Old Masters, ‘Wolfie’ and privatisation in Russia

IN a former life, Graeme Wheeler sat around the board table with one of the greatest art collectors in Europe. He also spent several years advising on the privatisation of state assets in Russia.

Wheeler was also once touted as a potential World Bank president, and gained fame for telling his then boss Paul Wolfowitz to resign from his post. ‘‘Wolfie’’, as US president George Bush called him, eventually stood down as head of the World Bank.

Wheeler spent 15 years in the US, most as a managing director of the World Bank, which provides loans to developing countries. But he missed out on the top job, leaving the World Bank in 2010.

Before taking the top job at the Reserve Bank last year, Wheeler spent a couple of years as a non-executive director of Thyssen-Bornemisza Group.

‘‘Heini’’ Thyssen junior inherited a vast collection of Old Masters from his father who died more than a decade ago, when he was seen as one of the richest men in Europe and owner of one of the world’s great art collections.

‘‘He’s a very wealthy German entrepreneur, who is an absolutely charming and intelligent man and it was a great pleasure to work with him.’’ tightened lending standards after the global financial crisis hit.

‘‘We just were not seeing the building taking place,’’ he says.

In both 2009 and 2011, annual building consents were rock-bottom at about 13,000 a year.

At the same time as there was a shortage of new homes being built, borrowers saw the lowest mortgage interest rates in about 45 years. The banks competed very aggressively to lend to people, especially to those with low deposits, which meant demand was growing strongly.

On top of that net migration has now turned from an annual net outflow of 4000 a year ago, to a net gain of 14,000 migrants.

Given the Reserve Bank’s responsibility for financial stability in the banking system, ‘‘we really needed to act’’ to slow down house price inflation, while the supply side caught up.

Wheeler’s concern about the New Zealand housing market is coloured by what he saw during the housing crisis in the United States, during his time with the World Bank.

When the global financial crisis hit, house prices in states such as California, Florida and Arizona slumped as much as 60 per cent.

About one in four of 45 million mortgage holders owed more than their house was worth, the so-called negative equity. It was an ‘‘extraordinary situation’’ for the most powerful economy in the world to be in, he says.

During the GFC unemployment rose rapidly towards 10 per cent, and incomes were flat, so people were forced to cut back spendingon their children’s education, healthcare and even food. ‘‘These effects were dramatic and went on for years,’’ he says.

‘‘My concern is that in this country [New Zealand], there is a general feeling amongst many that house prices are always a good investment, that they will always continue to rise in price.’’

Wheeler said he was invited to join the board of the company which produces capital goods for the manufacturing sector and sells into emerging markets.

He and two others also formed a company to give advice on privatisation in Russia.

‘‘A good friend who was deeply involved with Russia for 20 years, put the idea to me.’’ As a result, Wheeler made many trips to Moscow and St Petersburg.

He was heavily involved in the sale of Russia railways at one point.

For pleasure, Wheeler reads a lot of biographies, at present one about Italian artist Caravaggio. ‘‘I’ve read biographies all my life. I’m interested in people and how they make decisions and what factors shaped their experience. You learn a lot about history as well as people.’’

To keep fit, Wheeler does yoga ‘‘most days’’, and plays a lot of tennis with friends and often his wife Nadia, ‘‘who is a very good player’’.

Nadia, ‘‘the creative one in the family’’, did a design course when they lived in Paris for six years, and in time became an accessory designer for Christian Dior, followed by Swarovski. Now back in New Zealand she does portrait art.

But house prices fell 10 per cent after the global financial crisis hit, and also fell in real terms in the 1970s, adjusting for otherwise rapid inflation.

He also warned that many home owners had never seen rising interest rates. ‘‘We are saying we will need to increase the official cash rate sometime next year and our forward projections suggest it will increase by about 2 per cent by the end of 2015.’’

Mortgage rates would rise to between 7 per cent and 8 per cent and debt servicing costs would rise sharply.

He warned that house prices were high by international standards compared with rental returns or disposable incomes.

In some parts of the country the market was ‘‘certainly over-valued’’.

For example, house prices in Auckland were 26 per cent above the peak seen in 2007, which was already high after rapidly rising prices in the 2000s, but the gains were not just an Auckland issue.

With high house prices, there was a growing risk of a slump in prices, as seen in the US. That could be triggered by the US economy getting into serious trouble.

‘‘The biggest risk [for New Zealand] is if anything happened to the Chinese economy,’’ Wheeler says.

China’s growth rate has slowed from 10 per cent to 7 per cent.

But the real worry is its ‘‘shadow’’ banking system.

Over 235 years in the US, bank loans had generated about US$14 trillion of assets. China had done the same in just the past five years.

‘‘So if anything serious happened to the Chinese financial system it would rapidly feed through the Chinese economy and certainly affect New Zealand and Australia quickly.’’

China and Australia are New Zealand’s two top export markets.