New Zealand's economy has been hailed as one of world's top safe-haven economies in recent years after it emerged from Global Financial Crisis relatively unscathed. Unfortunately, my research has found that many of today's so-called safe-havens (such as Singapore) are experiencing economic bubbles that are strikingly similar to those that led to the financial crisis in the first place.
Though I will be writing a lengthy report about New Zealand's economic bubble in the near future, I wanted to use this column to outline key points that are helpful for those who are looking for a concise explanation of this bubble.View from Mission Bay, Auckland, New Zealand (Photo credit: Jaafar Alnasser Photography)
Here are the reasons why I believe that New Zealand's economy is heading for a crisis:
1) Interest rates have been at all-time lows for almost a half-decade
Ultra-low interest rate environments are notorious for fueling credit and housing bubbles, which is how the U.S. housing and credit bubble inflated last decade. New Zealand's interest rates have been at record lows for nearly five years, which is more than enough time for economic bubbles and related imbalances to form.
Here is the chart of New Zealand's benchmark interest rate:
New Zealand's three-month interbank rate, base lending rate, and 10 year government bond yield are also at or near all-time lows. Like many countries that are experiencing bubbles in recent years, New Zealand's low interest rates are a byproduct of global "hot money" flows from the United States and Japan, which have both had zero interest rates and quantitative easing programs to boost their economies after the Global Financial Crisis.
Low interest rates in the U.S. and Japan encouraged capital to flow into higher yielding investments in countries such as New Zealand, which led to reduced bond yields and an 85 increase in the value of the New Zealand dollar against the U.S. dollar since 2009. To combat the export-harming currency appreciation and bolster the economy during the financial crisis, New Zealand's central bank reduced its short-term interest rates to all-time lows.
2) Property prices have doubled since 2004
Following the pattern of many nations outside of the hard-hit U.S., peripheral Europe, and Japan, New Zealand's housing prices have doubled in the past decade, forming a property bubble:
Source: Global Property Guide
3) 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.