Bernard Hickey: New Zealand a 'zombie nation'

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The New Zealand economy feels a lot like a 'Zombie Nation' that wants to keep extending the loans and pretending that eventually everything will eventually go back to normal.

Parts of our financial system and many property owners have been in a zombie-like state for much of the last two years, hoping that the lending will start again and the deals will return. No one wants to sell for a loss. Some markets are not 'clearing' by matching lower demand and higher supply with a lower price.

Instead, they are frozen in the headlights of the Global Financial Crisis.

The best and first examples of 'Zombie Nation' were in the finance company sector. All through the middle of 2008 and into 2009 finance companies stopped paying their bills and asked for more time.

They pleaded with Mums and Dads that all they needed was more time and everything would be OK.

The government helped those still alive in September 2008 by giving them a guarantee to 'extend and pretend' for a bit longer.

Moratoriums for Strategic Finance, Hanover Finance, St Laurence, Dorchester Pacific, MFS Pacific, Geneva Finance, Dominion Finance were agreed through late 2008 as debenture investors agreed that.

The government offered an extended guarantee late last year for the likes of Equitable Mortgages, South Canterbury Finance, Fisher and Paykel Finance and Marac Finance.

The major banks meanwhile were in a much stronger position, although were happy in late 2008 to accept a government guarantee. Australian shareholders pumped more than A$20 billion into these banks and they remain strong enough to keep lending. However, they have yet to 'mark to market' any significant fall in residential property prices or rural land prices. Even the big banks have been satisfied to sit on the sidelines to wait for the activity to return.

But the sorts of sales volumes and valuations we saw through 2005, 2006 and 2007 haven't returned and won't, potentially for decades.

Something changed permanently in the wake of the Global Financial Crisis. The easy, cheap foreign loans have stopped. The seemingly unstoppable and ever-accelerating rise in property prices is over.

Things aren't returning to normal. There is a new normal.

Some parts of the economy have finally worked this out and are dealing with it in the obvious way. They are lettting the market clear by setting prices that match lower demand with higher supply.

The retail sector is the most obvious. Anyone walking down any main street in New Zealand in recent weeks will have noticed that every second shop has big 30 per cent to 40 per cent to 50 per cent off signs.

Retail sales volumes (but not values) rose sharply in the June quarter to their highest levels in more than three years as discounting pulled buyers out of their shells.

But that isn't happening in a widespread way in rural and residential property...yet.

It is happening where sales are being forced through by banks and receivers.
It is now happening in earnest for any assets controlled by receivers, particularly development properties overseen by finance companies.

Terralink figures show mortgagee sales now make up around 5 per cent of total sales, up from 1 per cent two years ago.

The major banks have yet to move en-masse to either revalue their loans or to call in those loans that are under water.

However, there are some early signs of loans being called from some very extended dairy farming and rural properties, but it is unlikely in the conventional residential loan books, unless there is some sort of global financial crisis that causes banks more funding grief.

The question then is how long will New Zealand's residential and rural property markets stagger on in this zombie state hoping to extend and pretend until the money-go-round starts again.

It's been more than two years now and the game is ending now for finance companies.

How much longer before buyers and sellers meet together in the middle to clear the market?

It is unlikely to happen any time soon without being forced.

Meanwhile, the economy continues to stumble on.

Japan had a similar problem through the 1990s and 2000s as banks and companies were supported by government or investors afraid to crystallise losses built up in the 1980s real estate boom that they thought would turn around.
Stock and property prices in Japan eventually fell 60 per cent over the ensuing 20 years.

Sometimes it is better to let the market clear and move on.

Only time will tell if extending and pretending is a sustainable long term solution.

It certainly hasn't worked for finance company investors who agreed to extensions in late 2008. Around 200,000 New Zealand savers have NZ$6.3 billion frozen in 59 dead or dying 'Zombie' finance companies and investment trusts.

- INTEREST.CO.NZ