I was sitting in a cafe recently. At a nearby table was an elderly couple and their financial adviser. They were discussing investment options. The adviser was suggesting they look at share investing as opposed to residential property. Aspects of his advice were very sound. He was pointing out the low rental yield on residential property and the advantages of investing in share index funds. He pointed out that this government has increased costs and potential tax liabilities for landlords. I felt a little guilty at eavesdropping. I do have friends, but he was crook that day.
I have been a share investor for more than 20 years. I also have a fascination with macro economics and economic history. Likely why I often dine alone.
Our sharemarket is booming. The market index has recently breached new heights. Our property market is slowing apart from certain regions such as Dunedin and Wellington.
After the 2008 global financial crisis (GFC), central banks around the world slashed interest rates to try to pump up demand in their economies and to provide life support to their financial sectors.
For a year or so after the GFC the housing market in New Zealand stalled and fell slightly. The banks were wary of lending for property for fear of bad debts. But eventually things stabilised and the banks regained their lending mojo.
The ultra low interest rates set by the Reserve Bank after the GFC rekindled the housing market, particularly in Auckland. Record migration levels and housing supply constraints turbo charged the market. But in recent years capital gains on residential property in many regions have slowed and slightly reversed. The debt levels acquired on property are simply too great for average income earners.
Yet interest rates remain at record lows. People, like the elderly couple at the cafe, with money to invest are looking for better returns. Returns on bank deposits are just too sickly.
Many Kiwis have little understanding or regard for investing in shares. This is likely a legacy of the 1987 sharemarket crash and the woeful education on financial literacy in this country.
As our housing market surged in the past decade so has our sharemarket.
But now our housing market is weighed down by the huge debt levels that local buyers have accumulated in the past decade. Our sharemarket is also very well priced. Yet it is still attracting investors wanting somewhere to place their funds to gain a semi decent return.
I am not an investment guru. No one is. I am very wary of anyone who paints himself as an investment oracle. But I do have a sound understanding of recent economic history.
I am picking our sharemarket will continue to boom as the Reserve Bank is expected to cut interest rates further and people seek a decent return on their funds. The Reserve Bank is also trying to reduce bank lending on property by increasing their capital requirements. The banks are bleating loudly about this.
I don't believe our sharemarket is in bubble territory — yet. A spectacular crash is unlikely because ultra low interest rates provide a floor to the market.
But novice share investors need to be very cautious. Symptoms of a dangerously inflated sharemarket include a sudden raft of new companies, that are of dubious quality, listing on the market. This means the sharks are circling for unwary investors. If the banks start lending for share investing this would be another warning sign. If uber drivers and barbers start chatting about the success of their share portfolio this is also a red flag. Ultra low interest rates are not a sign of economic strength. They are a sign of an economy that is still on life support.
• Peter Lyons teaches economics at Saint Peter's College in Epsom.