Something’s gotta give on prices

BNZ's Stephen Toplis

Thanks to the much lower cost of lending, property buyers – notably first home buyers and investors - are out in force and that demand, coupled with limited supply, has sent prices soaring.

According to the latest REINZ data,  median house prices nationwide increased by 14.7% year-on-year to a new record high of $685,000 in September, while 10 regions (including Auckland) turned in record median prices.

Yet it seems the impact of historically low interest rates on New Zealand’s housing market has caught everyone by surprise and many economists are now questioning where it could lead.

The latest to do so is BNZ in its latest economy watch commentary, which takes a look at the risks inherent in the expectation-defying hot market.

The bank’s head of research, Stephen Toplis, says that while the Reserve Bank is well aware of the financial stability implications, it believes high unemployment is a bigger risk than that of an overvalued housing market.

“This may well be the case short-term but we also caution that a future significant house price correction driven by stretched valuations could equally reverberate through the economy and generate the same, or even bigger, problem.

“We wouldn’t necessarily argue that house prices are currently wildly out of kilter, but we would question the risks imposed by further aggressive appreciation from here.”

BNZ’s data shows house prices are currently about 30% overvalued compared to GDP, 66% overvalued compared to earnings and also overvalued compared to house prices in the United States.

But it also shows they are undervalued compared to past immigration and – going on price to income ratio and price to rent ratio – slightly above average on a global scale.

Toplis says they thought that, by now, house price appreciation would have been a thing of the past, but it clearly isn’t – and interest rates are clearly the key driver for this.

“Despite our short-term positive view on house prices, we can’t help but think the underlying drivers [migration, unemployment, supply] will eventually weigh on the market.”

However, he concedes it is becoming increasingly plausible that when the marginal impact of falling interest rates on the market wanes, the world will be getting on top of Covid-19 and borders will be reopening.

“If this is so it would be reasonable to assume that net migration into New Zealand will soar and again underwrite the market.”

That means any major correction in prices may not occur until interest rates start to steadily move higher and that could be some time away.

Whatever the justification for prices, Toplis cautions there will become a point in time when overzealous investors push prices to simply non-sustainable levels.

“If house price to income and rent ratios blow out then owning a house will simply become an untenable option for a greater proportion of the population. Ultimately, prices will then have to move.

“When senior folk amongst the real estate fraternity start to express concern about the sustainability of current price increases you know something must be amiss.”

Read more:

Sales, prices skyrocket in defiant market 

Market correction? Don’t hold your breath