Media reports highlight the problem of an overheated real estate market and the high indebtedness of consumers, particularly in the USA. Could New Zealand's property be next?

Since that ill fated day in September 2001, after which central banks around the world aggressively lowered interest rates, lenders have made available huge amounts of capital to re-fuel confidence. This has brought about the biggest real property boom in human history.

Today the momentum of rising real estate values has eased in the USA and now, some borrowers in that country are less certain of their ability to repay existing loans. In New Zealand, interest rates have been rising yet our average house price is still said to be the highest in the world, relative to fundamentals of the economy (wages, inflation etc). A survey, undertaken by Fitch International Rating Agency to determine which countries are exposed in terms of their housing market risk is revealed below. Interestingly, the USA is not the riskiest - For the long-term investor in real estate, it is business as usual (presumably they have already built up good profits as a consequence of the massive growth behind us). For the new hands, the immediate concern is this ongoing issue of credit. Should it slow, the market will fall. It is this contagion effect that is apparent in our non bank finance company sector and it is this same "fight or flight" sentiment that now spoils credit markets around the world.

Clearly the USA has the biggest problem, but maybe they also have the biggest market!

Overall the US mortgage market is US$10.4 Trillion. The sub-prime accounts for 13% of this – about US$1.35 Trillion. Worrying is that approximately 14% of the sub-prime is in arrears. So, how safe is a first mortgage security investment – apparently not that safe in the USA!

Good financial institutions have lines of credit to help them through tight funding periods (liquidity) however, today we are seeing overseas inter-bank lending stall as institutions themselves are nervous about which banks hold the bad debts, about who is exposed to the "sub-prime"? Yes, banks are nervous about lending to banks so, should we be?

Just before you batten down the hatches and put that cash under the mattress remember, in times of a credit crisis, Central Banks inject capital into the system. Their failure to do so could result in a major economic disaster (read: Depression 1930's and Recession 1970's). Significantly bad performance is apparent in share, debt and property markets where big losses occurred after a period of substantial economic excess. While we have already had more excesses than any other time in human history, we do not think we are in the same position as previous economic dark ages. Corporate fundamentals are strong and there is good economic growth around the world, particularly with Emerging markets and European markets driving momentum. Even locally, things are booming - particularly in Australia.

Good companies have strong balance sheets, with solid profit growth. The current credit crunch is not a corporate event. The major risk to corporate profit is that the US consumer remains the predominant spender in the world and we suspect that their ATM, the revolving credit facility leveraged against their falling house value, will soon reject continued withdrawals. It is not unreasonable to expect a lowering of confidence, a lessening in spending and a slowing of economic growth.

Central banks will try to keep things calm by pumping money into the system but really, some carnage is necessary (to protect the long-term wealth). Remember, the rich typically get richer in any environment and so, ask your self, why is that? In reality, there is no free lunch. The longer the excesses persist, the longer the recovery (think of a hangover – and remember the experienced drinker knows when to drink plenty of water)!

Assuredly loan defaults will increase however, globalization is alive and well. Confidence needs to be returned, albeit coupled with measures of restraint. Our message is; "Do not borrow too much but do look for good investment options, for there are many to be had".

It is times like these that the good managers of money prove themselves to their clients.

Tony Munro is managing Director of Munro Financial, an independent Christchurch based personal financial advisor firm, found at www.munrofinancial.co.nz.

Which Countries are Most Exposed - 2007?
Housing Overvaluation	Household Debt Vulnerability	Overall Risk Rank
1 France	1 Norway	1 NZ
2 UK	2 NZ	2 Denmark
3 Denmark	3 Australia	3 UK
4 NZ	4 Denmark	4 Norway
5 Sweden	5 Finland	5 Sweden
6 Ireland	6 Sweden	6 Australia
7 Norway	7 UK	7 Finland
8 Spain	8 Netherlands	8 France
9 US	9 Canada	9 Ireland
10 Australia	10 US	10 US
Source: Fitch