Sunday, March 26, 2017

Financialization of Economies in New Zealand, Australia, Canada

Three currencies on our radar screen include the Kiwi (New Zealand dollar), the Australian & Canadian dollar  that may be vulnerable to a sharp price valuation correction if some of their real estate markets such as Sydney, Auckland, Vancouver & Toronto stall or commence a significant price correction. Some reports already have Vancouver declining in Canadian dollar prices. In Auckland, 55 percent of the homes are now valued at or over 1 million NZD. Within the city of Vancouver at peak pricing, almost every detached house was valued at or over 1 million CAD.

Their respective Central Bankers leaders over the last few years have implemented close to zero rate interest rate monetary policies in these three amigo countries coupled with a big FOR SALE sign open door policy to foreign investors targeting both their residential & commercial estate. Massive global capital inflows ensued, a large amount from Mainland China have boosted primarily residential real estate values in all these markets mentioned thus decoupling the market valuation from traditional income earned from the local economy.

In due course, real estate has become of the largest components of their respective economies employing many in construction, sales, finance, legal, architects, etc. History has shown several times that massive mortgage financing stimulus creating unsustainable false wealth for a short period of time does not end well most of the time. These economies have become 'Financialized' whereby taxes and artificial short term income and capital gain wealth has kept several governments budgets flushed with cash flows derived primarily from surplus domestic real estate taxation revenues.

The United States in years 2008-09 provides a clear example of the damage that can be done when a gas bag real estate market deflates. Spain during this time entered a depression with 20 percent PLUS unemployment. It has now taken Spain 10 years to recover economically from their experiment with a huge bubbly domestic real estate market..

China has recently implemented further capital controls to try and restrict capital outflows from its citizens in order to help protect and stabilize their national foreign exchange reserve position. Once the flow of foreign capital recedes or completely fades, it is impossible for Canada, New Zealand and Australia to rely on the local economy wealth production in income earned from the local economy to support the current inflated price level.

The most likely scenario is for their respective governments is to keep interest rates low, try and increase their domestic inflation rates while further depreciating their currencies to help mitigate the 'Financialization' damage that is likely to arise.

We remain cautious on these three amigo currencies.

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