Friday, October 31, 2003
Tell me again why you want to buy a house just now?
The current obsession with housing in New Zealand may well end in tears for many. The boom rests on very shaky ground, but like the man who built his house on the sand in the parable, no-one seems to want to heed the warning signs.
New Zealanders are taking on record personal debt. Our per capita debt is now the highest in the world, having risen from 64% of GDP in 1990 to 117% in 2002. The housing boom has played a significant part in this, as many mortgages are being financed using the revolving credit system, which relies on credit card spending and daily interest rates.
What are some of the other warning signs (stick with me - the going's a bit heavy in places, but it's vitally important stuff)?
• NZ’s current account balance has been in the red every year, except for two brief periods in the early 1970s.
• The trade deficit to June was $5.9 billion - $2.7 billion worse than last year. The increased deficit comes from a continuation of increased imports and falling receipts for dairy, wool and wood.
• The 2003 Budget forecast a current account deficit of over $5 billion for the year to 30 June, almost double the comparable figure for last year. The Balance of Payments deficit was almost $2 billion for the year ended April 2003.
• The Budget forecast that the current account deficit over the next four years will total $26 billion.
• New Zealand relies heavily on overseas investment to keep it in the black. A report by NZIER for AMP found that during the period 1975-2001, New Zealand was more dependent on foreign capital than any other OECD member (our net external debt exceeds $80 billion). This is one of the reasons New Zealand is lagging significantly behind Australia and the OECD average growth in GDP and GNI.
• The high New Zealand dollar is hurting exports and costing thousands of jobs. BERL forecasting group predicts that we are in for two to three years of a stalled economy and warns that the New Zealand unemployment rate could kick up to 7% next year with the number of people on the dole rising to 140,000.
• The investment market has stalled badly, causing many to lose savings they had been building up for retirement. Compounding that, the Government Superannuation Fund lost $352 million on foreign sharemarkets in its first year. Economist Charles Drace says the Fund’s investment strategy is designed to lose more than $59 billion over the next 10 years.
• Drace says the historical evidence from economic cycles indicates the current bear market is likely to last another 12 years.
All this sounds terribly scaremongering at a time when things are supposedly booming. As long as foreign investment keeps coming in, need we be concerned?
A lot depends on how closely New Zealand is tied to the global market, particularly the US, where the signs are not good. For instance:
• The US is now running a $500-billion-a-year merchandise trade deficit, largest in human history, equal to 5 percent of its $10 trillion gross domestic product.
• Foreign-owned US assets rose from 33 percent of GDP in 1990 to 78% today. Foreigners now own 22% percent of US corporations, 24% of US corporate bonds and 48% of its liquid Treasury market.
• In July, bond mutual funds had their worst drop in 16 years. The timing of the massacre couldn't have been worse as investors had just injected some $66 billion into bonds in a desperate quest for a safe alternative to stocks.
• Total losses on the Wall Street meltdown now exceed $US 6 trillion. So far, the crash has destroyed up to half of people's life savings and scrambled the retirement nest-eggs of more the 46 million baby boomers due to retire over the next five years. In sheer dollar terms, the collapse since March 2000 has brought the largest loss of wealth in the history of humanity, dwarfing the great 1928-29 crash by a factor of 29-1.
• The American economic boom of the 1990s was built on unrealistic investment in non-productive areas, and a massive build-up in inventory. That inventory has still not been cleared, which has led to price wars and increasing unemployment.
• What has kept the economy afloat, in the view of many, is the record monies consumers extracted from their homes via rock-bottom interest rates. (A Federal study estimated that homeowners raised $130 billion last year through home equity loans and lines of credit.)
• There is a high expectation that the US Federal Reserve will begin increasing interest rates.
If interest rates start to rise again in New Zealand, a lot of home owners are going to be in serious difficulty. The position now is considerably different from when mortgage rates shot up in the 1980s. As economist Keith Rankin pointed out, the immediate response then was a large growth in the numbers of women in their thirties and forties who headed out into the fulltime workforce. How will we pay our now much higher mortgages if interest rates double once again? Many families will require, once again, an additional income to service their mortgage, and where will they get that?
My answer is to get rid of your mortgage as fast as possible, even if it means downgrading. I have been so concerned personally at the signs, that recently I borrowed from a family member in order to pay off the bank. (I’m repaying the loan at investment rates, which is still less than the cost of servicing a mortgage.) I’m thankful to be out of the bank’s clutches.
Remember, a mortgage (like a puppy) is forever!
The current obsession with housing in New Zealand may well end in tears for many. The boom rests on very shaky ground, but like the man who built his house on the sand in the parable, no-one seems to want to heed the warning signs.
New Zealanders are taking on record personal debt. Our per capita debt is now the highest in the world, having risen from 64% of GDP in 1990 to 117% in 2002. The housing boom has played a significant part in this, as many mortgages are being financed using the revolving credit system, which relies on credit card spending and daily interest rates.
What are some of the other warning signs (stick with me - the going's a bit heavy in places, but it's vitally important stuff)?
• NZ’s current account balance has been in the red every year, except for two brief periods in the early 1970s.
• The trade deficit to June was $5.9 billion - $2.7 billion worse than last year. The increased deficit comes from a continuation of increased imports and falling receipts for dairy, wool and wood.
• The 2003 Budget forecast a current account deficit of over $5 billion for the year to 30 June, almost double the comparable figure for last year. The Balance of Payments deficit was almost $2 billion for the year ended April 2003.
• The Budget forecast that the current account deficit over the next four years will total $26 billion.
• New Zealand relies heavily on overseas investment to keep it in the black. A report by NZIER for AMP found that during the period 1975-2001, New Zealand was more dependent on foreign capital than any other OECD member (our net external debt exceeds $80 billion). This is one of the reasons New Zealand is lagging significantly behind Australia and the OECD average growth in GDP and GNI.
• The high New Zealand dollar is hurting exports and costing thousands of jobs. BERL forecasting group predicts that we are in for two to three years of a stalled economy and warns that the New Zealand unemployment rate could kick up to 7% next year with the number of people on the dole rising to 140,000.
• The investment market has stalled badly, causing many to lose savings they had been building up for retirement. Compounding that, the Government Superannuation Fund lost $352 million on foreign sharemarkets in its first year. Economist Charles Drace says the Fund’s investment strategy is designed to lose more than $59 billion over the next 10 years.
• Drace says the historical evidence from economic cycles indicates the current bear market is likely to last another 12 years.
All this sounds terribly scaremongering at a time when things are supposedly booming. As long as foreign investment keeps coming in, need we be concerned?
A lot depends on how closely New Zealand is tied to the global market, particularly the US, where the signs are not good. For instance:
• The US is now running a $500-billion-a-year merchandise trade deficit, largest in human history, equal to 5 percent of its $10 trillion gross domestic product.
• Foreign-owned US assets rose from 33 percent of GDP in 1990 to 78% today. Foreigners now own 22% percent of US corporations, 24% of US corporate bonds and 48% of its liquid Treasury market.
• In July, bond mutual funds had their worst drop in 16 years. The timing of the massacre couldn't have been worse as investors had just injected some $66 billion into bonds in a desperate quest for a safe alternative to stocks.
• Total losses on the Wall Street meltdown now exceed $US 6 trillion. So far, the crash has destroyed up to half of people's life savings and scrambled the retirement nest-eggs of more the 46 million baby boomers due to retire over the next five years. In sheer dollar terms, the collapse since March 2000 has brought the largest loss of wealth in the history of humanity, dwarfing the great 1928-29 crash by a factor of 29-1.
• The American economic boom of the 1990s was built on unrealistic investment in non-productive areas, and a massive build-up in inventory. That inventory has still not been cleared, which has led to price wars and increasing unemployment.
• What has kept the economy afloat, in the view of many, is the record monies consumers extracted from their homes via rock-bottom interest rates. (A Federal study estimated that homeowners raised $130 billion last year through home equity loans and lines of credit.)
• There is a high expectation that the US Federal Reserve will begin increasing interest rates.
If interest rates start to rise again in New Zealand, a lot of home owners are going to be in serious difficulty. The position now is considerably different from when mortgage rates shot up in the 1980s. As economist Keith Rankin pointed out, the immediate response then was a large growth in the numbers of women in their thirties and forties who headed out into the fulltime workforce. How will we pay our now much higher mortgages if interest rates double once again? Many families will require, once again, an additional income to service their mortgage, and where will they get that?
My answer is to get rid of your mortgage as fast as possible, even if it means downgrading. I have been so concerned personally at the signs, that recently I borrowed from a family member in order to pay off the bank. (I’m repaying the loan at investment rates, which is still less than the cost of servicing a mortgage.) I’m thankful to be out of the bank’s clutches.
Remember, a mortgage (like a puppy) is forever!
