Talking Economics: Why is New Zealand’s Price Level High? 

By Peter Nicholl

New Zealand has had very low inflation for over a decade. Yet many New Zealanders who return from living overseas or people who immigrate here often say that New Zealand has a high price level relative to incomes and is an expensive place to live.

These two things may appear to be contradictory. But having low inflation does not mean that no prices have been rising. Indeed, with the prices for some items like computer technology and airfares falling sharply, the cost of some other items must have been rising for the overall inflation rate to stay above zero.

The main areas that have had rising prices in New Zealand are housing-related items, including rents, transport, food and energy. These items are usually described as ‘necessities. It is not surprising that many people think the price level is rising despite low CPI numbers because these are the prices they pay most often. They are also the items that households with lower incomes spend a larger proportion of their income on.

Average rents have doubled over the last five years while average wages have risen only about 20 per cent.

Rents are closely correlated to house prices, and we know what has happened to house prices over the last few years. But that isn’t the only factor making housing expensive in New Zealand. The Productivity Commission in a recent report said that it costs 25% more to build a house in New Zealand than in Australia. Why is that? I think a major reason is the structure of the housing materials industry in New Zealand.

Electricity prices have risen twice as fast as the average rate of inflation over the last 30 years. Why is that given we produce a significant proportion of our electricity through hydro generation? Again, a major reason is the structure of the industry.

New Zealand produces enough food to feed around 40 million people. But food prices have also risen strongly. Why is that? I think the answer is the same.

One of the reasons often given for New Zealand’s relatively high price level is our size and location – a small country a long way away from most major producers. This means it costs a lot to get many things to New Zealand.  But most of New Zealand’s relatively high prices apply to things that are grown or made here.

One thing that the New Zealand food, housing materials and energy sectors have in common is a very high level of market concentration. The supermarket industry in New Zealand appears to have a number of competing outlets but they are almost all owned and controlled by two very profitable companies. The New Zealand electricity market is dominated by five big companies that are both energy generators and retailers. The housing materials industry has a similar high degree of concentration. For example, 85% of the concrete market is controlled by two firms and 94% of the plasterboard market is controlled by one firm.

To some degree, a high level of market concentration is inevitable in a small country like New Zealand.

While most business people will preach about the benefits and powers of competition, given the opportunity they would much prefer to operate in a market over which they have a high degree of control or influence.  In a small market, competition is not a natural phenomenon. It needs to have the backing of law and regulation to ensure it works – and these laws and regulations have to be enforced, not just exist on paper.

I lived and worked in many different countries during the 20 years I was away from New Zealand. In all of these countries there were Competition Laws in place – and they were actively enforced in order to prevent pricing abuse or a high level of concentration, especially in any key market. No markets are more key to a country than food, housing and energy. I believe in the countries I lived in overseas, a duopoly that controlled the supermarket sector would not have been allowed to develop.  Another example is that the USA Competition Authorities have imposed huge fines on over 150 companies in industries as diverse as automobile parts, ready mix concrete, broiler chicken, vitamins, air cargo transportation, bread and security services.

Competition authorities have to become much more pro-active or New Zealand will continue to be a high-priced place to live. In a highly-concentrated industry, market prices are not necessarily fair prices.

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