New Zealand Regulators on Bubbles: A worrisome déjà vu?

Bubbles have become a ubiquitous phenomenon.

Regulators in New Zealand superficially act to stem to what they see as growing risks of inflating homegrown bubbles

From the Wall Street Real Economics Blog: (bold mine)

It just got harder to swing a mortgage in New Zealand.

For homebuyers seeking to place a first foot on the property ladder, that’s bad news. For the central bank, however, it’s an attempt to head off a property bubble that would threaten the health of one of the best-performing developed economies.

Starting Oct. 1, banks have less leeway in making home loans to buyers who can make only a small down payment.

“It’s like taking medicine when you’re not well,” Prime Minister John Key said in a television interview Tuesday.

The rules are having an immediate impact, with one bank canceling mortgages that had already been approved.

New Zealand’s efforts are being closely watched as central banks across the globe experiment with steps targeting specific pockets of financial excess — particularly housing, which played such a prominent role in the global financial crisis.

Late last month, Australia’s central bank advised lenders against being too eager to offer mortgages to customers, saying record-low interest rates risked fueling a surge in speculative home buying.

Nice to see regulators acknowledging the untoward effects of their policies. Yet it's one thing to admit and it's another thing to act. The dilemma: Preventing a populist artificially inflated boom will extrapolate to a political backlash.

Yet zero bound rates induced mania…

Lawmakers here remember the last time lending was allowed to grow largely unchecked in New Zealand.

Easy credit in the early 2000’s fueled a housing bubble that the Reserve Bank of New Zealand tried to control — with little success — by boosting the policy interest rate. With so much of the country’s wealth tied up in housing, when prices did eventually fall the economy dipped into recession even before the global financial crisis.

Now, with New Zealand’s interest rates at record lows since March 2011, the housing sector could be heading down the same path again.  House prices in Auckland, a city experiencing rapid population growth, rose 13% on-year in August, while prices in Christchurch rose 11% amid a continuing housing shortage following devastating earthquakes. Nationwide, prices are up 8.5% on-year.

Cool stuff. 

The above exhibits New Zealand’s interest rate vis-à-vis annual GDP. Rising rates coincides with lower GDP in 2001-2008. 

So a boost to the GDP means that authorities implemented Zero bound rates in 2008.

This means pumping bubbles produce statistical growth rather than real economic growth.

New Zealand’s deteriorating balance of trade is another manifestation of a bubble economy. New Zealanders have recently been spending more than they produce financed by ballooning debt.

Zero bound rates have fueled a surge in domestic credit to private sector (% of gdp) which is over 140%. The above data is from 2010, the World Bank has no updates yet on New Zealand. This has got to be a lot higher today for regulators to raise the alarm bells.

Notice too that when interest rates moved up in 2001-2007 loan growth contracted which coincides with the declining trend in the annualized GDP.

 

New Zealand’s stock market zoomed from 2003 even as interest rate trended higher—amidst slowing loans—the Wile E. Coyote moment.

New Zealand’s stock market faced reality with a crash along with the world in 2008.

Finally New Zealand’s housing index: For regulators, is this the worrisome déjà vu?