Monday, July 16, 2007

Watch NZ housing tank over the next 12 months!

Inflation sends kiwi to new highs

Higher-than-forecast inflation and expectations of interest rate rises have sent New Zealand's currency to its highest against the dollar since 1985. Consumer inflation rose by 1% in the three months from April, which helped push the kiwi to $0.7900 to the dollar. The latest inflation data was above central bank forecasts, and double that seen in the previous quarter. New Zealand interest rates currently stand at 8%, which is the highest in the industrialised world. NZ house prices are more absurd than here. A country the size of the UK with less than a tenth of the population and very lax planning laws. This WILL end in tears!

Posted by tyrellcorporation @ 04:32 PM (546 views)
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13 thoughts on “Watch NZ housing tank over the next 12 months!

  • My boss has a house worth $2m that he bought for $900k about 5 years ago. I will be very interested to see if he sells when the 2 year fix comes to an end next year.

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  • tyrellcorporation says:

    My wife is a Kiwi but has lived in the UK since she was about 2 years old. Someone was telling me recently she could legally open a bank account in NZ and earn the nice interest rates over there. Anyone shed any light on this?

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  • planning4acrash says:

    I don’t see any reason why not, she would get a high interest rate but would risk a plummeting NZ dollar if the economy and interest rates go south. You would need to be monitoring exchange rate movements constantly and monitoring market indicators, because currency movements can happen very quickly, and, for really high interest accounts, money won’t be transferred immediately, possibly within three days, by which time a correction could occur. So, you need to be on the ball, choose an account with instant transfer options and factor in the risk of a falling kiwi dollar by managing your investment basket. An 8% interest rate over a year is meaningles if you loose 10% on an exchange rate correction within the space of a week or day! The risks in NZ are high, as is the case with any high yielding investment, in NZ this is because investment has been driven largely by the Yen carry trade, which could unwind quickly, and I don’t understand the situation, so don’t know how or when this may occur, so, an investment in NZ will require a close watch at Japan. But I’m not sure how high Japanese interest rates must rise to unwind the carry trade, that is not an area of expertise for me, they are so low that a significant rise may not impact, but who am I to know? Maybe you would need to see a shock to the NZ economy combining with a Japanese interest rate rise? Unfortunately you could be asleep ‘when’ the correction occurs, so you may want a friend in the city in NZ to have a direct line to you to wake you up in the case of ‘bad’ news if you invest your life savings over there!

    Maybe I’m being a bit over the top on this one?! Its only coz I personally would err on the cautious side, given that I know little about the mechanics of the situation in NZ.

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  • tyrellcorporation says:

    Fair enough… thanks for your thoughts on it. Cheers TC

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  • tyrell – I live in NZ (and would echo the comments about an incipient housing crash). There is nothing to stop her opening an account (she can get up to 8.4% with one of the main banks for 1 year), but she would have to pay non resident witholding tax (10%).Personally I think interest rates here are going much higher than people envisage (with another 0.5% to come this year), so the kiwi should be well supported by this in the medium term – the kiwi is also (and will still get) great support from record milk solid prices (a major export), since NZ is actually still pretty much a commodities based economy. There is always the risk of a carry trade collapse, but I would say it would not move quite as fast as suggested above – last year the kiwi did indeed move 15% down but that was in the space of 15 years.
    Better still you and your wife shoul leave the Uk and return to NZ; no better place to survive peakoil………..

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  • I have an account with http://www.kiwibank.co.nz. This gets 7.5 ish % .. with instant access
    if you dedicate your funds for 3 months or more, you may get 8.5 %
    I also do not really understand the mechanics of the carry trade .. so if anyone can enlighten us .. great !
    In particular, it’s great to earn high interest .. but being a dumbass – I dont really understand when this turns into a liabillity .. so if anyone wants to enlighten me – it’d be great !
    I have just moved back to Europe because you earn so little in NZ .. average wage is $28K NZ .. not much more than 10K UK
    Housing is really expensive in the main centres .. so is really a no go .. rents are also expensive. Prices are so stupidly high in Akl for the little – mostly badly built houses .. I can’t help but think they’re on a knife edge
    Nice lifestyle after the UK .. but nobody ever went to NZ to make money
    Still, it’s a great place & I’ll always go back !
    If you fancy it, go for a month’s holiday or retire there with your $$ – that’s my advice
    Am currently staying in mid Germany to see some old friends – & boy do they ever have a terrific lifestyle here. They have great jobs with good pay, houses, gardens, food, cars, holidays – easily anywhere in Europe and so on
    House prices have apparently been pretty flat – perhaps even correcting themselves in Germany – for the last 10 years – I think that 10 yrs ago they were the highest in Europe
    The Germans I think are way more balanced than the us when it comes to investments .. they’d never bet their entire life’s unrealised earnings on a clearly cyclical rise & dump market
    I’m surer than ever that’s what most of the recent UK homebuyers have done

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  • tyrellcorporation says:

    Thanks for all your comments guys. I went to NZ about three years ago for a 6 week holiday and loved it; I can’t wait to return. 🙂

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  • Sorry just re-read my post above:

    ‘last year the kiwi did indeed move 15% down but that was in the space of 15 years’

    That is of course nonsense and should read ‘in the space of 15 weeks’.

    One other point (long term and speculative) about NZ; the govt has just successfully issues drilling licences for the Great Southern Basin (Exxon Mobil were among the takers). Drilling back in the 70s suggested good shows of gas and oil. Major discoveries down ther e(from 2009 onwards) would have something of a petrocurrency effect on the kiwi.

    At the moment I cannot see any liklihood of a kiwi fall in the near term; the NZ economy is clearly over-heated and so interest rates will go higher and stay higher for longer than most here predict.

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  • re the carry trade; here is a simplistic explanation.

    Japanese grannie has 500,000Y to invest, but can only get interest at 0.5% for 1 year if she invests it in Japan. She asks broker for alternatives, who say take 500,000Y and borrow further 500,000Y from Bank of Hari-Kiri (at 1% interest) and invest in uridashi bond (invested in NZ govt $ debt) and get 8% yield offered here in NZ. Not only that but benefit from the fact that the amount invested goes up as the kiwi strengthens against the Y. For the past X years its been a no-brainer as Japanese granny has made an extra 7.5% on what she would have got at home, plus an extra 7% on the Yen she borrowed PLUS she got extra dough as her kiwi $ investments rose relative to the Y.

    The big IF is what might happen if the kiwi suddenly dropped 10% versus the Y (say if the BoJ raise rates 1%). All of a sudden all of her annual interest rate gains are wiped out by the currency move.

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  • TC
    I would not want to get exposure to FX risk in order to get the 8% IRs on the account. If you live in the uk and your expenses are here, you probably should not hold foreign currency for speculation

    I will try to explain the carry trade. Since there is such a large IR gap between Yen and NZ$, investors borrow in Yen and go long NZ government bonds. This creates an inbalance between the NZ$ demand and the Yen, so the NZ$ (more demand) appreciates.
    However, the currency pair movements predicted by the carry trade effect have opposite sign wrt the currency futures.
    What I am trying to say is that betting on carry trade is risky.

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  • planing4crash

    I would love to know if there is such a thing as “choose an account with instant transfer options” for doinf international TT. I am not aware of any. Please advise

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  • planning4acrash says:

    You can get 7% or thereabouts on, I think, the UK Nationwide bond they just issued. I think you have to hold money for a long period, but you don’t of course have the exchange rate risk. I’d settle for that or a UK ISA where the tax benefits on a 6% product prob bring it to the NZ level, without any risk.

    I’d have thought that the only way to get quick exchange is to have money in a bank with UK branches and transfer it within the same bank. I don’t know of any tho because I’ve never looked into it.

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  • planning4acrash says:

    So, the risk for a Jap Granny is relatively small when Jap interest rates are 0.5%, compared to a NZ rate of 8.5%, but the risk for a UK investor is significant when you compare a NZ8.5% with UK 6-7% rates (poss with tax benefits) and the potential for further strengthening of the £ with the next couple of interest rates. Your investment from the UK is more sensitive to exchange rate changes. But, so long as you factor in that risk, via the amount you invest and a few precautionary methods, and a find a better than 8.5% rate (You should be able to get closer to 10% given that the base rate is about 8%) then you could possibly make a little bit of money and have a bit of fun investing. I wouldn’t do it, but its definitely an option.

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