History repeats. And when you’re falling backwards into the mire, someone should call it out.
I was born in the 1970s. Just after the house-price boom ended.
From 1971 to 1974, house prices shot up 60% due to high rates of immigration and a shortage of builders. After the 1973 oil shock, net migration became negative. The UK joined the European common market — reducing their demand for NZ agricultural exports — and our small economy got precarious.
I grew up listening to my parents discuss challenges around housing. Mortgages were difficult. The Housing Corporation provided a guarantee system to help first-home buyers. And at the age of about 8, when it came time to move on from my parents’ first home, it took them years to sell it.
From 1974 to 1980, New Zealand house prices plunged about 40% in real terms.
By 1984, the country was on its knees. To stop a run on the Kiwi dollar, the Reserve Bank had to shut down all forex dealing on the NZD.
Under Roger Douglas, a new Labour government began to deregulate the New Zealand economy, following the right-wing policies of Reagan and Thatcher.
The top tax rate was halved. Financial markets were liberalised. Controls on forex were lifted. Subsidies to many industries, particularly agriculture, were cut or removed.
There was a painful adjustment period. But after the burn-off, green shoots began to show. Over the next 20 years, New Zealand transformed from a basket case to the progressive and prosperous economy it is today.
Now we could be staring back into the abyss…
Today’s economy has remnants of what we saw back in the 1970s. A huge run-up of house prices thanks to migration. Over-reliance on one big export market for our agricultural commodities. But it’s not the UK anymore. This time, it’s China.
Also, we’re seeing the creeping back of the regulation-and-compliance culture that had been slashed in the 1980s.
The writing is on the wall. Or at least in the interest rate. Slashed to the lowest OCR on record at 1%.
You don’t cut interest rates this hard unless you’re concerned about economic fundamentals. Will China continue to buy our exports at such a rate when its trading dynamic is changing?
Trump has rightly called out that country on the US deficit and aggressive trade practices. This is starting to impact the Chinese economy. A slowdown there will be felt most hard by commodity export countries like New Zealand and Australia, which have been focused on supplying the Chinese machine with logs, milk and iron ore.
Meanwhile, the dark realisation has hit. House price growth from about 2002 onwards was driven by unsustainable levels of net migration. Infrastructure is heaving under the influx. First-home buyers and younger people have had their futures sold on the global market. When you turn the tap down to a trickle rather than a gush, the train runs out of tracks.
But even worse is the mirror I now look into, having recently returned to New Zealand from Europe. I’m seeing anaemic growth. Low interest rates providing slender life support. And a business culture increasingly being suffocated by compliance, rules and regulation.
And people question why those with grey hair and life experience in the UK want to leave the EU?
Compliance and heavy tax on business
The other day, I read that ANZ Bank, New Zealand’s largest, has increased the number of people working in risk and compliance by 33% since last year .
Across the industry, ‘regulatory risk’ staff are in short supply. And large salaries are mentioned to attract them. Up to $500k for head of departments.
Now, banks need to be honest and follow the rules like everyone else. But it seems that such a raft of regulation is adding acutely to the cost.
And who will pay for this? Not the banks or their shareholders. They have profit targets to maintain and dividends are expected.
You will pay. Either through a higher margin on your mortgage. Or a lower rate on your savings. Perhaps both.
But the banks are only the canary in the coal mine.
I’ve recently joined the board of trustees at my local school. Before joining, I had hopes that our attentions could focus on growing the roll. Improving education outcomes. And doing the best we can for our children’s future.
To date, my observation is that much of the headmaster’s work revolves around compliance.
I hear this more and more from people trying to run small and medium businesses. Before they even open the door, there’s a raft of compliance activities, risks and costs that must be factored in.
Friends in Europe tell me that people retire early because they simply run out of steam and ability to keep abreast with it all. It’s easier to just play golf, with less money.
I see the same fatigue growing amongst GMs and business owners here.
Now, you would think that when you’re trying to trade from the bottom of the world, you would get some upside on the tax front. Some relief. But, no, you get no such luck.
In fact, New Zealand has one of the highest corporate tax rates in the OECD. It clocks in at 28% — against an average combined tax rate of 21.4% in 2018.
Our global competitiveness isn’t that great either. It has fallen to 18th place — behind France.
And who takes the number-one spot? Well, the United States.
What can you do?
Frankly, not a lot. Red tape is a self-feeding animal. This is particularly true as more lawyers, ex-high school prefects and ‘compliance professionals’ come to depend on the machine for their livelihood.
Time and time again, decreases to the company tax rate have been rejected. This most recently happened in the Tax Working Group report.
The best we can hope for is that an extraordinary government leader will emerge. Someone who’s ready to find ways to uphold the integrity of the system. Someone who’s willing to unpack and uncomplicate the cheese maze.
But…I’m not optimistic this will happen anytime soon.
Fortunately, as investors, we have the world’s markets at our fingertips. And we can go where the sun shines on opportunity. When our weakened dollar allows.
Our premium newsletter, Lifetime Wealth Investor, provides specific details on these opportunities — focusing exclusively on growth and yield. You can learn more about this opportunity by clicking here.