Bernard Hickey: Provinces left behind

The price falls are much heavier in real terms, in cities and areas such as Whangarei, Palmerston North, Wanganui, and Gisborne, among others.

New Zealand's previous economic recoveries and housing booms used to be spread fairly evenly. Auckland often led, but the provinces eventually caught up and the "goodness" of rising house prices would infuse through the department stores, builders' yards and hardware stores to create jobs, wages and yet more house-price inflation.

But not this time. Real house prices in Auckland rose 13 per cent from their 2007 peaks and Christchurch prices rose 5 per cent, but real house prices in the rest of New Zealand fell 20 per cent and are still falling.

"People tell me prices never fall. Go and have a look at the prices in the provinces," NZIER economist Shamubeel Eaqub said this week in his quarterly predictions briefing.

Take out a few of the warmer spots, such as Queenstown and Central Wellington, and the price falls are much heavier in real terms in cities and areas such as Palmerston North, Wanganui, Gisborne, Whangarei, Rotorua, Northland, the Coromandel and the West Coast of Southland.

The reasons for this disconnection aren't obvious.

Many of these provincial areas are in among the farming and tourism generating areas that have picked up over the past couple of years. Most are not as directly exposed to the slowdown in the rest of the world as, for example, Auckland.

But scratch a little deeper and some heavyweights are dragging down provincial New Zealand.

First, the ageing population and the continual exodus of young New Zealanders are hitting smaller towns and cities hardest.

Their populations have been hollowed out, leaving many residents in or near retirement. They are less likely to be splashing out on new houses and all the household-formation spending sprees that drive a normal economy.

Secondly, a lot of the manufacturing and light industrial job losses over the past five years have hit areas outside Auckland and Christchurch hardest.

The likes of Porirua, Lower Hutt, Dunedin and Oamaru have been slammed time and again by plant closures. The jobs lost are often the "best quality" jobs with higher wages that support entire families.

The almost visceral reaction by Dunedin's civic leaders to the Government's latest plan to close the Invermay AgResearch station was a sign many smaller cities have come to the end of their tether.

Thirdly, a lot of the extra dairy, meat and logging income that has surged into New Zealand over the past two years is not circulating in the regions from which it was harvested.

Farmers are loathe to reinvest or spend their windfalls, choosing instead to either repay debt or store the savings ahead of the next downturn, particularly in the sheep and beef sectors.

Finally, the combination of job losses, internal and international migrations and the resulting house price falls are creating a type of self-fulfilling feedback loop.

Once the momentum is built up, the economic decline becomes a vortex from which many of these small cities and towns are struggling to pull out.

Young families leave in anticipation of job losses and the slow drip, drip of house price falls is corrosive.

Why buy or build a house when its price keeps falling?

That's why the very strong house price growth in Auckland and Christchurch and the massive public infrastructure investments now adding to that activity are so tough to take in the provinces.

They can feel the growth at the other end of the state highway and can see their young being pulled into the centrifuges of Auckland and Christchurch, but can do little to stop them.

The final straw would be a nationwide interest rate hike next year to reduce the dangers to the overall economy from a housing boom in Auckland.

Solutions are hard to find and few are suggesting that Auckland and Christchurch be starved of the infrastructure investment needed to cope with their population growth and earthquake rebuild respectively.

But the pressure will build for more Government thinking on regional development and migration policy. Too much money, too many families and too many communities are embedded in these provincial areas to just let this vortex of decline accelerate.