NZ economy- risk factor massively high

householddebtThis blog does not buy into govt spin that says NZ has a booming economy and this boom is down to the genius of National’s economic management. Just to repeat, The Blast’s view is the economy in NZ is mainly underpinned by massive levels of culturally destructive immigration. Tourism is of course another factor, but like many others, it is not a real economic measure. It could for many reasons disappear overnight. As far as solid strong dependable economic factors go, there’s not much there.

Just how risky NZ’s economy is has been highlighted in an article by Forbes economist Jesse Colombo entitled “12 Reasons Why New Zealand’s Economic Bubble Will End In Disaster“. He says

“Though New Zealand is commonly thought to be an agriculture-based economy, this couldn’t be further from the truth. Agriculture accounts for only 5.1 percent of New Zealand’s GDP, while the finance, insurance and business services sector is the country’s largest sector, contributing 28.8 percent to the GDP. Furthermore, banks account for 80 percent of the total assets of New Zealand’s financial system. Not only is New Zealand’s banking system dangerously exposed to the country’s property and credit bubble, but so is the entire economy.”

This article was written in 2014 but most factors discussed have only worsened since then. Mr. Colombo has promised to update, and I’m waiting keenly for that update to appear. IMHO the critical factors are-

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.

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. 

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.

New Zealand has the fourth worst household debt-to-GDP ratio among advanced economies, surpassing even the United States. Other important factors are the tripling of overseas debt and the ridiculously over valued NZ dollar. Couple these domestic uncertainties with the fact that most NZ banks are in fact Australian banks, and that the Australian economy in 2017 looks decidedly shakey, and you’ve got an outlook where anything could happen.

National really has nothing to crow about. The only thing down to their “economic management” really is the massive risk factor in a bubble that when it bursts will have catastrophic consequences. And don’t forget, even if this risk falls into the hands of Labour, it will have been gifted to them by the Nats who during all their time in power have done precious little to reduce this risk and build a real and strong working economy.

Remember this when you cast your vote in this year’s elections.