Kiwi Retailus Investo-Erectus - The Dumbest of the Breed?

Retail investors in NZ have to be the least savvy of the species in the known world. . .

For those unfamiliar with this ongoing car crash in slow motion, the story over the last 8 years or so has had three main stars: finance companies, corporate debt, and residential real estate. Retail investors have relentlessly thrown their cash at all three.

They have woken up about finance company risk. Hard not to when many of them allocated their entire life savings to one finance company for it to go bankrupt with no prospect of principal return. Non-Kiwi readers would be spellbound at how common this was. The stupidity was astonishing. A toxic combination of greed and a lack of risk premia understanding.

A few have started to work out that a 7.5% coupon yield on corporate debt is not such a good deal when it's not much above what high-street banks are paying for similar terms. NZ's corporate debt issuance typically clocks amongst the lowest spreads (over government backed paper) when compared against similar investment-grade issuance of other first-world countries. Yet the yield-chasing masses appear to care not, corporates keep on issuing and wonder how long this party can last, and brokers are complicit with their perennial ticket clipping. All in all, more retail investor stupidity.

And then there is residential real estate. . . Unlike the two investment classes above, retail investors seem to just not get how bad an investment NZ housing currently is.

That NZ housing trades so far in excess of fair value has been explained well numerous times elsewhere (refer Bernard Hickey here, here, and here. The Economist has also covered this globally for sometime).

There are a number of things that seem immediately apparent when assessing NZ housing as an investment:

• On any fundamental measure (such as house-price to wage-earnings ratio and house-prices to GDP etc.) it is expensive;

• Prospects for the economy look pretty grim at least up to the medium-term and prospects for house price inflation for a long way out do too. Indeed a good proportion of analysts are still predicting further decreases in house prices;

• Any debt-backed investor is facing a negative yield gap from time zero, except for those with the lowest of loan-to-value ratios. (Initial yields in greater Auckland are around 3.9% and 5yr fixed mortgage rates average 8%).
  

So why would anyone buy something that is priced above fundamental fair value, has little prospect of offering a capital gain any time soon, has poor prospects for earnings (rental) growth, requires active and hands-on management, and in a product where the income won't even service the debt?

And yet they're queueing up around the block for a portion.

No margin of safety. One can only conclude that they are all paid-up subscribers to the Greater Fool theory. Or just plain stupid.