The New Zealand Regulatory Pendulum

New Zealand, like any democracy, can sometimes take a good idea too far.

Rising farm produce prices after the year 2000 boosted the value of New Zealand farmland (normal for farmland to capitalise increasing income). New Zealand policy makers took note of this and spent the years from about 2010 designing a series of policies to restrict capital flows into farmland.

These policies had some merit. A wall of QE funded money might have entered New Zealand’s most important sector (farming and forestry grow 80% of NZ exports), both directly via land purchases, and indirectly via bank debt financing. It was arguably prudent to rein in a potential rural asset price boom.

Also, there was a feeling among some New Zealand leaders that the country needed to “move on” from primary production. There was a desire to broaden the base of the economy – to incubate more tech companies and host more tourists.

Whatever their merits at the time, these policies went too far and ended up starving NZ agriculture of capital. And this has contributed to the 2023/2024 recession.

Fortunately, as tends to happen in a well-functioning democracy like New Zealand, policy is now normalising. Many of the current restrictions on flows of capital into NZ farmland are expected to be lifted in 2025/2026.

Policies which restricted flows of capital to New Zealand farmland after 2010 included:

• An approximate doubling of the equity capital ratios, which NZ commercial banks are required to hold against agricultural loans, leading the banks to ask farmers to amortise and otherwise repay mortgages*
• Restrictions on non-kiwi purchases of NZ farmland, supervised by an Overseas Investment Office (“OIO”), a throw-back to the sort of capital controls many countries attempted in the 1970s
• Restrictions on water use and other consents, to curtail expansion of more intensive pastoral farming
• And more recently, the exclusion of farm and forest assets from Approved Investor visa programs.

* Unfortunately, NZ banks then deployed this capital into residential property loans, which retained favourable capital ratios, with inevitable upward pressure on house prices, while withdrawing capital from the farm sector. Craigmore estimates these policies resulted in $2 bn p.a. less being available to NZ’s dairy sector alone.

Were these restrictions successful?

These restrictions were remarkably successful in shifting investment capital away from the NZ farming sector. However, it is not clear that much of the freed-up capital flowed to productive uses. Unfortunately, much of it fed a residential property boom, while lending to the dairy sector actually fell.

Housing versus Agriculture Lending from 2010 to 2024 (Indexed)

Source: RBNZ

Making money the easy way – buy a house in Auckland

As a result, Auckland house prices boomed to a peak of 350% of their 2010 values (below). It was a bonanza. Auckland law firm partners and property developers began taking their families on annual two-week skiing holidays in Aspen. Auckland became crowded with late model European cars.

Over this period NZ farmland values moved nowhere (see below). Farmers were too busy amortising their debts to undertake normal behaviour – buying each other’s farms at steadily increasing prices that capitalise the net cash flow gains they were achieving.

Dairy Land Value and Auckland House Price Index 2010 to 2023

Source: REINZ

What were the implications for the New Zealand dollar?

Demand for international loan capital to finance the housing boom pushed up interest rates, and thereby the NZ$, which saw a 40% rise from an average of around 50 US cents in the year 2000 (and 2009) to 72 cents at its Covid peak in February 2021. Broadly speaking this was a 40% rise in pricing of the NZ dollar.

Unfortunately, the capital that NZ banks raised from international investors to fund the domestic lending was not deployed productively so NZ’s current account balance steadily deteriorated.

New Zealand Merchandise Trade Deficit – NZ$ per Annum

Source: Stats NZ

Inevitably the ebullience did not last. New Zealand house prices fell sharply from 2022 and amidst the hangover, NZ suffered a two-year on-again-off-again recession. During which per capita GDP has fallen 5%.

The positive side of this pain is that inflation has fallen to around its target of 2%, enabling the RBNZ to cut rates faster than its trading partners, thus finally eliminating the high “carry” that had incentivised international savers to finance NZ’s residential mortgage boom. This has returned the NZ dollar to closer to long-term equilibrium exchange rates:

NZD vs USD 2000 to December 2024

Source: Trading Economics

What were the sectoral impacts of these polices?

Despite the desire of some urban Kiwis to be less dependent on their rural cousins, farming and forestry continued to pull their weight, despite being starved of capital – they still constitute 80% of NZ exports.

Farming has also continued to grow factor productivity faster than other parts of the NZ economy.

New Zealand Labour Productivity Indexes for Industry Groups 1996 to 2023

Source: Stats NZ

The policy pendulum is now swinging back

Christopher Luxton’s new Government, elected in late 2023, has recognised that it was foolish for New Zealand to restrict capital supply to its most important sector. The part of the kiwi economy which has an absolute global competitive advantage. Therefore, his government is winding them back:

• Already OIO approvals have become faster to obtain under the new Government (what used to take six months is now taking one month)
• The Overseas Ownership Act itself will be further reformed in 2025
• Approved Investor rules should soon also, we hope, once again include investments in land.

To where will New Zealand land prices recover?

A January Craigmore Commentary will analyse the potential investment returns which Craigmore expects on NZ land, as restrictions are lifted and a decade or so of farmland markets failing to capitalise productivity and income gains begins to correct. We will point out that there is a lot of ground to catch up. In my entire farming career, I have never seen farms yielding 8% to 10%, as they have for the past four years (see graph).

New Zealand Dairy Operating Return on Asset 2008 to 2025

Source: Dairy NZ

Following recent further depreciation of the Kiwi dollar, farm cash flow yields could rise further.

This begs the question at what sort of yields should a better capitalised market price NZ farms? That is what we will explore in the next Commentary.

Have a wonderful holiday season. We’ll be in touch in mid-Jan (unless you cannot wait to get the next piece, in which case email and I’ll send a draft, seeking comments).

As always, feedback on the NZ Regulatory Pendulum is welcome, please email.

Forbes Elworthy (and the Craigmore team)
forbes.elworthy@craigmore.com