Posted on 23-8-2003

Banks Riding You For Fall
by Alan Marston

New Zealand Banks,... sorry, there are no significant NZ banks, I mean Australian banks in New Zealand were they to be open, honest and showing due diligence of the NZ and `global economy' would be issuing a stark warning to debt-burdened kiwis that their long-running borrowing spree is unsustainable.

Instead banks are encouraging homeowners (by far the most profitable market in NZ is home real estate) to shrug off fears of a downturn in the housing market and continue on a borrowing spree-fueled speculation frenzy of unprecedented proportions. In the UK by contrast, though ignored by the banks themselves there too, the minutes of this month's meeting of the UK Bank's monetary policy committee cautioned that the acceleration in lending "could not be sustained indefinitely". Shades of ass-covering not dissimilar to that of the Chairman of the US Reserve's Alan Greenspan three years ago warning of an impending collapse in the .com markets.

The UK's MPC said it feared consumers could be basing their borrowing splurge on over-optimistic projections of their future income, warning of  "a risk that households were extrapolating forward the unusually high rates of growth of real disposable income of recent years". The committee was also concerned that consumers "might not have fully appreciated that inflation would not reduce the real burden of debt as quickly as it had in the past". This is thinly disguised code for the looming financial crisis of deflation, the exact opposite of inflation and much worse, not so nicely put deflation means depression. Like the UK debt levels in NZ have become so high that when, not if, the NZ Reserve Bank is forced to raise interest rates then a fiscal avalanche starts to roll downhill. An avalanche which is built to critical mass by ever-growing indebtedness causing the domestic economy's vulnerability to deflation.

In a deflationary economy prices go down and the value of money goes up, ie. its very bad to have debts (money) secured against assets (goods) because the value of debt is going up and the value of assets down. Sooner rather than later many debtors (mortgage holders) have more debt (bigger mortgage) than equity (house value). Very bad, especially when deflation hits businesses and many mortgage holders find themselves unemployed.

Mortgage lenders should be strongly cautioning their customers against overstretching themselves. However the blue mist of greed (on all parties, not just the banks) gets in the way of vision, and sanity. The housing market remains stronger than it should be according to reason and people should bear in mind that the current "buoyant" situation will not go on forever. The risks of a `correction' have not gone away, and borrowers should remain wary of over-committing themselves. Are we hearing that from banks, from politicians? Nope.

The real estate industry, not one to ruled by reason, is in the middle of a gold rush, which like the rushes of yor is being taken advantage of by banks in a period of impending deflation and low interest rates designed by governments to insulate an economy from the global downturn. In short, governments force down interest rates as a crude attempt to export deflation, to export economic depression. Consequently interest rates may go lower, but for a house-owner or any other citizen to see this as an opportunity to borrow big and cash in on the housing price boom, would be in my opinion a grave error. Interest rates would eventually have to go up as an economy recover. There we have it, the rock and the hard place. If the economy goes into deflation, bad for borrower. If the economy is `corrected' and interest rates start to go up, bad for borrower. Rock and hard place I'm afraid.

However banks, real estate agents et al will respond that the odds on an interest rate rise are still long. Your call punter. As for me, the day I listen to a banker or a real-estate agent is the day I sell-up and run for the hills. Come to think of it, I'm already living in the hills, where they call me Casandra. But whaddatheyknow.