Alan Clarke: Key may have a cunning plan

Prime Minister John Key.

Like many Kiwis I have been wondering why Prime Minister John Key does not seem to be doing much about the insane Auckland property prices. Successive governments have done too little and created this ludicrous situation, and now Key has a bubble out of control. Maybe he thinks any action at this late stage could make things worse, or even explode the bubble with disastrous results. Alternatively, he could be more cunning than that.

THE PM HAS PROBLEMS

* The Government has $64 billion in external debt .

* Our banks have borrowed $118 billion offshore, up from $55 billion in 2001.

* Dairy, our biggest exporter, is in trouble, with an estimated $7 billion drop in exports.

* No one can be sure that the dairy price will recover any time soon.

* That means the Government's revenue will be well down too.

MONEY TROUBLES? SELL SOMETHING ...

Assets sales are unpopular with voters, but Key is letting Aucklanders sell their houses to "aliens" for huge prices. In effect a lot of "alien" money is coming into New Zealand through the hands of Aucklanders, who cannot refuse the huge offers on their property. Many will then leave Auckland altogether after they sell, taking the money and resettling in regions such as Tauranga, Napier, New Plymouth, and Northland.

The regions have been sagging and are in need of the economic and cash fillip. In theory this is all good so far, as it helps compensate in part for the low dairy prices, and injects cash into the the regions.

So, is this Key's cunning plan and will it work?

FINANCIALLY

Cash flowing into New Zealand is usually good for just about everyone in terms of increasing wealth and more jobs.

POLITICALLY

If it is Key's plan and it does work he might just win a fourth term in government.

However, in time it might become known as "John Key's Great Auckland sell-off" and he could be reviled by many Kiwis for selling New Zealand to the "aliens".

KEY'S OTHER TOOLS

Tourism is a strong contributor to the economy and Key was in Queenstown last week with his trademark smile, opening the ski season. Tourism is always helped by a lower New Zealand dollar and, lo and behold, the Reserve Bank let interest rates ease recently, and the dollar immediately dropped 5 per cent. This is good for tourism, dairy farmers, and our exporters too.

RISKY FOR OUR ECONOMY

Lower interest rates, aka lower mortgage rates, will just add fuel to the Auckland property boom, and increase the bubble and its associated risks even more. Then again, the great Auckland sell off could bring enough money into New Zealand to get us through the current dairy price malady.

It is very risky though. Bursting bubbles mean loss of jobs and mortgagee sales, recessions and depressions. This is tough on people, young families in particular.

WHAT CAN KIWI INVESTORS TAKE OUT OF ALL THIS?

Sometimes several factors combine to create price "momentum", either upwards or downwards.

Auckland property is experiencing an extreme upwards momentum, and the obvious thing for investors to do is take profits. Remember, we are always urged to sell expensive assets and buy out-of-favour (cheaper) assets, so if you have a big Auckland house downsize it or leave town.

If you have several rentals in Auckland, sell some, buy something out of favour, and keep a bit of cash in your kitty too. If the bubble does burst, cash will be king.

For the farsighted patient investors who have real perception, invest where the money will go. Tauranga is an attractive city. Outer Auckland, within a reasonable commuter distance, is also an attractive option. Perhaps a rental on a few acres near the railway line, north of Huntly. However you will need to be both a thinker and have lots of patience.

If that's all too hard, just invest in diversified portfolio of cash, bonds, and shares.

So is selling Auckland Key's cunning plan? If it is and the economy holds together, the National party might get its fourth term. But what are the long-term ramifications of selling our country to "aliens"?

Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at acfs.co.nz Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and is free.