Most Foreign Investment Is A Gift Of Capital To The Host Country

Foreign investment is awesome because almost always, the asset that is sold to a foreigner ends up getting bought back for cents on the dollar by a local investor or institution once the cheap money financing the acquisition dries up.

See: Japanese investment all around the world in the 1980’s – in particular, how developers on Australia’s Gold Coast completely rinsed Japanese banks for tens of millions of dollars in development financing that was subsequently written off.

Bernard Hickey is on the money here – let’s help Chinese capital bankroll new developments. An Australian-style rule that says if you want to buy property here you have to finance a new development would solve a few policy problems with one stroke of the pen.

English, in his pre-Budget speech this week, touched on the thorny issue of Auckland’s need for small, affordable homes close to the city centre. He said council planners had effectively blocked the mass development of “shoebox” apartments by requiring floor plans no smaller than 40sqm and balconies of 8sqm.

He said these restrictions meant rents for apartments were $80 a week higher than necessary. Developers say there is large demand, often from Chinese investors, for apartments closer to 20sqm than 40sqm.

English has rightly pointed out that not everyone dreams of living in the quarter-acre pavlova paradise of old. An ageing population of couples starting families later, smaller families, and where both young and old live alone, need smaller more affordable homes.

One solution is to encourage an influx of capital from China to build thousands of these homes. There are signs it is happening. The 52-level tower planned for the empty space next to the Sky Tower is financed by Shanghai businessman Furu Ding. The $350 million project will include a 302-room hotel and apartments. This week, Beijing developer Fu Wah won the right to build a $200m five-star hotel on the Wynyard Quarter site occupied by Team New Zealand.

This is great stuff. Millions of dollars of margin will flow into Auckland’s construction sector and tens of millions of dollars of margin will flow into building material suppliers from just these two projects.

Foreign investment is awesome because almost always it involves a gain on sale for a local entity to a foreign entity. Then, when they inevitably lose their low interest financing, there’ll be a buying opportunity for a local entity. Nothing to worry about, move out of the auction room please.

Foreign Investment

The New Zealand Initiative have published two pieces on foreign investment: “New Zealand’s Global Links: Foreign Ownership and the Status of New Zealand’s Net International Investment” and “Capital Doldrums: How Globalisation is Bypassing New Zealand“.

They are both excellent pieces of research that provide some interesting facts, including the conclusion that both inward and outward foreign direct investment flows have stagnated since about 1995.

There is also discussion of how New Zealand is actually quite strict when it comes to permitting foreign investment. We are actually one of the more restrictive countries in the OECD.

It doesn’t need to be this way. Bryan Caplan wrote about anti-foreign bias in The Myth of the Rational Voter, and it is a good phrase that describes how people under-estimate the benefits of interaction with foreigners.

Populism and economic ignorance go hand in hand. It is very good politics to criticise foreign investment. But how many people who complain about “foreigners buying everything up” are beneficiaries of globalisation in terms of how much utility they can obtain?

The prices of almost all goods and services that can be traded across borders easily are going down. The Reserve Bank thinks that most inflation pressure will come from non-tradable goods and services.

This makes sense – but a lot of New Zealanders are hesitant to accept how much they benefit from foreign investment. Overseas capital is basically a free lunch – in exchange for a lot of benefits that accrue to the host economy, profits and interest flow overseas.

New Zealand firms benefit from this when they invest overseas – and in the race to keep skilled people here and offer them opportunities – we can’t let anything stand in the way of making inward capital investment difficult.

Non-economists do not understand that investment needs to increase by several orders of magnitude to catch up to Australia and the countries policymakers dream about catching up to. It’s easier to get $1 billion from overseas investment than for New Zealand households and firms to stump up $1 billion in retained earnings/savings!

Why There Is No Need To Worry About Chinese Home Buyers

When house prices rise and people can’t afford the new price level, someone must be blamed.

It is too easy to blame Chinese for higher house prices in Auckland because they are an easy target for Kiwis with anti-foreign bias.

It’s a short-sighted attitude – in most cases, foreign real estate transactions are a transfer of wealth to the recipient country.

If you don’t agree, I’d suggest you investigate how Japanese real estate purchases in the United States at the height of their 1980’s boom worked out in the long run.

Have you done that? Well, if you had, you’d know that pretty much every office building sold to Japanese buyers at “inflated prices” was bought back by a US investor at a substantial discount to what the Japanese buyer paid.

When we think about why Auckland house prices are high, we can use a simple supply and demand story.

The supply of Auckland housing is restricted by the metropolitan urban limit and a plethora of Auckland Council regulations and planning rules.

The supply of Auckland housing is restricted further by a lack of willingness on the part of banks to lend to property developers.

These two supply-side factors mean that fewer houses are built in Auckland and there is upwards pressure on house prices because supply can’t respond fast enough to what is happening on the demand side.

What is happening on the demand side? Well, Auckland is the place to be for higher wages. There is massive internal migration to Auckland from other parts of New Zealand.

This puts a lot of pressure on Auckland housing demand – before we add in that immigrants tend to move to Auckland first and stay in Auckland because that’s where the jobs are.

That means that there is a lot of demand side pressure on house prices – before we even take into account the effect of “speculative” or “investment property” demand for housing.

If we add in those demand side factors, it is quite straightforward to accept a 16% year on year rise in Auckland house prices, before even taking foreign buyers into account.

This means that blaming the Chinese, whether natural born Kiwis or immigrants, is really stupid.

As soon as supply side restrictions are eased, there will be downward pressure on house prices. The marginal “speculative” or “investment property” purchase could end up in a mortgagee sale.

There is no need to worry about Chinese home buyers, because they are a small part of the market, and if their “speculative”  buys don’t work out, the previous owner got a gift of wealth from China.

Mighty Foreign River Power

The news is full of stories about how buying shares in Mighty River Power is popular. Why wouldn’t it be if you are in line for a loyalty bonus simply for not selling straight away and saving National any embarrassment? With over $100 billion dollars sitting in term deposits it is no surprise that “the notional investor” is game for some sharemarket action after a 25% rise last year.

The objection that “we already own Mighty River Power” is obviously stupid.

If I owned Mighty River Power I have the following questions:

A) Why haven’t I been sent an annual dividend cheque?
B) Why haven’t I been sent copies of the annual report?
C) Why haven’t I been invited to the Annual General Meeting?
D) Why haven’t I been contacted and asked if I want my email address added to investor updates, as some NZX-listed companies you own shares in actually do?

You don’t own Mighty River Power. No one does. The concept of Crown ownership is essentially a mask for bureaucrats to do what they want with it. Just look at what Solid Energy executives did without going to their supervising Minister for approval – go on a spending and performance bonus bender that ran the company into the ground. If you think there is accountability for anyone in New Zealand, watch out for stories on how Solid Energy executives were forced to return their performance bonuses.

Another silly objection is that there is no guarantee that Mighty River Power will end up in foreign control. It’s like, bro, New Zealand already is under foreign control. It’s called a banking sector dominated by Australians and a dearth of NZX listings as companies get picked off by foreign firms or taken private to avoid freeriding small shareholders and the pain of continuous disclosure. The government deficit is also financed by foreigners in that without their continued support no one in New Zealand would have any money.

For any politician to open their mouth about foreign control in 2013 New Zealand is ridiculous. New Zealand, by virtue of a land speculation obsession dating back to 1870’s Auckland, has been an importer of capital. We rely on foreign capital because we spend above our means and sell everything off as soon as we can. When you worship at the altar of asset-price inflation, worrying about foreign control of important strategic assets is laughable. At least the dams can’t be shipped overseas and reassembled in an asset-stripping exercise!

The government is even running risky deficits shifting the burden of baby boomer retirement and healthcare onto my generation, and our children if we can afford to have any. Inheriting “original debt” is no way forward for any country. Economists who don’t think the trade deficit is a bad thing forget that there is a thing called risk and one day New Zealand might be seen as irresponsible and find the overseas lending spigot turned off.

If that happens, we’ll realise that state owned asset sales were just another distraction from the real problems at hand. Most New Zealanders don’t have a spare $2,000 to put into Mighty River Power even if it does turn out to be a winner. Because of the way power companies revalue their generation assets, the most likely outcome of state owned asset sales is higher electricity prices. If only we could export electricity!