

As rents rise, young people will feel extra pressure to quit renting and purchase a property instead – or leave the country. That is already happening to a great degree with a net 45,000 loss of Kiwis over the past year. That is, 71,000 left and about 26,000 shifted back home. But if you are considering leaving NZ because rents here are becoming painful, you’d best do your research for the part of Australia you are thinking about relocating to.

In Sydney, rents have risen over 25% in the past year, according to one measure. The national vacancy rate has fallen to a record low. These pressures have developed because like us Australia is also enjoying record net migration inflows. The UK is experiencing the same thing.

For the moment there seems little pressure on the NZ Government to rein in migrant inflows, with more people currently happy about the boom than unhappy. More staff, more customers, more tenants. But policies are being developed in the UK to try and deliver the control of migrant inflows many people voted for in Brexit but have yet to see.

Similarly, in Australia pressure is growing on the Federal Government to rein in migrant numbers. Concern is rapidly deepening about the pressures on infrastructure and housing. When might a backlash arise against our migration surge? Maybe late next year as the unemployment rate climbs towards 5% and the issue of housing affordability once again becomes a deep matter of concern.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz