Avoid worrying about the NZD/USD exchange rate when buying gold

An article on Stuff.co.nz this week was headlined “Bullion bullish but beware the bears”.

The excerpt below is taken from the beginning of the article (emphasis added is ours):

The price of gold, now near nominal highs at more than US$1180 an ounce, is expected to climb further, analysts say.

However, they warn New Zealand investors should be wary of exchange rate fluctuations.

Fund manager Liontamer, a specialist in capital protected funds, said the price could rise more than 15 per cent to over US$1400 an ounce by December 31, and continue rising well into 2011.
Investment manager Sean Butler said there was fundamental support for the gold price at current levels. “Central banks in China, India and Russia continue to buy gold, and investors are building up their gold exposures in the wake of global market uncertainty and the risk of higher inflation.

“In the meantime, the supply of gold is tightening. A combination of reduced supply and the large set-up costs associated with setting up new mines is helping to set a new floor under the price of the precious metal,” Butler said.

OM Financial senior dealer Kevin Morgan said the price “could be comfortably above US$2000 an ounce within 18 months”, but saw a possible dip to US$1050 in the next two months.

“I would view that as a buying opportunity,” Morgan said, but cautioned anyone investing in gold to remember that it is priced in US dollars and subject to currency fluctuations.

“A New Zealand investor who purchased gold in early 2009 at US$900 an ounce would actually be losing money despite gold being 25 per cent higher at US$1200 an ounce today.

“The reason for this is that back in early 2009 the NZD [New Zealand dollar] was trading at about 0.5 to the USD [United States dollar] and today we are trading closer to 0.72,” he said.

No counter party risk:

Talk about over complicating things!  Firstly, Liontamer’s new fund - as also discussed in this Otago Daily Times article - uses derivatives to track the gold price.  It doesn’t actually hold bullion.  While it does offer capital protection -  i.e. you will get back at least 100% of your money at the end of the 6 year investment period – this is also achieved using derivitivisation.

The reason we choose physical gold is because it has no counterparty risk.  This simply means we are not relying upon another party to remain solvent to get our funds back one day.  If we buy physical gold and take possession it is ours and ours alone.  Our only risk is keeping it safe from prying eyes and thieving hands.

The price of gold in any currency is volatile!

Secondly is the point that as per the Otago Daily Times article “the Liontamer index follows the movements in the international gold price and is not affected by currency [movements] between the New Zealand and US dollars.”

The stuff.co.nz article also mentions how Kiwi investors should be careful as gold “is priced in US dollars and subject to currency fluctuations”.

The thing is you don’t need to invest in a fund tracking the international/US dollar gold price using derivatives to handle currency fluctuations!  All you have to do is track the NZ dollar gold price yourself (simply the USD gold price converted to NZ dollars by the current USD/NZD exchange rate) and ignore what the media says about the US dollar gold price!  We live in New Zealand not the USA!  (As a bonus, you’ll also avoid paying fund managers fees!)

Best time to buy gold

If you believe gold remains in a bull market (or rather that paper currencies are still in a bear market), then the time to buy is when the NZD price of gold has fallen not when it is soaring.  This can be an emotionally difficult thing to do but this gets you the most bang for your buck – or rather the most ounces for your dollars.  You don’t actually need complex financial instruments and hedging with futures contracts to achieve this.  Just buy when the price has fallen as this is likely to be when the NZ dollar is strong.

NZD Gold 3 Year Chart - Buy the price dips

Do this on a regular basis and the average buy price will be at a good low level and allow for maximum upside and you should hopefully avoid the heavy feeling of watching the price drop sharply just after you’ve bought.

In the above 3 year chart you can see that the NZ dollar price of gold has just dipped down to the 200 day moving average (the red line).  Over the past 3 years this has generally been a good time to buy, with June last year being the only time the price fell substantially further below the moving average.

Our website has gold price graphs from 1 day all the way to 40 years – all in NZ Dollars.  (See Gold Survival Guide Gold and Silver Price Charts.)  The 1 year, 2 year and 5 year charts are particularly useful in seeing where the current price is compared to the past and can help identify when the price dips.

Anyway, that’s just our opinion and as always we offer it freely - but with no guarantees!

Whither the NZ Dollar Gold Price?

Gold has just made another all time high priced in US dollars reaching an intra-day price of $1261.90.  In Euros and sterling and many other currencies it also has hit new highs recently.

Here in New Zealand, while it has rallied sharply since the start of May, the previous February 2009 high of $1980 has yet to be breached as can be seen further down the page on the 2 year chart of the New Zealand Dollar Gold Price.  In early June it touched $1900 briefly but has since fallen away sharply.

The mistake many new gold investors make is trying to guess where the price is going.  They either sit on the sidelines waiting for the price to get cheaper while it rises and rises, or they jump in when the gold is hitting mainstream headlines as it makes new highs, only to subsequently see it fall steeply.  Often they make their initial purchase in one big hit hoping to pick the “bottom” and then see their purchase lose 10 or 15% in no time. 

We prefer not to guess where the price is going and rather buy at regular intervals, ensuring a good price overall. 

However we also like to keep some “powder dry” for when the price dips, and this is when it is useful to keep an eye on the charts to pick buying zones where you can grab some bigger handfuls.

Technical analysis is as much an art as a science. You could ask 5 or 6 technical gurus about a chart and probably get 5 or 6 different answers!  And particularly in these days of manipulated markets it is of dubious value. 

However, technical analysis does have some predictive value, chiefly because so many people use it, so it’s worth taking into account when making purchase decisions in our opinion. 

The 1 year chart below has Fibonacci retracement levels drawn in from the recent high at $1900 back down to 0% at $1372 last October.  You can see $1700 at the 61.8% retracement and $1637 at the 50% level.

 1 Year NZ Dollar Gold Price Chart with Fibonacci Retracements

Also worth taking into account is the 50 day moving average (red line) of $1723.  Further below is the 200 day moving average at $1581.  You can see on the 1 year chart that the price has not dipped down to touch the 200 day moving average (red line) since the start of the year.

These price levels all offer good “support” in technical terms, so in our opinion, could likely be good buying zones. 

2 Year NZ Dollar Gold Price Chart - Cup and Handle Pattern

 

The 2 year chart above has a very interesting look about it, namely, in chartist terms, what is referred to  as a “cup and handle”.  You can see the cup highlighted in green.  This is known as a “bullish continuation pattern” and while it is usually seen over a period of months rather than a year and a half it is worth looking at more closely.  For a full description of the cup and handle pattern, see http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:chart_patterns:cup_with_handle_cont

The handle usually trends down for a short period before eventually heading up and breaking out and recording new highs. 

So from here we could see the price head up to test $1980 and with then possibly a “handle” forming, or maybe we are already witnessing the formation of a handle.  If this break out were to occur we can make an estimate of an upside target by taking the difference between the bottom of the “cup” at $1400 and the high of approxiamately $1950.  Adding the difference of $550 to the current high gives an upside target of $2500.

Of course a “double top” may occur where the price rises to test the $1980 resistance but fails to break through this level and we might then see the NZD gold price fall significantly.  However unlike the February 2009 high, we haven’t seen a sharp rise in the space of a few months but rather a series of sideways movements followed by some steady gains.  So you could say we are at a lower risk of a significant breakdown in price than we were in February 2009.

As always, these are just our opinions.  The charts clearly demonstrate that the gold market is a very volatile market, however, this makes for opportunities, so long as you have a plan to handle this volatility.  A plan which could be as simple as buy the dips and keep buying until your big picture view of the global financial landscape hints at some real improvement, which we haven’t seen a lot of as yet, and which looks increasingly unlikely, given the current economic and financial situation.

Note: Both live and historical gold and silver price charts in New Zealand dollars are available here: Gold Prices

When will you know it’s time to sell gold?

“The ultimate asset bubble is gold” said George Soros in late January. 

This was widely reported as Gold is now the ultimate bubble.  A subtle but very significant difference, thereby implying that Soros was stating that gold was in a bubble right now.

Only Mr Soros knows what the true intent of his remarks were.  However the fact that he had been purchasing shares in both gold mining companies and the Gold ETF at the end of last year would make you think he was likely doing his best to talk the gold price down so he could buy some more.  Most likely these were very carefully chosen words that he knew would be misinterpreted by an uninformed mainstream media and help to prod the masses to sell gold.

History proves that Gold is in fact the ultimate bubble.  5 years after the 1929 stock market crash, gold’s investment purchasing power rose 17 times.  From 1970 to 1979 it rose 15 times.  But from 2000 to now gold is up 4 times (Source: Bullionvault).  So with only a 4 fold rise so far in this bull market, the ultimate bubble seems like it is a few years away yet.  Or put another way gold is in fact the anti-bubble, the ultimate extinguisher of debt as per John Exter’s Inverse liquidity pyramid (A whole other topic in and of itself).

But the oft asked question is “When will I know it’s time to sell my gold?”‎

Unfortunately there is not likely to be someone holding up a sign proclaiming ‎‎“The top is in – Sell Gold Now!”  However history shows there may be some ‎not quite so literal signs we can still look out for.   Below is a list of them and ‎our verdict on their “bubblishness”.‎

1.  Dow Gold Ratio.  The Dow Gold ratio is simply the Dow Jones Industrial ‎average (a measure of the US stock market) divided by the price of gold.  It is ‎useful as a guide as to when stocks are cheap and when they’re overvalued.  ‎See the below chart care of sharelynx.com for these extremes. ‎

Towards the end of the 1930’s depression the ratio reached a low of 2 and at ‎the end of the inflationary 1970’s it reached a low of just over 1.  It’s currently ‎at just under 10.  So history shows the time to sell gold will be when the ratio ‎reaches these levels again.  Interestingly the below Log scale graph (hat tip to ‎Sharelynx.com again – a must visit site for great graphs) shows the ratio has ‎made higher highs each time it has peaked over the last century.  It also ‎made a lower low in 1980 so could fall below 1 at the end of the current ‎monetary crisis.  ‎

So while the ratio has fallen it’s still at 10.  Verdict: No Gold Bubble.  (For more on ‎the Dow Gold ratio see this earlier article Expert gold miners opinion on the dow gold ‎ratio.)  ‎

2.  Housing gold ratio. Much like the Dow Gold ratio the Housing gold ‎ratio also indicates when housing is over and undervalued.  In New ‎Zealand the ratio last bottomed out in 1980 at just over 50.  ‎

It’s currently at 250 so when it gets close to 100 that might be the time ‎to swap some gold for property.  We covered the US, UK and NZ housing gold ratio in ‎great depth previously here: Could NZ House Values drop by 80%.  Verdict: No Gold Bubble.

‎3.  Real interest rates rise.  A common misconception is that gold ‎performs poorly when interest rates rise as gold pays no dividend or ‎interest.  However the key is what real interest rates are doing.  That is ‎the nominal interest rate less the rate of inflation.  Currently there is ‎very little reward in the form of interest for keeping your money in the ‎bank, and real interest rates are actually negative as per the graph ‎below from McClellan Financial Publications, www.mcoscillator.com ‎

You’ll notice how gold continued to rise throughout the 1970’s until real ‎interest rates finally turned positive again.  However, today central ‎banks find themselves in a worse position than 1980 as it will be very ‎difficult to raise interest rates sufficiently to head off gold without ‎destroying their economies in the process. So interest rates could rise ‎from here but if inflation rose too then real rates would stay below zero, ‎and gold would continue it’s rise as there would still be insufficient ‎reward for dollars in the bank.  Verdict: No Gold Bubble.  ‎

4. Governments become fiscally responsible.  At the end of the ‎inflationary 1970’s we had the likes of Margaret Thatcher in the UK ‎cutting government spending and Paul Volker for the US Federal ‎Reserve raising interest rates significantly to fight inflation.  Here in NZ ‎the 80’s saw “Rogernomics” and some harsh medicine for the country ‎to swallow.  Worldwide generally this period saw taxes cut along with ‎government spending.  Cast our eyes across the planet at the politics ‎of today and generally we see more government spending and ‎increasing public debt and likely higher taxes - as much as they would ‎have us believe otherwise.  Verdict: No Gold  Bubble.  ‎

5.  People discuss how much their gold mining shares have risen at ‎dinner parties and where to buy the cheapest gold coins.  Most ‎likely you currently know very few people in your wider circle of friends ‎and acquaintances that have any gold or gold related investments.  ‎When the tables turn and gold is dominating discussions at social ‎gatherings and regularly on the mainstream news we are likely getting ‎near a top.  A long way from there yet I’d say.  Verdict: No Gold  ‎Bubble.  ‎

6.  There are Gold kiosks selling gold bars and coins popping up in ‎shopping malls everywhere.   As we have mentioned previously ‎here, we are seeing the opposite of this currently ‎with kiosks popping up buying gold from the public.  Verdict: No Gold  ‎Bubble.   (However, the counter to point 5 and point 6 above is that ‎Joe Public may be so tapped out and broke that he won’t be able to ‎afford to buy any gold.  In this case it will be institutions that are buying ‎gold bullion and gold mining shares.) ‎

7.  Our website visitors rise exponentially!  Highly likely if more and ‎more people start paying an interest in gold.  They’re rising steadily ‎currently.  Don’t worry we’ll let you know if our visitor numbers start ‎exploding without us doing anything to warrant it.  Verdict: No Gold  ‎Bubble.  ‎

 The other possibility to consider is that you may not have to sell your gold ‎at all.‎

‎“Huh?”  You may be thinking, “I’ve read stories of people who didn’t sell ‎gold when it was in the $800’s at the end of the 1970’s and then watched it drop all ‎the way down to $300 or less.”‎

Well, you see, the possibility exists that gold could become widely accepted ‎again as money.  This could come about in a couple of ways…‎

‎1.‎   The elites may be forced to reintroduce a gold standard and hopefully a ‎true gold standard as existed prior to WW1.  Whereby an ounce of gold ‎is worth a specific dollar amount.  So gold = money.‎

2.‎   The above doesn’t happen and so the global financial system totally ‎breaks down, maybe hyperinflation ensues, paper money is worthless ‎and people resort to trading and bartering.  Gold will still buy the same ‎amount of goods and services as it always has.  Again gold = money.‎

Another possibility bandied about by the likes of Jim Sinclair of jsmineset.com, ‎is that the elites merely introduce a loose gold link.  This would possibly be by ‎way of a new global currency with gold trading in a narrow range but at a ‎much higher price.  This would allow the master planners to still control the ‎currency issuance - albeit with a partial handbrake on their money creating ‎powers.‎

Whatever the final outcome, it appears that paper currency is slowly (or ‎maybe not so slowly) dying.  Who knows what will deliver the death blow, and ‎it could be a way off yet, but none of the above signs of a “gold bubble” are ‎here yet so don’t sell gold…..‎

Buy gold (and silver).‎ 

Hold gold (and silver).‎

Learn, observe and wait.‎

Could NZ house values drop by 80%?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962. Both peaked around 1970 at near to 300 ounces. Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold. If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis. That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over. Or using the same analogy as above you could now buy 5 houses! Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued. For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ (i.e. $360,000 / 50 = $7200). Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly. With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces! Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising. For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
2. Since then it has fallen 50%
3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces. This is a further 80% drop from today’s ratio of 250 ounces.
5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box at the top right of this page.

When will the Australian housing bubble burst?

We know we’re not part of Australia - even if the rest of the world doesn’t - but we’ve posted this article under the “New Zealand Articles” heading, as where the Aussie housing market goes generally so does ours.  It also discusses the NZ housing market in terms of affordability or rather it’s unaffordability.  NZ may not have risen to the (even) giddier heights the Australian market has in the last year or so, but house prices here are pretty much back to the highs of 2 years ago.  So we should have plenty of room to fall too.  The author, Mike “Mish” Shedlock writes regularly in his blog ”Mish’s Global Economic Trend Analysis” and is definitely worth keeping an eye on.

Pool of Greater Housing Fools in Australia Finally Runs Out; OZ Dollar, Where to From Here?

Today the Reserve Bank of Australia (RBA) unexpectedly held interest rates at 3.75%. No doubt this was in fear of the Australia’s enormous housing bubble that exceeds the height of the bubble that long ago burst in the US. 20 economists predicted the RBA would hike. Not a single one predicted anything else.

Fear in the board of governors over the pending crash is palpable. Prime Minister Kevin Rudd did not learn a single thing from the US and the disastrous policies of Greenspan. He gave one last goose to the housing market with $14,000 tax credits in a foolish attempt to stem the tide of the global recession that started two years ago.

Prime Minister Rudd brags about Australia’s ability to duck the recession. It did not work. All Rudd did was delay the inevitable, fueling an even bigger housing bubble. The bigger the bubble, the bigger the crash, and rest assured Australia is headed for a housing crash.

Here are a few snips from the Bloomberg article Australia Unexpectedly Keeps Interest Rate at 3.75%.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

Australia’s dollar tumbled to a six-week low and Asian stocks pared gains after the announcement sparked concern at the economy’s ability to withstand higher borrowing costs. Business confidence fell to a six-month low, a report showed today, and Woolworths Ltd., the country’s biggest retailer, warned last week that rate increases would hurt consumers.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. Lending to companies “has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said today. “Credit conditions remain difficult for many smaller businesses,” he said.

Here is a statement from the article that particularly caught my eye: Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney said “Today’s decision reduces the serious risk of a policy blunder.”

Serious Policy Blunder

Sorry Prasad, a serious policy error was made long ago, and there is not a damn thing the RBA or anyone else can do to stop the impending housing crash in Australia.

What follows is a post I actually wrote yesterday. I intended to post this before the rate decisions, but it never happened. I too, thought one more hike was coming. That it did not come is a sign of panic at the RBA.

First Time Buyers In Severe Stress

Just as happened in the United states with subprime borrowers, Australia’s first-home buyers struggle as interest rates rise.

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

“The dream of home ownership has turned sour for many thousands of first-home buyers now that the reality of rising interest rates is kicking in,” said Fujitsu Consulting managing director Martin North.

“Rising utility costs and school fees are also cited as reasons for hardship, and many first-home owners are living without proper furniture or carpets as they divert all their cash to their monthly repayments.”

During the past 18 months, more than 135,000 first-home buyers have entered the market, encouraged by the generous grants and stamp-duty relief.

As a result, more than 50 per cent of first-home owners are forecast to be in the “mortgage stress” category by the end of this year.

“This was a disaster waiting to happen,” Steve Keen, professor of economics at the University of NSW, said yesterday.

“The grant panicked first-home buyers to rush into the market, which pushed prices up by far more than the grant itself. Now we have buyers falling behind with their repayments as rates increase and thousands of owners exposed to the danger of bankruptcy as the situation deteriorates.”

No Lessons Learned

“LD”, a reader from Australia who sent me the link asked and answered his own question: “What have Australians learned from Americans over the last 2 years? Nothing!”

Credit Squeeze Coming Up

Craig, another reader from Australia writes …

Mish

I’ve been waiting a long time to buy a house in Australia. Looks like I may not have to wait too much longer for the Aussie bubble to burst. As always, love your blog. Cheers, Craig

Craig is referring to Tighter credit rules to halve home loans.

Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property’s value - a new low for a big bank. Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.

“If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million,” said Steve Keen, associate professor of economics at the University of Western Sydney. “But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved.”

Westpac’s reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615. Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.

Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse. According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property’s value.

“Westpac’s move could affect many thousands of buyers and they will be forced to go to new lenders,” a spokesman said. “It’s a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market.”

Further restrictions now appear to be inevitable. “And banks can’t go on lending forever.”

Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers. Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common. But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.

It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.

Deposit Math

Note the above paragraph in red by Steve Keen, one of few economists in the world who actually has a clue. His blog is Steve Keen’s Debtwatch.

Also note the worries of the so-called housing experts in the above article: Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.

If those “experts” had an ounce of common sense they would be worried the housing bubble would get bigger.

Indeed, housing prices are so stretched in Australia that the bubble will bust soon enough regardless of whether lenders tighten standards or not.

The US housing bubble burst with credit standards still getting looser a year or more later.

When Do Bubbles Burst?

Bubbles burst when the pool of greater fools runs out, and not before.

That is exactly why Economist Steve Keen lost housing bet against Rory Robertson.

AN ECONOMIST known as the “Merchant of Gloom” will have to walk from Canberra to the top of Australia’s highest mountain after losing a bet about the resiliency of Australian house prices.

Last November, University of Western Sydney associate professor of economics and finance Steve Keen made a high-profile bet with Macquarie Group interest rate strategist Rory Robertson.

The two parts of the bet were that house prices would tank by the end of 2009 and that house prices would fall 40 per cent from their all-time high within 15 years.

The loser of the bet would have to make the more than 200km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt that says “I was hopelessly wrong on house prices! Ask me how.”

Why The Bet Went Wrong

Keen’s mistake (miscalculation is a better word as I am positive he will ultimately be proven correct), was that he misjudged actions the Rudd administration might take to keep the bubble going.

Bear in mind that once the trend changes, it changes for good, but until the trend does change, efforts to keep bubbles alive frequently produce blowoff tops.

In Australia’s case I finally sense a blowoff top in fools. The US suffered the same fate in 2005 when the cover of Time Magazine went “gaga over real estate” and people were camping out overnight and entering lotteries for the right to buy Florida condos.

Inquiring minds might be interested in the following flashbacks, the first showing the funniest Time Magazine cover in history, the second shows approximately where we are today although I do have to move the arrow one notch closer to the bottom.

April 10, 2006: US vs. Japan Land Prices Pictorial Update

July 13, 2009: Housing Update - How Far To The Bottom?

How did Bernanke and other experts fair?
Let’s answer that with a few more flashbacks.

The initial data point on my chart came in the post It’s a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.

• Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that “South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.
• “I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90’s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”
• Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. “It is a new paradigm” he said.

Flashback October 27, 2005

Inquiring minds may wish to review Bernanke: There’s No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Flashback February 12, 2008

Bernanke Expects Housing Recovery by Year End

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.

“He let us believe that the housing situation should begin to ameliorate by the end of the year,” said Sen. Pete Domenici, a New Mexico Republican, told reporters.

“He gave a very good, succinct, short overview of where he thought the economy was right now and how it might move forward,” said Sen. Jon Kyl of Arizona.

Bubbles and Humpty Dumpty

Bernanke has proven all the king’s horses and all the king’s men cannot put bubbles together again.

For further proof please see Bernanke’s Deflation Preventing Scorecard.

After bubbles burst, nothing matters including loose lending standards in the US that lasted long after the housing peak in summer of 2005.

Supply of Fools Exhausted

I am willing to bet that at long last, Australia’s pool of greater fools just ran out. Rudd’s ridiculous $14,000 grant and stamp-duty relief programs were likely enough to exhaust that pool.

The ultimate irony of Keen’s bet is that by the time he starts his hike in April he will likely be right.

Bear in mind however, that prices tend to fall slowly at first as inventory builds up. Then the losses accelerate quickly.

A Long Wait

By the way, Australia buyers might need to wait 5-7 years or more for reasonable valuations. Look how long it took for the US housing bubble to implode. We have not hit bottom yet after 5 years, and the Australia bubble has a bigger starting point.

 

Please see Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan for a county by country comparison of housing bubbles from the Ecomomist.

Demographia International Housing Survey

Inquiring minds are reviewing the results of the 6th Annual Demographia International Housing Affordability Survey. Countries in the survey include Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States.

Least Affordable Cities

The article shows the top 58, I captured the top 20 above.

Congratulations To Canada And Australia

Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.

 

Sydney Australia proudly wins the Silver medal and the Sunshine Coast Australia wins the bronze. It was close but no cigar for Australia’s Gold Coast. Honolulu Hawaii came in a respectable fifth place.

Most Affordable Cities

Detroit, South Bend, Youngstown, Flint, Toledo, Akron, Peoria, Cleveland, and many other “affordable” cities are not places where anyone would particularly want to live. Indeed many cities at the top of the affordability list are places that most would hope to escape from.

The high school graduation rate in Detroit is a mere 25%!

I am willing to bet that Detroit’s graduation rate is far and away the worst of any city in the survey. See Michigan Forces Business Owners Into Public Sector Unions; Detroit’s Aura of Hopelessness for more details.

Moreover, there are houses in Detroit, Cleveland, Flint, etc, that one could buy for $500 that have no takers. Unlivable houses no one wants at any price skew the results.

Demographia Summary by Nation

All of the affordable markets were located in Canada and the United States, while most markets in Australia, New Zealand and the United Kingdom were severely unaffordable.

Australia: House prices have continued to rise in Australia (Figure 2), which registered the worst housing affordability (the highest Median Multiple) in the
history of the Survey. Overall, housing in Australia is severely unaffordable, with a Median Multiple of 6.8, more than double the 3.0 historic maximum norm. Housing had been affordable in Australia in the late 1980s, with a Median Multiple of under
3.0. The Median Multiple remained at or under 3.5 until the late 1990s.

All of Australia‟s major markets were severely unaffordable (Median Multiple above 5.0). Moreover, all markets, including smaller markets were severely unaffordable except Ballarat (Victoria), which was seriously unaffordable (Median Multiple between 4.1 and 5.0).

Canada: Housing is moderately unaffordable, as in previous Surveys. Canada‟s Median Multiple is 3.7. Housing had been affordable in Canada in the late 1990s, with a Median Multiple of 3.0. Canada had 5 affordable markets, 13 moderately unaffordable markets, 5 seriously unaffordable markets and 5 severely unaffordable markets.

Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable.

Ireland: Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.20 Housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0. The extent of Ireland‟s recent housing affordability improvement is illustrated by the EBS/DKB Affordability Index, which indicates that mortgage payments have been halved in Ireland since the peak of the bubble in relation to first home buyer incomes.

New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.7, nearly double the historic maximum norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0. Auckland is the least affordable larger market, with a Median Multiple of 6.7, while Christchurch (6.1) and Wellington (5.7) were also severely unaffordable.

Tauranga-Bay of Plenty was again the least affordable market, with a Median Multiple of 6.8. Five of the 8 New Zealand markets were severely unaffordable, while Palmerston North, Napier-Hastings and Hamilton were seriously unaffordable New Zealand had no affordable markets and no moderately unaffordable markets

United Kingdom: Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0. Housing had been affordable in the late 1990s, with a Median Multiple of under 3.0. Less than one-half of the United Kingdom markets were severely unaffordable (14 of 33), while the other 19 markets were seriously unaffordable. The United Kingdom had no affordable markets and no moderately unaffordable markets.

United States: Housing in the United States is rated as affordable, with the Median Multiple of 2.9.The recent house price declines have restored U.S. housing affordability to the below 3.0 historic norm (last achieved in the early 2000s), as the price bubble burst in many plan-driven markets. The United States had 98 affordable markets, 58 moderately unaffordable markets, 8 seriously unaffordable markets and 11 severely unaffordable markets.

The most affordable major market (population over 1,000,000) was Detroit. Other affordable major markets were Atlanta, Buffalo, Cincinnati, Cleveland, Columbus (Ohio), Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Las Vegas, Louisville, Memphis, Minneapolis-St. Paul, Oklahoma City, Phoenix, Riverside-San Bernardino, Rochester, Sacramento, St. Louis and Tampa-St. Petersburg.

Gold, Silver, Bronze Medals

In terms of national unaffordability (the team competition) Australia wins the gold medal, New Zealand, the silver medal, and the UK wins the bronze medal.

Because of a preponderance of “affordable” cities in the US and the way the national rankings are made, I question the results of the national survey although it likely did not affect the top three medal-winning rankings.

Email Exchange With Survey Developer

I had this exchange with Hugh Pavletich of Performance Urban Planning who helped develop the survey.

Mish: When you come up with “national affordability” are all the cities given equal weight? Does Detroit count as much as San Francisco?

Hugh: Yes.

Mish: In my opinion, a weighted average is what matters most (at least for the purpose of figuring out how big the bubble still is).

Hugh: We are NOT attempting to explain how big the bubble is on a country wide basis. We are simply illustrating what the Median Multiple is at the 3rd Qtr of each of the urban markets listed.

Other researchers are most welcome of course to take the next step and do a population weighting, if they wish to do so.

Our goal is simply to illustrate the degrees of housing stress of the urban markets listed.

Bear in mind my goal is quite different than Hugh Pavletich’s. He wants to show the role local planning rules have in affordability. Hugh makes a case that local zoning rules play a huge factor on a city by city affordability basis while I am concerned with “How Big Is The Bubble?”

From my perspective, the US and Canadian bubble problems are very understated, and the national affordability rankings of the US and Canada are thus overstated. To be certain, one would have to take a weighted average of populations and rankings. One would also need to take into consideration unlivable houses offered at $500 that no one would take. If one did that, we would see the bubbles are where the most people live.

There is much more in the survey. Please give it a look.

Mortgage Stress in Australia

If this chart does not scream “nationwide bubble”, nothing ever will.

Australian Interest Rate Hikes

On December 2, the Reserve Bank of Australia hiked rates to 3.75%.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.75 per cent, effective 2 December 2009.

With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Let’s come back to that last paragraph a year from now. Two years from now it is likely to look downright silly.

One more hike is in the cards, too, on February 2. Some will lay the blame on what is about to happen on these last couple hikes. The reality is the blame for the coming bust lay in the ridiculous expansion of credit that preceded it.

Australia’s problems have not yet started. Remember too, that commercial real estate follows residential with a lag. Australia can look forward to a bust in commercial real estate down the road as well.

Email From “Down Under”

Here is another email from Australia that readers may appreciate.

“Down Under” Writes …

Mish,

I actively watch this chart and a colleague of mine updated it today. RBA balance sheet collapsed in early part of 08 ahead of the debacle.

Add this to the recent report of Sydney being second most expensive city in the world. And add in likely tightening of bank prudential standards by our regulator APRA (extend liquidity requirements out to 21 days) and not looking so pretty. Deja vu all over again.

You can get the data straight from the RBA on the web: RBA Liabilities and Assets - Weekly

Kind regards,
“Down Under”

Australian Dollar Outlook

Two of the biggest factors affecting currency fluctuations are interest rate differentials between countries along with trends in interest rate differentials. The latter is more important. The Fed clearly is not going to cut rates (at zero bound it can’t).

The Australian dollar has strengthened vs. the US dollar on the back of rate hikes. If the RBA hikes once more and the Australian dollar sinks anyway, the top is likely in.

$XAD Australian Dollar vs. US Dollar Monthly

click on chart for sharper image

Déjà vu all over again?

At some point the RBA will stop hiking and start cutting. In turn, speculators in Australian dollars will start taking profits. At a bare minimum, at least a fair sized pullback in the Australian dollar vs. the US dollar is likely.

$USD - US Dollar Index Monthly Chart

click on chart for sharper image

Most underestimate how far the US dollar can strengthen. Another run at 90 is certainly not out of the question.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

How much gold does the Reserve Bank of New Zealand have?

We’ve had the odd query from other New Zealanders asking “With all the recent reports of ‎various Central Banks of the world buying gold, just how much gold does the Reserve ‎Bank of New Zealand (RBNZ) actually have?”‎

So we thought we should publish the specifics.  And we’re sorry to report folks, the news isn’t so great.‎

The RBNZ website has the following table:  (We’ve highlighted the gold related part in blue.  And the full table can be found here on the RBNZ website.)

 

New Zealand’s International Reserves and ‎Foreign Currency Liquidity

30 Sep 2009
(Information is disclosed in NZD 000’s)
I.	Official reserve assets and other foreign currency assets (approximate market value)
A.	Official reserve assets		19,994,933
	(1) Foreign currency reserves (in convertible foreign currencies)		17,074,379
		(a) Securities	15,079,813
		of which: issuer headquartered in reporting country but located abroad	-
		(b) total currency and deposits with:	1,994,566
		(i) other national central banks, BIS and IMF	1,912,062
		(ii) banks headquartered in the reporting country	-
		of which: located abroad	-
		(iii) banks headquartered outside the reporting country	82,504
		of which: located in the reporting country	-
	(2) IMF reserve position		382,538
	(3) SDRs		1,598,884
	(4) gold (including gold deposits and, if appropriate, gold swapped)		-
		volume in fine troy ounces	-
	(5) other reserve assets		939,132
		financial derivatives	484,080
		loans to non-bank non-residents	-
		other	455,052

 

Last time I checked a dash didn’t mean that the number was too big to report but was ‎rather a simple alternative for the number zero.  So according to the RBNZ website, ‎New Zealand has $0 worth of gold deposits from a grand total of zero fine troy ounces of gold.‎

Further confirmation of this comes from the World Gold Council.  They periodically ‎take information compiled by the IMF to create a ranking of gold deposits of ‎countries.‎

The lazy mans research site – Wikipedia means we don’t have to look too hard for the ‎latest figures though.  The table below ranks each nation according to it’s ‎officially reported gold holdings as of November 2009.‎ 

We can save you some time searching and state that unfortunately New Zealand does not feature - at all.‎

 

World official gold holding (November 2009)^[11]

Rank	Country/Organization	Gold (tonnes)	Gold’s share of total forex reserves (%)[11]
1	United States	8,133.5	77.4%
2	Germany	3,408.3	69.2%
3	International Monetary Fund	3,005.3	-
4	Italy	2,451.8	66.6%
5	France	2,445.1	70.6%
6	China	1,054.0[12]	1.9%
7	Switzerland	1,040.1	29.1%
8	Japan	765.2	2.3%
9	Netherlands	612.5	59.6%
10	Russia	568.4	4.3%
11	India	557.7[6]	6%
12	European Central Bank	501.4	18.8%
13	Taiwan	423.6	3.9%
14	Spain	416.8	42.5%
15	Portugal	382.5	90.2%
16	Venezuela	363.9	35.5%
17	United Kingdom	310.3	18.7%
18	Lebanon	286.8	30.0%
19	Austria	280.0	50.5%
20	Belgium	227.5	42.5%
21	Algeria	173.6	3.6%
22	Philippines	153.9	12.3%
23	Libya	143.8	4.5%
24	Saudi Arabia	143.0	12.4%
25	Sweden	135.9	14.2%
26	Singapore	127.4	2.2%
27	Bank for International Settlements	125.0	-
28	South Africa	124.7	11.0%
29	Turkey	116.1	4.7%
30	Greece	112.5	92.8%
31	Romania	103.7	8.4%
32	Poland	102.9	5.0%
33	Thailand	87.4	2.2%
34	Australia	79.8	7.3%
35	Kuwait	79.0	11.9%
36	Egypt	75.6	6.4%
37	Indonesia	73.1	4.3%
38	Kazakhstan	72.0	11.6%
39	Denmark	66.5	4.7%
40	Pakistan	65.4	20.3%
41	Argentina	54.7	3.4%
42	Finland	49.1	17.6%
43	Bulgaria	39.9	7.6%
44	West African Economic and Monetary Union	36.5	11.8%
45	Malaysia	36.4	1.2%
46	Slovakia	35.1	81.6%
47	Peru	34.7	3.3%
48	Brazil	33.6	0.5%
49	Bolivia	28.3	10.3%
50	Ecuador	26.3	11.6%
51	Ukraine	26.2	2.0%
52	Syria	25.9	-
53	Morocco	22.0	2.2%
54	Nigeria	21.4	0.9%
55	Belarus	20.3	11.6%
56	Sri Lanka	15.3[7]	3.8%
57	Jordan	14.8	5.2%
58	South Korea	14.3	0.1%
59	Cyprus	13.9	29.7%
60	Czech Republic	13.2	0.9%
61	Netherlands Antilles	13.1	31.4%
62	Cambodia	12.4	12.9%
63	Qatar	12.4	2.6%
64	Serbia	12.2	2.3%
65	Laos	8.1	23.1%
66	Latvia	7.7	3.3%
67	El Salvador	7.3	8.2%
68	Economic and Monetary Community of Central Africa	7.1	-
69	Guatemala	6.9	3.9%
70	Colombia	6.9	0.8%
71	Macedonia	6.8	7.6%
72	Tunisia	6.8	2.1%
73	Lithuania	5.8	2.3%
74	Ireland	5.5	16.3%
75	Mongolia	5.2	10.9%
76	Bahrain	4.7	-
77	Mauritius	3.9[8]	2.4%
78	Bangladesh	3.5	1.6%
79	Mexico	3.4	0.1%
80	Canada	3.4	0.2%
81	Slovenia	3.2	7.2%
82	Aruba	3.1	17.1%
83	Hungary	3.1	0.3%
84	Mozambique	3.0	4.6%
85	Kyrgyzstan	2.6	5.3%
86	Luxembourg	2.3	10.8%
87	Albania	2.2	2.6%
88	Hong Kong	2.1	0.0%
89	Iceland	2.0	1.9%
90	Tajikistan	2.0	-
91	Papua New Guinea	2.0	2.1%
92	Trinidad and Tobago	1.9	0.6%
93	Yemen	1.6	0.5%
94	Suriname	1.4	7.0%
95	Cameroon	0.9	-
96	Honduras	0.7	0.7%
97	Paraguay	0.7	0.6%
98	Dominican Republic	0.6	0.7%
99	Gabon	0.4	-
100	Republic of the Congo	0.3	-
101	Chad	0.3	-
102	Central African Republic	0.3	-
103	Uruguay	0.3	0.1%
104	Estonia	0.2	0.1%
105	Chile	0.2	0.0%
106	Malta	0.2	0.8%
107	Costa Rica	0.1	0.0%

 

It’s a bit of a worry when the Central African Republic of Chad, which the U.N. ‎reports as the 5th poorest nation on the planet, has more gold reserves than we do!‎

They may come in at number 101 on the list and only have 0.3 tonnes but that’s 0.3 ‎tonnes more than us!  (Or about $15 Million NZD in Gold reserves more than New Zealand)‎

Just like we believe the average person should have at least a small percentage of their ‎liquid net worth held in gold, we too think the RBNZ would be wise to convert some ‎of it’s foreign currency reserves into real money to ensure a store of value in a time ‎when currencies the world over are being depreciated at ever greater speed.‎

The Current Stage of the New Zealand Real Estate Cycle

Today we have a very informative article from an aquaintance of ours who publishes some great information on “Crisis Investing”.  We follow J.S.’s thoughts closely and highly recommend his newsletter especially if you are interested in some very close guidance on investing in the stock market with far more detail that virtually any other newsletter around.  Read more about him at the end of the article…

The Current Stage of the New Zealand Real Estate Cycle

By JS Kim.

All real estate cycles, no matter in what country they occur, can be evaluated within the framework of the monetary policies undertaken by its Central Bank. By understanding a Central Bank’s monetary policies, one can understand the risk/reward setup of the real estate market in one’s country.

Today, I am going to evaluate New Zealand’s real estate market within the framework of the Reserve Bank of New Zealand’s monetary policies over the last decade or so. In recent years, the Reserve Bank of New Zealand (RBNZ) has drastically cut their interbank lending rates in line with other world leading central banks such as the Bank of England and the US Federal Reserve. Housing prices peaked in late 2007, spurred by cheap credit that the RBNZ had made available since December of 2001. In response to a growing housing bubble and in order to rein in malinvestment in the real estate market, the RBNZ pumped up interest rates to 8.28% in August 2007.  Housing prices dropped due to the RBNZ’s monetary policies, and from a high of 8.33% in November 2007, the RBNZ started slashing interest rates again - a whopping 15 times from the high watermark level just a couple of years ago to its current October 2009 interbank lending rate of 2.49%!

 Above, I’ve charted a history of the RBNZ’s monetary policy from February of 1994 to October of 2009 since understanding its monetary policy is often easier to do in a visual format. The RBNZ established interbank lending interest rates of 4.32% in February 1994, then increased this rate by more than 100% to 10.00% by October 1996, then slashed rates 67% to 3.30% by February 1999, then almost doubled them again to 6.50% by January 2001, then dropped them to 4.75% in December 2001, then tremendously hiked them to 8.33% by November 2007, and finally drastically slashing them again to a record low of 2.49% by October 2009.  These wild swings in interest rates are not healthy, not promotional of economic growth, and certainly not indicative of interest rate patterns that would predominate in a free market where supply and demand set interest rates. So why does the RBNZ engage in interest rate decisions that seem to be more the work of a madman than somebody interested in promoting sustainable growth?  

The answer is simple. Because the whole monetary system is fraudulent and unsound (a topic for another day), the RBNZ is forced to follow the lead of the European Central Bank and the US Federal Reserve or perhaps cause irreparable damage to the New Zealand economy. If these Central Banks act foolishly and irresponsibly, then often other Central Banks have no choice but to actively embrace similar policies. Former US Federal Reserve Chairman Alan Greenspan stated that the foolish actions of the US Federal Reserve in the 1920s almost caused the entire global economy to come crashing down. Today, the same shenanigans are once again occurring. If one can not see that the RBNZ is responsible for every real estate and stock market bubble and crash in New Zealand by way of their unnatural, interest-rate manipulations, one merely needs to study Austrian theories of money and credit to understand this process. In very simple terms, this is how the process works. 

When a flood of cheap credit is deliberately made available to investors by the RBNZ, as was the case from the beginning of 2002 through the end of 2004, this cheap credit creates much more liquidity than would be dictated by free market conditions. In turn, investors funnel this excess liquidity into real estate markets, thus creating massive distortions in prices above and beyond fair market values. In response, the RBNZ tightens interest rates (as happened from 2005-2007), causing malinvestment to cease and consequently, markets to correct or crash. Distortions are sold by Central Banks as “growth” and returns to fair market valuations are sold by Central Banks as “crashes” when neither explanation is honest or correct.  These are not mechanisms of a free market but mechanisms of interferences by Central Banks into free markets – a huge and very important distinction that is not understood nor appreciated by the great majority of investors. Central Banks also use this same free market manipulation and intervention scheme to manufacture artificial rallies in stock markets to sell the public on the idea of recovering economies when in essence, such “recoveries” are merely illusions that are destined to crumble.  

This cycle brings us to the present day situation in the New Zealand real estate market, where the following was reported in early November 2009: 

“New Zealand house prices advanced for the first time in 16 months in October, with a lack of houses for sale driving prices higher. Government agency Quotable Value’s residential house price index rose 0.2 percent in the year to October, compared with a 1.1 percent decline in September. It was the first increase in values since June 2008 but the trend in property values has been improving now for seventh straight months. The agency said market activity was well below spring levels, and the price was driven higher by buyers competing for a lower-than-usual number of listings.” 

In Auckland and Wellington, housing prices respectively increased 2.5% and 1.6% in October 2009 from the same period a year prior. In Auckland, average home sale prices reached a 22-month high in October 2009. In response to these “improving” signs, Peter Thompson, managing director of Barfoot & Thompson, stated: 

“It is a sure sign Aucklanders have shrugged off their concerns about the future, and are moving forward with their plans around home ownership. We’re seeing a slow, but steady, appreciation in sale values and we’re now back to the prices being fetched in the corresponding period in 2007 when the median was NZ$351,500.” 

However, one must always evaluate any rise in real estate prices within the framework of the purchasing power of the New Zealand dollar as the media always reports new highs erroneously in terms of absolute amounts of dollars but never in the context of inflation-adjusted dollars.  The RBNZ, from October 2007 to October 2009, dramatically slashed interest rates, thus deliberately weakening the New Zealand dollar by approximately 33% against gold (one of the only sound currencies in the world) in just two years time!   

Thus the “recovery” in New Zealand housing prices, due to the monetary policies of the RBNZ, ultimately created a loss in terms of real wealth for all New Zealanders and is merely an illusion. Remember, if “recoveries” are not a process of free markets, but are instead artificially manufactured by Central Banks by devaluing currencies, one can be left with MORE money that can purchase LESS – this is a loss, not a gain, in terms of real wealth.  In fact, when measured in terms of gold, even though Peter Thompson has claimed that the prices in October 2009 have now recovered to the equivalent median home prices of September 2007, it is not the amount of New Zealand dollars that you own that is important as I’ve just explained but it is what these dollars can buy. In terms of gold, in October 2009, these equivalent New Zealand dollars will now buy you 33% less gold than they would have in October of 2007. Consequently, a more accurate method of interpreting this recovery is in terms of gold and not in the absolute amount of New Zealand dollars. If one looks at this real estate recovery in terms of gold, one will realize a 33% loss of one’s wealth despite median real estate prices returning to their October 2007 levels.  

Currently, if the RBNZ keeps its word, interbank lending interest rates will remain at a record low 2.5% until the second half of 2010. Thus, given that this occurs, it would not be surprising to see property values in New Zealand continue to rise into the end of the year and the first half of 2010 and possibly throughout 2010 before the bubble bursts. However, much of the sustainability of the re-inflated New Zealand housing bubble will depend on the stock market bubbles in Europe, the US and China growing larger as well. If the illusion of these bubbles burst first, then the jig will be up. However, due to foolish and unsustainable monetary policies undertaken by the US Federal Reserve, there is a good chance that serious damage to the US stock market rally will not happen until sometime after this year. 

Because there are so many moving parts that determine daily price movements in real estate markets, I would have to follow New Zealand real estate markets daily and update my opinions daily about when I believe the New Zealand real estate market bubble is set to burst. However, I can tell you, beyond a shadow of a doubt, that the RBNZ’s monetary policies have created tremendous malinvestment in the New Zealand real estate markets (money inflow into real estate that would NOT happen under free market conditions). In turn, this malinvestment has created great distortion in real estate market prices. These distortions will also probably become greater before correcting back towards fair market valuations. 

This is not a knock against the RBNZ, but against ALL Central Banks. Central Banks never create any sustainable benefit to any party except the elite bankers of its nation. If you think this sounds conspiracy tinged, know that former Vice Chairman of the US Federal Reserve, Alan Blinder, in 1994, stated, “the last duty of a Central Banker is to tell the public the truth.” I think that the New Zealand real estate market has a little more wiggle room to move higher if one is already invested.  However, the risk-reward setup is terrible, in my estimation, for anyone seeking to enter real estate in New Zealand today. Understand the above artificial boom-bust cycle that Central Banks create as I have described it above, and you will understand, if you are currently invested, when to exit the New Zealand housing market in the future before it crashes. 

As you ponder the New Zealand real estate market’s future, always keep close to your heart and mind the following statement by John Maynard Keynes, the father of the modern day economic system instituted by all developed governments today: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (1919)”  

If you understand this concept that less than one in a million understand even today, you should be able to use the policy decisions of the RBNZ to avoid getting hurt by the inevitable real estate market fall that is likely to happen sometime in the next year or two.  

 

About the author: 

J.S. Kim is the Managing Director & Chief Investment Strategist of SmartKnowledgeU™, a financial and research consulting company that offers hard-hitting investment guidance to help investors prosper during the ongoing and continuing global financial meltdown. His investment newsletter, the Crisis Investment Opportunities newsletter, has not suffered a single down year since its launch, returning +23.78% in just six months in 2007, +3.21% in 2008 and returning 37.54% YTD as of the end of September 2009. For more information, please visit http://smartknowledgeu.com

Steve Keen: The Reserve Bank of Australia gets it wrong again

Is there an Australian in the house? 

Today, yes there is.  For any of our Australian brethren reading we feature some thoughts from one of your countrymen.  Steve Keen was one of the very few academic economists worldwide that predicted the current debt fueled financial crisis as far back as 2005.  He writes regularly on his blog here.

He gives his thoughts on why the Reserve Bank of Australia has likely made a mistake in calling the all clear and raising interest rates in Australia.  Going so far as to say they may finally prick the ever expanding Aussie housing bubble  (Aussie house prices are now virtually back to their all time highs). 

But for our New Zealand readers we think it’s also an important read as where Australia goes we usually follow not too far behind.  Especially when our main banks are all Australian owned - any trouble in their banking sector will be felt here too.  The fact that house prices have also been rising again in New Zealand and like Australia did not fall greatly means we should pay attention to the happenings across the ditch in Australia.  While Steve is firmly in the deflationist rather than inflationist camp and we are somewhat torn on the issue, it is always worth getting varied opinions.  So over to Mr Keen…

Oh yes, and we have featured a video of Steve Keen previously too which you can watch here.

 

Buy gold in New Zealand - Is now a good time?‎

With Gold having reached a weekly closing price over $1000 US for the first time in ‎history on Friday 11 September and being less than $30 off it’s all time high, is it ‎currently a good time to buy gold in New Zealand?‎

We have written in our FREE eCourse (which you can access here) how the time to buy is on dips ‎not when the gold price is reaching or close to reaching new highs, so that would ‎indicate that this isn’t the best time to buy gold.‎

But, while that might be the case in the U.S., here the New Zealand dollar gold price ‎tells a different story.  Just look at the following 1 year price chart…‎

Clearly, February this year was not the ideal time to be buying gold in New Zealand dollars as it topped out.  This was also when the NZD reached a low against the USD as per the 1 Year Chart below:

The US Dollar generally moves inversely to the (US Dollar denominated) gold price, while the NZD - as a preferred resource currency - generally also moves inversely to the US dollar.  So, the exchange rate plays a major role in the NZ dollar gold price.

The below table shows the annual percentage change in the gold price for 10 currencies during the last eight years of the current bull market in gold. 

Annual Percentage Change in Gold Price
	USD	NZD	AUD	CAD	CNY	EUR	INR	JPY	CHF	GBP
2000	5.7%	11.6%	10.6%	2.2%	5.8%	7.0%	1.2%	5.6%	4.7%	2.1%
2001	2.5%	9.1%	11.3%	8.8%	2.5%	8.1%	5.8%	17.4%	5.0%	5.4%
2002	24.7%	-1.0%	13.5%	23.7%	24.8%	5.9%	24.0%	13.0%	3.9%	12.7%
2003	19.6%	-4.5%	-10.5%	-2.2%	19.5%	-0.5%	13.5%	7.9%	7.0%	7.9%
2004	5.2%	-4.1%	1.4%	-2.0%	5.2%	-2.1%	0.0%	0.9%	-3.0%	-2.0%
2005	18.2%	24.4%	25.6%	14.5%	15.2%	35.1%	22.8%	35.7%	36.2%	31.8%
2006	22.8%	19.4%	14.4%	22.8%	18.8%	10.2%	20.5%	24.0%	13.9%	7.8%
2007	31.4%	21.5%	18.6%	10.4%	23.0%	17.9%	17.5%	24.7%	21.5%	29.2%
2008	5.8%	20.0%	32.5%	32.4%	-1.1%	11.9%	30.4%	-14.9%	0.2%	44.3%
Average	16.3%	12.8%	13.3%	13.6%	13.5%	10.8%	16.8%	13.6%	10.6%	17.1%

You can see that while there is significant volatility year to year in every currency, the overall change in the past 9 years has been very consistent.  At a 13.8% increase on average per year it has also been large!

The chief point to take away from this table is that all currencies have been devalued compared to gold, and on a remarkably similar basis.  Gold has gained by over 100% in almost every currency over the past decade.

So if you are a long term holder you have made good gains or rather protected your original capital well.  So the question remains, is now a good time to buy gold as a New Zealander?

If we look at the longer 2 year price chart for NZ dollar gold we can see that the price is now back around where it was a year ago just prior to the panic surrounding the Lehman Brothers collapse.  So overall we think this is a good time to be buying gold in New Zealand.

As we’ve already mentioned the NZD/USD exchange rate is a big factor in the NZ dollar gold price.  While the “Kiwi” may still strengthen further from here, this is also the time of the year when the US dollar denominated gold price usually strengthens which could negate much of any further NZD strengthening.

Could the price drop further yet?  Yes, as the graph shows it may yet drop back to the longer term trend line at about $1300, but we would much rather be buying gold at the current price than anything else for the last 8 months.  We still believe we are in the early to middle stages of this current upwards gold price cycle.  We discuss this further in an earlier article.  Refer to the last 3 paragraphs here. 

So, if you buy gold in New Zealand dollars now we don’t think you’ll regret this in the years to come.  A minimum of 5-15% of your assets should be allocated to physical gold.  We also discuss this in more detail in our Free eCourse.

NOTE: You can go to our Gold Prices page to see the very latest Silver and Gold prices in both NZ and US Dollars along with their respective gold charts.  For a complete list of all our articles go to the “Sitemap”.

There won’t be any housing led recovery in NZ anytime soon

As we discussed in “Green Shoots? – Don’t believe the hype”, we believe comments coming from world and central bank leaders and economists that the worst of the recession may be behind us are likely very premature.

They’re still coming though.  For example here in New Zealand, BNZ bank economists recently stated that the housing market may drive the first stages of economic expansion after an 18-month-long recession that may be all but over.    Housing has fallen enough to spark a “significant bounce” in activity in the next 12 months, BNZ says. But that will come through a rise in house building, not another house-price boom.

If house prices did take off again, it would be a “bad sign” for the economy, suggesting few had learnt the lessons of the past.  The leading indicator for housing is sales turnover, which slumped by two-thirds to about 4000 in May. Sales have since improved to more than 6000 a month. That is still about half peak levels, but the demand for housing is buoyed by rising net migration, which could reach 30,000 over the next year, BNZ says.  At the same time, house-building approvals are down to record lows, suggesting not enough homes are being built to meet demand.  House building should also get a boost because the cost of debt is falling and shorter-term interest rates are expected to stay low until late next year.  Household spending usually follows house building. Retail spending should start to creep up late this year, supported by tax cuts and net migration, BNZ says.  That will be offset by the impact of unemployment rising to just under 8 per cent and higher savings rates.

So BNZ believe - as do many - that rising net migration and record low new building approvals will lead to growth in the property market.  Albeit in construction rather than house prices they hope.

However a recent interest.co.nz report shows that currently there is an oversupply of rental property with high vacancy rates and rents actually decreasing.  It is hypothesised that this is due to people downsizing, reducing work travel distances or moving into shared accommodation.  Also that students may be moving back in with Mum and Dad.  All likely solutions in tougher times we should think.

The “net migration causing housing market growth” argument seems to ignore the fact that in a struggling economy it is possible that these people returning to or migrating to NZ may struggle to find employment themselves. 

We reckon this may even be happening already.  Last week ASB reported on the latest unemployment numbers (emphasis added ours)…

The unemployment rate increased sharply to 6% from 5%, despite the number of employed holding up better than we expected. Rather than job losses, the increase in unemployment reflects an increase in the number of job seekers.  The pool of job hunters increased due to growth in working age population. Also contributing to the increase was the rise in participation. The size of labour force increased 0.6%, and, combined with a 0.4% loss in employment, pushed the unemployment rate up a full percentage point. The last time unemployment jumped by a full percentage point was in September 1988.

So while there are not as many job losses, (if you believe the numbers - read our previous article here for why you shouldn’t) there is an increase in the number of people looking for work.  ASB go on to explain how usually in a weak labour market there is a drop in the number of people actively looking for work as they give up searching or else study instead.  This isn’t occurring and they surmise this may be due to “the higher indebtedness of households compared to previous recessions.”   No kidding – if you’ve got a monster mortgage you most likely won’t say “Forget this looking for work malarkey, I’m going off to get a student loan”.

But could it also be that “net migration”, the supposed salvation of the New Zealand property market, is also adding to the numbers looking for work?  We don’t see it as being too long a bow to draw that the numbers looking for work are also going up due to migrants arriving and not finding work in a down economy.  And if the green shoots of recovery wilt as we believe will happen in the not too distant future, then it’s not going to get any easier for migrants, or anyone else for that matter, to find work.

So our argument linking these stories together – patience, we are getting there slowly -  is that…

If the “net migrants” can’t find work, they may also struggle to afford to purchase a home.  Given that the disparity between the cost of buying versus renting is still so great, and there is a surfeit of rental accommodation, it would seem a reasonable argument that a portion of this increase in population may end up renting not necessarily by choice, but by circumstance.  The “housing shortage” is only a shortage if there are enough people looking to buy. 

This would make the BNZ and many in the mainstreams argument of any housing led recovery null and void we reckon.  Therefore a temporary blip up in house prices now, but more pain to come in the form of higher unemployment and more house price declines in the near future.

Do you agree?  Leave a comment below.  We like a good argument discussion!

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