Dr Don's gloomy outlook for house prices

Speaking at the New Zealand Mortgage Brokers Association (NZMBA) conference about house prices, Brash says over the last three years the median house price has moved around for a small upward movement - which looks encouragingly stable.

However, he says household sector debt has grown enormously over the last 30 years from 40% at the beginning of the 80s to 160%, which means it has increased fourfold.

He says household sector debt service has also risen, though not as much because of lower interest rates, but would rise further if interest rates increase.

Brash says net immigration which has traditionally been a big driver of increases in house prices also now looks soggy.

He also acknowledged that Government policy threatens house prices in three ways:

• Reduction in top personal tax rate from 38% to 33% reduces the attractiveness of losses arising from property investment
• Inability to claim depreciation on buildings which have a life of more than 50 years also reduces the attractiveness of property investment
• A government-appointed advisory group has been looking at the effect of Metropolitan Urban Limits (and similar restraints) on the price of residential land – which might lead to a change in policy which frees up supply of residential land.

The Economist has also suggested that many housing markets remain overcooked, with New Zealand fourth on the list with 23.7% overvaluation in house prices.

He says when you look at the path of real house prices in New Zealand since 1970 it's easy to be pessimistic and if the public thinks it couldn't see a big fall in real house prices in New Zealand, all it needs to do is look at the example of Japanese real land prices which have been declining since 1990.