The wrong investment

12 Nov 2020 The wrong investment image

House prices across the country have risen nearly 20% to a median $725,000 in the past 12 months. At the same time, New Zealand’s Reserve Bank has announced a $28 billion programme aimed at forcing down borrowing costs and left the official cash rate at 0.25%.

Thankfully though, the Reserve Bank is concerned about the residential property market, with Governor Adrian Orr commenting that the Bank “has seen a marked acceleration in higher risk loans, particularly to investors in the property market”. As a result, the Reserve Bank is considering imposing loan to value ratio restrictions, in a bid to curb risky lending in the residential property market.

Simply put, investing in residential property will not aid New Zealand’s recovery from the current economic downturn. The housing market does not produce products that can be eaten or used by consumers. It does not create jobs, and it does not earn overseas return through exports. It is a wasted investment when what we should be investing in is New Zealand’s economic recovery.

This is, in my view, where the Reserve Bank’s focus should be: enabling significant investment in businesses that will drive our much-needed economic recovery and create jobs.

The Government has developed a programme for the primary sector called the Fit for a Better World Roadmap, which has the goal of generating an additional $44 billion in export earnings over the next decade. This will take significant investment and the development of sector strategies and Government programmes that enable growth.

Roadblocks to growth and unnecessary red tape will need to be removed. The Reserve Bank needs to become part of the programme, and direct investment away from the overheated residential property market into Fit for a Better World.

The Roadmap includes initiatives to accelerate the growth of new products, with a focus on current growth areas such as aquaculture and horticulture. It also includes initiatives that will unlock further value from New Zealand’s larger and well-established industries, dairy and beef and lamb.

Primary sector growth will come through both increasing the volume of exports and the amount of money those products sell for. Horticulture’s exports are a good example of this in action, where year on year, both volume and value are increased – horticulture has grown 64% over the last decade.

Environmental sustainability will also need to be enhanced as part of this export drive. New Zealand’s freshwater and climate change programmes are requiring extensive and costly changes in how the primary sector operates. This will need to be factored into how export volume and value are increased. Our producers also need to feed New Zealand first, and in the case of horticulture, that is healthy food.

Horticulture and wine exports have grown from $3.3 billion in 2009 to $6.39 billion in 2019, thanks to increasing international demand for high-quality fruit and vegetables, and investment in new varieties aligned to consumer preferences. In the Fit for a Better World Roadmap, an additional $2.6 billion in additional horticulture export revenue is targeted to be achieved, driven primarily by investment in innovation leading to the development of new products and varieties.

The barriers that have been identified as achieving that growth includes lack of capital for cultivar and new product development and a lack of labour and skills. There are also other barriers, including eroding grower margin due to increasing compliance costs, the cost of freshwater and climate change mitigations, water shortages and the lack of water capture and storage, access to new age compounds for pest and disease control, and access to high quality land to grow fruit and vegetables. Funding the development of new growing techniques, automation and robotics is also needed.

So, the key to unlocking horticulture’s and indeed the primary sector’s growth potential is money. Growers and packers simply do not have the money to do what is required. Their margins are tight and for margins to increase, consumers would have to pay more for their produce.

New Zealand consumers are very price sensitive to even small movements in the price of fruit and vegetables. We also want healthy food to be affordable to everyone in New Zealand. So, if the money to generate primary sector growth isn’t going to come from consumers, at least New Zealand based consumers, where is it going to come from?

This is my message to the Reserve Bank: we need to stop the investment in residential houses and divert that investment to where it will drive New Zealand’s economic recovery – the primary sector.

Mike Chapman, Chief Executive