NYSE in possible hacker attack

The New York Stock Exchange's website was apparently hobbled twice Monday, possibly the result of computer attacks as part of the anti-Wall Street protests, according to a company that monitors website response times.

San Mateo-based Keynote Systems said the NYSE website experienced a one-minute outage around 3:30 pm Eastern (1930 GMT), then a half-hour outage about two hours later.

But NYSE spokesman Ray Pellecchia said an investigation by the stock exchange showed no disruptions to its website.

The loosely organized Anonymous hacking group has threatened an attack on the NYSE.

Some protesters have objected to those threats because of the impression a hack would leave about the movement as a whole.

Keynote spokesman Dan Berkowitz said his firm began monitoring the NYSE site Monday after receiving media inquiries about the threats. He said the slowdowns were substantial enough that his firm considered it an outage.

Just because a website is slowed down doesn't mean it was hacked in the typical sense of the word.

So-called "denial of service'' attacks involve bombarding websites with so much bogus traffic that their servers are overwhelmed.

An attacker need not ever gain access to the inside of the target's computer systems.

The websites of the NYSE, major banks or government agencies are almost always separate from the computer systems where sensitive transactions are performed.

NYSE's Pellecchia emphasized that trading on the exchange wasn't disrupted, and that the exchange's website is separate from its trading platform.

- AP

Short selling banned for Euro bank shares

France, Italy, Spain and Belgium are banning short-selling amid efforts to calm market turmoil that has sent bank shares gyrating wildly and aggravated worries about Europe's huge debts.

The European Union's markets supervisor, the ESMA, announced the move late last night after boosting surveillance of stormy markets earlier in the day. The move capped two days of whipsaw trading that saw French banks' market value fall and rise by billions of euros.

In a short sale, a trader hopes to make a profit by betting on the decline in the price of a share. The practice has been blamed for contributing to market volatility.

The ESMA said in a statement that the four countries "have today announced or will shortly announce new bans on short-selling or on short positions" as of Friday.

The French market regulator, the AMF, announced late on Thursday (Europe time) that it is banning for 15 days net short-selling on 11 stocks, including those of banks Societe Generale, BNP Paribas and Credit Agricole and leading insurers.

Greece banned it on Monday but until Thursday, no other European countries had followed suit.

French bankers and officials scrambled to soothe investors' nerves after days of suggestions that France could be the next major economy to lose its coveted triple-A credit rating. By late in the day, those efforts appeared to have an effect, but economists said the rebound remained very fragile.

The European Union's markets supervisor said on Thursday that regulators were increasing surveillance of financial markets following the days of steep selloffs.

Bank of France head Christian Noyer blamed "unfounded rumors" for plunges in the shares of top banks, including Societe Generale and BNP Paribas, and said the country's financial institutions were sound. The country's market regulator warned of sanctions against anyone who fuels or profits from rumours that fed the sell-off.

Noyer said that French banks' first-half earnings "confirmed their solidity in a difficult economic environment" and that the banks' capital cushions were healthy.

French bank stocks fell on Thursday until strong US jobs data helped propel solid gains on Wall Street late in the European trading day. BNP Paribas closed up 0.3 per cent and Societe Generale rose 3.7 per cent.

France is taking pains to assure markets that it won't be the next to see its credit rating downgraded.

Attention will be on France's release of second-quarter GDP figures on Friday. Some have warned that France could suffer if it has to spend significant new money to bail out more struggling eurozone states.

The leaders of the eurozone's biggest economies, Germany and France, announced they will meet on Tuesday to discuss solutions to Europe's financial difficulties.

French President Nicolas Sarkozy's office said that the two will come up with "joint proposals" on the governance of the eurozone before the end of the summer. Chancellor Angela Merkel's spokesman said the meeting would focus on suggestions for how to improve the zone's economic policy and crisis management.

All three leading credit rating agencies reaffirmed their triple-A assessment of France, and analysts said they could not identify a trigger for the market turmoil.

"There's nothing behind it, it's a market of malintentioned speculators trading on pure rumours," said Marc Touati, an economist at French trading firm Assya Compagnie Financiere.

After Societe Generale, France's second-biggest bank, saw its share price drop nearly 15 per cent on Wednesday, the bank asked the French market regulator to investigate the rumours that it was on the ropes because of its heavy exposure to debt from troubled eurozone economies.

Societe Generale CEO Frederic Oudea called the rumors "totally unfounded" and "irrational." Speaking on France-Info radio, he urged calm and insisted that the bank's fundamentals are sound.

Oudea said Societe Generale had already accounted for its exposure to Greece's debts in its second quarter earnings.

France's growth prospects are considerably better than those of Italy and Spain's, but its economic expansion is slowing and it's failed for years to reduce a deficit that stood at 7.1 per cent last year. No other eurozone economy with a triple-A rating has a higher debt than France's around 85 per cent of national income.

Adding to market worries, French presidential elections scheduled for the spring of 2012 may make it difficult for the government to implement further austerity measures at a time when the economy is slowing.

Elsewhere in Europe, Greece announced a rise in unemployment after a series of unpopular austerity measures aimed at dragging it out of debt that sparked troubles across the eurozone.

And Italy's finance minister, Giulio Tremonti, told lawmakers on Thursday that tough and speedy measures are needed over the next two years to balance the budget in 2013. The market turbulence has seen Italy's borrowing costs in the markets spike up to uncomfortably high levels.

-AP

Billionaire Soros going it alone

Man who broke the Bank of England returns money to investors, to concentrate on philanthropy.

George Soros, the billionaire best known for breaking the Bank of England, is returning money to outside investors in his US$25.5 billion firm, ending a career as hedge-fund manager that spanned more than four decades.

Soros, who turns 81 next month, will hand back the money, less than US$1 billion ($1.14 billion), by the end of the year. His firm will focus on managing assets solely for Soros and his family, says a letter to investors.

"We wish to express our gratitude to those who chose to invest their capital with Soros Fund Management LLC over the last nearly 40 years," says the letter signed by Soros' sons Jonathan and Robert. "We trust that you have felt well rewarded for your decision over time."

The move completes Soros' transformation from a speculator, who in 1992 made US$1 billion betting the Bank of England would be forced to devalue the pound, to philanthropist statesman, a role he first imagined for himself as a Hungarian emigre studying at the London School of Economics after World War II. In the past 30 years he has given away more than US$8 billion to promote democracy, foster free speech, improve education and fight poverty around the world, he said in a recent essay.

Soros' sons say they took the decision because new financial regulations would have made it necessary for the firm to register with the US Securities and Exchange Commission if it continued to manage money for outsiders. Because the firm has overseen mostly family assets since 2000, they decided it made more sense to run it as a family office, says their letter.

Soros was born in Budapest in 1930, as Dzjchdzhe Shorash. When the Nazis invaded the city in 1944, Soros' father arranged for false papers for his family and friends that identified them as non-Jews. Most of the people his father helped survived the war, Soros said in the essay, published in the New York Review of Books late last month.

"Instead of submitting to our fate we resisted an evil force that was much stronger than we were - yet we prevailed. Not only did we survive, but we managed to help others," he wrote, adding that the experience gave him an appetite for risk. "This left a lasting mark on me, turning a disaster of unthinkable proportions into an exhilarating adventure."

After London, Soros came to New York at the age of 26 and became a trader, initially buying and selling stocks for a Wall Street brokerage. He planned to work for five years, enough time, he reckoned, to save US$500,000 and return to England where he would pursue his philosophical studies, according to an interview he gave to Michael Kaufman, author of Soros: The Life and Times of a Messianic Billionaire.

Instead, he stayed in the world of finance, eventually setting up the predecessor to his Quantum fund in 1969. He started his own firm in 1973.

Quantum has returned about 20 per cent a year, on average, since 1969, says a person familiar with the firm, though it lost about 6 per cent in the first half of this year, and made only 2.5 per cent last year.

Over the years, Soros had to deal with the conflicting goals of making good and doing good. While his fund made about US$750 million betting on a decline in the Thai baht in 1997, the wager increased economic woes in Thailand as the government spent billions unsuccessfully defending its currency, and had to cut public spending.

In 1997 his philanthropic tendencies drove him to buy Russian assets. He took a US$1 billion stake in Russia's state-owned telecommunications company, and went on to buy Russian stocks and bonds. He didn't sell his positions even after publishing a piece in the Financial Times advising the government to devalue the ruble. Four days later, Russia followed his advice.

"He felt that if he was a beacon of investment in Russia, others would follow and the capital inflows would transform the society," Robert Johnson, a former Soros managing director, told author Sebastian Mallaby in his book More Money than God. "There's a philanthropic side of George that started to interfere with the speculative one." In his recent essay, Soros echoed the remarks of his former colleague. "I have made it a principle to pursue my self-interest in my business, subject to legal and ethical limitations, and to be guided by the public interest as a public intellectual and philanthropist," he wrote.

"If the two are in conflict, the public interest ought to prevail."

Soros opened his first foundation, the Open Society Fund, in 1979, when his fund had reached about US$100 million and his personal wealth had climbed to about US$25 million. His initial focus was on promoting democracy and a market economy in Eastern Europe. Soros now funds a network of foundations that operate in 70 countries. In late 1988, he hired Stanley Druckenmiller to be his chief strategist to take over the day-to-day trading of the firm's assets so he could concentrate on his charitable pursuits.

While Druckenmiller was the architect of the US$10 billion British pound trade, which forced the currency out of the European exchange-rate mechanism, Soros served as a coach to the younger man, encouraging him to increase his bet.

Druckenmiller left in 2000, after losses when the technology bubble burst. In 2007, as the subprime mortgage crisis was gaining speed, Soros stepped in. Quantum returned 32 per cent that year and posted an 8 per cent gain in 2008, when funds on average dropped about 19 per cent. Overall, Quantum Endowment grew from about US$11 billion in June 2000 to today's level.

The uncertainty about markets and Quantum's recent fall meant it sold investments last month and the firm is now holding about 75 per cent cash.

Soros continues to focus on his philanthropy and on voicing his views on macroeconomic events.

"My success in the financial markets has given me a greater degree of independence than most other people," Soros wrote recently. "This obliges me to take stands on controversial issues when others cannot, and taking such positions has itself been a source of satisfaction. In short, my philanthropy has made me happy."

How Much?

George Soros' wealth totalled US$14.5 billion as of March ($16.6 billion at current exchange rates), according to Forbes magazine. That made him the 46th-wealthiest person in the world.

- BLOOMBERG

Kiwi dollar bulldozes its way over US87c

The New Zealand dollar exchange rate bulldozed its way to yet another post-float high against the US dollar today, touching US87.08c as the greenback slumped.

The surge has left the kiwi within striking distance of doubling its nominal value - US44c - when it was floated in March 1985.

After spiking three times to US87c or above, the New Zealand dollar retreated a little to trade at US86.93c at 5pm, compared to US86.50c at the same time yesterday.

Reuters reported that stop-loss buy orders around the world were triggered following a rise in the exchange rate for the euro against the greenback. Such stop-loss orders were used to protect wealth by automatically placing a "sell" order when the price of a commodity - or currency such as the US dollar - dropped below a specified threshold.

The kiwi had earlier dipped to a relative "low" of US86.13 after weaker than expected trade data, but soared higher - with the Australian dollar and the euro - as speeches and statements by US politicians raised concerns over the political impasse in Washington.

US President Obama warned in an address to the nation that burgeoning US debt could cause serious damage to the world's largest economy if the Congress can't agree on raising the debt ceiling of US$14.3 trillion.

Investors poured into perceived safe-haven assets - such as the commodities-driven New Zealand and Australian currencies - and pushed gold to a record high and created an exchange rate for the Swiss franc at an all-time peak against the US currency.

"Stops were triggered in euro...that's taking everything higher," HSBC's NZ head of institutional sales Daniel Brdanovic told Reuters.

"We're not seeing really too much flows. People are still staying on the sidelines as much as possible...waiting for some resolution out of the US," he said.

The New Zealand dollar has risen over 5 per cent this month and 20 per cent this year. It was last at these levels in mid-1981, when the currency was still regulated by the Muldoon Government's central bank. The gains have been underpinned by improving economic data and expectations of interest rate rises.

At 5pm the NZ dollar was buying 0.6005 euro, down a little on yesterday's level at the same time of 0.6017 euro, while slipping to A79.63c against the Australian dollar from A79.96c, and to 67.86 yen from 67.89, over the same period.

The trade weighted index was 74.07 at 5pm from 74.06 yesterday.

ANZ bank said that the NZ dollar remained a currency in vogue.

Across the Tasman, Reserve Bank of Australia governor Glenn Stevens did little to dampen expectations of another interest rate rise. The central bank chief said Australian consumer spending would eventually ramp up from the sluggish pace of recent years, and the shift could come soon if some uncertainties over the global outlook were to ease. The Australian dollar was US$1.0918 at 5pm, from US$1.0818 at the same time yesterday.

The euro rose to US$1.4477 at 5pm, from US$1.4375 yesterday, and the Japanese currency also strengthened against the US dollar to 78.07 yen, 78.48 yen.

- NZPA

Midnight subsidy for quake-hit businesses

The first round of quake-affected businesses signed up to the Government's wage assistance package will see money in the bank tomorrow.

The Canterbury Chamber of Commerce has worked to approve a number of small businesses in the last two days.

They'll receive $350 a week per staff member.

Chamber Chief Executive Peter Townsend says the payments will be processed at midnight.

"So that is an extraordinarily fast relief package, it's in place and we will see that building quite significantly over the next few days."

Mr Townsend says there should be another round of payments to more businesses on Friday night.

The Government announced on Tuesday it was putting aside $15 million for the $350-a-week subsidies which can be paid to earthquake-affected businesses so they can continue to pay their employees.

Mr English said that in the day-and-a-half since the announcement was made Work and Income had received about 340 calls from employers and 36 formal applications.

"The first few have already been approved and we expect that to grow quickly over coming days," he said.

Updating Parliament on the cost of earthquake damage, he told MPs the $4 billion estimate issued by Treasury yesterday was "still a very early estimate" and a better idea of the overall cost would gained when more information was available.

"So far the Earthquake Commission has received 36,000 claims and expects this to rise to around 100,000 claims in coming weeks," Mr English said.

Asked about the cost to the economy, he said Treasury expected there would be lower GDP growth over the next two or three months but a net benefit over the 12 months following that as money from insurance companies and the Earthquake Commission was injected into the Canterbury economy.

- Newstalk ZB, NZPA

Earthquake could cost $4 billion

he full cost of the Canterbury earthquake could be as high as $4 billion, Treasury has revealed.

Treasury Secretary John Whitehead said the $2 billion figure previously used in relation to the cost of the earthquake referred to Earthquake Commission liabilities only.

Treasury's "ballpark" estimate of the total cost to householders, insurance companies, businesses and the Government was double that.

"The cost faced by the EQC, individuals, and insurance costs will probably be of the order of $4 billion," Mr White head said.

In terms of the economic impact it was early days "but the pattern of these is certainly a short term drop in activity of businesses being unable to function and ...there's always a risk of businesses failing.

"In the slightly longer term when you've got that reconstruction effort, a big amount of that going on tends to raise GDP (gross domestic product)."

But Mr Whitehead stressed that there were a "very wide range of estimates" on costs at the moment because officials were still to "get down to what's actually happened on the ground".

NZ dollar heads down towards US 70c

The New Zealand dollar fell to its lowest level against the yen in three months and headed down toward support at US70c as international events continued to dictate direction in a week with little in the local economic diary.

The NZ dollar was at US70.15c at 5pm, down from US70.47c at 8am. It had fallen throughout yesterday from US71.25c to nearly US70c shortly after midnight then started to move upward, rising after news that sales of previously occupied homes in the United States during July fell to the lowest level in 15 years.

ANZ said market sentiment was negative through last night's session, weighing on offshore equities and initially sending currencies, the NZ dollar included, lower against the US dollar and the yen.

"The US dollar's fortunes reversed after abysmal US housing data saw a swift US dollar sell off, allowing the NZ dollar to move back to mid-range levels," ANZ said.

Westpac said that the Australian and New Zealand dollars look heavy, and should break below major support levels during the next few sessions.

In the Australian dollar's case the level is US88c. It was at US88.37c at 5pm, from US88.76c at the same time yesterday.

In the New Zealand dollar's case the support level was US70c.

The yen has been at a 15-year peak against the US dollar but retreated slightly today on speculation that Japanese authorities will intervene to knock it back down.

The NZ dollar dropped to 59.11 yen at 5pm from 59.70 yen at the same time yesterday.

It was at 0.5547 euro 5pm from 0.5559 at the same time yesterday.

The NZ dollar was at A79.37c at 5pm, down from A79.72c at 8am but up from A79.19c at 5pm yesterday.

The trade weighted index was at 65.91 at 5pm from 66.09 at the same time yesterday.

- NZPA

Kiwi dollar tipped to weaken on Aust election drama

The New Zealand dollar may fall below 70 US cents this week as investors wait on the outcome of Australia's Federal election, which failed to deliver a clear result.

Five of seven economists and strategists in a BusinessDesk survey were downbeat on the currency this week after Saturday's election raised the prospect of a hamstrung executive.

Neither the reigning Labor Party nor the Liberal Coalition secured a majority.

The two remaining strategists are picking the kiwi will trade in a range this week.

Initial market reaction was to push the kiwi higher to 70.57 US cents from 70.25 cents on Friday in New York, and it gained to 79.44 Australian cents from 79.16 cents as investors eschewed the so-called 'lucky country' in favour of New Zealand amid the uncertainty over the election.

However, currency strategists don't expect this trend to hold.

"The kiwi's going with it (the Australian dollar) to some extent, and this could be the catalyst to break 70 US cents,"said Imre Speizer, markets strategist at Westpac Bank.

"It's going to be a volatile week with weakness hovering over the Aussie."

Speizer predicts the kiwi will fall against the greenback this week as a general downbeat tone among investors keeps them shying away from yields on offer in Australia and New Zealand.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, forecasts the New Zealand currency to make a "gradual drift off" towards 69 US cents, though the kiwi will get some early support as investors jump out of Australia and into New Zealand.

Central bankers from around the world will gather in Jackson Hole in Wyoming in the annual Federal Reserve forum on Thursday.

Fed chairman Ben Bernanke's keynote address on Friday will be watched with interest by market-makers.

The local data calendar is almost bare, with the Reserve Bank's survey of inflation expectations the only release of note, though it's unlikely to be market-moving.

Mike Jones, strategist at Bank of New Zealand, said the two-year expectation will be one to watch, and any prediction above 3 per cent, which is outside the central bank's target band, could see the kiwi rally as investors boost their pricing for an interest rate hike.

Investors have been paring back their forecast track for the official cash rate as the economy cooled down, and they're picking 54 basis points of hikes over the next year, according to the Overnight Index Swap curve.

Nervous investors are still waiting to see what comes, if anything, of a proposed meeting between Japan's Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa.

The yen's strength has been a cause of concern, and markets have been chattering that the central bank is poised to intervene.

Khoon Goh, ANZ New Zealand head of market economics and strategy, said the Bank of Japan would need a coordinated approach for intervention to succeed, and with most countries wanting to devalue their currencies, the bank can't intervene successfully.

The kiwi climbed to 60.45 yen from 60.03 yen on Friday in New York. The seven strategists surveyed by BusinessDesk are more divided on where the currency will go on a trade-weighted basis, with four having a negative bias, though only one is calling an outright decline, and three expecting it to go sideways this week.

The kiwi rose to 66.32 on the TWI from 65.91 last week.

European Central Bank council member Axel Weber told Bloomberg TV that Europe needs to keep its stimulus in place until the end of the year, wiping any upbeat sentiment investors have about the state of the region, while sovereign debt continues to plague Europe's outlook.

BNZ's Jones said credit default swap spreads widened last week, and the region's sovereign debt is still a concern for the market. The kiwi climbed to 55.56 euro cents from 55.26 cents on Friday in New York, and was little changed at 45.35 pence from 45.27 pence.

On the radar this week is American housing data and the Richmond Federal Reserve's manufacturing index. An estimate of second-quarter growth in the US Germany's IFO survey will also come under scrutiny as Europe's biggest economy continues to bear the brunt of the region's recovery.

Australia growing faster, Govt admits

Finance Minister Bill English has admitted Australia's economic growth is outstripping New Zealand's and says that in the long term the Government is determined to turn that around.

Mr English and Prime Minister John Key have been under pressure in Parliament over National's commitment to close the wage gap with Australia, with Labour saying it is widening and accusing the Government of failing to do anything about it.

Mr English today said Australia had a higher growth rate because its economy had not been in recession, and because of the huge demand for its minerals.

"Australia's mineral boom is likely to mean it will perform better than New Zealand in the near term, but it is the long-term trend we are determined to turn around," he said.

"The only way we can permanently lift New Zealand's economic growth is through considered and consistent reform and change year after year."

He said New Zealand's economic growth in the three years to 2008 had been unbalanced and sluggish, and while Australia's economy grew by 11.5 per cent in the four years to March this year, New Zealand's grew by just 2 per cent.

Australia's minerals were in such high demand they made up 70 per cent of its exports, while New Zealand's leading export industry, the dairy sector, made up 20 per cent of exports and prices had not increased by as much as those for minerals.

Labour's finance spokesman, David Cunliffe, has been leading the attack over the wage gap.

He said today Mr English's claim that National inherited a bad economic situation ignored Labour's achievements, such as the world's lowest unemployment rate, the longest post-war economic expansion and halving gross government debt while pre-funding superannuation.

"Every time Bill English repeats his mantra it sounds thinner and more ridiculous," Mr Cunliffe said.

- NZPA

Lifestyle No 1 reason for investor migrants Lifestyle No 1 reason for investor migrants

New Zealand's lifestyle is more important than business and tax issues to migrants moving here, a study has found.

A dozen investor migrants and one investor's wife were interviewed for an Immigration New Zealand and Investment New Zealand-commissioned study aimed at finding messages to lure potential investor migrants.

"It is clear that this decision to migrate is a heart decision ... emotive topics were far more resonant for these migrants than facts and rationality," the report said.

"Business and tax issues came a distant second to lifestyle and community."

Thirty 30 potential messages were developed for the research, and the migrants were asked to select the message that appeal most strongly to them.

The top two messages were "New Zealand is a great place to bring up a family" and "New Zealand is a small country with a strong sense of community".

A message that strongly did not find favour at all was "Investing in New Zealand isn't about just relocating - it's about regenerating your business."

Any references made to "government" - such as one that said "The New Zealand Government understands it takes time to get your offshore tax affairs in order" - also didn't go down well.

Some said it was difficult to establish business networks.

"I've been here for one and a half years and am just finding my way in. It's a much smaller market and difficult to get established," one said.

"Children are a critical element in the migration decision," the report said.

"When young they are clearly an important motivating factor but by the time they hit the teen years they can become a barrier."

A senior marketing lecturer at Massey University, Dr Henry Chung, said the study confirmed what many already knew.

"The wealthy see the investor migrant category as a pathway to come to New Zealand, usually for the lifestyle or for their children, and not necessarily to do business or make money.

"New Zealand is such a small economy, and usually, a would-be business migrant would be better off staying put in their country of origin."

By Lincoln Tan

Ten reasons why house prices have 10pc to fall

I want to detail 10 reasons why I think house prices have another 10 per cent to fall, but first a bit of background.

Back in March 2008 before the Global Financial Crisis hit and before finance companies collapsed en masse, I predicted house prices would fall 30 per cent from their late 2007 peaks.

I got a lot of stick for saying such an outrageous thing. Our Home Loan Affordability analysis showed then that prices were unaffordable for most and I was worried about the stability of the global financial system, although not the New Zealand system.

I thought New Zealand house prices had been pumped up with NZ$100 billion of foreign debt over the past 5 years and would subside once the cheap foreign credit dried up.

Then most of the property finance companies collapsed through May, June and July of 2008. Lehman Brothers and AIG collapsed in September 2008 and global credit markets froze through until early 2009. All hell appeared to be breaking loose and there was genuine fear for the future of the financial system.

In early October Australasia's banks were granted government guarantees and between July 2008 and April 2009 the Reserve Bank of New Zealand cut the Official Cash Rate from 8.25 per cent to 2.5 per cent, helping to bring the 2 year mortgage rate down from over 9 per cent to under 6 per cent. This stabilised the economy and the housing market, where prices had fallen as much as 11 per cent by early 2009.

So in early 2009 I revised my view on house prices to a fall from the late 2007 peak of 15 per cent, rather than the 30 per cent I forecast a year earlier. House prices bounced through mid 2009 thanks to the drop in interest rates and the decision by many investors to abandon low interest rates in banks, a collapsing finance company sector and a discredited stock market to put yet more leveraged cash into rental property.

Also, it appeared, New Zealand's economy had dodged a bullet because of our stable banking system and our close connections to the strong-growing Australian and Chinese economies.

But the fundamental problems had not gone away. Housing was still vastly overvalued compared to incomes, households were carrying too much debt, and the cheap foreign credit had dried up.

And now those fundamentals are coming home to roost.

In the last six to eight weeks the sheer weight of these problems has ground down growth in the economy and the housing market to a virtual standstill.

Reports on the housing market from Quotable Value, REINZ, Barfoot and Thompson and First National indicate the winter of 2010 has been awful for the housing market. Buyers have gone into their shells and those that haven't are demanding price reductions.

Those that still want to borrow are reporting the banks are being cautious about Loan to Value ratios and the types of property being bought, in particular apartments, townhouses and sections.

Two events locally and one internationally seem to have been the catalysts for this slowdown. The May 20 Budget was initially welcomed by property investors as being a weaker crackdown on property tax breaks than they had feared, but it was still a crackdown of sorts.

Also, the Reserve Bank's widely expected decision to start putting up the Official Cash Rate from June 10 appears to have shocked those who thought interest rates would stay low for a long time. The European Financial Crisis in May to June was the final nail in the coffin.

So now prices are falling again.

Here's why I think they have another 10 per cent to fall, taking the fall from the late 2007 peak to 15 per cent. QV figures show prices are now down 4.7 per cent from the late 2007 peak.

1. The cheap foreign credit has dried up

Before the Global Financial Crisis banks could borrow as much as they wanted for around 15 basis points above the prevailing wholesale interest rates. That cost rose above 200 basis points early in 2009 before subsiding to around 120 basis points earlier this year.

The European Financial Crisis boosted that cost to back over 150 basis points and now it's clear that the cost is never going back to the 'normal' levels of 2002-2007 when New Zealand's banks borrowed almost NZ$100 billion on these 'hot' money markets and passed it on to home buyers at a sharp margin.

This chart shows how much those margins have risen during the crisis. Interest rates are likely to remain around 1 percentage points higher than they would otherwise have been.

This makes it harder for the banks to offer fixed mortgage rates that are significantly cheaper than floating rates and keeps the margin between mortgage rates and the OCR relatively high.

2. Home loans remain unaffordable for most in the bigger cities

The Roost Home Loan Affordability reports that we prepare show that it still takes 61.8 per cent of a single median income earner's after tax pay to afford an 80 per cent mortgage on a median priced property in New Zealand.

In Auckland Wellington, Hamilton, Tauranga, Queenstown, Nelson and Christchurch that portion of after tax income is between 65-75 per cent.

New Zealand's house price to gross income multiples are still well above historic norms and those of other countries such as Britain and America, albeit not Australia.

Those with two incomes in provincial cities such as Wanganui, Palmerston North, Invercargill, Whangarei and New Plymouth can still afford to buy a house, while first home buyers with two incomes can also afford a cheaper property in these markets.

Rodney Dickens makes the point in his piece about the property outlook here.

3. New Zealanders are migrating to Australia again.

The exodus of New Zealanders to Australia through 2008 was a major reason for the decline in house prices through mid to late 2008.

During 2009 the exodus slowed as the Australian economy slowed, but it has restarted again in recent months as Australian wages are now growing at a rate of 5.5 per cent while New Zealand wages are growing around 1.5 per cent.

Australia's unemployment rate has fallen to 5.1 per cent versus New Zealand's on 6.8 per cent. The likely reduction in non-New Zealand immigration to Australia after the upcoming Australian election will intensify the pressure for New Zealanders to migrate to Australia. The wage gap between Australia's average weekly earnings and New Zealand average weekly earnings has blown out to NZ$643 from NZ$565 in the last two years.

That translates into an annual gross wage gap of NZ$33,400, up from NZ$23,000 two years ago. New Zealand wages are now on average worth 60 per cent of the Australian equivalent, down from 66 per cent two years earlier.

At current wage growth and exchange rates, New Zealand wages will be half those in Australia within 7 years. By then annual wages will be NZ$65,000 higher in Australia than New Zealand.

4. The property tax changes are hurting more than expected

The tax changes in the 2010 Budget were less than some had expected or hoped or feared, depending on your exposure to property. But they are having a real impact on demand for residential investment property, particularly by those already heavily geared.

It is forcing many to ask whether than can afford to take the risk of going negatively geared when they may not be able to claim so much of the losses back against their regular incomes.

The IRD is also cracking down around the fringes of the property trading, LAQC and family trust areas. The recent Penny vs Hooper case has sent a chill through the sector.

Independent economist Rodney Dickens believes the property tax changes are having as big an impact on property demand as a 100-150 basis point increase in the OCR.

5. The developed world is deleveraging from property bubbles

The forces of deleveraging globally cannot be underestimated. The scale of the debt now embedded into developed economies in Britain, Europe and America is enormous.

Consumers, in particular, but also governments, will spend at least 20 to 30 years either repaying or restructuring debt to reduce their debt loads.

This chart here shows the scale of the debt in the US economy, the world's biggest. To reduce leverage levels to anything near normal will take decades of slower growth, less consumption, more savings and higher interest rates. Debt is now much higher than it ever was before the 1929 Depression.

New Zealand's banks depend on these international funding markets and will be affected in one way or another by this huge sinking lid of deleveraging.

6. NZ households have hit debt saturation point

New Zealand's household debt to disposable income hit a peak of 159 per cent in the fourth quarter of 2008, right at the time of the Global Financial Crisis. Since then it has been trending down as New Zealanders chose either not to take on any more debt or chose to repay debt.

Reserve Bank figures show many New Zealanders either left their mortgage repayments at relatively high levels, even though interest rates had fallen, or 'downsized' their houses and repaid debt.

Leverage is reducing. It has a long way to get back to 'normal' levels of around 100 per cent, which is widely seen as the sustainable maximum for any government or household.

To get back to around 100 per cent, New Zealand's household sector would have to repay around NZ$45 billion of debt over the next five to seven years.

House prices will not rise without the impetus of extra debt.

7. Our debt is relatively high compared to many others

New Zealand's household debt to disposable income ratio is actually higher than some of the countries such as Britain, America, Spain and Italy, who are seen as heavily indebted and in danger of being ostracised by lenders.

New Zealand is lucky in that government or sovereign debt is much lower than in those countries, but it's the reason why our government can't afford to 'pump' up the economy with deficit spending.

That will restrain the ability of our government to restart economic growth with heavy government spending.

The risk is that foreign lenders will work out how indebted we are and increase our interest rates.

8. Rents are not increasing in most places

Data from the Department of Building and Housing up until the end of June shows the median rent across New Zealand has been flat since December 2008 at NZ$300/week.

However, they have risen in Auckland in recent months, particularly for larger houses rather than apartments.

However, rental growth remains significantly below inflation and has stubbornly remained less than growth in house prices.

Landlords looking to increase rents more than wage growth have consistently failed to impose such increases.

Increasing costs and the potential removal of tax breaks will dampen demand from residential property investors, given rental growth will not be enough to compensate for higher costs and the removal of tax breaks.

That sends a new chill across the market.

9. Banks face even more funding pressure

The pressure from the big banks to pass on increased funding costs and to restrict their lending growth will become more rather than less intense in the coming two to three years. This will keep the pressure up on interest rates and ensure banks remain cautious.

European and US banks have to replace over US$2 trillion worth of funding in the coming 18 months, raising the likely cost of such funding on international markets.

The Reserve Bank's Core Funding Ratio (CFR) is expected to increase from 65 per cent to 75 per cent over the next two years, forcing the banks to raise more funds from the expensive long term and local funding markets rather than the cheaper 'hot' short term money markets.

The likely imposition, albeit slowly, of tougher rules for capital and leverage by the Basel Committee for international capital rules will also keep credit growth contained in coming years.

10. The baby boomers will start selling down their houses and rental properties to free up cash

Fresh research published over the weekend by the Bank for International Settlements estimates real New Zealand house prices could fall more than 35 per cent over the next 40 years as a growing population of elderly are forced to sell assets to a smaller population of younger people to fund their retirement and health care costs.

By Bernard Hickey