NZ bubble 'going to burst'

MICHAEL FIELD
Last updated 10:21 19/04/2014

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New Zealand's economic boom is about to pop with dramatic results, the US business magazine Forbes reports.

In a study by economic analyst Jesse Colombo - who specialises in writing on economic bubbles - the magazine gives 12 reasons why New Zealand is facing an economic disaster and "heading for a crisis".

Colombo says the economic bubble will pop here as a result of rising interest rates, which will put pressure on the country's property and credit bubbles.

He says key interest rate rises are expected to continue while longer-term bond yields will also go up.

"The popping of Australia and China's bubbles are two other external factors that have a high probability of contributing to the popping of New Zealand's bubble," Forbes reports.

It says when the bubble truly pops the property bubble will also pop, banks will 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 says stock and bond prices will fall, the Kiwi dollar will weaken, economic growth will reverse and unemployment will rise.

In discussion on why the bubble formed, Forbes says New Zealand has the world's third most overvalued property market.

"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."

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

"Though New Zealand is commonly thought to be an agriculture-based economy, this couldn't be further from the truth," the report says, noting agriculture accounts for 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.

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

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- Stuff

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