NZ house prices over valued, says IMF

Tuesday 10 May 2011

House prices in New Zealand are over-valued by as much as 25% compared to the average over the past 20 years, according to the International Monetary Fund (IMF).

By The Landlord

In its latest report on New Zealand the IMF said there was some uncertainty though around the 15-25% estimate which was based on the OECDs house price to income ratio as at September last year, which did not take into account Statistics New Zealand's recent upward revision to household income.

Under the OECD model real house prices rose by 150% in the 15 years to 2007, the IMF said, making it one of the strongest house price increases among advanced countries, though since then house prices have fallen by more than 10%.

A new model developed recently that takes into account income, demographics and interest rates, suggests house prices in New Zealand are over-valued by 20-25%, the IMF said.

Yet another model that uses demographics, mortgage interest rates and the terms of trade instead of future income indicates house prices are over-valued by 15-20%.

However, that model is sensitive to terms of trade and interest rate movements. For example, a 10% fall in the terms of trade could result in an 8% fall in house prices over the medium term.

On residential rents, the OECDs price-to-rent ratio shows a much higher over-valuation of 43% relative to the past 20 years.

"However, the measures include Government subsidised rents which has pushed up the ratio over time as subsidised rents decreased, most notably in 2001," the IMF said.

Taking subsidised housing out of the equation, the rent over-valuation drops to around 15-27% when compared to historical averages.

Comments from our readers

On 10 May 2011 at 8:26 pm Grammar Zoned said:
It's all well said but what does that mean to us home owners? Does this mean that we can expect a loss of up to 25% of what we paid for if we sell now? And for buyers, does this mean we can expect to pay 25% less than the CV? In fact I think that over-valuation doesn't really mean anything if there are demand and supply. In popular areas and in city fringe suburbs such as Herne Bay, Westmere, Ponsonby, Remuera, Mt Eden and Parnell, people are always will to pay the "market price" regardless if the houses are over or under valued.
On 13 May 2011 at 8:37 pm Richard Hoadley said:
I assume by 'house prices' they include land and building/improvements. As the cost of building a house is very competititive, and is variable depending on the materilas used, it is hard to accept that the cost of the improvements is 25% overvalued. That leaves the land, and that is where in my view the housing stock has been affected. High land values have been a major contributor to the escalation of values. There needs to be some clarification from the IMF to support their claims please.
On 14 May 2011 at 11:48 am Wolfgang Himme said:
It is easy to claim houses are overpriced and unaffordable - but should new buildings then also be 25% cheaper? Should the brick layers, carpenters, plumbers and drainlayers all also charge 25% less? Should the Councel reduce fees by 25%? Are the prices not related to the cost of providing housing? At least to me the IMF claim that houses are "overpriced by 25%" does not make much sense. We are in Hastings - maybe it is the case in the Auckland market.
On 15 May 2011 at 12:16 pm Peter said:
Unfortunately, once again, we have a comparison of incomes to house prices. This is an erroneous approach given that the average income is $50,000 and 3x $50,000 is $150,000. There is no way that a section can be developed for that price let alone a house built on it as well. It is time for the economists - especially overseas economists with no knowledge of local condtions - to stop using such a measure. It simply does not work. Actual development costs, especially Council charges, are much much higher than they ever used to be, and supply and demand will ensure that the income/ price ratio is meaningless in the market.
On 16 May 2011 at 9:55 pm Gordon said:
It amazes me how these economists make these statements. Property values in NZ have basically on average doubled about every seven years since records began. Yes some times they were flat for long periods of time but when averaged out it works out about every seven years. A lot has changed in reacent years. Before the Lange govt NZ was a regulated economy, it is not now so it is subject to the open market. Also NZs population has grown from about 1 million in the 60s to 4 million today. User pays has forced up costs of councils etc. GST on building materials etc. More people wanting the same bit of useable land, prices go up. Nothing has stayed the same therefore it is not feasable to expect past trends to stay the same. Wages have been eroded because of Govt handouts etc. This distorts the picture also. The past is exactly that, it is the past therefore cant be used as a reliable measure.
On 1 February 2012 at 5:55 pm Steve P said:
Australian property is in a massive bubble, NZ always mirrors what is happening across the ditch. It is insanity to even consider a rental investment at this stage due to low rents VS high house prices coupled with a zero chance of any capital gain. I expect a bloodbath !
Commenting is closed

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