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Opinion: What the retreat of the Debt tide means

Opinion: What the retreat of the Debt tide means

"Make us good, but Lord not right now."

That was Alan Bollard's rueful comment to a Parliamentary Select Committee this week after his decision to hold the Official Cash Rate at 3%.

He was talking about New Zealanders finally being 'good' about reducing their debts, but that this new-found austerity was hampering the recovery.

The Reserve Bank Governor just can't seem to get away from the perfect storm of debt that hit New Zealand's economy between 2004 and 2007. Back through 2004 to 2007 Bollard was struggling to keep a lid on inflation and housing market. His main tool, the Official Cash Rate, was deadened by New Zealanders love of fixed mortgages fueled by cheap foreign debt.

Now that same tool has been robbed of its potency by that same foreign debt, but this time on the other side of the ledger. Now New Zealanders are very reluctant to do what they did during previous recoveries. Even though confidence has bounced back from the depths of 2008, spending on consumer goods and new plant and equipment has stayed stubbornly low.

Even the banks are frustrated that consumers and businesses seem to have lost their mojo to take on fresh debt to spend and invest. Whereas the Reserve Bank was grumpy through early 2009 about the banks being reluctant to lend and charging relatively high floating mortgage rates, now even the central banks acknowledges the issue is not enough demand for new debt, rather than any restriction of supply of debt from the banks.

It's as if the nation has collectively taken a big breath and buckled down to repay the debt.

The trouble for Dr Bollard and the New Zealand economy is that this is stunting our recovery. Unfortunately for New Zealand and the rest of the developed world, this was inevitable. It is literally the hangover we had to have after the biggest party of the century.

The debt is remorseless.

Without an inflationary surge or a restructuring, it just will not go away. And borrowers sense this in their bones. Having just had the fright of our financial lives, New Zealanders realise that a debt to disposable income ratio of almost 160% is just too high.

That we are paying it back is not too surprising, but the speed and the ferocity of the repayment has taken the Reserve Bank and many banks by surprise. It is driving (a lack) of activity in the housing market, as shown by figures this week from the Real Estate Institute of New Zealand showing sales volumes down 26% from a year ago. Mortgage approvals are down by exactly the same amount.

It is no coincidence. Just as retailers and property investors celebrated the Tsunami of debt surging through their tills and into house prices from 2004 to 2007, they are now seeing the tide wash right back out again.

And unfortunately, there is much more to come.

A 'normal' level of debt to disposable income of closer to 100% of disposable income has the potential to suck upwards of NZ$50 billion out of spending over the coming five years. Research into financial crises overseas found that deleveraging of debt after a crisis typically reduced a country's growth rate by as much as 2 percentage points if debt was above 90% of GDP before the crisis.

There is a lot more of this austerity to come from both the government and households. The Reserve Bank's decision to dramatically lower its forecast track for interest rates reinforced the scale of the task ahead. New Zealand is deleveraging, which means lower growth, lower asset prices and low interest rates for longer.

Sometimes being good hurts.

*This article appeared in the Herald on Sunday.

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4 Comments

And keeping the credit cheaper for longer to pork activity aint working a zot either...Joe Peasant knows dam well what's going on and is staying well away from the baited hooks......maybe Bolly's banking chums could try selling the cheap credit with prizes..."you too could win your mortgage"..

or just try honesty...." yes the rates might rise high enough to kill you but hey it's worth a punt".

Too many ppl have grown fat and lazy on the cheap credit and housing ponzi scheme....time to get real....

 

regards

My thinking is that the strategy of central banks around the world will now be to try and inflate the debt away. The only alternative to years of debt reduction, or worse still, deflation.

 

Compounding the household debt backwash is the crazy vendors out there still trying to suck a buck out of their houses by putting too higher price on the prop..everyday they waste a potential buyer as this artice in todays herald explains:

"A common house sales tactic used to lure buyers is causing longer sales cycles and more misery for homeowners, research by realestate.co.nz suggests.

Realestate.co.nz chief executive Alistair Helm said a property receives four times as many views in the first five days of it being marketed online than one week later, meaning the common sales technique of setting a higher asking price initially and negotiating later could prove costly for homeowners.

Helm said the analysis of 1100 New Zealand properties across a six week period during July and August was based on similar research carried out in the States, and was crucial given the current market.

"Clearly the level of sales in New Zealand over the last two years has been very low - almost to the extent that there must be people out there who want to move, who need to move and just can't find a buyer."

"The problem is if you pitch at a price and have to adjust later, you really have missed the opportunity because the buying public has ignored your property because of what you said you thought it was going to be sold for."

The realestate.co.nz research shows a new listing exhausts more than a quarter of its total viewing audience within its first week, when looking at that listing across an eight week period. Massey University property group Professor Bob Hargreaves said the results were telling.

 

"When we were going through the property boom things were going up so fast, people had sellers' remorse in a way where they thought if we'd asked more we probably would have got it." "At the moment, unless you have a realistic price on your property you are not going to sell it."

Now ain't that the truth..get real vendors..get moving!

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