Blogging vs sensationalism – Economic Bubble?

By Shamubeel Eaqub 24/04/2014


Social media frenzy over the news-quiet Easter weekend. Blooger at Forbes.com says NZ economy is headed for a bubble! Hat tip to Jessie Colombo for creating a media storm.

While there are reasonable and often cited risks in his analysis, the substance is lacking. You will find any number of economists, including in the RBNZ and Treasury, highlighting the risks from high Auckland house prices, high household debt and concentration risk in exports (from our increasing exposure to emerging markets, China in particular).

Here are his 12 reasons and why I think there is reason not to panic:

1)     Property prices have doubled since 2004

In Auckland and Canterbury. They have fallen elsewhere.

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

Yes. Auckland is.

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

Bit selective. Household debt to income has actually been going sideways, if a little down, in recent years. Although not paid down the rapid accumulation in the 2000s.

4)     Nearly half of mortgages have floating interest rates.

Actually 73% by value. But you can fix if you want to. Which borrowers have done in the past. This is not to say that rising interest rates wont bite, but they will be spread over a long period of time.

5)     Mortgages account for 60% of banks’ loan portfolios.

I haven’t verified this number, but presumably this is bad if this will lead to high defaults. New Zealand does not have the legal structure to allow borrowers to walk away from their debts. Also, even during the recession of 2008 and the early 1990s mortgage default rates in NZ were relatively small.

6)     Finance, not agriculture, is New Zealand’s largest industry.

Like any advanced economy services are a big part of the economy. This is not surprising. Although he misstates the data. The top 10 industries as per GDP are:

  • Information Media and Telecommunications    7%
  • Professional, Scientific and Technical Services                   7%
  • Owner-Occupied Property Operation (National Accounts Only)                  7%
  • Rental, Hiring and Real Estate Services                  6%
  • Wholesale Trade              5%
  • Construction      5%
  • Health Care and Social Assistance           5%
  • Retail Trade        5%
  • Transport, Postal and Warehousing       5%
  • Financial and Insurance Services              5%

Agriculture details are:

Production approach

  • Ag 3.2%
  • Fishing 0.6%
  • Forestry and logging 1.1%
  • Food manufacturing 4.6%
  • Wood & paper product manufacturing 4.6%
  • Total 11.1%

Export approach

Or Ag related exports are 43% of total exports and 14% of expenditure GDP.

Like most advanced economies the services sector is a large share of the economy. Ag, forestry and fishing is around 7% of GDP as at 2010, compared to the OECD average of around 2%. Finance & insurance directly account for around 10%, while the OECD average is around 6%. Most debt in NZ is intermediated by the banking sector (smaller equity market etc). Details available at oecd.stat

7)     New Zealand’s banks are exposed to Australia’s bubble

Not really. Banking regulation in NZ separates our banks from direct exposure. Although our cost of funding may rise if tarnished with a Aussie housing bust. Real economy threats too from a recession in our second biggest trading partner.

8)     Australian and Chinese buyers are inflating the property bubble

Really? I still haven’t seen evidence of this. So cant comment.

9)     New Zealand has a household debt problem

Same as number 4.

10)  Government overseas debt has nearly tripled since 2008

Government net debt to GDP is less than 30% of GDP and denominated in NZD. Whats the issue?

11)  The New Zealand dollar is overvalued

NZD is high relative to history. Export share of GDP is at a historically high level. A fall in the NZD would spur exports and reduce imports.

Here is what to expect when New Zealand’s economic bubble truly pops:

The property bubble will pop.

Sure in Auckland.

Banks will experience losses on their mortgage portfolios.

Like they did in the GFC? More than half of the housing market in NZ crashed in the GFC and bad debts peaked at a very low amount. Don’t buy this argument.

The country’s credit boom will turn into a bust.

We haven’t had this already?

Over-leveraged consumers will default on their debts.

Why? Its not America. You cant walk away from your debts. This did not happen in the GFC.

Stock and bond prices will fall; the New Zealand dollar may weaken.

Good.

Economic growth will go into reverse.

Ok. Thats what happens in a recession.

Unemployment will rise.

Ok. Thats waht happens in a recession.