By Amanda Morrall
Weighing up whether to jump into the property market in Auckland?
You might not like what Canadian economist/ecologist/Peak Oil theorist Nicole Foss, senior editor of the financial website automaticearth.com) has to say but her opinion is probably worth consideration on the chance her bearish views are right.
Foss, whose convictions about the global economy collapsing were so strong she moved from the U.K. to Canada where she's built a self-sustainable refuge, believes we are on the cusp of the next Great Depression that will plunge New Zealand and other developed nations into a prolonged financial funk that will leave debt-laden Kiwis in serious trouble.
According to her gloomy forecast, the euro will become a footnote in history, civil unrest will sweep Europe, nations that are not self-sustaining will be thrown into total chaos, oil will plummet to US$20 a barrel and the remaining housing bubbles including New Zealand, Australia and Canada will burst violently.
For this reason, Foss (on a speaking tour in Australasia) has the following advice for prospective first time home buyers in Auckland.
"Don't buy a house under any circumstance, unless you can buy it outright.''
"It's a trap"
She describes the property market here as "a trap" that will leave thousands helpless, homeless and bankrupt when the bubble bursts and interest rates rise.
"Auckland is the sixth least affordable city in the world, the property bubble is huge, asset prices have a long way to fall, mortgages here are recourse loans, so if people end up under water, and the house is foreclosed and sold for less than they owe, they will have to cover the difference.
"So it really is a trap, and interest on ordinary peoples' debt are going to rise sharply so people will find their levels of debt unserviceable. This is a trap, do not go through. If you have a job, by all means rent. Don't jump in to the property market especially not in Auckland.''
How can she be so sure, particularly as a foreigner visiting Auckland and the southern hemisphere for the first time in her life?
Two big reasons: Peak Oil and the credit crisis, part two.
"I think we're facing global economic depression, a period like the 1930s and it could come on quite quickly and the impact is potentially enormous.''
Foss believes we've hit peak oil already and blames the demise of the global economy on the finance sector.
Credit crisis part two
"What we're really going to see over the next few years is the financial crisis being the dominant factor. That's hurdle No.1, peak oil and energy is hurdle No.2 because the time frame for changes in supply and oil demand is simply longer.''
The supply crunch, says Foss, is closer than many might think; five to 10 years.
"As we saw in 2008 prices can fall a very long way which is nothing to do with supply and demand for oil it is simply that you take liquidity out of the market,'' she said, noting that oil prices fell 78% in five months in 2008 - from a record high of US$147 a barrel.
"We could see something like that again. If purchasing power is falling faster than price, even if oil prices are low, it doesn't mean it's affordable. In fact it could be less affordable if people have less money.''
She sees the troubled eurozone breaking up even sooner.
Au revoir eurozone
"I'd be surprised if the single currency lasted more than a couple of years. It could go all at once or shed members. Various countries on the periphery of Europe look poised to go over the edge pretty much immediately."
"Default is definitely on the cards for all of them. Austerity programmes are accelerating the default. Even the countries at the centre of Europe have major financial risks enormously over exposed banking system, too much leverage, large housing bubbles. It's pretty much the story across Eurozone. We're seeing contagion that is going to spread from Europe to much of the developed world.''
And the U.S.?
"In the U.S. there is a knee jerk flight to safety into the reserve currency, it began a year ago and it I think it still has far to go."
"Interest rates are very, very low because the U.S. is perceived to be a safe haven. Rightly or wrongly there is a perception that the U.S. will never default on its debt. And that's enough to make it the recipient of capital flight from Europe. At the moment, the U.S. is seeing its dollar rise while interest rates stay low because it's not attracting the risk premium unlike the eurozone where interest rates are going through the roof because interest rates are a risk premium."
Following the onset of the US sub-prime mortgage crisis and credit crunch, the Federal Reserve has held official interest rates at 0% to 0.25% since December 2008 and says an "exceptionally low level" of rates is likely until at least late 2014. Speculation is rife in financial markets over whether the Fed will launch another round of quantitative easing, or money printing, which would be the third with the first two rounds having totaled US$2.3 trillion.
Canada's bubble next to burst
Foss' grim projections include a negative outlook for the country she lives in. She believes a bursting of the Canadian housing bubble is overdue.
"I think 40 year mortgages are sup-prime by almost anyone's definition; 110% mortgages. Canadian banks aren't that large or liquid and too often they are holding the bag at the end of a reinsurance contract. So I don't think the banking system there will be able to withstand what's coming.
"There are some of the largest housing bubbles in the whole world there and the banks are invested in assets that are going to collapse in value."
While Foss also foresees some financial pain for New Zealand and Australia, she expects it will be somewhat tempered. That is especially the case for New Zealand having a resource base that could adequate support the population.
"The prospects for New Zealand are not that bad. The prospects are far worse for Europe, and ultimately the United States where the political culture there is heading in a dangerous direction, toward a police state. There will be an almighty financial crisis and a period of economic depression here. If people look at the history of the depression here in the '30s it wasn't a pretty picture.''
10 years of serious pain
And the length of the suffering?
"Probably 10 years of a depression and seriously hard times.''
And there's no soft landing for China in Foss's crystal ball.
"We (Canada) were insulated (from the effects of the global financial crisis) as in fact were New Zealand and Australia, by being commodity exporters into a commodity bubbly particularly to China. But the Chinese bubble itself is bursting and commodity prices are going to fall with the withdrawal of liquidity as they did in 2008, so this time all the exporters are not going to be insulated from what's coming."
Foss isn't entirely pessimistic. She see hope and renewal on a small scale basis and on her talks advocates a movement toward sustainable communities.
She said those looking to depression-proof will do well to take a back to basics approach, anything that services basic needs that aren't dependent on discretionary income.
"The sort of things that have local supply chains and a local customer base. It'll really going to be about being self sufficient, living within the local resource base because trade takes an enormous hit during times of economic depression. In the '30s trade fell by 66% in two years.''
"New Zealand is currently extremely plugged into a globalised economy as an importer and exporter. That isn't going to work in an economic depression so New Zealand will have to revert to living on its own resource base. The transition from here to there is going to be uncomfortable but at least it's possible. It some parts of the world it won't be possible to be self sufficient.''
Foss baulks at the idea of an effective political or financial intervention.
"Everything they will do will be too little, too late. They'll be behind the curve and they'll feed the cycle of fear. Just like we're seeing the European government do at the moment. When fear picks up it becomes a self sustaining dynamic and it drives deleveraging to its natural conclusion until the small amount of remaining debt its acceptably collateralised by the remaining creditors.
"I think we are definitely going to see that dynamic no matter what central banks and governments do and they can't print money because the bond market prevents them from doing that. They are trying to midwife credit to keep the credit Ponzi scheme going. It's not going to work because you don't have willing borrowers and lenders any more and the engineers of credit expansion like fractional reserve banking and securitisation are breaking down.''
Asked whether she was not adding to the fear, telling her audiences to prepare for the worst, Foss was staunch.
"I'm trying not to feed fear. When I lecture, I try to present the scope of the problem in the most dispassionate and analytical terms possible because I don't want to feed the cycle of fear. Where I try to put emotional impact is on building local solutions, creating local mechanisms to deliver liquidity, looking at how you can build local and resilience communities because that's how you're going to get through tough times.''