'NZ's economic bubble will pop' – economist who predicted GFC
"Hard to believe my generation survived 23% mortgage rates in the 1980s. Also hard to believe this generation does not understand that our perceived prosperity is totally fueled by the artificially low cost of money which will not stay at these levels"Featured comment
UPDATE April 20: Economic Development Minister Steven Joyce has taken issue with Forbes correspondent Jesse Colombo's theory that New Zealand has a housing and credit bubble that, when it pops, will take down our entire economy with it — not the sort of publicity our government would hope for from arguably American's most influential business magazine (or at least, its website).
Mr Joyce tells NBR the economic analyst is "alarmist" and (although the insult has yet to be added to the Oxford English Dictionary) a "bubble-ologist".
"He pretty much spends his entire time predicting catastrophe around the world. Looking on his website he’s picked Northern and Western Europe, China, Canada, Australia, most emerging country’s economies, the US; in short, everywhere he can see he’s predicting a bubble."
Just as a certain lunar-focused weather forecaster maximised his chances of predicting a quake by picking multiple dates as possible disaster days, the Forbes contributor takes a scattergun approach that has "a certain sort of Ken Ring feel to it", Mr Joyce says ... "As someone said this morning, he's picked 27 of the past three recessions."
And while Mr Colombo says bubble-fuelled finance dwarfs agriculture in NZ's GDP, Mr Joyce says the Forbes man underestimates the size of the rural sector due to ignoring its indirect influence on food, beverage and other sectors.
Mr Colombo, who has yet to release his full report on New Zealand, has also been criticised for ignoring moves to cool the housing market, such as the loan-to-valuation lending restrictions that kicked in on October 1, and the Reserve Bank hiking the OCR on March 13.
It's very simple - Colombo
For his part, Mr Colombo says he's applying tried-and-tested methodology.
"I am using the same tried and true economic analysis techniques that I used to spot the US housing and credit bubble," he tells NBR.
"It’s very simple: abnormally low interest rates lead to dangerously rapid credit growth and asset bubbles that pop when interest rates rise again. It’s amazing that the same pattern is occurring over and over again but people expect different results each time."
Useful reminder – Hosking
"He exaggerates, but it is a useful reminder of New Zealand’s underlying vulnerabilities," NBR economics editor Rob Hosking says of Mr Colombo's bubble theory.
"To put in context, he doesn’t seem to write about any country without using the word ‘bubble’. In the past three months alone he has made similar predictions about Singapore, South Africa and Turkey. I know he gets touted as the guy who predicted the GFC but if you're making predictions about bubbles with that sort of scattergun regularity, it kind of detracts from the impact. At some point, you’re going to get it right," Mr Hosking says.
"So is he right about us? I don’t think so.
"But his comments are a useful reminder that although the economy is picking up quite strongly, we have barely made a dent in the huge household debt which built up between 1998-2007, and this makes us really vulnerable to any shock, external or internal."
A point on household debt - Joyce
Even Mr Joyce concedes the Forbes contributor has a point on household debt.
“I disagree with much of his analysis, and much of it doesn’t bear scrutiny, but we do have quite high household debt," the Acting Finance Minister says.
"It has started to come back as Rob [Hosking] says, but there’s a fair bit of a way to go, and people should be cautious because the world economy is not out of the woods yet.
"But that’s a long way from saying we’re about to have an economic disaster."
What do you think? Is NZ's economic bubble about to burst? Click here to vote in our subscriber-only business pulse poll.
April 19: Not everyone agrees with HSBC's verdict that we'll be a rock star economy in 2014.
New York-based economic analyst Jesse Colombo says New Zealand is experiencing an economic bubble that will end in disaster.
Mr Colombo – credited by the Financial Times for predicting the GFC – says so-called safe haven economies, such as NZ, “are experiencing economic bubbles that are strikingly similar to those that led to the financial crisis in the first place.”
In an April 17 post for Forbes, the analyst quotes data saying NZ property prices have doubled since 2004.
And (via NBR), he notes Deutsche Bank research that found NZ’s property market the third most overvalued in the world in terms of home price to rent ratio. Australian and Chinese buyers are helping to fuel the market, he says.
He also throws in that nearly half of mortgage rates have floating rates.
And that “a mortgage bubble that grew from approximately $NZ70 billion in 2002 to $NZ186 billion in 2013 – a 165 percent increase in a little over a decade” as debt grew faster than the economy, causing the country’s total outstanding mortgage debt-to-GDP ratio to rise from approximately 57% to 85%, he says.
He adds that “New Zealand has the fourth worst household debt-to-GDP ratio among advanced economies, surpassing even the United States ... household debt-to-disposable income ratio soared from 100% in the early-2000s to just under 150% in recent years thanks in large part to the country’s mortgage bubble.”
Meanwhile, government overseas debt has tripled since 2008 he notes. And to top it off, our dollar is overvalued.
And if you think the cheap credit and housing boom pale into insignificance beside Fonterra's booming exports to China, Mr Colombo says, "Agriculture accounts for only 5.1% of NZ's GDP, while the finance, insurance and business services sector is the country’s largest sector, contributing 28.8% to the GDP. Furthermore, banks account for 80% of the total assets of New Zealand’s financial system."
This means that "Not only is New Zealand's banking system dangerously exposed to the country's property and credit bubble, but so is the entire economy," Mr Colombo says.
The analyst says “The property bubble will pop”. He also sees shares falling and unemployment rising. Read his full analysis in 12 Reasons Why New Zealand's Economic Bubble Will End In Disaster.
What do you think? Who has more credibility on whether NZ has an economic bubble? Click here to vote in our subscriber-only business pulse poll.