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12 Reasons Why New Zealand's Economic Bubble Will End In Disaster; Australian and Chinese buyers are inflating the NZ property bubble
Topic Started: 20 Apr 2014, 07:33 PM (2,171 Views)
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12 Reasons Why New Zealand's Economic Bubble Will End In Disaster

New Zealand’s economy has been hailed as one of world’s top safe-haven economies in recent years after it emerged from Global Financial Crisis relatively unscathed. Unfortunately, my research has found that many of today’s so-called safe-havens (such as Singapore) are experiencing economic bubbles that are strikingly similar to those that led to the financial crisis in the first place.

Though I will be writing a lengthy report about New Zealand’s economic bubble in the near future, I wanted to use this column to outline key points that are helpful for those who are looking for a concise explanation of this bubble.
view from mission Bay Auckland New Zealand View from Mission Bay, Auckland, New Zealand (Photo credit: Jaafar Alnasser Photography)

Here are the reasons why I believe that New Zealand’s economy is heading for a crisis:

1) Interest rates have been at all-time lows for almost a half-decade

Ultra-low interest rate environments are notorious for fueling credit and housing bubbles, which is how the U.S. housing and credit bubble inflated last decade. New Zealand’s interest rates have been at record lows for nearly five years, which is more than enough time for economic bubbles and related imbalances to form.

New Zealand’s three-month interbank rate, base lending rate, and 10 year government bond yield are also at or near all-time lows. Like many countries that are experiencing bubbles in recent years, New Zealand’s low interest rates are a byproduct of global “hot money” flows from the United States and Japan, which have both had zero interest rates and quantitative easing programs to boost their economies after the Global Financial Crisis.

Low interest rates in the U.S. and Japan encouraged capital to flow into higher yielding investments in countries such as New Zealand, which led to reduced bond yields and an 85 percent increase in the value of the New Zealand dollar against the U.S. dollar since 2009. To combat the export-harming currency appreciation and bolster the economy during the financial crisis, New Zealand’s central bank reduced its short-term interest rates to all-time lows.

2) Property prices have doubled since 2004

Following the pattern of many nations outside of the hard-hit U.S., peripheral Europe, and Japan, New Zealand’s housing prices have doubled in the past decade, forming a property bubble:

3) New Zealand has the world’s third most overvalued property market

The doubling of New Zealand’s housing prices in the past decade far surpassed household income and rent growth, making the country’s property market the third most overvalued in the world. New Zealand’s home price-to-rent ratio is 77 percent above its historic average and its home price-to-income ratio is 26 percent above its historic average.

4) New Zealand’s mortgage bubble grew by 165% since 2002

New Zealand’s housing bubble is driven by a mortgage bubble that grew from approximately NZD $70 billion in 2002 to NZD $186 billion in 2013 – a 165 percent increase in a little over a decade. New Zealand’s mortgage debt bubble grew at a faster rate than its economy during this time, causing the country’s total outstanding mortgage debt-to-GDP ratio to rise from approximately 57 percent to 85 percent.

5) Nearly half of mortgages have floating interest rates

New Zealand’s ultra-low interest rate environment has encouraged the country’s home buyers to make many of the same mistakes that the American home buyers did during last decade’s bubble. One of the gravest of these mistakes is using adjustable or floating rate mortgages, which will reset at higher interest rates when the low interest rate environment ultimately ends.

Almost half of New Zealand’s outstanding mortgages currently have floating interest rates, which is up significantly in the past decade:

6) Mortgages account for 60% of banks’ loan portfolios

As if the fact that almost half of New Zealand’s mortgages have floating rates isn’t scary enough, mortgages now account for 60 percent of the country’s banks’ loan portfolios, which means that the financial sector is heavily exposed to the eventual popping of the housing bubble.

Read more: http://www.forbes.com/sites/jessecolombo/2014/04/17/12-reasons-why-new-zealands-economic-bubble-will-end-in-disaster/
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Tattoo
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Bubble is the new black
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stinkbug
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The word 'bubble' is used far too often in these sorts of articles. It's misleading, and distracts from when genuine bubbles really do appear.
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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peter fraser
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Jesse Colombo is apparently something of a bubble slayer - http://www.forbes.com/sites/jessecolombo/


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5) Nearly half of mortgages have floating interest rates

Almost half of New Zealand’s outstanding mortgages currently have floating interest rates, which is up significantly in the past decade:

As if the fact that almost half of New Zealand’s mortgages have floating rates isn’t scary enough, mortgages now account for 60 percent of the country’s banks’ loan portfolio


He seems to have a phobia about variable mortgages.

I wonder why these guys try to superimpose systems used elsewhere on us without trying to understand the difference, or even questioning why their fears about our system haven't materialised in past recessions. Don't they understand that central banks adjust rates for effect, and the rate of adjustment required for that effect is different in different systems.



Edited by peter fraser, 21 Apr 2014, 08:36 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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goldbug
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stinkbug
21 Apr 2014, 08:25 PM
The word 'bubble' is used far too often in these sorts of articles. It's misleading...
I agree, it's over used to the point people have become desensitized to it. Just say that the homes are dangerously overvalued and leave it at that.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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stinkbug
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goldbug
21 Apr 2014, 11:24 PM
I agree, it's over used to the point people have become desensitized to it. Just say that the homes are dangerously overvalued and leave it at that.
Some may well be.
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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goldbug
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The only problem with housing in the major cities these days is that everyone sems to want to own 2 of them. Add to this the nasty demographic trent of failed marrages and you have a serios supply/demand imbalance. These issues can be solved. Just not in the short term. And in the short term we have to deal with other issues like unprecedented debt levels, business supercycles, the transition from cheap oil to expensive renewables as well as a possible global war cycle coming around again.

I find these latter issues particularly interesting since they always seem to occur in unison.
Hi catWeasel. I see you lurking down there.
Edited by goldbug, 21 Apr 2014, 11:58 PM.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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Brian Fallow: Four reasons not to panic about a property bubble

Here are some reasons not to embrace the long-distance view of economic analyst and Forbes contributor Jesse Colombo that New Zealand is hurtling towards crisis when a property bubble inevitably bursts.

The risk of that is not zero, but on a gauge that runs from complacency to alarm, the needle should probably point somewhere in the middle.

1. Colombo is right about the danger that a prolonged period of historically low interest rates will inflate asset prices. It is one of the reasons the Reserve Bank has started raising rates, the first developed country central bank to do so.

But that is not its first move to bolster financial stability. It has increased the amount of capital banks need to have for a given quantity of mortgage credit and last October it introduced loan-to-value restrictions on new lending.

These measures are cooling the housing market. Turnover last month was down 10 per cent on March last year and price growth is slowing, with the REINZ housing price index rising 2 per cent in the March quarter -- half its pace during the second half of last year.

2. Colombo points to the steep rise in house prices over the past decade. We had noticed.

But one reason that did not lead to the painful bust that the United States, Ireland and Spain suffered is that it did not lead to the same sort of construction boom. We still have a housing shortage, not a glut, and the current surge in net immigration suggests that will last a while yet.

3. He also rightly points to the high level of household debt relative to incomes. But what matters most at this stage is the rate at which it is increasing, which has been only slightly faster than household incomes. Housing credit growth seems to have peaked at an annual rate of 6 per cent last October and rising interest rates and the LVR curbs should rein it in.

The level of debt, the legacy of the mid-2000s boom, has the effect of lowering the pain threshold -- so that interest rates will not have to rise nearly as far in this cycle to get the attention of the mortgage belt, which is good for business borrowers and the exchange rate.

4. "New Zealand's ultra-low interest rate environment has encouraged the country's home buyers to make many of the same mistakes that American home buyers did during the last decade's bubble," Colombo says. "One of the gravest of these mistakes is using adjustable or floating rates which will reset at higher interest rates when the low interest rate environment ultimately ends."

But a key difference between our situation and the US sub-prime teaser-loans period is that New Zealand banks keep the mortgage loans they write on their own balance sheets. They do not shovel that risk off onto unsuspecting investors through securitised poducts.

They therefore have every incentive to consider borrowers' capacity to continue to pay the mortgage when rates normalise.

Read more: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11242228
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Jesse Colombo's warning in Forbes about New Zealand's housing bubble bursting disastrously is over-blown

April 22, 2014 - 12:24pm, Bernard Hickey

I have a lot of sympathy for Jesse Colombo's somewhat startling article published in Forbes.com that listed 12 reasons why New Zealand's Economic Bubble will end in disaster.

It certainly stirred up a lot of debate over the news-lite Easter weekend about our bubbly house prices and that's a good thing.

I agree that New Zealand's housing market is over-valued and I made the same mistake in early 2008 of assuming that a financial crisis would burst that bubble of over-valuation and 'of course' drive prices 30-40% lower. In the end, they only fell 10-15% and have since rebounded way past the 2007 peak for a bunch of reasons I'll touch on below.

It's one thing to say that a market is over-valued relative to incomes and rents and another thing to say that it will 'automatically' burst and 'therefore' trigger an economic disaster. What Jesse has done, and I did in early 2008, was fail to take into account the responses of both markets and authorities to an economic shock to our housing market.

In short, New Zealand's housing market is too big to fail, and New Zealand's shock absorbers and buffers would quickly kick in to soften the blow of a fall in house prices. Also, the Reserve Bank and the Government have already taken a lot of action to lessen the risks that Jesse rightly identifies with those house valuations and their connection to our banking system.

So in response to Jesse, here's 6 reasons why his warning of an economic disaster is over-blown.

1. NZ has a floating exchange rate and flexible interest rates

There are plenty of candidates to generate a shock to New Zealand's economy that could cause our house prices to start falling. The IMF warned in March that a sharp slowdown in China could do the trick.

Here's the warning in the 'Tail risks and downside risks section of the IMF's annual assessment of the New Zealand economy:

A sharp slowdown in China could weaken growth prospects in Australia, triggering a broad-based fall in demand for New Zealand’s exports, and lead to a sudden decline in house, farm and commercial real estate prices. This in turn could weaken consumer demand and negatively affect banks’ balance sheets and their willingness to lend. The downside macroeconomic impact in a scenario where shocks compound each other could be large.

So if you think Jesse was scary, then the IMF appeared just as scary.

However, the IMF rightly points out in the very next sentence that New Zealand has some automatic stabilisers to deal with just such a shock.

The authorities have monetary and fiscal policy space to respond to shocks. The RBNZ has scope to adapt monetary conditions to help buffer against a downside scenario, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. New Zealand’s modest public debt gives the authorities scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

Unlike America, Europe and Japan, New Zealand could cut interest rates sharply to respond to a surge in unemployment and a slump in economic activity that accompanied a fall in house prices. That's exactly what happened in late 2008 and early 2009 as house prices were falling 10-15%. The Reserve Bank cut the Official Cash Rate from 8.25% to 2.5% inside 12 months.

Also, our currency is floating and it also acts like an automatic stabiliser. It fell from 81 USc in February 2008 to 50 USc in March 2009. That helped reduce our demand for imports because their relative prices rose and increased demand for our exports, which became relatively cheaper. Ireland and Spain, where housing slumps caused all sorts of economic grief, did not control their own currencies and interest rates.

2. Our Government has room to borrow to cushion the blow

Jesse displayed an alarming chart showing a tripling in the Government's overseas debt in nominal terms between 1993 and 2012. Unfortunately, that didn't show the net and real value of that debt in relation to our economy, which is the most important thing.

New Zealand's net government debt has risen from less than 10% of GDP to under 30%. US Government debt is over 100% of GDP, Britain's public debt is over 70% and Ireland's debt to GDP ratio is over 120% of GDP.

As the current government proved from 2008 to 2012 when it kept spending high to cope with the recession and the Christchurch earthquakes, there is a buffer there to cushion the blow and stop a slump turning into a collapse.

3. The Reserve Bank and the Government would help the banks again

In late 2008 and early 2009 the Reserve Bank provided emergency funding to our banks because they couldn't roll over their wholesale foreign funding when the markets froze after the Lehman collapse. This Term Auction Facility (TAF) helped prevent the banks having to force marginal lenders into mortgagee sales, and again avoided a housing slump turning a housing collapse.

The Reserve Bank lent the big banks more than NZ$7 billion between November 2008 and June 2009. Here's more detail in this Reserve Bank paper.

The Government also gave the banks a helping hand by giving a Government guarantee for NZ$10.3 billion worth of bonds issued from November 2008 to February 2010. Here's more detail on that scheme, which has now ended, but could easily be restarted.

Those Minskyists who believe there is no such a thing as moral hazard should remember that most of the developed world's central banks and governments acted to use their balance sheets to stop banks from falling over and damaging their economies.

New Zealand's property market and its banking system were too big to fail. The Government and the Reserve Bank acted to make sure they did not fail in 2008 and 2009. They would do so again. My mistake in 2008 was to assume that the Reserve Bank and Government either would not or could not support the banks. They could and did. That implied guarantee remains and should be paid for with a deposit insurance levy, but that's a story for another day.

3. The Reserve Bank has already acted to reduce the risks of the housing market to our banks

Jesse's piece appeared not to have noticed the Reserve Bank's imposition in October of a speed limit on low deposit mortgages, which has slowed house price inflation significantly and reduced the amount of 'riskier' mortgage lending.

The Reserve Bank itself is well aware of the risks that an over-valued housing market poses to our banks, who are heavily loaded up with mortgages, as Jesse pointed out.

There's still an argument to say the banks are still more loaded up than they should be with high Loan to Value Ratio mortgages, but it's clear the authorities have not ignored this and have done something.

4. New Zealand does not have the over-supply problem that contributed to other housing crashes

One of the reasons the US housing slump was so severe in some states was that America's house builders are much better at rolling out large numbers of a 'cookie cutter' houses onto ample land supplies than we are in New Zealand.

Plentiful supply of new homes and a slump in demand equalled much lower house prices. That was also the case in Ireland and Spain.

Despite Jesse's comments here in a follow-up piece on Forbes rubbishing the supply argument ('it's always a shortage and never a bubble'), New Zealand certainly doesn't have the over-supply in its most over-heated markets of Auckland and Christchurch that would fuel a bursting of the bubble.

Auckland built around half the houses it needed in the decade to 2012 to cope with migration and natural population growth and is only now starting to catch up. There is a debate about whether there is a shortage, but I haven't heard anyone argue there is an over-supply.

Christchurch's housing supply was devastated in the 2010 and 2011 earthquakes. No one is arguing there is an over-supply there.

5. The Government has already acted to increase housing supply in Auckland to reduce over-valuation

The Government legislated last year to improve housing supply in Auckland, agreeing an Accord with the Auckland Council to speed up housing consents and free up greenfields and brownfields land to build new houses.

There's some debate about how quickly these changes have flowed through to housing consents and actual building, but housing consents are up 85% from their March 2011 lows.

6. A fall in Chinese economic growth doesn't necessarily burst our 'bubble'

Jesse made the connection between a bursting of China's own credit-fuelled housing bubble and a bursting of our bubble. He is right to point out there has been an increase in flows of capital out of China and into the New Zealand and Australian housing markets.

There is much better data to measure the surge into Australia, but the information is not so clear cut here.

But Jesse's assumption is that when China's 'bubble' bursts, those flows would dry up and demand from China for our exports would dry up.

Both of those assumptions are worth challenging. Firstly, China is slowing in part because it is trying to reduce its reliance on investing in infrastructure and apartments and increase its reliance on consumers consuming products and services. That increase in consumption includes New Zealand protein (dairy, fish, meat) and tourism.

Secondly, the surge of investment by wealthy Chinese property investors in other markets has only just begun. As China opens up its capital account, those flows will only increase, not decrease.

In summary, Jesse's argument that New Zealand house prices are over-valued may be true, but it doesn't necessarily mean a 'bubble' would burst or that a Government would allow it to burst.

That may mean that property investors can load up on moral hazard and cheap debt to capture their tax-free capital gains, but it doesn't mean New Zealand is on the brink of a crisis.

Read more: https://www.interest.co.nz/opinion/69557/bernard-hickey-gives-6-reasons-why-jesse-columbos-warning-forbes-about-new-zealands-ho
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Ollie
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The Real Estate Institute of New Zealand (REINZ) has released its July house price results, which registered a third consecutive monthly fall in values, as well as another slowing in annual growth.

In the month of July, the national stratified median price fell by 0.7% to around $437,500. However, prices were up in each of the major capitals – i.e. up 3.5% in Christchurch, 2.1% in Wellington, and by 0.7% in Auckland. Over the quarter, prices fell by 2.2% nationally, with Wellington down 7.0%, Auckland down by 0.9%, and Christchurch down 0.7%.

Annual house price growth slowed to 5.9% nationally in the year to July 2014 to be 14.9% above the November 2007 peak. Prices in New Zealand’s largest city, Auckland, rose by 12.2% in the year to July to be 33.3% above their July 2007 peak. This was followed by New Zealand’s second biggest city, Christchurch, where prices rose by 13.9% over the year to be 24.3% above their 2007 peak. Finally, prices in the capital, Wellington, fell by 2.3% in the year to July and were 2.9% below the September 2007 peak.

The weakening price growth amid the strengthening domestic economy and rising population growth suggests the RBNZ’s macro-prudential curbs on high risk mortgage lending and recent interest rate increases are working.

Other indicators support this contention.

According to the REINZ, sales volumes were 13.0% lower than July 2013. In a similar vein, New Zealand housing loan approvals are falling.

Well done RBNZ for taking concrete action to cool New Zealand’s frothing housing market.
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