House price bust talk exaggerated

Investment bank Goldman Sachs has released a report which says there is a 40% chance the New Zealand housing market will see a price “bust” in the next two years.

However, it defines a “bust” as house prices falling 5% or more after adjustment for inflation.

Economic commentator Michael Reddell said that a 5% fall in real house prices could only be described as a "bust" in some sort of alternative universe.

If the Reserve Bank does its job and keep annual CPI inflation around 2%, unchanged nominal house prices for 2.5 years is a real fall of around 5%, he said.

“As recently as 2008/09 -  which fit no one's definition of a house price "bust" in New Zealand -  nominal house prices fell by 9.1% in the year to March 2009. 

“The total nominal fall was a bit larger than that, and the real fall was a bit larger again.”

But in serious 'busts" abroad, real house prices have fallen by 50% (most of that nominal), he said.

“In the late 1970s in New Zealand, real house prices fell by 40%.”

In Reddell’s view, such house price falls qualify as a real “bust”, but Goldman Sachs definition of a “bust” is not one that most people would have.

But he added that Goldman Sachs use of an “ill-chosen label for a modest correction” was not the worst of it.

“That is politicians who fall over themselves to suggest that, no matter how awful and unaffordable current house prices are, we can't possible have house prices falling.”

One example of this was Labour Party housing spokesperson Phil Twyford, he said.

Twyford responded to the Goldman Sachs report by saying that a housing bust could be just as bad as skyrocketing prices as stable house prices and an increase in house building is needed.

Prime Minister Bill English was also reluctant to say he wanted to see house prices fall when talking to media about the report today.

But he said that it would be good if the market settled down and that a 5% price reduction would be a reasonable adjustment.

Like Reddell, he suggested the language used by Goldman Sachs exaggerated what they were describing.

English also pointed out that prices in some parts of Auckland have already fallen by 5% in recent months.

This view is given weight by the latest REINZ data which shows that Auckland’s median price was down by 2.1% in April.

It also shows that house prices grew at 3% last year but that is well down on price growth of 24% in 2015.

Concerns that the booming housing market could burst spectacularly, particularly in Auckland, have been circulating for many months.

But most recent data, such as the latest REINZ data, indicates that market activity and house price growth is slowing at a sustainable rate.

Last week Reserve Bank governor Graeme Wheeler said the bank now projects that recent softening in house prices will continue and that price growth is likely to be in low single digit figures for the next few years.

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