New Zealand's Property Finance Crisis: An Austrian Perspective

Abstract

This thesis examines the expansion and collapse of the property finance industry in New Zealand from 2000 until 2010 and considers these events in reference to the Austrian theory of the business cycle. It finds evidence that the lowering of interest rates below the Wicksellian natural rate from 2000 until 2004 changed the price of residential property through an expansion of credit. This resulted in a cluster of errors as finance companies created loans for entrepreneurs who were misguided by prices. The Austrian theory does not predict which sector of the economy the Cantillon Effects of money will impact prices, however in this instance it does provide the logical glue to interpret the series of events which led to the collapse of thirty three property finance companies in a four year period. Consensus forecasts are used to silence rational expectations criticism and regulatory reviews highlight a lack of understanding of the business cycle. Monetary causes to the crisis are yet to be addressed both in the literature and in policy; therefore directions for further research are provided.