New Zealand: The Housing Market, Is This A Bubble We See?

New Zealand: The Housing Market, Is This A Bubble We See?

Neuseeland New-Zealand
Auckland Harbour and Sky Tower – New Zealand [Photo credits to Travelling Pooh on Flickr]

From the standpoint of someone living in the UK, New Zealand’s housing market exhibits some familiar trends. Overall the situation seems benign for the middle aged and much less so for younger people who have yet t0o get a foothold on the property ladder. New Zealand mortgages tend overwhelmingly to be fixed (85% of the total) and this skews the impact of the Reserve Bank of New Zealand’s interest rate (Official Cash rate – OCR) rises in a similar way to the Bank of England’s; causing a marked time lag between a rise and the looked-for effect. In fact, New Zealand’s interest rates are the second highest in the developed world (after Iceland’s).

At the moment house prices seem to be rising at an impressive rate. Quotable Value New Zealand, the property valuation arm of Statistics New Zealand recorded an average rise of 12.2% in the 12 months to June, the highest increase recorded since (the 12 months to) May 2006. Despite the steady rise in interest rates so far this year and the estimated 26% of fixed rate mortgages that are up for renewal in the next two months, commentators seem unsure as to whether there is going to be a housing downturn.

Although, Moody’s have forecast a downturn in the wake of the interest rate rises, the home mortgage market is very competitive. Is there a possibility of the major banks taking a gamble on interest rates coming down in the fairly term so that they can risk renewing fixed rate mortgages with smaller increases than expected? Alternatively, might they see their way to introducing something like the much longer term fixed rate mortgages that UK borrowers are beginning to hear about and taking a gamble on interest rates that way?

Generally speaking, even though the average house price is only the equivalent of £135,000, now doesn’t seem like the right time for foreigners to invest in New Zealand’s property market. House prices have risen 60% since this time in 2003, these interest rate rises must have some kind of impact and New Zealand has something of a reputation for economic volatility. However, in the short term the real clinching argument is that economists do seem able to agree that the New Zealand dollar is likely to drop back from its current high levels and present overseas investors with significant exchange rate losses.

In the longer term the outlook is considerably more promising with developers forecasting that the high proportion of the population beginning retirement from 2010 will mean both more immigration and a strong downsizing trend by the newly retired. Both these factors are seen as likely to contribute towards higher prices for apartments in the larger cities in the 2010-2015 period.

The potential of the New Zealand property market should be seen in the context of the perceived flaws in the housing market in the eyes of the government and financial authorities. They view housing and mortgage debt as playing an inordinately important part in New Zealand’s economy. Interest rates though high have not been high enough to stem a marked increase in property prices with a decline in the proportion of the population owning their own homes.

The Reserve Bank of New Zealand is currently considering a mortgage interest levy (read pdf report here) as a way to modify housing-market related pressures and as a tool for managing phases when New Zealand interest rates are out of step with the rest of the world.