Retiring in New Zealand. Bring $ over or is the NZ dollar now in a dangerous bubble?

[JBrit]

A friend of a friend who is a former financial adviser suggested bringing my US dollars over here now to invest. However the dollar has been irrationally high… and in the last week it shot up to $85. He thinks it will stay there for a while. I am not so sure since the high dollar is not based on real wealth but on a housing bubble largely fed by overseas investors, and also based on one of the highest interest rates in the developed world (mostly due to the inflation brought on by the housing bubble.)

The average exchange rate since we moved here in 1995 from the US has been about $.66 to the US Dollar. http://www.anz.co.nz/commercial-inst...raphs/nzd-usd/. This is close to where he rate “should” be to reflect real costs (purchase parity). And this is reflected in the real wealth differences between the countries. The per captia GDP of NZ is $ 29,176 USD according to the World Bank as compared to the USA which is $54,704 USD. http://en.wikipedia.org/wiki/List_of...PP)_per_capita. In addition, the cost of living as compared to the US is 36% higher than in United States largely due to the inflated dollar (also reflecting the GDP difference). e.g. http://www.numbeo.com/cost-of-living...y2=New+Zealand.

I emigrated with my family from in 1995. We became dual citizens in 1999. I am now looking at early retirement 6 years before the Super due to redundancies at work. I have assets overseas that may be able to bring in around $40-45k USD a year, which at the current exchange rate is OK but we could do much better moving back to the USA. Any suggestions?

[Super_BQ]

Greetings JBrit and welcome to the forum.

Now for the gritty bit. Your financial friend does have some strong assumptions and I know many will disagree.

I am not so sure since the high dollar is not based on real wealth but on a housing bubble largely fed by overseas investors, and also based on one of the highest interest rates in the developed world (mostly due to the inflation brought on by the housing bubble.)

I complete agree with this statement, but other forum members (such as batgirl1001) will disagree. If you follow a post in the Real Estate thread, there's been a long debate between myself and batgirl about real estate investments in NZ and capital gains tax, etc. As a developed nation, NZ does indeed have high interest rates (and it will go higher in the next year or so) - my explanation would be due to inflationary pressures. Higher interest rates will attract more overseas $ into NZ to lock in at attractive rates, causing more strength in the NZD

This is close to where he rate “should” be to reflect real costs (purchase parity). And this is reflected in the real wealth differences between the countries. The per captia GDP of NZ is $ 29,176 USD according to the World Bank as compared to the USA which is $54,704 USD. http://en.wikipedia.org/wiki/List_of...PP)_per_capita. In addition, the cost of living as compared to the US is 36% higher than in United States largely due to the inflated dollar (also reflecting the GDP difference). e.g. http://www.numbeo.com/cost-of-living...y2=New+Zealand.

What's really pushing the NZ $ stronger to the USD has more to do with what the US is doing. Do look at other developed nations over the past 10+ years for the comparison to the USD (like Australia & Canada) and you will see that it's not a coincidence. In macroeconomic sense (your financial advisor should have some idea), that the US debt is a burden to the US$ strength. When a nation keeps printing $, the strength of it's currency will simply devalue.

I have assets overseas that may be able to bring in around $40-45k USD a year, which at the current exchange rate is OK but we could do much better moving back to the USA. Any suggestions?

In terms of retirement - that all depends what you value. NZ attracts wealthy celebrities, and the rich not for financial benefit but rather, a place to have some isolation to the rest of the world. If you're trying to look into the future and don't want to be in retirement, then IMO it's hard not to pick the US as a place to live. Look to going where the grass has just been cut vs where the grass is already grown too fast.

[JBrit]

Thanks. First of all, how do you put those boxes around the quotes?

After reviewing the stats today, I think it is likely that the New Zealand dollar is now in a bubble of sorts that most certainly tumble within 2 years. So bringing US dollars over now would not be wise. (A drop to 77% to the USD would wipe out all gains if it happens within a year...and it already happened this year.) Like all historical bubbles, people (such as my friend’s friend) are always in denial before it bursts. And the historical data shows significant dips every 8 years or so. The reasons are almost always unexpected (some sort of crisis), so making a prediction on how this will happen is like predicting the daily weather a year from now in this system of “chaos”.

New Zealand has the highest interest rate by a long shot of any developed nation other than Australia (the next highest... tiny Iceland notwithstanding). The EU is .5% to NZ’s central bank rate of 2.5%. The USA is .25% http://www.fxstreet.com/economic-cal...nterest-rates/ and http://en.wikipedia.org/wiki/List_of...interest_rates

Certainly low interest rates have something to do with debt but per capita external debt is the same here as the USA. http://en.wikipedia.org/wiki/List_of..._external_debt The US’s and EU’s low rates were instated for the need to kick start the economy. It worked in the USA, which now is growing OK…bumpy due to the crazy politics, but growing at rate just below NZ’s is now, and since it is emerging from a recession, it is due to start growing much faster (assuming the politics is ironed out albeit, a long shot until at least next year’s congressional elections). The inflationary pressures here therefore seem due primarily to an overheated housing market and Christchurch. Interest rates are also directly related to risk. NZ is a greater risk and will fall at global instability.

The bottom line is that the wealth generated in New Zealand as seen in the per captia PPP or GDP lists above is about 35% less than the USA. And not coincidentally the cost of living is about 37% higher here with the dollar about 30% higher than its average rate (since 1995). (Costs will always be more on an isolated island with a relatively small population).

Sooo. I guess it is a crystal ball thing at this point of when the NZ dollar will dip significantly to the USD, but it most likely will drop sooner or later.
However we do feel more Kiwi now than American, and our son (now at Auckland’s medical school) is 100% Kiwi. We own our house in a lovely semi-rural location and don’t want to leave after 18 years, so I guess we’ll probably hold out for a dollar correction.

[JandM]

Thanks. First of all, how do you put those boxes around the quotes?

What I just did to get that effect was as follows. I ran the cursor over that line in your post so it was highlighted in blue, then hit Control and c (the 'copy' instruction). I placed the cursor in the Quick Reply box and hit Control and v (the 'paste' instruction). I then highlighted the text again in its new location, then clicked on the second icon from the right, the speech bubble. That caused to appear at either end of the passage, and those instructions are interpreted to give the box effect when I make the post.

[Super_BQ]

In the area that you type (Quick Reply), the top row of icons show the editing of the text you type in. To the very last icon is the QUOTE box that if you move your mouse cursor over it, it says "Wrap [QUOTE] tags around selected text". You click on it and type the message to be within the boxes (or copy & paste the message of a person's previous quote). When you see -{QUOTE] your message [/QUOTE}- you click to the end and continue your text typing in the next paragraph to be outside of the box. I hope this helps.

New Zealand has the highest interest rate by a long shot of any developed nation other than Australia (the next highest... tiny Iceland notwithstanding). The EU is .5% to NZ’s central bank rate of 2.5%. The USA is .25% http://www.fxstreet.com/economic-cal...nterest-rates/ and http://en.wikipedia.org/wiki/List_of...interest_rates

Yes i'm in complete agreement with you and it's good that you made some reference as all too often, myself, I get lazy in Googling references thinking my statements are clear enough. The issue is what factors could crumble the NZ economy? While the US sub-prime crisis was unfolding, it didn't seem that the NZ economy had much of a hit. Yes unemployment went up but nothing like 8 or 9% that we've seen abroad (partly because of NZ being a primary producing country - diary etc). But having said this, the problem I find in NZ is it's lack of economic diversity.

The inflationary pressures here therefore seem due primarily to an overheated housing market and Christchurch. Interest rates are also directly related to risk. NZ is a greater risk and will fall at global instability.

Without a doubt. I too have bearish issues with NZ. Especially when the reserve bank has to make a tough decision with controlling the OCR. Inflation in NZ has always been out of control IMO (while virtually all local kiwis tend to disagree with my statement) and I have serious doubts about the NZ CPI / inflation figures they publish; being that they're not fully factoring the rapid rise in NZ housing prices. The problem that the NZ reserve bank has to balance is, if inflation is too high, then they need to increase the lending rate. But doing so will also increase the NZ$'s strength as this high interest rate attracts more overseas funds. To weaken the NZ$ would mean more currency needs to leave NZ than coming in (or via trade). I tend to be critical of the currency inflows in NZ rather than the local NZ economy as a factor of changing currency rates. Because NZ is a small country and it doesn't take much for it's currency to move (being that big time investors can easily move funds in & out of NZ readily).

When I travel to the US & Canada each year and see the difference between all places, I can tell the NZ market is simply in a world of it's own. Insanely high cost of living yet Labour Gov't wants to push increasing minimum wage. Things don't add up here and the long term future I find is very uncertain. Recently having spoken to my wife, she asks if we would consider living in NZ indefinitely. I assured her that there are better and cheaper places to live than in NZ. Though i'm biased, I still have a fondness of Vancouver. Despite how expensive houses are there, the affordability and what you get living in Vancouver is incomparable to Auckland (just my personal opinion). Better built houses, better comfort homes, better public transit systems, better restaurants and a much wider selection of food, yet without the gouging price tags, the list goes on).

However we do feel more Kiwi now than American, and our son (now at Auckland’s medical school) is 100% Kiwi. We own our house in a lovely semi-rural location and don’t want to leave after 18 years, so I guess we’ll probably hold out for a dollar correction.

I too have to look out for our little one but you can be sure I won't hold much eggs in NZ. When the sub-prime fiasco was unfolding in the US, over a 2 year period I was telling people BUY BUY stocks. But what i've found was too many people were scared out of their pants. They were playing the sit and wait and see approach because they didn't know how to react during the stock market & housing collapse in the US. Keep in mind though a lot of people lost a huge chunk of their retirement investments when they saw say, 70% of their pension vanished, they felt they need to sell everything up in fear of losing more. So I don't know when the NZ$ will tumble but I do know that once the US economy goes into full gear (and they WILL come back with a vengeance force), then perhaps that may be the time to move back. Perhaps wait for the signal when the US fed being to raise rates.

[JBrit]

The New Zealand economy doesn't necessarily need to tumble for the dollar to crash. In fact, in 1999-2000 when it did crash to just above $.38 (due to both residuals of the Asian crisis and capital flight/strike because of big business fears of the Alliance/Labour government) it was the best thing that happened to the economy. We were now competitive. It ushered in the longest period of rapid growth in recent history.

In 2008-09 the New Zealand dollar crashed again (for a brief period this time), not because of the economy but because of its relative risk in the world. Right now the overly high dollar is terrible for business and employees (causing, in part ...with the Nats policies, record high unemployment since the 90’s and stagnant wages) …in spite of OK growth in wealth and productivity. The unrealistically inflated NZ dollar is good for consumers of electronics and gas, but terrible for the export industry - in an export based economy, and not great for consumers of local goods such as basic items like food. And NZ is still 30-35% below the USA in purchase parity and overall per capita wealth, so there will likely have to be a realistic correction in the not too distant future. But who knows when.

[Super_BQ]

Yes it doesn't take much for the NZ currency to fluctuate much. As I was saying before, NZ is a small country and big players that can move large amounts of currency can easily shift the table here. But as what i've been seeing in the past 10+ years, a lot of bets on overseas funds coming into NZ are going into real estate (which isn't that liquid).

The unrealistically inflated NZ dollar is good for consumers of electronics and gas, but terrible for the export industry - in an export based economy, and not great for consumers of local goods such as basic items like food

The only thing NZ has in terms of export based industry are primary producing goods (meat & dairy related products). With free trade with China, NZ's entire export industry is only a few grains of sand to them and it doesn't seem that the high NZ$ has affected their desire to buy all what NZ can supply. The dairy unions have voiced their fear of an excessively strong NZ currency over the past years but quite frankly, i'm not hearing mass unemployment in the diary sector. With NZ's alignment with China means NZ shouldn't waste time producing goods that China is already well known for making.

When I look at previous crashes, I tend to look at other countries too. When the NZ$ was under 40cents / USD, Canada at the time too saw it's lowest levels (sub 60 cents / USD). But, look at today and compare the playing fields. How do we know when the NZ$ will tank? NZ isn't the same country as it was 10 years ago while when I look at Canada, their gov'ts still have the same restrictive policies to foreign trade today as they did 20 years ago (ie' diary board with lobbying power to stop overseas dairy products to be sold in Canada, and fully subsidised $ to the farmers) ; a system that does not exist in NZ.

[JBrit]

I agree for the most part. However the dollar also crashed in 2008-09 when Canada was much closer to the USD. It was the risk factor then. Free trade deals have not always been so great in other countries; the biggest and most powerful always win -or in the USA with NAFTA, it was the corporations that won, not the general economy (trade for them was like taking one thing off one shelf and then putting it on another). But I personally believe that free trade has little bearing on the dollar value -as you say it is only a few grains of sand to China. It will just take some unexpected glitch that will throw it off. As you mentioned it is a very small player -and the real worth as compared to GDP and purchase parity is that the nzd is still about 35 % overvalued. The housing bubble is the main culprit as you also mentioned (adding nothing of value to the economy) and it will break sooner or later... if it hasn't already.

[dede]

Three things could bring the NZ $ down. i) higher labour/green in the polls ii) the end of quantitative easing in the US. iii) inflation/interest hike track expectations coming down because the damn NZ$ is so high! i) has happened already but the election is some time away and ii) hasn't happened because of our friends in the tea party who have been destroying the confidence of the US people....but it will happen probably Q1 next year. iii) will likely happen in the next quarter with the concomitant reduction in the RBNZ rate hike track. The NZ$ has rallied recently partly also because the economy while not cooking on gas, is simmering along nicer with GDP set to rise to an OECD high of 3.5% next year, maybe more. That's been helped by the Christchurch rebuild, high net migration (lots of cashed-up Brits and Chinese buying Auckland property), a strong log industry (Russians can't sell them cheap to China anymore due to lack of infrastructure), high dry milk prices (China has had bad foot-and-mouth) among many others. Rates may also go higher because the new central bank governor Wheeler was in the US when house prices plummeted and he is worried it will happen here....he said he would raise rates already if he didn't try the loan to value caps on <20% equity mortgages. I'm in the same position as you and on balance I'm going to wait a little for i) ii) and iii) to play themselves out. Also add iv) a revived US economy going into 2014 means that short term rates will inevitably rise from 0 and hence make the US$ look more attractive...Why do I think that? Well, no one is dumb enough to pull the government shutdown stunt that they just tried going into an election year and it's been 5 years since the GFC. I'm not saying rates will go down to 66 but they may head back down to 78 which is more palatable. YMMV. We could go up to 90c first given interest rate differentials if Wheeler is as hawkish as he sounds...at that level I'd be selling NZ$ and buying the US$.

[JBrit]

Three things could bring the NZ $ down.

This sounds about right. Excellent analysis! And as always, the unpredictable, out of the blue factors that no one has guessed yet could also be a likely cause of a dollar correction.