NZ economy set to crash, says expert

Colombo warned that NZ has the fourth worst household debt-to-GDP ratio among advanced economies, surpassing even the US. Photo / File

Auckland's sizzling property market could bring New Zealand's economy crashing down, a global economic expert warns.

Jesse Colombo, one of the few experts to warn of the Global Financial Crisis last decade, warns New Zealand's economic bubble is about to burst in an article on the respected Forbes website. He says our so-called "rock star" economy is actually in dire trouble. He says New Zealand residential property and the Kiwi dollar are significantly over-valued — and will inevitably implode.

Colombo says interest rates had been at all-time lows for almost five years, and property prices had doubled since 2004, creating the world's third most over-valued property market. As interest rates rise, he says, pressure will mount on borrowers.

"New Zealand's ultra-low interest rate environment has encouraged the country's home buyers to make many of the same mistakes that the American home buyers did during last decade's bubble," he writes. "One of the gravest of these mistakes is using adjustable or floating rate mortgages, which will reset at higher interest rates when the low interest rate environment ultimately ends."

In a ripple effect, banks will lose money on their mortgage portfolios, over-leveraged consumers will default, stock and bond prices will fall, and unemployment will rise.

Local commentators acknowledge the danger, but also sound caution about overreacting.

"The housing market in Auckland is the biggest risk facing New Zealand from within our borders," NZ Institute of Economic Research principal economist Shamubeel Eaqub says. "At the same time you don't want to be overly alarmist."

This month, the average Auckland house price was $697,454 — up from $340,000 in 2004. In the past year, there has been a 12 per cent increase in house prices.

Commentators say homeowners should focus on paying off their mortgages, and asses their ability to meet repayments if rates rise. Floating rates are around 5.5 to 6 per cent and could rise to 7.5 per cent.

Labour's deputy leader and finance spokesman David Parker says: "I think there are real vulnerabilities for the economy. I don't think it will be as bad as he says, but unless we get these problems under control there's likely to be a painful correction for those who've bought at the highest prices."

Associate Finance Minister Steven Joyce agreed New Zealand had suffered high levels of household debt.

"I think he's over-hyping it to say that there's some sort of bubble that's going to burst."

Prepare for the future

• Be aware of the potential for house prices to fall and interest rates to rise, says financial commentator Bernard Hickey. Be careful about taking on too much debt.

• Leave yourself room for the unexpected so if someone gets sick, or pregnant, you can afford to pay the mortgage when interest rates are 8 per cent and not 6 per cent. Consider fixing mortgage rates before they rise any further.

• The Reserve Bank signalled very strongly in March that they're probably going to rise by 2 per cent and floating mortgage rates are going to reach 7.5 per cent.

• Respect debt and do not over-stretch.