Brian Gaynor: Figures show house bubble a real worry

COMMENT

The latest bank lending statistics give a clear indication of why the Reserve Bank is concerned about a housing price bubble.

The figures show that the country's commercial banks continue to pour money into residential mortgages while the productive sector, particularly agriculture, forestry and manufacturing, receives a relatively small amount of bank funding.

As the accompanying table shows, housing loans rose by $11.9 billion, from $70.5 billion to $82.4 billion, in 2003. Since the end of 1990 residential mortgages have risen from $15.6 billion to $82.4 billion and now represent 45.5 per cent of bank lending compared with 24.4 per cent in December 1990.

The huge increase in mortgages has been one of the main factors driving the buoyant housing market.

On the other hand, lending to the productive sector has been far more modest. In the past 13 years housing loans have increased by a whopping $66.8 billion while lending to the agriculture, forestry, fishing, mining and manufacturing sectors has risen by only $18.6 billion.

Herein lies one of the main problems with the New Zealand economy: the low level of investment in the export sector.

There are three major sources of export investment - domestic equity, direct foreign investment and bank lending.

The stock exchange should be a major source of equity funding but it has not fulfilled this role. The New Zealand sharemarket is relatively small, most of the recent new listings have been domestic-oriented companies and only two of the 10 largest companies, Carter Holt Harvey and Fisher & Paykel, are export-oriented.

The NZX is on the back foot because a capital gains tax applies to managed funds that invest in the New Zealand sharemarket while there are tax advantages associated with rental housing investments.

Foreign direct investment (investment in new projects rather than the purchase of existing assets) has also played a minor role in New Zealand because successive governments didn't want to be accused of picking winners.

This is also clearly ridiculous as demonstrated by The Lord of the Rings, which has given a huge boost to the country's tourism sector.

The banking sector should also be a source of funds for the export sector but our banks have a huge bias towards residential housing.

New Zealand isn't the only country experiencing a housing boom based on bank lending. In the past two years residential mortgage lending in Ireland, which has the same population as New Zealand, has risen 60.9 per cent to €54.7 billion ($102 billion). The average Irish house price has surged to €234,000 ($435,000) compared with $229,000 in this country.

But there are differences between New Zealand and Ireland including:

* Residential mortgages represent 34.1 per cent of total bank lending in Ireland compared with 45.5 per cent in New Zealand.

* In Ireland mortgage lending represents 41.8 per cent of GDP compared with 62.9 per cent in New Zealand.

* The Irish Stock Exchange has a market value of €68 billion ($126 billion), which is well above the level of mortgage debt, while the value of the NZX is only $51 billion, well below house borrowings.

* Successive Irish governments have promoted direct investment that has had a positive impact on export growth. Annual Irish exports are €78.3 billion ($146 billion) compared with house lending of €54.7 billion whereas New Zealand exports are only $29.2 billion compared with residential mortgages of $82.4 billion.

Last week Reserve Bank Governor Dr Alan Bollard made an important speech to the Canterbury Employers Chamber of Commerce. His main point was that if physical asset prices are rising more rapidly than general prices then resources will be diverted to build or create more of these assets.

According to Bollard asset price bubbles "distort resource allocation in the wider economy as people get fooled into investing in the wrong things" and "when the bubble bursts there is damage to consumer and investor confidence, economic activity and potentially the financial system".

The Reserve Bank Governor didn't say there is a speculative housing bubble but it is clear from banking statistics that too much of the country's economic resources are being directed into property and not enough into the export sector.

This unhealthy trend has accelerated in recent years.

The Penny Dreadful One of the features of most sharemarkets is the penny dreadful. These are the companies that have fallen from grace, whose share price has dropped below 5c but are still managing to keep their heads above water.

Any status report on these companies is bound to be fairly general because of the sparsity of information but there is always the possibility of a potential winner in this neglected group.

* Apple Fields has a sharemarket value of $1.2 million at 4c. A proposal to purchase a precious metals interest through a South Australian company in 2002 fell through and according to its latest stock exchange announcement Apple Fields is "not presently reviewing any investment opportunities".

* Following a shareholder-approved debt capitalisation Newcall has a sharemarket value of $3.6 million at 2c, shareholder funds of $945,000 and is 49.5 per cent owned by Charoong Thai Wire and Cable Public Company.

Newcall owns a mish-mash of small companies and is looking for an acquisition or merger with a local company to facilitate the exit of Charoong.

* Pure New Zealand is worth $3.7 million at 4c and is effectively controlled by the same South Australian company that was involved with Apple Fields in 2002.

Yesterday Pure said it was acquiring Balmoral Capital, an Australian merchant bank, and earlier announced it was purchasing Greater Bendigo Gold Mines, which has a great name if nothing else.

* Savoy has a sharemarket capitalisation of $2.8 million at 2c and is effectively controlled by chairman Garrick Wells. The company isn't giving anything away about its future direction.

* Sealegs (formerly IT Capital) is one of the hot stocks at present and at 4.3c has a market value of $28.9 million (no, that is not a mistake).

Renewed investor interest is based on the start-up production of 12 amphibious boats with a total sales value of approximately $1 million.

* Selector, which has a market capitalisation of $1.6 million at 2c, recently announced that it has signed a conditional sale and purchase agreement to acquire the Green Acres Franchise Group. No further details are available.

* Spectrum Resources, which is one of the few penny dreadfuls earning revenue, is worth $4.9 million at 1.6c. Chief executive Gavin Mitchell continues to predict a positive future but investors shun the company.

Maybe Dorchester Pacific, which recently acquired a 6.8 per cent stake, can reproduce its 42 Below marketing magic on Spectrum.

* Trading Solutions, formerly known as E-cademy, has a sharemarket capitalisation of $2.1 million at 0.1c. The company is involved in corporate training, continually issues huge amounts of new shares and is 92 per cent Australian-owned.

* Widespread Portfolio recently changed its name from NZIJ.co.nz and is now under the control of Chris Castle and his close associates. At 3.3c the company has a market value of $8.7 million, compared with the net tangible asset value of its investment portfolio of 2.63c a share.

Speculators keep a close eye on these companies because there is a possibility, albeit a faint one, of finding a pot of gold at the end of the rainbow.

* Disclosure of interest: Brian Gaynor is an Apple Fields shareholder.

* Email Brian Gaynor