Kiwi houses too expensive: IMF

It suggested the Reserve Bank would need to raise interest rates if house price rises and credit expansion continued, but said it was comfortable with current monetary policy.

In previous years, the IMF had said house prices were 10% to 20% overvalued.

This year, it said house prices were a primary issue for New Zealand and could “lead to an increase in debt-financed household spending which would put pressure on aggregate demand and increase the risk of an abrupt price correction.”

It noted that price-to-income ratios are 20% higher than the average of the past three decades. Price-to-rent ratios show an even larger overvaluation, although the IMF noted that that was distorted by the large number of houses supplied by the Government.

Population growth, low housing investment, supply constraints, low interest rates and high building costs were driving values, the IMF said.

"New Zealand has one of the highest rates of growth for working age population among OECD countries—over the last 30 years New Zealand has experienced population growth well above the OECD mean."

It said not enough new housing was being built.

"Housing investment fell sharply in the wake of the global crisis and has been below 4% of GDP in the last five years, the lowest level in 40 years and relatively low when compared to other countries."

It noted that the cost of building was a lot higher than in Australia and industry productivity was flat-lining.

The IMF raised its assessment of the potential for a sharp fall in house prices to "low to medium", from "low" previously. Such an event would have a medium to high impact on the economy by reducing household investment and increasing mortgage defaults.

Directors agreed that the current accommodative monetary policy stance was appropriate.