… and a better New Year- Dennis Dorney

News and views from New Zealand

The NZ Reserve Bank has decided that a borrower who cannot raise 20% of the total value of the home he wishes to buy may not get a mortgage (see my last article). Figures are now available for the first whole month (October) under which this restriction applies and although it is early days yet and the figures are small, the trend is worrying.

Mortgages for which the restriction applies have fallen about 50% from $1.2 million to $0.57 million. On the other hand the value of unrestricted mortgages rose from $3.50 million to $3.90 million, leaving total mortgage commitments little changed.

This suggests that speculators have moved in to take up the slack, obviously realising that would-be home buyers will now have to rent instead. If so, the Government by leaving the problem for the market to fix has created a more speculative (and hence more risky) market than before.

Looking back through my previous articles, I am stunned that I have not yet mentioned the current round of SOE assets sales which the government has been forcing through parliament, because it vies with housing as the debacle most likely to topple the government at the next election.

In Jan, 2011 the Government announced that it would be selling down its share of the energy companies, Mighty River Power, Meridian Energy, Genesis and Solid Energy from 100% to 51%.It would also sell its existing shares in Air New Zealand down to 51%. Although this sounded like a bold plan the Labour Party was in such disarray that the Government had little to fear. In the lead up to the election 80% of the public opposed the plan and the National Government clearly lost the debate on this issue. However, it won the election by a large majority and immediately claimed a mandate to sell down those assets and to do virtually anything it wanted to.

The opposition vowed it would raise a petition to force a referendum on the issue. This requires something over 300,000 signatures (10% of eligible voters) – a massive effort undertaken more by the Greens than the Labour Party, whose own history on asset sales is rather embarrassing. One would think that the Government would have some moral obligation to await the result of the petition and, if a referendum resulted, to recognise that the outcome must have more validity than its own claim of a mandate. No such luck. After some set- backs the required number of signatures was reached but the referendum that ensues (it will be completed by Dec12th) will be non-binding and Prime Minister John Key has stated bluntly that he will not accept a negative result and that the referendum “is a waste of public money”. Perhaps it is, because in the interim he has already sold down the shares of Mighty River Power, Meridian and Air New Zealand.

Why is this a debacle? It lost virtually every round of the economic debate on asset sales. Even the Treasury, which is as right wing as you can get, would not endorse the government arguments. The share value of each SOE offered for sale so far was at the low end of market valuations and has fallen since. Recently Mighty River Power ($2.50 issue price) closed on a new low of $2.10. Meridian Energy is now below its $1 issue price. Before its sell-down, Air NZ had been performing well on the stock market and the Government was predicted to be able to sell at a premium but the shares reached only the offer price of $1.65.

Genesis may now be withdrawn from sale because of the poor results. As for Solid Energy, the less said the better. Even before it was put up for sale, Solid Energy (meaning coal and lignite) revealed that having been encouraged by the government to take on more debt and be “more entrepreneurial”, it had run into financial difficulties, requiring it to mothball its $29 million Mataura lignite briquette operation and be bailed out by a $100 million injection by the Government.

It also came to a debt rescheduling agreement with five banks but so far the Bank of Tokyo (owed $30 million) has refused to accept this deal and intends to pursue its claim through the courts. This could put Solid Energy into receivership and a forced sale to anyone who wants it, unless the Government intervenes, which is unlikely.

So what has the Government got to show for its ideologically driven foray into State asset sales? John Key invoked the idea of “mum and dad” investors, buying shares for the first time, who would benefit from their purchase. If these people exist they will not want to repeat the experience and may well want to sell. Meridian energy is New Zealand’s largest generator of natural energy, which surely represents the future. We have effectively lost control over it. Meanwhile the government is encouraging oil and gas exploration that most experts say should remain in the ground. And Solid Energy, which produces some of the dirtiest energy imaginable, will be sold to any company that has no qualms about burning it. You needn’t ask if our Government has a commitment to reduce global warming.

It is traditional about now to wish people a prosperous New Year. That is a dream too far. I’ll settle for a better one.

Dennis Dorney is a NZ member of ERA