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Reserve Bank Governer Hits out at Banks because of the housing boom.

http://tvnz.co.nz/view/video_popup_windows_skin/624243

'Banks - Look beyond your profits - and think of the overall economy.'

Brendan O'Donnahan - Chief Economist - Westpac Bank.

- Banking sector is hughly comptitive with small margins, its ironic to blame the banks they are functioning like any private competitive business.

"But the reserve bank governer is right. The imbalances (in NZ) are HUGE.

We have got a household sector thats spending beyond its means - hes right - The money going out is about 10% more than whats coming in on an annual basis." "We have a massive current account deficit because the NZ dollar is overvalued."

"He is trying to target the housing market which he cannot hit because the fundementals of the economy are not driving it! All the fundementals - extra supply - interest rates are higher - Migration flows have dried up - are all saying lower, - sentiment is driving it higher"

"Higher interest rates and the high dollar really are affecting the productive parts of the economy." "The foreign capital flooding in is driving the liquidity for the housing market"

Peter Connolly - Union Leader.

"People live in the housing market and work in the labour market - it is the labour market (Wages) which has reponded in the last 3 years to shortage by moving 57%" "But taxes on housing are off the agenda - anything to do with housing is off the agenda - but higher interest rates (to cool housing) will really hurt the productive economy"

"So in the three months to the end of October, New Zealanders borrowed a total of $8.82 billion from Euro markets while Australia borrowed $3.9 billion. If this doesn't stagger you, it should. On OECD figures, Australia's economy is nearly six times the size of New Zealand's, but New Zealand borrowed more than twice as much in international markets.

The counterpart of this borrowing is a current account deficit of 8 per cent of GDP. That deficit in turn is driven by household dissaving of about 12 per cent of income. Where's the borrowing going? Into housing and consumption.

Despite the interest rate increases, inflationary pressures in New Zealand are still rising. Housing prices, for example, are still increasing at an annual rate of 14 per cent, feeding an unsustainable level of consumer spending. Alan Bollard has not ruled out another rate rise in December.

This is beginning to look like overkill. A similar episode in the mid-90s ended in tears.

The surge of foreign funds into New Zealand, attracted by high interest rates, is reinforcing the squeeze on the New Zealand economy through a high exchange rate. "

http://www.theaustralian.news.com.au/commo...5E31478,00.html

New Zealands bank was the first bank to switch to inflation targeting rather than money supply targeting. The inflation rate is only 3.4%.

Edited by brainclamp

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'Household dissaving' - This means each household is borrowing 12% more than its dollar income.

'Current Account deficit' - The overall nations Import value of goods and services is 8% more than the value of what is being sold.

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Guest Charlie The Tramp

Nice post brainclamp, the video was very interesting.

Could we see something similiar here in the future with the lenders passing the buck.

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Nice post brainclamp, the video was very interesting.

Could we see something similiar here in the future with the lenders passing the buck.

I think the bank economist is right - you cannot blame the retail price of credit (the banks) when the wholesale price has been delibrately set low - (to target some inflation measure which only rises when the damaging effect of all the extra money in the economy is already done).

Unlike the UK, New Zealand's government is in fiscal surplus. It is he private citizen who has extreme imbalances of -10% of income and who is buying the great deals abroad.

In the UK we have a less extreme combination of both! A growing trade deficit of over 4% of GDP, and a government fiscal blackhole growing over 3% of GDP which threatens to swamp the private citizen with taxation and interest rates so low the money supply is flooding the economy by 12% per year.

"What we saw in '87, highly geared companies, the paper shufflers, imploding and a lot of investor savings going with that.

What we have this time is slightly different in the sense that it's consumers that are geared up rather than companies, and they are geared up into the housing market which is what Bollard's on about.

"If that unwinds, that could get pretty ugly, because studies have shown around the world that a housing bubble unwinding is much more dramatic than a sharemarket unwinding."

The classic example was Britain in the 1980s, where a lot of people borrowing 90% to 100% of the value of houses ended with "negative equity" and lost all their savings.

"One thing that suprised a lot of people post '87, was how significant the second and third round effects were. If one company went under, all of a sudden you found another company had exposure, which led to another company having exposure and so on and so forth."

The economy and sharemarket took around five to 10 years to adjust from the 1987 crash.

http://www.sharechat.co.nz/news/scnews/article.php/6c41aeae

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Guest consa

Following on this thread there is a couple of interesting articles I found earlier for your perusal

Are we heading back to 1987?

The sharemarket may not be heading for a 1987-style melt-down but Tyndall fund manager Anthony Quirk believes there's a good chance the economy will find itself in similar straits.

"It's not the most likely scenario, but it's certainly a possibility, and the more (Reserve Bank governor Alan) Bollard talks about having to raise rates to get imbalances out of the system, the more risk there is that we get a situation a bit like post '87." he said.

Quirk reckons Bollard "stepped it up a notch" this week when he issued a fresh stern warning about consumer spending and the runaway housing market.

Bollard told banks, homeowners and international investors they could be in for a sharp shock if New Zealanders are allowed to continue their current borrowing and spending.

http://www.sharechat.co.nz/news/scnews/article.php/6c41aeae

South Africa wakes up:

No longer as safe as houses

South African homeowners are feeling much wealthier because of the property boom and have gone on a spending spree. But it is time for caution. There are signs that the property market is slowing and yet consumers are still borrowing extensively on their home loans.

Property investors and homeowners should be on guard: The average price of homes in South Africa has doubled since late 1999 and there are danger signs that a property bubble in the United States could burst.

US consumers are mortgaged to the hilt and there are indications that South Africans are also borrowing like crazy.

There is little risk of a South African-led property meltdown, Michael Power, a strategist at Investec Asset Management, told the Personal Finance/Fairbairn Capital Investors' Club this week.

But the problem is potentially more serious, he says, in that there could be a property meltdown in the US. This could lead to a global recession, because the locomotive driving growth in global markets is the spending power of the American consumer.

http://www.persfin.co.za/index.php?fSectio...ticleId=2981177

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Fewer New Zealand Consumers Say Now Is Good Time to Buy a House

Nov. 7 (Bloomberg) -- Fewer New Zealand consumers say it is a good time to buy a house as interest rates rise and prices are higher relative to income, according to an ASB Bank Ltd. survey.

Just 22 percent of 600 people surveyed last month said it is a good time to buy compared with 25 percent in the July survey, ASB said in a statement on its Web site. About 27 percent said it was a bad time to buy.

Reserve Bank Governor Alan Bollard last month raised the benchmark lending rate for an eighth time since January 2004 to curb spending, and said he couldn't rule out another increase until be sees a ``noticeable moderation'' in housing. More than half of those surveyed expected interest rates will rise, ASB said.

``The housing market is still tight,'' Anthony Byett, chief economist at Auckland-based ASB, said in a statement e-mailed to Bloomberg. ``The overall vulnerability to a negative shock is higher.''

About 45 percent of those surveyed expect house prices will rise over the next year, ASB said. That's more than the 39 percent in the July survey. About 15 percent expect house prices will decline.

Houses prices rose 15 percent in September from a year earlier, according to government figures.

To contact the reporter on this story:

Tracy Withers in Wellington, New Zealand at twithers@bloomberg.net.

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Fewer New Zealand Consumers Say Now Is Good Time to Buy a House

Nov. 7 (Bloomberg) -- Fewer New Zealand consumers say it is a good time to buy a house as interest rates rise and prices are higher relative to income, according to an ASB Bank Ltd. survey.

Just 22 percent of 600 people surveyed last month said it is a good time to buy compared with 25 percent in the July survey, ASB said in a statement on its Web site. About 27 percent said it was a bad time to buy.

Reserve Bank Governor Alan Bollard last month raised the benchmark lending rate for an eighth time since January 2004 to curb spending, and said he couldn't rule out another increase until be sees a ``noticeable moderation'' in housing. More than half of those surveyed expected interest rates will rise, ASB said.

``The housing market is still tight,'' Anthony Byett, chief economist at Auckland-based ASB, said in a statement e-mailed to Bloomberg. ``The overall vulnerability to a negative shock is higher.''

About 45 percent of those surveyed expect house prices will rise over the next year, ASB said. That's more than the 39 percent in the July survey. About 15 percent expect house prices will decline.

Houses prices rose 15 percent in September from a year earlier, according to government figures.

To contact the reporter on this story:

Tracy Withers in Wellington, New Zealand at twithers@bloomberg.net.

What's this?

The night Brainclamp turned uber-bear???

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Interest rates could be 1% and Houses would still be unaffordable.

One of two parts of the affordability equation need to change. Wages need to skyrocket or House prices need to plummet. It's that simple.

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Interest rates could be 1% and Houses would still be unaffordable.

One of two parts of the affordability equation need to change. Wages need to skyrocket or House prices need to plummet. It's that simple.

Perfect timing!

New Zealand Wages Skyrocket

New Zealand's Spiraling Wages Threaten Rate Increase (Update2)

http://www.bloomberg.com/apps/news?pid=100...refer=australia

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NZ Govt Harshly Criticized Over Moves To Curb Inflation

By Shri Navaratnam

WELLINGTON (Dow Jones)--A New Zealand government decision to seek new ways to curb rising inflationary pressures has come under severe criticism by financial market participants.

"It's a step back in time, the proposed measures are interventionist," said Cameron Bagrie, head of market economics at ANZ Bank.

The Reserve Bank of New Zealand Thursday made public a government request for a joint central bank-Treasury Department review of financial institutions' lending practices aimed at knocking back a resilient housing market.

"In particular, the review will look at policies that may influence housing credit growth independently of changes to the Official Cash Rate," the Reserve Bank said.

The Official Cash Rate - currently at 7.00%, the highest in the developed world - is the country's key policy rate.

The review comes as New Zealand experiences its longest-ever economic growth cycle, underpinned by an extended housing boom and strong domestic consumption - forces that have caused severe inflationary pressures.

John Edwards, chief economist at HSBC, said the proposed measures under consideration were a "sharp departure from contemporary orthodoxy."

"It will be interesting indeed to see which direction it takes," Edwards said.

Economists note that Reserve Bank Governor Alan Bollard has failed to quell housing market activity despite raising the cash rate eight times since January 2004.

Annual inflation in the third quarter was at 3.4%, above the central bank's mandate of 1%-3% in the medium term.

Inflation is set to peak at 4% next year due to stubbornly strong housing activity, consumer spending, wage-inflation driven by a tight labor market and higher gasoline prices.

Some of the measures under review include the possibility of imposing limits on the ratio of a property's purchase price banks could lend to buyers, and new rules that would specify how much banks could lend in proportion to their own assets.

The review would also examine other direct interventions to influence the quantity and price of mortgage lending.

Risk Of Property Slump

Financial market participants are worried that intervening in the market could scare off foreign investors and undermine New Zealand's free market system.

ASB Bank Managing Director Hugh Burrett was stinging in his criticism, describing some of the proposals as "draconian."

"Anything that starts to re-regulate starts to smack of the Muldoon era," Burrett was quoted as saying in the local media. "I would subscribe more to supply and demand sorting this out."

Former Prime Minister Robert Muldoon, who was in power between 1975 and 1984, was heavily criticized for some of his interventionist policies. His administration's extensive subsidies and overseas borrowing artificially bumped up the exchange rate, and in 1982 he imposed a blanket freeze on wages for nearly three years in an attempt to rein in inflation.

Both Bollard and the center-left Labour Party-led government appear to be concerned that simply continuing to raise interest rates will trigger a hard landing for the economy, which has started to slow after 4.8% growth last year.

Bollard last week warned the country risked a property slump due to unrealistic expectations for house prices to continue rising. He said that annual house price inflation of 14% cannot continue unabated.

But Cameron Bagrie, head of market economics at ANZ Bank, said the proposals under review risked "imploding the housing sector."

On Tuesday, Finance Minister Michael Cullen told reporters that he had been looking at options the central bank could use to control inflation besides raising interest rates.

He said raising rates was "clearly less immediately effective" than was the case five or 10 years ago, because around 70% of home mortgages are on fixed terms.

Opposition National Party finance spokesman John Key said Friday that the options under consideration "amount to economic sabotage."

"Small business survives off the back of the housing market," he said.

"The wrong call could cripple small business and send finance companies to the wall," Key added.

Cullen shot back, saying the government is only seeking instruments the Reserve Bank "could use to underpin the effectiveness of the interest rate mechanism to slow down or stimulate the economy" to keep inflation within the required target band.

"An intelligent finance spokesperson who was ready for the real job would be interested in such analysis because clearly there are issues of concern about the effectiveness of the interest rate mechanism," he said.

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Interest rates could be 1% and Houses would still be unaffordable.

One of two parts of the affordability equation need to change. Wages need to skyrocket or House prices need to plummet. It's that simple.

Completely agree. Somehow I don't think employers here will go for the first option ;)

Edited by Tentpeg

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WHY THE BANKING SYSTEM CANNOT STOP LENDING - David McWillams.ie

....http://www.davidmcwilliams.ie/Articles/view.asp?CategoryID=-1&CategoryName=&ArticleID=304

The defendant, ‘Mr Banks'.

“M'lud, in front of me is this snivelling piece of financial delinquency, who has been engaged in practices so heinous, so depraved, so despicable that he threatens the integrity of the entire system. His profligacy knows no bounds; his self-serving greed is so transparent as to suggest that he is beyond redemption.”

The prosecution's charges are detailed, meticulously aided by charts, spreadsheets and stress ratios. In the end, the list is so exhaustive, the accusations so plausible that most of the jury are already convinced that the banks are guilty of breaching all the lending guidelines and breaking all the laws.

Then, just when we expect the prosecuting barrister to deliver the denouement, he crosses the floor and begins the defence of Mr Banks explaining that, although the litany of charges is explicit and serious, no real crime has been committed and that in general, Banks' activities are kosher.

He concludes by ignoring all the evidence he has produced and announcing that all is well - an Irish insider's solution to an Irish insider's problem. I believe that the expression in English is a whitewash.

The jury is likely to be confused, but that is the Central Bank's way. It will pull its punches because, as seen in the Dirt inquiry a few years back, the Central Bank is much more concerned about the integrity of the banking system and is on the side of the banks' management.

In the words of a former Central Bank governor, it does not want to “frighten the horses'‘. This is the financial equivalent of the familiar Irish phrase, taken by Seamus Heaney for the tile of his poem “Whatever you say, say nothing'‘.

But by pulling punches, the Central Bank will not serve any of us. Goodbody stockbrokers pointed out last week that we are getting into debt faster than any other country in the world. By 2008, we will have, on average, debts of 200 per cent of disposable income - an alarming trend highlighted by the Central Bank's chief economist Tom O'Connell last week in its quarterly bulletin.

As this figure is an average, it implies that certain groups, notably those between 25 and 40, are in much deeper debt. This means that the banks are breaching lending guidelines, and in so doing, undermining the stability of the banking system.

In fact, there is a self-reinforcing logic as to why the banks, the so-called bastions of prudence, are actually the main agents of profligacy.

To shed light on the system and how it works, consider the following little story.

Some time ago, the following letter arrived at my retired parents' house: “Dear Mr McWilliams, it has come to our attention that you bought your house in 1957 for €1,000. Today,we have had it valued at €700,000.

“We believe that this offers you a once-in-a-lifetime opportunity to liberate equity.

“Yours sincerely, Mr Bank Manager.”

My dad called me: “Son, I've heard of liberating Kuwait and liberating Iraq, but what in God's name does liberating equity mean?”

It means that one of our supposedly prudent banks was urging my father, a 75-year-old pensioner, to borrow and spend against the value of his house.

Now I realise that bank managers are under pressure to increase margins, but this is taking the biscuit, don't you think?

However, this is happening every day.

Irish banks are lending hand over fist.

There are three forces at work here.

The first is the law of insecure middle management. Let's not forget that, behind all the slogans like ‘working together' or ‘your partner', banks are simply moneylenders and the more money they lend, the more money they make. So yellow pack bankers, whose status within the bank and outside has been dramatically eroded by ATMs, are at pains to exceed lending targets set by senior bosses.

The middle manager does not see my father as a person in this transaction, but sees his suburban house as collateral. My dad is simply the conduit to the asset. If the banker can get his hands on a bankable piece of collateral, such as the house, he can make an easy sale and hit or exceed his target. After all, if he does not hit the target, there are plenty more suits coming behind him who will. The second force at work is the law of shareholder value.

Bank bosses' salaries are linked to the share price of their outfits, so it is in their interest to push the share price up above the average. The problem, however, is that the people who ultimately own the banks - large pension funds - expect too large a return every year.

How can a business like a bank, which is involved in a typically low-growth, mature industry like money-lending, make returns on equity of 20 per cent-plus as expected by the pension funds and banking stock indices?

The only way they can do this is by working their workers to the bone, capping costs and wages and lending recklessly. Therefore, and ironically, our own pension funds are driving our banks to lend to us with abandon. So the prospects of your pension fund when you retire are indirectly linked to getting you into debt when you are working.

The third – and most important - factor at work in the lending frenzy is the impact of land on the balance sheet of the bank. If the price of land is rising in tandem with the amount of money gushing into property, the banks will be able to lend more against it. The balance sheet starts to play tricks with them.

Counter-intuitively, the more money they lend, the safer it looks in terms of the ratios they use to assess secure lending. So it becomes a self-reinforcing dynamic where, the more money they lend, the more they feel they should lend.

So credit becomes the crack cocaine of the financial industry. The initial hit leads to euphoria, but it wears off quickly, leaving the junkie needing more. And, like the addict, all the economy's senses have been blurred by credit, so it doesn't know when to stop.

We have all become hopelessly addicted to the soothing balm of credit, and the banking system is desperately dependent for its living on the price of land, houses and property. The banks can be regarded as the dealers - the middlemen - who cut up the deals, take a fee and keep the addict hooked. But because of the impact of the lending on them, their balance sheets, their bonuses and share price, they are as addicted as their clients.

So we have junkies acting as dealers, feeding the habits of other junkies. The agency in charge, the Central Bank, is afraid to upset the dealer/junkies, so the corroded system thrives.

This is similar to what might be a prison drugs policy. In order to prevent large numbers of prisoners going cold turkey, the guards turn a blind eye to heroin getting into the jail. It is better to have the junkies placid and off their heads than agitated and strung out.

Our credit junkies act in the same way and the entire system is in denial. When will we wake up? When debts are 300 per cent of disposable income? When the average house price is €400,000 or when interest rates rise?

Whatever happens, don't expect the Central Bank to tell it as it is. After all, when was the last time you heard of cold turkeys voting for Christmas

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Bollard Taking on Global Monster

Reserve Bank governor Alan Bollard is having a problem reining in the spending habits of the average New Zealander, whose financial habits can only be described as dissolute.

Investment Research Group

19 November 2005

The governor's main weapons - stern words and short-term interest rates - are having little impact in the face of a global oversupply of credit. Ironically, Dr Bollard's attempts to slow down spending by making it more expensive to borrow is attracting billions of dollars from overseas as investors chase our high interest rates.

This demand for our currency is pushing the New Zealand dollar up, making imports cheaper and spurring kiwis to buy consumer items - usually on credit. Dr Bollard is pushing up our interest rates as he is required to keep consumer price inflation in a 0% - 3% band and we are currently over the limit. However, this concept of 'inflation targeting' has come under question by investment bank Morgan Stanley, which has described the process as an "out-dated concept".

Chief strategist Stephen Roach notes the massive amount of excess liquidity in the world (too much money and credit relative to economic activity) is a formidable challenge not only for financial markets, but also for central banks.

Much of this excess has come into being as a result of sharp interest rate declines in the US following equity market declines in 2000 and after the 9/11 terrorist attacks. This has produced an unprecedented amount of liquidity not needed to finance transactions in the real economy and therefore available to chase bond, equity and property prices higher.

The perceived wisdom used to be that, by ensuring economic stability, central banks could deliver financial stability. However, with consumer price inflation kept low by globalisation and deregulation, he believes central banks were encouraged to keep interest rates very low for a very long time, thus encouraging excessive risk taking in financial markets.

"Allowing asset prices to inflate, possibly far beyond their fundamental values, creates risks of its own not only for investors but, more importantly, also for the stability of the real economy, as the Japanese learned the hard way in the 1990s."

One solution to a liquidity trap is to stick to inflation targeting in principle but extend the time horizon to 3 - 5 years. This could imply tolerating, say, an undershoot of consumer price inflation below target for some time and pursue a less expansionary policy to limit both inflation and the rate of descent of asset bubbles.

One of the problems is that the political will to mop up excess liquidity - by allowing aggressive rises in interest rates - does not exist. Europe has sluggish economic growth despite low rates and is unlikely to push them up by more than token amounts. The Bank of Japan looks set to maintain its zero-interest rate for some time and, if anything, money and credit growth may accelerate. That leaves the US Federal Reserve, which is widely expected to push interest rates up further but not significantly.

"So, excess liquidity will likely stay around, cushioning the bear market in government bonds, credit and high yield that I think has started or is about to start." Roach's conclusion is that "As the liquidity has to go somewhere, my guess is that the next bubble could well occur in equities, the least overvalued of all major asset classes, in my view."

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Monthly update - could it be like this in the UK?

Houseprices not being affected by rising interest rates, - the highest interest rates in the western world.

Domestic inflation spiralling upwards, a huge trade deficit - the largest int he western world, people are spending 10% more than thier wages and the currency is souring to all time highs.

Rate rise has some tipping recession

05 December 2005

By SUE ALLEN

The economy could fall into recession if interest rates rise much more, some economists say.

The Reserve Bank is widely expected to raise interest rates on Thursday to contain inflation. It is also likely to keep talking tough, warning of further rises.

Almost all bank economists expect the official rate to rise to 7.25 per cent, from 7 per cent.

But there is growing concern that further interest rises now, with the economy already slowing, might stall growth.

TD Securities chief strategist Stephen Koukoulas said the case for a rate increase was weakening. He is the only economic forecaster to predict no rise this week.

"In fact, there is a risk that by hiking interest rates too much, too late in the cycle, the RBNZ will trigger a recession."

Bank of New Zealand economist Tony Alexander said he expected Reserve Bank governor Alan Bollard to disregard the weaker data and to warn interest rates might go higher.

AdvertisementAdvertisement"The Reserve Bank can't afford to get it wrong again about the housing market or inflationary pressures. They've got zero room for error."

UBS economist Robin Clements said that, with the benefit of hindsight, rates should have been higher last year.

"The question now is, does policy need to catch up, in some sense, or let bygones be bygones?

"Further hikes now increase the risk of what is already looking like a hard landing turning into something worse – that is, a recession."

Cameron Bagrie, National Bank head of market economics and strategy, said the tenor of economic figures was already softer.

These included retail sales, housing consents and the performance of the export sector.

"My suspicion is the New Zealand economy has hit a brick wall."

Last week's influential ANZ National Bank of New Zealand survey showed companies' confidence in their prospects at a five-year low, a level that the bank likened to the economy at a standstill.

But with the Reserve Bank's monetary policy getting little traction, Mr Bagrie said it would ultimately do too much and push the official cash rate too far.

"But to be fair to the Reserve Bank, they did warn, for the first six months of the year, that if they didn't see the economy decelerate they would have to raise interest rates. So, they did give the economy every opportunity."

After the last rate rise in October, just three economists forecast a rise this month, but a batch of stronger-than-expected economic pointers has changed opinion.

In the past three months, unemployment has fallen to a 23-year low and wages have grown at a record pace, which, in turn, has fuelled more retail spending.

The housing market, the single biggest bugbear for the Reserve Bank, remained buoyant, with prices setting record highs in October.

Though the Reserve Bank has raised its official cash rate twice since January, 2004, in a bid to keep prices stable, inflation broke through the 3 per cent target range to reach a five-year high of 3.4 per cent in the third quarter.

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Hi Brainclamp,

Yes, this supports an argument I tried out on here in the last few days - that the medium/long term effects of inflation targetting are catastrophic, because it allows speculators free rein, secure in the knowledge that central banks will compensate for the damage they cause to the wider economy. Feckin' stupid.

Please, please, could you change your avatar! It's horrible - somebody else was using it and I was so glad when they stopped. I glance at the top of your posts and then scroll down quickly to get it off the top of the screen.

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"One thing that suprised a lot of people post '87, was how significant the second and third round effects were. If one company went under, all of a sudden you found another company had exposure, which led to another company having exposure and so on and so forth."

I remember a 10 - 14 day period in the last bust when every day the TV news was full of stories going bust left, right and centre in the Thames Valley. Millions unemployed in other parts of the UK did not worry the Tories but when the TV was going bust something had to be done. Frankly, I found it hilarious watching all the SMEs whinge about their companies going bust!

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We have NZ as the 1st country in the world to adpot this inflation target - before the BOE.

Is this where we are headed?

Houseprices will not stop rising using the inflation target 2% approach.

HousePrices.gif

Rising CPI inflation

NZCPI.gif

A growing and massive Trade deficit.

NZBOP2.gif

Rising tax burden (real inflation).

NZLCLAUTH.gif

IncomeTaxBurden.gif

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Inflation Targeting does not work?

NZ's central bank, desperate to turn off the credit tap, switches from inflation targeting to credit clampdowns targeting houseprices to try to stop the banks lending - and the further destruction of the real economy.

Government looks at curbs on home loans

11.11.05

By Kevin Taylor

Homebuyers could find it harder to get a mortgage as the Government studies ways to curb lending to cool the housing market and control inflation.

But the options officials are studying have been criticised by the National Party and some economists for risking an implosion of the housing market that would hit the economy.

The Reserve Bank yesterday revealed details of the study it and the Treasury are doing on options other than interest rate rises to control inflation. Officials have until the end of January to report.

Finance Minister Michael Cullen said on Tuesday that he had asked officials to consider ways to slow the economy, but noted that the options were not "exactly attractive".

The Reserve Bank is worried continued interest rate rises are not flowing through to mortgage lending and the housing market, which continues to be a key driver of inflation.

One option being considered is limiting the amount banks can lend on a property's value. Some lenders, including Government-owned Kiwibank, now lend up to 100 per cent of a property's value.

http://www.nzherald.co.nz/section/12/story...jectID=10354683

Edited by brainclamp

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Its a year on. - 2006 now - New Zealand houseprices still rising strongly. up 9.6%, Wages up 3%.

A few facts on New Zealand.

- First bank in the world to adopt inflation targetting/stability while letting the money supply grow.

- Central bank governer is targetting house prices as key driver of inflation

- Central bank forecast house prices would drop in 2005, repeated this in June 2006.

House sales, prices rise in Sept

Oct 16, 2006

New Zealand house sales and prices rose slightly in September, reflecting on going consolidation in the housing market, a survey showed on Monday.

The Real Estate Institute of New Zealand said the median house price rose 1% to $313,000 from August, to be 7.9% above the same month in 2005.

Institute members sold 8,671 houses compared with 8,562 in August, but down 5.6% on a year earlier.

REINZ president Murray Cleland said the market, while a little stronger as it emerged from the winter slowdown, was levelling off.

"The inflationary price expectation has gone now and the market is reflecting basic housing demand issues," he said in a statement.

However, one of the biggest threats to the market's current confidence level was whether the Reserve Bank of NZ will raise interest rates on October 26, Cleland added.

The Reserve Bank warned last month it may have to raise interest rates again unless it saw an easing in inflation pressures, particularly in the housing and labour markets.

"This month's residential statistics certainly won't do anything to dissuade the Reserve Bank if it is considering an increase," Cleland said.

The median number of days taken to sell a house fell to 31 days from 33 days the month before.

Prices rose in eight of the REINZ's 12 regions, including Auckland, while four regions recorded a fall.

By contrast, government agency Quotable Value's house price index rose 10.4% in the year to September from a year earlier.

http://tvnz.co.nz/view/page/859011

Edited by brainclamp

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Expect further pain - Bollard

By COLIN ESPINER - The Press | Friday, 9 March 2007

Homeowners and exporters are facing further pain as the Reserve Bank threatens new measures to slow the rampant housing market.

In what Finance Minister Michael Cullen called "a wake-up call for New Zealanders", the central bank yesterday raised the official cash rate (OCR) at which banks buy their money by 25 points to 7.5 per cent – the first rate rise since December 2005.

Bank governor Alan Bollard's decision, although largely factored into banks' mortgage rates, provoked protests from political leaders and unions.

Among the most vociferous was third-ranked Cabinet minister and Progressive Party leader Jim Anderton, who broke ranks to criticise the rate rise, which he said exporters needed "like a hole in the head".

Bollard was unapologetic, warning that more rate rises were on the way unless households curbed their "unsustainable" spending.

He also blamed the Government's "expansionary" fiscal policy, which he said was a "net contributor" to higher inflation.

He used an appearance at Parliament's finance and expenditure select committee yesterday to send a warning to trading banks that the Reserve Bank may increase their minimum capital requirements on residential mortgages, essentially forcing up the cost of the money banks lend to their customers.

Such a move would almost certainly prompt banks to increase mortgage rates further or face further cuts to already slim margins.

Bollard told the select committee that the Reserve Bank was searching for another way to cool the housing market after political leaders ruled out Cullen's hugely unpopular mortgage-levy proposal.

The housing market appeared to have got "a third wind", which the Reserve Bank could not afford to allow to continue, Bollard said.

House prices were still rising by 10% a year and this threatened to undermine last year's "rebalancing" of the economy and could lead to a more costly correction in the country's external deficit.

"We've now reached a view that the housing sector needs more pressure, and we'll apply it," Bollard said.

During a testy exchange with National Party finance spokesman Bill English, Bollard denied he was undermining confidence in the Reserve Bank's ability to control inflation by essentially admitting the OCR did not work.

"The market's not listening to you. The market's taking no damn notice," English told Bollard. "Telling them off doesn't seem to be working."

Bollard replied: "That's a bit harsh."

The OCR mechanism was working, just more slowly than the bank would like. No other Organisation for Economic Co-operation and Development country had household debt levels as high as New Zealand, he said.

The bank's move to increase rates prompted calls for changes in the Government's fiscal policy to shelter workers and exporters from what Government support party New Zealand First called "a blunt instrument". The Greens blamed the banks for making cheap money too easy to obtain.

The engineers' union said it would make life harder for working New Zealanders and made the case to increase wages more urgent.

Anderton said the rate rise and the foreshadowing of further rises would stimulate further demand for the kiwi dollar.

"Our exporting community need this like a hole in the head," he said.

"I'm not convinced that the official cash rate mechanism will cool down the property boom or inflation.

"It is hard to see how the current heavy focus on price stability serves the national interest."

Edited by brainclamp

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"The market's not listening to you. The market's taking no damn notice," English told Bollard. "Telling them off doesn't seem to be working."

Still, at least he is raising interest rates as well, not just talking about it like the MPC.

The problem is that with a global liquidity bubble pushed by 'inflation targetting' he has less and less control over his own economy. If people can borrow at 3.5% in Euros or 1% in Yen and buy houses in New Zealand then 7.5% rates locally only harms the productive parts of the economy while speculation continues.

'Inflation targetting' is the most ******tarded idea in economics since Keynes. Unfortunately a lot of people are going to be burned before it's thrown in the great dustbin of history.

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Govt 'fiddling' as high dollar burns economy

NZPA | Wednesday, 18 July 2007

http://www.stuff.co.nz/4132195a13.html

The Canterbury Manufacturers' Association (CMA) said today it expects the New Zealand dollar to continue its upward trend towards US80c irrespective of whether the Reserve Bank raises the Official Cash Rate (OCR) next week.

"The Government's response to the current economic cycle is a case of `Nero fiddled while Rome burns'," chief executive John Walley said.

Ten of 17 economists polled by Reuters expect the RB to raise the OCR at its review next week and economists from at least two major banks expect yet another hike – what would be the sixth this year – next month.

"The NZD has climbed from around US62c to nearly US80c in a year, but the Government continues to use the Reserve Bank Act as a pretext to sidestep having to adjust policy settings to reduce domestic inflationary pressure."

Mr Walley said if the Government lacked the necessary leadership, then the select committee looking at alternative options for controlling monetary policy would agree on what needed to be done to break the cycle.

"How much worse do things have to get before we really start to look for a better way? The export sector is in sharp decline and our economy is increasingly vulnerable to possible shocks, such as sharp falls on international financial markets, a second Asian Crisis, or even just a shift in sentiment regarding our currency. All of these are beyond our control," Mr Walley said.

While high dairy prices and a slightly better NZD/Australian dollar cross rate were providing some comfort, domestic spending and house prices showed no sign of slowing.

"So we can expect the NZD remaining strong against the US dollar and the yen, even if the RB holds the OCR next week," he said.

The kiwi has risen 27 per cent this year against the US dollar.

He said Finance Minister Michael Cullen's comment that New Zealand had to shift from consumption-led growth to savings and investment-led growth was correct, "but the rules will have to change before the behaviour changes".

"At the moment the RB cannot fix the problem without killing the external sector.

"The Government must show leadership, change the rules, and act to break the cycle of house price inflation –- pushing consumption, pushing inflation, pushing the OCR, pushing international money back into inflated house prices – round and round, to the point the rest of the economy feels the pain currently felt by our exporters."

Meanwhile, Berl economist Ganesh Nana said inflation was under control and within the RB's 1-3 per cent target and there was no justification for more rate hikes.

He said other commentators were "just plain wrong", calling for rate hikes just because inflation in some sectors was above 3 per cent.

"And it is just plain wrong for such analysis to be used to inform or to justify policy actions."

He said it was perplexing for favourable terms of trade to be used to justify further monetary tightening.

"Apparently, favourable terms of trade for NZ commodities are not to be welcomed with open arms and, consequently, the possibility that dairy farmers' incomes will get a boost is not good.

"Further, we are told that the economy is growing too fast.

"Thus, we now have a policy outlook focussed on stopping improvements in New Zealanders' incomes and halting the growth of the economy."

Mr Nana said the RB's new policy of not hedging some of its foreign currency reserves was an encouraging move to fight against speculative pressure on the kiwi dollar.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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