Talk about being read the riot act.
If New Zealanders hadn’t got the message after last week’s interest rate rise to a new high of 7.50 per cent; and after more warnings this week after strong rises in house prices and retail sales, and a firm admonition from Finance Minister Michael Cullen, Kiwis copped a blast from New Zealand Reserve Bank Governor Alan Bollard.
He told a business conference yesterday that the days of easy money were over and that “exuberance” by consumers and banks (mostly Australian!) to borrow and lend had undermined his attempts to slow consumer spending and cool the overheating housing market.
Using words that recalled former Federal Reserve Governor Alan Greenspan’s 1996 comment about “irrational exuberance” in stock prices as the net and tech booms gathered pace, Bollard sent a very strong signal that he may have to increase interest rates even further consumers curtailed their current borrowing binge.
“We need to see realization amongst borrowing households and lending banks that this period of cheap international money has been unusual. That means thinking about other eventualities ahead, and in some cases showing less exuberance.”
According to the RBNZ’s website, total household debt rose 13 per cent to NZ$150 billion in January from the same month in 2006. That’s an almost doubling in the past five years.
Analysts say New Zealand has become a favoured destination for some big international investors who borrow at half a per cent in Japan in yen and then move the money to New Zealand where the gross margin is around seven per cent: much of this cheap money is being organised by the big local banks who then use it to finance their current mortgage war.
Before last week’s increase official rates were steady at 7.25 per cent for well over a year.
Complicating the matter is that well over 80 per cent of all home loans in New Zealand have an interest rate that is set for a fixed term, unlike here in Australia where we favour variable rates. That means it is very hard to influence the housing and home buying sectors in NZ by moving interest rates.
The downside is that the rates on business are variable and these are transmitted very quickly (and rates on personal loans and credit cards are variable): so you can have declining exports, a sluggish economy but booming house prices and solid activity in and around the industry.
No wonder Governor Bollard is sounding more than a little frustrated and why pie in the sky ideas of a levy on mortgages have surfaced and then been knocked down.
The Governor summed up the situation with this comment: “It is New Zealand households’ desire to keep investing in housing, while at the same time consuming strongly, that fuels their demand for funds”.
I think the chances are rising there will be a very rough landing.
With the NZ economy increasingly dominated by Australian corporates (banks, media and retailing) the fallout will bounce back here through the various profit and loss accounts and balance sheets.
It won’t be shattering, but it will be a reminder that being big in a very small market can hurt financially.
