In short, the situation in New Zealand, and other industrialized nations right now is that the financial system is shot as a direct result of fudging the issues that emerged during the 2008 global recession.
Namely, too much of what we have borrowed to buy is over-valued, housing being the obvious contender.
Once upon a time, the rental price of a house in New Zealand was roughly 10 per cent of its value ( a very rough guide, but a guide none-the-less).
So, a house costing $500,000 would typically be rented for $500 a week. But in recent years, rents have not kept pace with rising sale prices, which I believe puts us in property bubble territory.
Property investors are banking on making gains due to the property rising in value, not on income from tenants. Which means if property prices drop, property owners who have over stretched themselves could find themselves owning property that’s worth less than the bank loan tied to it. And that could put pressure on the banks.
Low interest rates has also led to there being far too much debt being created. Banks are to blame here, and not only that, banks are focused far too much on property loans, at the expense of lending to businesses to develop new ideas and create jobs.
The RBNZ is not in a position to call the shots any longer. The banks are running the show.
If it all turns to custard this year, it will be different than 2008 when China and Russia kept the global economies going.
For these two countries are facing their own economic issues, they will not save us next time around.
There were recessions in 1968, 78, 88, 98, 2008…anyone see a pattern here?