New Zealand’s bubble

By Matt Nolan 02/05/2014


I know, I know, I’m very late to the party – while I was busily writing about factor shares and income inequality the big news in New Zealand was this discussion of how our housing market is a “bubble”!

A bunch of points have already been made about why the US to NZ comparison isn’t fair, our shortage of housing being key among them.  Shamubeel also did an excellent post last week noting how the framework for thinking about the issues wasn’t really there – and what was missing from each of the points raised.

However, there were a few things that didn’t get play that should have over the last couple of weeks.  As a result, and after conversations with a bunch of wonderful people who were interested in the issue, I thought I would do a blog post noting these points.  Here is what I said in the conversation:

Remember, New Zealand banks have already been stress tested on 30% house price declines – and found to still be solvent.

It would be fair to discuss risk if the conclusion was only a fall in house prices by itself.  But picking a gigantic recession for a small open economy, with a fragile global financial market, is virtually meaningless for planning purposes without a catalyst/narrative.  It sounds more like marketing than a real forecast.

We would need a situation with massive household bankruptcies for the NZ banking sector to struggle (loans aren’t nonrecourse).  To me that suggests our banks have strong power over consumers, and there are more important regulatory failings than banging on about bubbles.

Also, our external debt is mostly in NZD nowadays, with maturity of over 90 days.  Crisis happens, dollar drops, foreign investors have taken on that risk.  I find it surprising – but good for NZ.

The key points raised here:

  1. Unlike the US, NZ loans are not non-recourse.  People are still stuck with their mortgage if house prices fall.
  2. NZ banks have been stress tested on a large house price decline, and the banking system was still holding together.  We need to think about specific shocks to think about risk – the real fear is a massive drop in export prices, which leads to greater defaults in both agricultural and housing loans.
  3. Banks have changed their external funding significantly in recent years – with the maturity a lot longer and currency risk being shifted further towards overseas investors.  If a crisis strikes, this implies that the liquidity issues will be less severe, and the value of our gross debt will also drop (due to a lower currency) – a fortuitous situation!  These figures are all available on the RBNZ’s website if you want to check them out!

We aren’t like the US prior to their housing market imploding – we have our own sets of risks and concerns we need to think about.