• The global outlook has weakened with some talk of recession emerging.
• Auckland and New Zealand are not immune from offshore impacts – it will affect us directly and indirectly.
• Auckland in particular starts from a position of exceptional strength, which will make it easier to weather the effects of slower offshore growth.
• Other buffers include Auckland’s industry structure, a better banking regulatory regime, a proactive Reserve Bank, and strong central government surpluses available if needed.
We are bombarded by stories of impending economic doom, particularly focused on what is happening offshore. Risk of recession in the US and Europe, and weaker growth in China, which was the stalwart that helped keep global economic growth above zero through the Global Financial Crisis (GFC) 10 plus years ago.
In New Zealand, business sentiment is the weakest in 10 years.
Does this gathering global and domestic gloom matter to Auckland? The short answer is yes, of course it does. But a more meaningful question is: How much does it matter? Or how well insulated is Auckland against these risks?
Let’s start with some facts
Auckland is in an exceptionally strong economic position. Here’s the evidence.
• Year on year GDP growth to June 2019 is estimated at 2.8%.
• The unemployment rate is 4.2%, the lowest in a decade, and has been flat for about nine months.
• Employment (actual number of jobs) is up 2.8% year on year to June 2019.
• Guest nights, despite some recent wobbles, are up 2.9% in the year to August, and at the highest ever figure for Auckland (20,600 guests per night in our city, excluding uncounted categories like baches and AirBnB).
• Annual net New Zealand migration remains around 53,000, down only 20% from the peak two years ago. Half this migration is into Auckland, so about 27,000 more people a year. They all need to eat, be clothed, use internet services, and have their hair done. That underpins demand for Auckland businesses.
• Auckland has consented 14,345 new dwellings in 12 months to August, up 11% in the year, 43% since the Unitary Plan began to affect development two years ago, and up 356% (not a typo) since we bottomed out in August 2009.
• Non-residential floor area consented is up 49% in the year to August 2019 compared to two years earlier. Almost 100% of this growth is driven by the downbeat private sector.
• Auckland is also constructing its consenting. Annual building work put in place in Auckland is up 20% in nominal terms, or an estimated 15.6% in real terms in the 12 months to June 2019.
• The region has added 160,000 jobs in the last five years, in construction, in tourism, and 22,000 in usually well-paid professional services, which includes lawyers, accountants, and engineers.
• Wages are growing strongly at last, and with higher labour force participation has boosted household incomes by 57% in the last 10 years.
The message is clear. Auckland is not growing at the 5% it briefly touched a couple of years back, but the region is in an exceptionally strong position and continues to grow.
Risks of contagion
So what is it that’s happening overseas that is causing concern? Primarily, it’s the trade war between the US and China. These two countries are exchanging increases in tariffs on each other’s goods, as the US administration seeks to stop what it sees as unfair advantages for Chinese exporters to the US.
Trade protectionism is not new; it was one of the bedrocks upon which the Asian Tiger economies grew rapidly in the second half of the 20th century. Put big tariffs on imports, and create your own domestic industry until you have the economies of scale to compete and even out-perform. But a once popular approach is mostly out of favour today.
The trade balance between China and the US is heavily skewed toward China. As a result, tariffs are having a bigger impact on the Chinese economy. China is also a bigger trading partner for New Zealand, so for simplicity, we’ll follow the logic of how the trade war will affect China and thus us.
Chinese manufacturers are feeling the heat and confidence is falling. This means they will be incentivised to find ways to trade more with other countries. This could actually mean cheaper imports for New Zealand consumers. At the same time, weaker trade by China will mean less job growth there, fewer pay rises and thus less money for Chinese people to spend on premium products like New Zealand dairy milk powder, holidays to our fair isles or sending their children to study here.
It may also mean less demand for overseas products used to drive China’s infrastructure development, such as logs from New Zealand or coal from Australia.
So New Zealand is affected two ways: direct trade with China may fall, and indirect trade with other countries like Australia may fall as they trade less with China.
Finally, if the trade war continues to expand, it will also become a war over political ideologies. Both sides will want peripheral nations to choose between them. Will we side with our biggest trading partner or a country with which we traditionally share more political similarities?
How big is the risk?
Auckland is not immune from this risk, but our city and our country have some buffers that will help.
• Auckland starts from a position of strength. While undesirable, even if growth drops away or unemployment rises to 5% or 5.5%, our economy can weather this.
• Our banking and Reserve Bank system is more resilient than it was at the time of the last slowdown. And to be clear, we are not suggesting GFC 2.0 is upon us, in large part because the regulatory system is much stronger.
• We have a proactive Reserve Bank. Too proactive, some would argue. The Reserve Bank has been clear that in an environment of GDP growth under 3%, it would expect to keep the OCR low to support growth.
• We have huge fiscal surpluses and reserves. Post 2020 election, whoever is in government will have plenty of room to spend if there is any reason to think the economy needs it.
• Auckland’s economy is largely focused on domestic consumption, despite being the international gateway, limiting risk. The city has a tiny primary sector (the national primary sector accounts for 71% of New Zealand’s goods exports), some exposure to manufacturing exports, and moderate exposure to tourism. But only about one-seventh of the city’s economy is in any way directly exposed to international trade in these sectors.
* David Norman is chief economist at the Auckland Council. This article was first published here.
63 Comments
When your banking system is 88% owned by overseas interests, you have to recognise we are not in control of our own destiny. You'll have to ask Roger Douglas why he allowed this to happen, or Jonkey why he encouraged lending growth into non productive assets, then accepted an appointment at ANZ which was the main benefactor to his policies. Doesn't he or this bank understand conflict of interest?
Until we are net savers, and regulate away monopoly practices and tax these multi nationals appropriately, if overseas market sneeze NZ inc catches a cold.
Maybe you could ask the most transformational government ever about why they ruled out a CGT and haven't initiated any migration reform that they campaigned on with their coalition partners. But no, keep sabre-rattling against the (pro-CGT) Douglas and Key, who despite doing almost nothing to dampen housing prices, still did more than the previous Labour government did (because they needed people to still feel rich when their house prices rose so they didn't mind being taxed at 39% for every dollar over $60k).
Think you'll find Winston had the say on the CGT, which I agree with you should have been implemented to reduce the speculative element.
Have you not considered the wider effects of Douglas introduction of GST, and Keys increase of it?
GST places more burden on the bottom end of the ladder, suffice to say the government had to introduce subsidies in the form of working for families and the accommodation supplement for them to survive. In fact, the accommodation supplement has been nothing more than a private landlord subsidy. I am one so I should know.
As for Keys increase of GST at the start of a recession, the timing couldnt have been worse. This took money away from the people who spent it regardless. The consequence was wider business suffered. And by the way, Douglas and Key had plenty of time to introduce a wide ranging CGT, but they didn't.
Something to consider when Australia owns NZ banks
https://youtu.be/KP6bqXxUnt0
I had to do the right thing & provide this link to interest.co.nz
Unsurprisingly I found yet another property Spruiker seriously stating it won’t matter too much
if the world plunged into what will be the worlds worst ever financial meltdown
I suggest you see what’s on the horizon in Australia that will undoubtedly have consequences for NZ
This newsletter provides general information on economic issues and is not intended to be used as a basis for any particular course of action or as a substitute for financial advice. The views and opinions expressed are those of the relevant author and do not necessarily reflect the views of the Auckland Council. Auckland Council disclaims all liability in connection with any action that may be taken in reliance on this newsletter, and for any error, deficiency, flaw or omission contained in it.
Thank goodness for that!
Auckland City Council needs an economist? What for? This opinion piece seems designed for a performance review and a lapel pin from Goff's office.
Love the disclaimer. Translation: As a representative of the council (and with the logos on my opinion piece for endorsement), I can say what I want without any accountability.
Yet more unconvincing optimism from a team of economists who once, at a seminar in 2016, equated the cause of our housing woes in Auckland to those in other global regions facing a similar economic boom and influx of talent, i.e. Seattle, Berlin and the Bay area.
But only about one-seventh of the city’s economy is in any way directly exposed to international trade in these sectors
Much of the remaining economic activity is based on 'clipping the ticket' at good and services produced in the regions.
A decent chunk of the economy is also tied to the fragile construction sector. He keeps talking up the building consent figures, but these are lag indicators. He's either unaware of the looming downturn or intentionally turning a blind eye to it.
He makes some valid points, and there is a smidgeon of token balance to what he says, but...
"Auckland is not immune from this risk, but our city and our country have some buffers that will help."
The doomie gloomies that have infested this site are completely unbalanced when it comes to understanding New Zealand's exposure to international risk. They simply can't get it through their heads that as a small open economy, NZ will be adversely affected by a downturn, but if China/US/Australia/Timbuktu sneezes NZ doesn't catch terminal cancer.
Edit: Also, NZ is 2007 Ireland!
Don't know what your life experiences are. Three questions for you to think about:
1) Have you ever seen any person or business go into financial distress due to taking on too much debt (relative to their net worth, or debt servicing capabilities)?
2) For highly leveraged borrowers, what happens if the asset value falls significantly or their income falls unexpectedly so that they are unable to continue meeting their debt service payment obligations? (and they don't have sufficient cash available for unexpected emergencies)
3) How many households in NZ are potentially in this situation in the event of an economic downturn?
Feel free to undertake a creditworthiness risk assessment of:
1) highly leveraged households in NZ
2) banking sector in NZ
Also look at their vulnerabilities and sensitivities in the event of an economic downturn. Stress test their balance sheets, income statements and cashflows to assess the possible financial outcomes. The fact is that those that are highly leveraged and no access to emergency funds, have significantly reduced financial flexibility to cope with either a small fall in incomes or asset prices or both.
Let us know what conclusions you come up with.
The economist for the Auckland Council has overlooked any credit risk assessment. The credit risk of a sufficient number of highly leveraged households who have mortgages collateralised by overvalued assets is where the vulnerabilities lie in the economy. Furthermore add to that, the fact that banks have a large proportion of the bank lending portfolios to residential real estate lending.
1) Yes
2) Asset values falling significantly has no impact unless the owner decides to or is forced to sell. If their their income falls unexpectedly and they are unable to afford repayments they would default, obviously. A more important factor that you didn't mention is interest rates. And as far as this goes, interest rates are very likely to stay lower for longer, and banks have been stress testing new mortgage lending at a high level of interest (about 6% I think) for a long time. Mortgage lending has been extremely conservative in terms of borrower financial position over the last decade.
3) I don't have a number. Do you? As far as mortgage risk exposure goes (as opposed to general household debt), probably about the same as before the last financial crisis.
Have a look at the S&P, Fitch and Moody's ratings of our major banks - https://bankdashboard.rbnz.govt.nz/summary
1) "A more important factor that you didn't mention is interest rates. And as far as this goes, interest rates are very likely to stay lower for longer"
Yes, fully agree with you. That is why there was no mention of interest rates - under current conditions, that is a lower risk variable in causing financial stress in highly leveraged households.
2) "banks have been stress testing new mortgage lending at a high level of interest (about 6% I think) for a long time"
Yes, agree with you. The big 4 banks in NZ have been stress testing new mortgage lending more stringently since the implementation of the Responsible Lending Code, and the Royal Commission on Banking in Australia (since the big 4 banks in NZ are subsidiaries of the Australian banks). The stress interest rates have come down recently to about 6.75% levels.
3) "If their income falls unexpectedly and they are unable to afford repayments they would default, obviously"
It depends on the banks. A bank may be willing to work with a financially stressed borrower to reduce their debt payments for a period of time. For example, the bank may be willing to go on interest only from P&I payments for a period of time, if the borrower is able to meet interest only payments. This occurred in 2008/2009 I believe, as the banks pledged to the government to work with borrowers (as the government guarantees allowed banks to access international funding markets). However if the borrower is unable to meet the interest only payments, the bank may require the borrower to repay the mortgage and force the household to sell the mortgage collateral. Why would a borrower be unable to meet interest only payments? Due to an unexpected fall in household income.
4) "Asset values falling significantly has no impact unless the owner decides to or is forced to sell."
Yes, agree with you.
Now why would a highly leveraged house owner be forced to sell? If the household experienced an unexpected loss or significant reduction in household income, and the borrower was unable to make interest only payments. (or the bank may be unwilling to allow the borrower reduced payments from P&I to interest only, as the banks wish to reduce their credit exposures)
Now what happens in an economic recession? The economy slows down or contracts, business revenues stagnate or fall, businesses cut costs, & businesses cut staff - even more so in the cyclical sectors of the economy. So some households face an unexpected loss in household income - this could be a significant reduction, if the main income earner is made redundant.
If a household is highly leveraged and paying a high percentage of their net after tax household income in mortgage payments (say 40%), will the household be able to continue making those payments? (especially if the main household income earner is made redundant). If there is an economic recession and there are few jobs available, the household may be forced to downsize. Saw that happen in 2008/2009 in NZ.
You mentioned that banks have stress tested new mortgage lending for interest rate increases. But have they stress tested household incomes for income falls? Typically they allow for collateral value as the source of loan repayment to cover that scenario. Also many recent owner occupier buyers are reliant upon two incomes to make the mortgage payments - you only need one income earner to lose their job or have their hours cut to result in lower wages and hence lower take home pay for the household.
If the economy slows down significantly, with a deep recession, and the unemployment rate gets high, this may result in a large number of households downsizing. If there are a sufficient number of vulnerable households downsizing at the same time, that means potentially more properties are listed for sale, potentially leading to falling house prices. There will likely be an increase in mortgagee sales.
Also remember in a recession, businesses go bankrupt. Especially small & medium sized enterprises (SME's), as they may not have sufficient funds to ride out an economic downturn. For many of these businesses, the money used to finance the business is the entrepreneur's home - they have typically used funds from a mortgage against their home. So what happens when the business goes bankrupt and the house owner is unable to meet the mortgage payments? They are forced to sell their house. I have already seen one Auckland businessman where there have been earlier news reports of difficulties in the business, list both his house in Orakei and holiday home on Waiheke for sale.
So the key questions are:
1) how many households are vulnerable?
2) how much will the economy slow down or contract? and where will the unemployment levels get to?
3) how many households will be adversely impacted by an economic downturn? If it is a sufficiently low number, then the economic downturn in NZ might be short. On the other hand, if it is a sufficiently large number, then there could be a prolonged impact on the economy. The extent and magnitude will be dependent upon the actions of banks, the RBNZ, and the Central government in their fiscal policies to stimulate the economy.
There are indications of a sufficiently large number of vulnerable highly leveraged households. If even only 20-30% of these are ultimately forced to sell by banks, then that could be sufficient to cause an imbalance in the property market, and the knock on valuation impact on property values, and debt covenants on business & commercial loans. The potential breach of debt covenants due to lower valuations and higher LVR's could result in more properties being listed for sale.
The reason that some commenters here are so cautious about the future economic outlook in NZ is they believe that there are a sufficiently large number of vulnerable highly leveraged households and that the downside risks vastly outweigh the upside benefits, after allowing for the balance of probabilities. If the number of vulnerable households was sufficiently low, then there would be much less cause for concern.
The scenario highlighted above illustrates how a household credit bubble / household debt bubble can unravel when there are a sufficient number of highly leveraged vulnerable households in the event of an economic recession.
Most people in NZ are unaware of or are missing the credit risks with households in NZ.
Take a look at this example of a business going into bankruptcy in Christchurch:
1) The businessman is selling his house, and a number of his eight investment properties (some are co-owned with his brother) to repay the creditors (note that the businessman will not get full sales proceeds if there are mortgages outstanding on the properties).
2) The employees of the business are now unemployed, and if they are unable to find a new job, if they own their own house, will they be able to continue paying their mortgage?
3) The NZ economy isn't even in a recession yet, so how many more businesses will face stress in a possible recession?
https://www.stuff.co.nz/business/property/116378021/ecohouse-businesses…
"He had sold his family home at Redcliffs and his family would be renting from the settlement date in January, he said.
According to Terranet Advance Web and Ahei Ltd, companies owned by Dan Tremewan and his brother Colin, and directed by Dan Tremewan, own seven properties in Christchurch and one in Akaroa.
Tremewan said some of the properties had since been sold and the remainder were being put on the market "to keep financiers happy".
They would be used to pay first and second mortgages and he did not expect there to be any extra money."
Note that the above business was related to domestic consumption in Christchurch - not impacted by the trade war. For a similar business in Auckland, then it pretty much debunks this point (construction is about 10% of GDP in Auckland I believe):
"Auckland’s economy is largely focused on domestic consumption, despite being the international gateway, limiting risk. The city has a tiny primary sector (the national primary sector accounts for 71% of New Zealand’s goods exports), some exposure to manufacturing exports, and moderate exposure to tourism. But only about one-seventh of the city’s economy is in any way directly exposed to international trade in these sectors."
Attempts to build a multicultural society in Germany have "utterly failed", Chancellor Angela Merkel says.
https://www.bbc.com/news/world-europe-11559451
This is a massive admission. The world has changed. Finally, the recognition that immigration has problems and that we need to start talking about them if we are to find solutions.
This is irrational optimism. Although the graphic seems accurate in terms of the chain reaction between China, Australia and NZ, David is completely ignoring (perhaps oblivious to?) the real estate market situations in all three countries. They are 3 of the most unaffordable markets in the world, and astute observers say in bubble situations. What will happen if/when China's real estate market corrects from the extreme it's in? Australia's has to a certain extent, with unfolding impact on its economy. As for Auckland and New Zealand, all three of these real estate markets could unwind at the same time, after managing to kick the can down the road during the GFC. I'd say there's a decent risk of this. David hasn't even addressed this. I'd say the RBNZ is well aware of this risk, but is doing everything it can to keep the bubble rolling, while trying to improve the capitalisation of the banks in case this happens. Their timeline for doing this is quite long though.
There are a few essential points missed in the assessment above. For the purposes of full information to make a more comprehensive risk assessment, here are some other issues for consideration:
1) high household debt levels which are near record highs (household debt to GDP)
2) heavy concentration of debt (and likely associated residential real estate collateral) in a relatively small number of households
3) high exposure (relative to bank capital and bank assets) of the bank loan portfolios to residential real estate lending
4) the real estate collateral supporting those bank loans is significantly overvalued in some areas (such as Auckland)
5) large number of negatively geared highly leveraged residential property owners who may become financially stressed in a economic recession.
6) reliance of big 4 banks in New Zealand on international capital markets and international money markets - such as commercial paper which needs to be refinanced as it matures. If the banks are unable to finance then this may result in credit contraction in New Zealand.
7) a sufficiently large proportion of the economy is tied up with real estate and construction.
Many highly leveraged residential property owners may not realise how long it can take to sell residential property in adverse market conditions, when there are few buyers. They may come under unexpected financial stress and be unable to hold on.
Here is an example of a transaction in a market where the monthly sales volume for September was NZ$7.2bn. Desperate sellers cut their prices by 7-20%.
https://www.scmp.com/business/article/3031318/hong-kongs-desperate-home…
Observations from a mortgage broker on land speculation in Auckland ...
https://www.squirrel.co.nz/blogs/housing-market/is-2019-the-year-that-t…
And land is even more difficult to sell than residential investment real estate, given the fewer number of potential buyers.
No 6 is probably the most critical but least acknowledged. Look at what happened in 2007/8 and 1929/32, a huge issue was the unwillingness/inability to lend by Banks due to uncertainty of if the borrower was solvent long term, as many toxic assets were unidentified. Deutsche and HSBC have significant problems and even a partial failure of either would have a domino effect and likely cause the contagion and reluctance to lend that could make NZ position in the financial markets precarious. I think the RBNZ has recognized this and is trying to do something about the underlying issues against massive push back from the Aussie owned Banks. Don Brash succeeded in having the NZ subsidiaries NZ Companies but could not ring fence the NZ cash balances. Consider why OBR & a Govt deposit scheme are subjects of much consideration by the RBNZ and I expect this "govt". Black clouds are often the lead indicator of storms despite blue skies and sunshine overhead.
No 6 is probably the most critical but least acknowledged. Look at what happened in 2007/8 and 1929/32, a huge issue was the unwillingness/inability to lend by Banks due to uncertainty of if the borrower was solvent long term, as many toxic assets were unidentified. Deutsche and HSBC have significant problems and even a partial failure of either would have a domino effect and likely cause the contagion and reluctance to lend that could make NZ position in the financial markets precarious. I think the RBNZ has recognized this and is trying to do something about the underlying issues against massive push back from the Aussie owned Banks. Don Brash succeeded in having the NZ subsidiaries NZ Companies but could not ring fence the NZ cash balances. Consider why OBR & a Govt deposit scheme are subjects of much consideration by the RBNZ and I expect this "govt". Black clouds are often the lead indicator of storms despite blue skies and sunshine overhead.
The "356% (not a typo)" reflects how completely screwed Auckland construction becomes in the face of global difficulty. Auckland has high costs and builds very slowly. Our current best efforts during these great economic conditions has Auckland constructing housing at a similar per capita rate to Sydney or Melbourne build during their Australian housing slump.
"... more imported inflation affects the price of pretty much everything we buy."
Then CPI exceeds RBNZ targets and the RBNZ raises the OCR, with the potential knock on effect on mortgage interest rates for all borrowers. Some of those borrowers are highly leveraged, negatively geared residential property investors ...
Yes, Auckland is primarily driven by consumption and that in turn rests on two things: disposable income to rise faster than inflation and housing costs; and more important it is a FIRE economy. Meaning the creation of money by banks to give to people to buy houses is a large driver of the credit impulse which has to be growing to drive GDP growth. In Auckland it has stopped growing because prices are stagnating to slow falling and sales are 11% below where they were in the first 8m of 2018. This means that virtuous circle of monetary leverage is now a vicious circle of deterioration with knock ons down the supply and distribution chain. Unfortunately, economists do not get good (or much at all) training on credit in reality. Instead they read lots of theory on the rational man and utility theory and theoretical supply and demand - NOT real demand. NZ GDP in 2017 was forecast to grow by 3.5% pa for 5 years. It is now 2% and falling. Few are saying why. I just did
Eighteen people are dead in riots in Santiago, the once-halcyon capital of Chile, a beautiful city long favored as an expat retirement haven. The scale of violence as well as the death toll surpass the toll in Hong Kong after months of disturbances.
No two cities could be more different than Hong Kong and Santiago. It is hard to find any common political theme. But they have something significant in common: Real estate bubbles in both venues have priced housing outside the means of ordinary people, and especially young people.
https://www.asiatimes.com/2019/10/article/housing-bubble-toil-trouble-i…
Lets be honest here, Auckland is NOT a strong economy. A big event overseas now and Auckland will go down like a pack of cards. We are not in the same position we were before the last GFC so I'm expecting a serious crash here if things dive internationally or even a huge earthquake in Wellington would be the last straw.
Agreed. When last GFC happened, we still had our OCR rate around 7%-8%. Then 2009, it was droped to 2.5% to stumilate our economy and minimise the impacts. Now, the only positive fact is our government still has decent amount of surplus. Despite this, I dont see other indicators are looking good at the moment. Our consumption is pretty weak at the moment, export is not changing much but might get worse for the next coming years due to trade war, Brexit and Global economy recession. Business confidence is still pretty low and it will effect investment confidence.
And here are the downside risks....
If our economy slows, so will migration as there will be less jobs for new migrants to come into.
Migration is already high and interest rates at record lows yet the Auckland property market is still as flat as a pancake.
Guest nights, despite some recent wobbles, are up 2.9% in the year to August - many of these are housing NZ tenants waiting for houses paid for by the NZ tax payer.
The last time we had a recession the RBNZ slashed the OCR by 575 points. They only have 100 points to play with this time around and by the time the real storm hits it may be less than that.
Last time both China and Australia were in much stronger positions when the GFC hit. China spent trillions of dollars on infrastructure which helped to drag the world out of the GFC. Now China is in a much weaker position and so is Australia so NZ will be impacted far greater this next time around.
NZ now has the highest household debt to income and household debt to GDP levels we have ever seen. Meanwhile we have a downward negative savings rate meaning that most people in this country end the week with an echo in their bank account once all the bills are paid or in debt.
The last time there was a Global downturn all of the major countries were unified to quickly counteract it. Now most countries are divided due to the Trade Wars or some other significant Geo Political issues. The internal Governments and their oppositions are also divided in many of these many of these countries, much more than usual. This is a significant factor as it will take longer to communicate, find common ground and fix the issues.
Right now we have multiple countries going into recession, having major Geo political issues or having some sort of financial crisis. Many of the economic indicators and data points point towards a Global recession. It will be a miracle if we avoid one but here's hoping we can.
P.S - Auckland will hold up better than most cities in NZ but we are still going to feel it in this next downturn, possibly worse than the last one.
"And you can't really go under as a council, you have endless amounts of money you can get whenever you want - from ratepayers."
That same belief led to US banks lending to Latin American central governments in the 1980's. These countries defaulted which led to the Brady Plan and Brady bonds in late 1980's.
Local government can and do default on their debt payments, if they become over indebted with debt relative to their debt servicing capacity.
Refer examples in US - https://www.google.com/amp/s/qz.com/975193/puerto-rico-filed-what-could…
Central governments can also default on their debt obligations if they become overly indebted relative to their debt servicing capacity - refer Greece 2010, Argentina 2002, Russia 1998, Latin America in late 1980's.
All elected civil servants (mayors, councillors, politicians in Central government, etc), as well as voters in elections (to ensure that they avoid voting for spendthrifts into powers of elected office) should be aware of potential financial mismanagement.
I think it's time to have a clear out of economists, especially those that think never ending growth is a) good and b) sustainable, it's not.
I vote we change all economists with Kate Raworths and Thomas Picketys, so that we can begin to see that not only is constant growth bad, but that we can actually continue to thrive without it.
Time's up for growth
Much as I hate to agree with a Council functionary, this is a fair assessment of Auckland's prospects. Perhaps a little on the Pollyanna-ish side, but you couldn't expect a Council economist to bag his region's prospects. Not exactly good for confidence.
Employment and internal immigration are high, interest rates are low, and there is little threat of inflation breaking out. Stagnation on the horizon perhaps, but collapse looks unlikely. Although the NZX has lost touch with reality, most Kiwis don't hold shares directly so a correction here may not be too painful.
"most Kiwis don't hold shares directly"
1) most Kiwis wealth is held in residential real estate.
2) most finance that purchase with banks.
3) a sufficient number of younger property owners have high levels of leverage
4) a large proportion of older owners who have owned residential property for a long period of time have increased their net worth (mainly due to rising residential real estate prices
5) owners in (4) above that are in their late 40's to 60's have been told that superannuation will be insufficient income when they retire and they need to invest for their retirement. As a result, a sufficient number of these owners, have borrowed against the equity in their home, to use as deposits:
i) for purchasing residential real estate which is hoped to produce adequate income during retirement
ii) for purchasing residential real estate which is hoped to increase in value before their retirement. Upon retirement, they can sell a number of properties in their portfolio to reduce or eliminate debt. The unsold properties may be used to generate income during retirement.
As a result, a sufficient number of older house owners also have high levels of leverage.
So you have:
a) a sufficient number of younger property owners who have high levels of leverage
b) a sufficient number of older house owners (pre-retirement age) who have high levels of leverage, and are capital gain oriented
In the event of an economic slowdown, and their ability to maintain debt service payments during the economic slowdown, they may be dependent upon property prices.
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