Minister bursts analyst's bubble

MICHAEL FORBES
Last updated 05:00 20/04/2014

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The Government is playing down predictions published by powerful US business magazine Forbes that New Zealand is on the path to economic disaster.

Economic analyst Jesse Colombo yesterday labelled New Zealand's economy a bubble which will pop devastatingly.

The current housing bubble was creating a mortgage bubble, he said, with almost half of outstanding mortgages currently having floating interest rates.

Rising interest rates would eventually pop this bubble, banks would experience losses on their mortgage portfolios, "the country's credit boom will turn into a bust" and over-leveraged consumers will default on their debts, Colombo said.

"Not only is New Zealand's banking system dangerously exposed to the country's property and credit bubble, but so is the entire economy."

Acting Finance Minister Steven Joyce last night dismissed 28-year-old Colombo's theories as "alarmist" and described him as a "bubble-ologist".

"His view on life is that the whole world is pretty much in a bubble and there's no place he doesn't pick on," Joyce said. "I wouldn't be paying too much for that level of analysis. He's a little bit like [earthquake forecaster] Ken Ring. He's out there predicting catastrophe at every turn."

Colombo's assertion that New Zealand could not fall back on its agriculture sector was disingenuous, Joyce said.

The American said agriculture accounted for only 5.1 per cent of our GDP, while the finance, insurance and business services sector contributed 28.8 per cent.

But Joyce pointed out, "a fair bit of New Zealand's food and beverage manufacturing is directly part of the agricultural story".

Some of Colombo's information had been sourced from the Immigration website, which was accurate but very much a "once over lightly" collection of figures, Joyce said. "If he'd bothered to look at our GDP figures he would have seen a different story."

Infometrics managing director Gareth Kiernan said Colombo had picked out all the high-risk metrics he could find to build an "end of the world scenario".

If his predictions ever came to pass then the economy would be in trouble, but no one was really forecasting that to happen, he said.

"You would need a bit of a catalyst to kill off the housing market so sharply and I don't think, given the outlook for economic growth over the next few years, a lift of a couple of percentage points in interest rates is going to do that."

Interest.co.nz contributing editor Bernard Hickey said many of the risks identified by Colombo were real but they were old news to those who ran the economy.

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"For him to come out and say we've got a bubble, therefore it's going to burst, which will lead to a crisis is a little bit simplistic," he said.

Kiwis had already seen the Reserve Bank step in to curb the risk of rising house prices by introducing a new loan-to-value ratio, he said.

"Should we all be running for the hills with our hands in the air screaming the end is nigh? Probably not."

Hickey added that it appeared Colombo's article had not been published in Forbes magazine proper, which was important when judging its credibility. Instead it was published on the Forbes website with a disclaimer saying Colombo's opinions were his own.

- Sunday Star Times

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