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Can you connect the dots?

The New Zealand economy has definitely passed its peak. Brendon O'Donovan, Westpac Economist is recorded as saying 'the parties over, the music just hasn't stopped.'

At the risk of sounding like Olly Newlands, the well-known property investor who has made millions in property, you need to be reading between the lines.

Let's look at what is happening and you see if you can connect the dots for yourself.
  • House prices have peaked. You can buy a low quality apartment in Auckland for $140,000, back from their giddy heights.
  • Oil prices are up and likely to stay so. When the dollar drops, and it will, oil prices will only go one way and that's up.
  • New Zealand is an isolated nation producing very little of its own fuel and is dependent on fossil fuel imports.
  • There are some cracks appearing as developers rely on property sales. Some sales are slowing and this is causing cashflow problems.
  • New Zealand interest rates are near the highest in the western world. This attracts investors, who want the high return, keeping our dollar up.
  • Interest rates may go higher yet with Alan Bollard still pushing rates to control inflation.
  • Domestic spending, utilizing unearned capital gain in residential housing, is very high.
  • Food prices are rising steadily.
  • The National deficit (offshore earnings versus offshore purchases) is at an all-time high. Our national deficit as a percentage of GDP is again, one of the highest in the western world.
  • New Zealand Stock Exchange is trending down on the back of a bull run.
  • The government has little clout, following such a close election. It will be difficult for them to get policies approved with such a slim majority.
  • There is record new lending from banks.
  • You can get 100% finance on houses.
  • Tourism back by 20%
  • New home building permits hit a two year low.
  • There are 700 kiwis leaving New Zealand every day for pastures greener overseas.
What I am saying is, the real value of the dollar that we use is losing value rapidly, you need twice as many dollars now as you did five years ago, to purchase the same farm or property.

The United States

    Is struggling with inflation starting to affect their economy?
    The Iraqi war is sucking their economy dry.

China

    Is a consumption economy taking up a lot of fuel, oil, coal etc?
    A fixed currency is out of line with the rest of the world, causing Balance of Payment concerns with other nations.

In summary:

These are just some of the issues going on in the New Zealand economy and it is difficult to find positive economic data.

I am no pessimist, but we do need to think about what is happening. We have had six years of unprecedented growth in New Zealand and given all the economic data it is likely to go the other way.

Connect the dots for yourself and draw your own conclusions. My recommendation is to stay in cash ie: keep some money unspent and available, so if things get tough, you have some financial flexibility. Those who don't will find life difficult and will come under pressure from the banks as the banks move to reduce their exposure.

Spending all your money now on a tightening economy will see you knocking on my door for help sooner than later as you run out of liquidity and other people start to control your business.


 

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