cost of living

The best thing to have in business, South Island hotels entrepreneur Earl Hagaman once mused, is a monopoly. At the time he was intent on buying the Christchurch Casino because of its protected monopoly status. Compared with owning and running hotels in a highly competitive market, owning a monopoly like the casino was a business dream, Mr Hagaman reasoned.

By that logic, the next best thing must be a duopoly, where two big players have the market sewn up. This is the case in the New Zealand grocery market, where home-grown co-operative Foodstuffs and Australian-owned Progressive Enterprises dominate. Figures from the Organisation for Economic Co-operation and Development (OECD) show the giants are enjoying a very happy duopoly.

According to the OECD, grocery prices have risen 42 per cent in New Zealand in the past decade, while those in Australia, which also has a market dominated by two players, have risen 41 per cent. By comparison countries with more competition – Britain and the United States – have experienced more moderate rates of grocery price rises.

On the face of it there appears to be no shortage of competition between our big two. Both advertise extensively, constantly refreshing their offerings and rethinking their approach. The owner of Timaru's New World, under the Foodstuffs banner, has spent a small fortune redeveloping the Highfield supermarket and its mall and is taking on another 75 staff. You don't do that if you're not sitting pretty in a comfortable duopoly.

Likewise Progressive is spending up large to rebrand its Woolworths stores and its Church Street supermarket has just had a makeover.

While the big two argue their competition is cut-throat the suspicion is that it's become more of a handbags-at-dawn affair than a pitched battle. Critics believe they are going through the routine while protecting established positions which see the consumer lose out.

That is what the Australian Government believes and there has been a lot of jumping up and down about the OECD figures, and talk of bringing the "blowtorch" of competition to the incumbents.

In New Zealand The Warehouse had a crack at the duopoly and failed miserably. Supermarkets do have competition in the form of alternative meat and fruit and vegetable outlets, but there is precious little competition in terms of groceries.

In Timaru consumers have the option of a farmers' market. If the success of the first one, last weekend, is anything to go by, the supermarkets' traditional market is being nibbled around the edges. But until The Warehouse gets its act together, or someone else arrives, there seems precious little consumers or the Government can do.

Waikato supermarket owners are "blown away" by figures showing a 42.5 per cent rise in food prices since 2000.

The news has prompted Labour consumer spokeswoman Carol Beaumont to call for the Government to encourage more competition in the supermarket sector.

New Zealand grocery prices have risen 42.5 per cent between 2000 and 2009, followed by Australia which pays 41.3 per cent more, Britain's prices rose 32.9 per cent and America's were up 28.4 per cent, according to a study out yesterday.

Pak `n Save Mill St owner Glenn Miller said he was trying to obtain a grocery bill from nine years ago as he and his staff doubted the cost of many grocery items had risen to that extent.

He said a can of spaghetti cost 90c in 2000 and now customers would pay $1.09 for the same can. "At Pak n Save the margin we enjoy is lower than many other countries in the world and we think we are still very competitive given manufacturing cost and we try and keep our overheads down," said Mr Miller, who believes Pak `n Save is extremely competitive.

Vege King owner Swaran Singh said prices at his Fairfield fruit and vegetable shop would have risen by up to 10 per cent at the most. In some cases prices had not changed. He said the price tag on asparagus had stayed at $3.99 since 2000.

Progressive Enterprises, which owns Countdown, Woolworths and Foodtown, blamed international events such as drought as the main drivers of food inflation. Progressive spokesman Bill Moore said the group was consistently striving to offer the best prices and its profitability had remained at between 3 and 4 per cent since Australian-owned Woolworths Limited purchased Progressive four years ago. The group said there was plenty of competition between supermarkets, delis, butchers, green grocers and bakeries.

But Ms Beaumont has questioned why New Zealand is not following the example of Australia's Competition Minister, Craig Emerson, whose government was taking "hard measures" and lowering the barriers to other retailers competing with Coles and Woolworths on that side of the Tasman.

She was critical of Consumer Affairs Minister Heather Roy's suggestion that New Zealanders "shop around" to combat some of the fastest-rising food prices in the developed world, saying it had attracted widespread criticism. It was "poor advice" to families struggling with soaring food bills, Ms Beaumont said.

Public comments on news websites and on talkback radio produced a stream of consumers critical of grocery pricing, with many calling for overseas chains such as Aldi and Costco to compete against New Zealand's Foodstuffs (which owns Pak `n Save and New World) and Progressive Enterprises.

Hamish Wilson, of Consumer New Zealand, said there had been some attempts by other companies, such as The Warehouse, to break into the supermarket sector "but it's pretty difficult". The controversy arose in the wake of the Australian study which says the price of food in New Zealand has risen faster than in any other OECD country other than Korea.

- With NZPA

The wallet has been a bit lighter over the past 10 years if new figures are anything to go by with food prices both in New Zealand and Australia rocketing up more than 40%.

And experts say it's because New Zealand has only got two major supermarket chains, with a stranglehold on prices.

Statistics prove the cost of food in New Zealand has increased more than almost anywhere else in the 30 countries that make up the developed world.

The OECD figures show Korea had the biggest grocery price hikes over the past decade, 48%. In New Zealand, they went up 42% and Australia was close behind on 41%, all significantly higher than the OECD average of 33%.

A competition expert at the University of New South Wales, Frank Zumbo, says it's not fair on consumers on both sides of the Tasman. "We're paying more than competitor countries and the reality is consumers are being ripped off," he says.

He says consumers are being ripped off because both in New Zealand and Australia two supermarket heavyweights have a stranglehold on shoppers' wallets. Zumbo says Coles and Woolworths control 80% of the Australian grocery market.

In New Zealand, Foodstuffs owns Pak 'n' Save and New World, and Progressive Enterprises runs Foodtown, Countdown and Woolworths.

Hamish Wilson of Consumer New Zealand says this does lead to a lack of competition. "There've been some attempts by people like The Warehouse to try and break into it but it's pretty difficult," he says.

And it seems the increases are not going all the way down the food chain. Ken Robertson of Horticulture New Zealand says vegetable and fruit growers probably have not seen any real price increases in the past 10 years.

ONE News approached both chains. Progressive would not appear on camera but says consumers are getting a fair deal. Foodstuffs agrees. "It is an intensely competitive industry. We certainly don't meet with Progressive and agree price increases or nothing like that," says Tony Carter of Foodstuffs.

In Australia, the government says it's going to take its "competition blowtorch" to the industry. Until that happens in New Zealand, the advice to consumers is to shop around.

Consumer Affairs Minister Heather Roy says the Australians have their blowtorch and National and the Act Party have their regulations bonfire. She says she wants more competition and they are working on taking out some of the red tape and compliance costs to encourage more competition for New Zealanders' dollars.

Zumbo is advocating a marketplace similar to Britain's where four or five big players share about 60% of the market. He says letting rivals such as Aldi have a greater market share is the only way consumers will get a fair go.

Household power bills are set to rise across much of Auckland, in the latest of a string of price hikes by power companies.

In a move that will add between $5 and $6.50 to the average power bill, Mercury Energy will increase central Auckland power bills by 4 per cent on October 1. Customers in Manukau, Papakura and Franklin also face bigger bills, with rises of between 2.5 and 5.7 per cent on top of the average monthly bill of $165.

Mercury Energy said the rise was to cover "general increases in operating costs" including the cost of third-party suppliers. But consumer advocates said the latest round of price increases showed there was too little competition for our power bills.

Meridian Energy and Contact Energy have said they will raise prices by 6 per cent in coming months - an increase of around $10 a month for the average household.

And while energy analyst Molly Melhuish said the latest price hikes were no bigger than expected, there could be worse to come, as the effect of the winter's low lake levels continues trickling through into power bills.

Consumer New Zealand chief executive Sue Chetwin said households missed out on the benefits of competition in the power market. Most of the competition was for commercial and business users, she said. "The companies have this cosy arrangement where they don't really compete for new [household] customers," she said. Ms Chetwin said that since the power sector was deregulated, household power prices had risen while commercial and industrial power users had seen their bills flatline or even go down.

Ms Melhuish said New Zealand's power prices were high relative to the cost of making and distributing the power.

Ms Melhuish said the latest hikes would be too much for some people in Auckland. "It's a huge amount to people who cannot afford even the tiniest increase," she said.

Consumer New Zealand figures show household power bills rose between 7 and 10 per cent in the year to March.

The organisation runs a website where people can find which power company is the cheapest in their area: Powerswitch.

House prices are grossly overvalued, by as much as $90,000 on average and prices could stay flat for five years, according to Westpac Bank economists.  The house price boom is over and a long-expected housing market downturn is under way, they say.

But a strong economy, unemployment at a 20-year low, high job security and growing wages meant there was not likely to be a big fall in house prices.  National median house prices have not moved for the past seven months, stopping dead in April after rising about $8000 a month earlier in the year.  Prices are expected to "wallow" a few points either side of zero and in five years prices will be much the same as they are today, Westpac forecasts. Prices were flat for four years till 2001.

This year the market was hit by rising fixed-term interest rates and there is no relief in sight.  Mortgage rates were expected to move even higher next year, putting even more pressure on the market.

For investors, rents are averaging just 4 per cent of a property's value while interest rates are about 9 per cent, making property less attractive.

On Westpac's "investor value" of housing measure, the average home is worth about $260,000, slumping from $328,000 at the end of last year. The investor value of property has been dragged down sharply by rising interest rates. That value is based on interest rates, marginal tax rates, rents and expected capital gains. While the value to investors has fallen sharply, the median price rose to about $350,000 earlier this year but has stagnated since then.

Westpac stressed that the investor value was not a price forecast. "We are not saying the median house price will fall to $260,000," Westpac's latest market report said.  But that value would exert slow and steady pressure on the market price, so the overvaluation could persist for many years.  The big jump in interest rates has also made housing much less affordable this year.

The cost of servicing an 80 per cent mortgage on a median home, based on a five-year fixed mortgage rate, has risen from 34 per cent of average household disposable income to 39 per cent this year. The historical average is just 25 per cent of the average household disposable income.

If house prices remained steady, it would take eight years before affordability returned to normal levels, based on incomes rising 5 per cent a year. If house prices stagnated or fell slightly, it would take four or five years for house prices to come back into line with the return from rents for investors.

Average rents have risen faster than wages in the past five years and are tipped to jump further in the next two years as the rental market catches up with Auckland's soaring house prices.

Property Investors Association vice-president Andrew King predicted yesterday that Auckland rents could leap 20 per cent in the next two years.

The head of the property department at Auckland University, Associate Professor Laurence Murphy, said a 20 per cent increase would be necessary to restore yields on rental properties to the rates prevailing in the early 1990s.  But other experts consulted yesterday were more moderate. All expect more increases, but most do not expect them to reach 20 per cent.

A consultants' report published on Monday forecast continued pressure on the rental market as a spinoff from rising house prices.  Average rents registered with the Government's tenancy bond centre rose in the year to March by 3.3 per cent in Waitakere, 6.1 per cent in Auckland City, 6.9 per cent in Manukau and 8.8 per cent on the North Shore.

Mr King said big rises in house prices had left rents behind.  "The market is out of kilter at the moment. There is a big difference between the cost of home ownership and the cost of renting. In the last three years that has got out of kilter.  "Renting at the moment is much more affordable than owning your own home."

This was driving many young couples to continue renting rather than trying to buy. More renters meant more pressure on rents, which were bound to rise.  "They could go up 20 per cent in the next two years."

An agent for Harveys real estate in Mt Eden, Ann Farquharson, said the rental market had been rising since January after a seasonal lull late last year.  She has rented homes in Mt Eden where the rent for the new tenants rose from $460 to $490 a week in one case, and from $470 to $500 in another.  On average, she said, most rents were going up for new tenants by $5 to $10 a week.

Professor Bob Hargreaves of Massey University said the typical private sector renter would have paid 26 per cent of the average wage to pay the median rent in 1993. By last year, rents had risen to 32 per cent of the average wage nationally and 37 per cent in Auckland.  Overall, rents rose by 86 per cent from 1993 to the first quarter of this year but wages rose by only 50 per cent.

Professor Hargreaves said there was a high correlation between rents and net immigration.  "Rents started to take off again about October last year. Although net immigration has come off a little, it is still quite strongly positive. Net immigration is a very volatile statistic, but provided it stays positive, that's going to keep pressure on rents."  But he said a 20 per cent jump in rents in two years would be almost unprecedented and was unlikely. 

Professor Murphy said the faster increase in house prices meant rents were now returning landlords a yield of only around 5 per cent, compared with 6 to 7 per cent in the early 1990s.  "If you were on a 5 per cent yield and you wanted to shift it up to 6 per cent, back to what it was earlier in the 1990s, you'd have to increase your rent 20 per cent," he said. "On a $350 a week rent, that's $70. 

"Traditionally you would anticipate that the yield should bear some relationship to the interest rate because it's a rate of return.  The fact that it doesn't at the moment reflects the way people finance their [investment properties] to get a tax loss and claim it off their tax, and because people are looking for capital gains.  "But if there was a general feeling that yields were too low, especially now that interest rates have gone up ... it could lead to increases."