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New Zealand house prices are overvalued - but they will keep rising, according to the BNZ

Posted in Property

New Zealand house prices are definitely overvalued, but that won't stop them continuing to rise, according to the BNZ.

The BNZ's head of research Stephen Toplis says in a research paper titled "The Housing Dilemma" that it is "widely accepted" that our house prices are overvalued. He says a "significant correction" in house prices is warranted, but won't happen till current shortages of housing are addressed.

"Often cited is the inability of prospective new home owners to fund the purchase of a new dwelling; elevated house prices relative to wages and rents; the cost of housing relative to the other countries; and the amount of debt householders have built up relative to the value of their assets," he says.

According to Toplis the average house price in New Zealand is 6.9x the average gross (pre-tax) annual wage. This is down from the peak of 7.6x back in the fourth quarter of 2007 but is still well above the average 5.4x. In the United States, the current equivalent ratio is just 4.1x.

If you were to adjust for the currency, the average New Zealand house would buy you 1.84 average US houses.

"Sure, some of this simply represents the 'overvaluation' of the NZD," Toplis says. "But even if we assumed that the NZD fell, say 20%, to USD0.67 this would still mean a NZ house would buy you 1.47 US houses."

In better shape

Toplis says there are extenuating factors. The ongoing low interest rates are making debt servicing less problematic so, it could be expected that valuations relative to things such as rent and incomes would creep higher. Also, the NZ economy looks in better shape than countries such as the US, so some premium for NZ assets might be expected.

"But, when push comes to shove, it’s hard to conclude anything other than house prices are indeed 'overvalued'."

So, this means we can expect some sort of downward movement in prices then?

No, says Toplis.

"It is all well and good saying that current house price inflation is too lofty and that house prices should fall but then one has to ask the question as to what might be the catalyst for any correction. Currently, we don’t see one appearing in the near future."

Addressing demand

Toplis believes the Reserve Bank will be forced into addressing the "demand side of the equation" with higher interest rates and, possibly, lower loan-to-value ratios. Limits on LVRs are one of the options the RBNZ is considering in its range of macro-prudential tools being readied for introduction this year.

Toplis says that many people point to New Zealand’s alleged house price overvaluation as being similar to that which prevailed in other countries such as Spain and Ireland immediately before house prices there collapsed.

"But, in New Zealand’s case, there is one big difference – there is absolutely no indication of excess supply - in fact, quite the opposite. It would appear that New Zealand has been underbuilding (relative to population growth) for quite some time and that the excess demand that has resulted will take some time to diminish."

Toplis says, however, that in the 12 months to February 2013 there were 17,432 new dwelling permits were issued, which now seems "about right" for the relatively low population growth that is occurring.

"However, if net migration turns positive, as appears to be the case, a further increase will be necessary. In addition, the Christchurch earthquakes delivered a hit to the capital stock that needs rectifying and clearly exacerbates the shortages that already exist."

No easing in prices

Toplis says it is "hard to imagine" any moderation in the current 8.1% house price inflation as indicated by the Real Estate Institute's Stratified House Price Index while housing supply remains relatively constrained and interest rates are so low.

So, what of the suggestion that house price inflation is going to become a problem for the Reserve Bank?

Toplis says the central bank can cope with inflation in the housing market to the extent that it represents "a relative price shift" and in fact when there are supply difficulties it may take significant price movements to encourage an increase in supply that more balances the market.

"From a monetary policy perspective, house price inflation probably only becomes problematic if the impact of such starts to flow through into household sector demand, more generally, via the age-old method of equity withdrawal. While there is some evidence that credit growth is again beginning to accelerate, the Reserve Bank currently seems comfortable that equity withdrawal is not occurring," Toplis says.

"The ability to judge this will, of course, be tainted by difficulties in assessing the balance sheet impact of the funds supplied by insurers to those in Christchurch."

Risks for the banks?

Addressing the question of whether the level of house prices could put the banking sector at risk, as international credit ratings agency Standard & Poor's recently warned, Toplis says "it seems unlikely" given the current housing supply constraints.

As for how the RBNZ should react, Toplis says if the housing market is seen to be getting out of control, "we believe the RBNZ will have no option but to raise its cash rate even in the event that complimentary prudential policy is enacted".

He says theoretically, the RBNZ should only utilise its "prudential tool-kit" for systemic reasons not because house price inflation is causing wider inflationary concerns. "Be that as it may, recent pronouncements by the Bank suggest there is a genuine desire to dabble with the prudential policy option," Toplis says.

"Our view is that house price inflation is likely to prove problematic, sooner rather than later, which lies, in part, behind our belief that the cash rate starts to move higher from early next year and then moves progressively towards a 'new neutral' of 4.5% [compared with the current 2.5%]. While we have a quicker interest rate adjustment than the Reserve Bank has in its published forecasts, we think we have a shared general sentiment as to the progress of the economy and its inflationary implications."

Toplis says the problem is that monetary policy and prudential policy to an extent are designed to influence demand.

"But with supply the more likely issue here it looks to us that fiscal and regulatory policy may prove a more effective solution to the issues that the sector confronts. Moreover, to the extent that demand is funded either out of free-cash flow of New Zealanders who have been saving of late or by the accumulated wealth of foreign buyers, demand-constraining policy may have little impact."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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55 Comments

"The European Parliament is

"The European Parliament is vast superstructure... designed to create an illusion of accountable democracy. A condescending pat on the head for voters held in contempt.     "...the EU’s parliament... is the repository of an unspoken agreement between the left and the multinationals. ... In effect, the left has said to the multinationals: you can have your markets stitched up for you, if we can indulge ourselves in endless social engineering. Big business has agreed. The result is a largely supportive parliament both from the left and right of the political divide."[13]Today's euphemistic propaganda for regional governance continues to mislead the public."
[Same here immigration isn't even considered in relation to house prices]

http://www.crossroad.to/articles2/006/migration-un.htm

What exactly do the rantings

What exactly do the rantings on the Internet of some credentials-free bloke about the European Parliament tell us about the situation in New Zealand?
 
Anyway, the point is clearly made in the article that the main reason for house price inflation is that house building has not kept up with population growth.  How would it have changed anything if the article had specifically stated that immigration is one of the drivers of that population growth?
 
It's not even clear that the problem is on the population growth side of the equation, let alone that the immigration component of the population growth is the problem.  One might equally validly reach the conclusion that the problem is in the barriers that prevent more houses being built.
 
 
 
 

The difference between

The difference between lumping population growth and immigration as though they were one and the same hides the fact that immigration is part of the discretionary policy of government, so these *growingrowing pains* are not (infact) normal.

Only up to a point.  The

Only up to a point.  The Government can't make people immigrate if they don't want to, and it can neither force people to emigrate nor prevent then from doing so.
 
Further: placing constraints on the market's ability to build new houses is also part of the discretionary policy of Government.  Much more to address the cost of housing could be achieved on this side, and with fewer adverse consequences, than by attempting to restrict immigration

Yeah right... "population

Yeah right... "population growth is government policy" ; "80 percent net population growth over last twenty years from offshore".
http://www.treasury.govt.nz%2Fdownloads%2Fpdfs%2Fmi-jarrett-comm.pdf

Population growth is driven

Population growth is driven by Immigration policy. Immigration aims to replace every New Zealander that leaves and aims for a net buffer of around 10k surplus per annum. The problem is that most migrants prefer to live in Auckland which is driving Aucklands 33k per annum population growth. Around 9K is due to normal birth, which means that 24k is from new migrants.

I guess it all depends on

I guess it all depends on your definition of overvalued.  When comparing NZ or Auckland houses to European and US conterparts we don't consider that their are different housing options over there. Just about all Auckland and NZ houses are detached homes on a 1/4 acre + land.  Just about every house in say England is a flat, apartment or terraced house.  If we built more of these housing options (and Kiwis accepted them) you'd see our 'average' house price drop dramatically. 
 
If you compare a detached Auckland house in a leafy coastal suburb with the same in Brisbane, Sydney or Melbourne you'll find Auckland very cheap.  A big reason so many foreign buyers and expats are buying in Auckland.  Whilst we don't have the cheap options for first home buyers, the quality, coastal, homes in Auckland are still very undervalued by international standards. 
 
Aucklands unitary plan should, eventually, give Auckland the cheap house options and this in turn should improve affordability.  The supply of houses in the leafy, coastal suburbs is not going to change and the demand is strong; it's these areas where there will be sustained price inflation. 

Would be interesting to see

Would be interesting to see how much a square metre of land 5Km out of Auckland City is worth compared to similar sized cities elsewhere. You are right that there is no point in comparing the price of an appartment in one city to the price of a stand alone house in another.

Apart from NYC, most cities

Apart from NYC, most cities in USA grew in such a way where anything within 5km's of the downtown is undesirable. So ours up goes for the same reason theirs goes down. Go figure.

Gareth/BH,   Entertain

Gareth/BH,
 
Entertain me...you should do an analysis that shows what each bank economist thought house prices would rise/decline by at the beginning of the year, and what actually happened.

Yes, not a bad idea Keyser.

Yes, not a bad idea Keyser. We'll see what we can do...

and for the last several

and for the last several years.  Was it beginning of 2012 / late 2011 when everyone forecast house prices would only grow at 2.5% for CY2012.

A very good point, would be

A very good point, would be great to track their "successes"....or um not.
;]
Didnt a bag of economists predict some huge figure? 25%? with Auckland's bubble it may actually play out....funny thing.
regards

Well, what else would the BNZ

Well, what else would the BNZ (and any bank for that matter) say ... in NZ, especially Auckland,  it's the banks "bread and butter" for **** sake.
Who pays Mr Toplis's salary... the BNZ, so is he going to say "houses are overpriced" and we need to address "willy nilly" 0% deposit lending to property investors, who go in and gazump the first home buyer etc etc ......   Fat Chance.
Why do you even bother to listen to a bank economist's opinion....it's like walking onto a used car yard and the dealer says to you, "I wouldn't really recommend this car, it has a bad resale value after 5 years and uses too much petrol for the engine size" ...is he really going to say that ....refer to my comment above ....Fat Chance !
The only economist I pay any attention to, is the NZIER .....at least they are not biased towards what they are selling.  
 
 

I wonder how much it costs to

I wonder how much it costs to build a new house in the US compared to here - I wouldn't be surprised if NZ was 1.84 times as much. 

JJ ....was on the ground in

JJ ....was on the ground in Phoenix, Arizona  - November 2011 ..not that long ago.
Saw an amazing brand new house and land package  - 2 level, dbl int. access garage, marble floors/benchtops, 2 bths, 3 beds and study, walk in wardrobe,  landing on the upper floor, high celings and NO leaky materials used ... a really nice home on a section, in a good part of Phoenix.
Came to the sum of USD 210,000 (NZD 251,497) .......that wouldn't even get you a garage in the equivalent part of Auckland !
And before people jump up and down and say " who would want to live in Phoenix, it's the desert" ...well, it has a huge market for "snowbirds", that have a home here to escape the North American winter, so plenty of buyers.
We are truly ripped off in NZ.... excessive council charges of all sorts, materials - raw and already processed, land costs etc etc ......you know the drill !!!
 
 
 
 

Are you comparing like with

Are you comparing like with like? 
So by 2011 the US housing market was down 30%? NZ has had that melt down.  Nice part of Phoenix....well I wonder how much a house would be in a nice part of Invergill....(oh wait oxy-moron)....
;]
I see some numbers suggesting Arizona had a 42% drop...NZ hasnt really taken much of a hit.
Not that I dont disagree on materials at least...you can get far more choice at far lower price, It seems its the cost of living in small NZ, no competition, MRRPs abound and little choice...whether thats justified is another matter. 
regards
 

steven, I am coming at this

steven, I am coming at this from the angle of a prospective property investor, so I am comparing like with like, hence my comment about the market for snowbirds.  I would imagine those November 2011 costs would be very similar today.
BTW have you been anywhere in the States? So many kiwis (or are you ex UK or somewhere else?)  make extremely vague and generalised statements about the USA and have actually never been there. Each state is different, each area of that state is different and the same applies to US cities...as it does in NZ.
As a purchaser of a home for you and your family to live in,  is ALWAYS another story ........ no matter what country.
regards CH

So many new houses over there

So many new houses over there up to recently were able to be purchased for what must have been less than the sum of their parts. The bargains are all gone for time being though, at least until the next shock. 

idlebumski,  don't worry,

idlebumski,  don't worry, more bargain properties to come. I know developers are still hitting the wall due to lack of cheap development finance. These guys can be paying 15% interest for development finance. With the massive delays that council takes in approving any phase of a development these guys are going broke. Auckland Council officers are busy taking tea while residential developments keel over from paying high interest on delays. but they don't really care.

What we can say is that

What we can say is that current stability in world markets, money printing has helped bubbles in different part of the world. When money printing comes to an end this is when thing will most likely end in tears as we are in unknown territory.  This will put a break to house price inflation.  Currently we can enjoy the calm and go with the shortage of housing that causes prices to rise.  Other risks to banks is a pronouced slow down in the Chinese economy, notably hitting Australian banks that rely on the mining boom.  This will cause a downgrade of Australian owned banks and thus result in higher interest rates for these banks to borrow money.  This may happen within 2 years. As a consequency funding costs go up for everyone with a mortgage regardless of how well the economy is doing.  Like other Western Countries we have Rich and Poor with the middle classes disappearing.

Does the continued  house

Does the continued  house price escalation in Auckland (in particular) reflect  an improved standard of living, generaly speaking....? in this great Metropolis...?
Removing migrant purchases, and cashed out to cash in from the equation, many Mortgage borrowers are increasing borrowings against equity (a speculative component) in an attempt to maintain a living standard. Others are stretched to the limit in hope of servicing enough to create equity margin to gain relief. And then there are those who are not managing, finding themselves further and further in debt with a bleak outlook of rising rents should they be forced to  settle upand rent  reasonably near their place of  work.
When I speak to a lot of people from say Eden/ Roskill to .G.I on to Howick I've asked if they think their standard of living has gone up... down...bout the same.... and then, is it easier than 1990 or harder just to get though and manage their finances week to week, month to month.
Given the response I get from the vast majority  of  people, I'd say there is a bubbling pot of very disenfranchised,disillusioned N.Z.'s brooding their way to some kind of action.
 

Have you noticed that those

Have you noticed that those people who stand on the podium, stand at the lecturn, talking to the microphone, keep pussy-footing around the problem(s) .. mincing around .. will not address the issue(s) .. issue you say? .. what issue?
 
And sorry to keep harping on it .. there is only one person (that I can see) who has the courage to do something about it .. but nobody seems to want to vote for him

They,... those with the

They,... those with the microphone iconoclast, dislike, and discourage Nationalist rhetoric as anti growth, anti Foreign investment, anti progress.
 In doing so they use the lowest common denominator to maximum effect, when under threat of reprisal pull the race card, and use the word racism to drive the discontents back through fear of being seen to be guilty of such an abhorrence to  modern day society.
 There is your .....bullshit......right there, not the lie you can't argue with , but the one you don't want to argue with....and they know this only too well.
 Key has used the card / word twice in three months when pushed by journalists on the subject....and they have withdrawn from further questioning on the matter.
You see, it matters not whether it's ...Guyon Espiner, John Campbell, it's the shit that sticks they fear.
In time N.Z.'s will be far too fragmented to impose a collective will of Nationalist interests.... if indeed they ever had a collective will. 

"too fragmented to impose a

"too fragmented to impose a collective will of Nationalist interests"
 
Well count I spent a few hours with a Ngapuhi lass last week, someone I have known for a long time. I can assure you that Ngapuhi have a ver strong collective will to see the best interests of Maori served in the long term not matter what the rest of NZ like to think. They are very aware of the Declaration of Independence they signed in 1835 and won't rest until it is honoured. As the world melts down I think they might just get their opportunity. Woe to anyone that thinks they own property from the Waikato North.

While I find that admirable

While I find that admirable on the part of Ngapuhi Scarfie, repeat Administrations have found it all to easy to polarize public opinion  where Maori grievences are concerned.
It is time for most of us to see Divide and Conquer  is still the preferred method of Governance. 

Well I am talking about a

Well I am talking about a scenario where the administration doesn't have the same leverage it does right now. Ngapuhi have been waiting 6 or 7 generations and will keep chipping away for as many as it takes. But the elders can sniff the opportunity fast approaching. 
     Quite frankly the tribal structure offers great hope for New Zealand, I think that land in Maori title might be quite desireable going forward. What they still own is largely unencumbered by debt :-) Look to Maori to make an economic recovery while contemporary society decays.

Scarfie, indeed the Maori

Scarfie, indeed the Maori King should ensure that more of the money invested in Hamilton should be invested in his own backyard in Ngarawahia and Huntly, Apologies if I can't spell or pronounce that town. The reason I have not invested in Ngarawahia is because I can't pronounce that name. Lots of cheap properties here and WINZ pays the rent.

A wildcard like that might be

A wildcard like that might be just the ticket. He has my vote.

Ollie Newland 1 : Bernard

Ollie Newland 1 : Bernard Hickey 0
 
...... same old , same old ...... until such time that our politicians & local body councillors  can get their tiny pea brains around the basic concept of supply & demand ......
 
House prices will continue to rise ...... sorry Bernard !

Up 30% since 2009/2010 -

Up 30% since 2009/2010 - great return if you had the balls to purchase when the recession was at it's worst!

bigblue, I did buy in

bigblue, I did buy in 2009/2010. Property number 11. I was bleeding cash but went ahead to buy, to balance my loss of $300k equity due to the ridiculous 10% interest charged by our banks driven by a nutcase Reserve Bank. Purchase price $300k, 3 bedrooms on 570sqm adjoining an existing rental thereby allowing for a third subdivisible site in the MT Roskill Grammar zone. The additional site added a increased value of $300k plus reducing at least on paper my real cash equity loss paying lousy interest. Up 30%? I think a whole lot more than 30%. Suggest you guys start looking at your neighbours closely as opportunities abound with the new Unitary plan.

bigblue, I did buy in

bigblue, I did buy in 2009/2010. Property number 11. I was bleeding cash but went ahead to buy, to balance my loss of $300k equity due to the ridiculous 10% interest charged by our banks driven up by a nutcase Reserve Bank. Purchase price $300k, 3 bedrooms on 570sqm adjoining an existing rental thereby allowing for a third subdivisible site in the MT Roskill Grammar zone. The additional site added a increased value of $300k plus reducing at least on paper my real cash equity loss paying lousy interest. Up 30%? I think a whole lot more than 30%. Suggest you guys start looking at your neighbours closely as opportunities abound with the new Unitary plan.

Its so easy to make money in

Its so easy to make money in these conditions that its boring.
SK
 

It really makes me sad. But I

It really makes me sad. But I have moved my rent to a tenant by $30 per week today after providing notice. This would be the first of the 12 properties that I own. She is on the DPB and has a whole bunch of kids. She said that she could not afford the rent. I had to tell her I need to move to fair market rent and that she should raise the matter with WINZ. Hopefully WINZ can assist her. This is to cover loss of Building Depreciation. For every action there is a reaction. Cause and Effect.

Do let us know whether she

Do let us know whether she manages to get an increase in accommodation supplement to cover your rent increase.
 
It would be nice to know whether you are a welfare bludger or not.

Pretty much cross party

Pretty much cross party support for the a/s to go;
 
http://www.interest.co.nz/property/60426/govt-reviewing-accommodation-supplement-rent-subsidy-housing-minister-heatley-says-go
 
http://www.interest.co.nz/property/60260/labour-follows-greens-attacking-landlord-subsidy-accommodation-supplement-act-claims-
 
Suggests you sell the low end rentals and get into stock that attracts tenants who are income self-sufficient.

Kate, I am happy keeping this

Kate, I am happy keeping this property. It is 2000sqm plus. Currently subdivisible to 4 sections. The Unitary plan would provide for mixed housing which is 300sqm per dwelling allowing 6 units. Kate, thank-you, I will follow your exact reasoning, replace the state dependent tenant with a income self sufficient tenant.

Actually it would be bloody

Actually it would be bloody good if there were no need for the likes of you, a situation I would like to see a bold govt work towards!

Actually it would be bloody

Actually it would be bloody good if there were no need for the likes of you, a situation I would like to see a bold govt work towards!

So Kimy - you increase the

So Kimy - you increase the rent by $30 per week then it takes you 6 weeks to find a replacement tenant - assuming your total rent was pre increase say $400 per week it will take you 80 weeks to recover the lost rent while your property is vacant. Or are your sure rental demand is so high that you will have no extended vacancy between tenants? WINZ ie government will probably cover it though eh!

bigblue, never had a vacancy

bigblue, never had a vacancy for more than 2 weeks for the past 10 years in any of my 12 rentals. My rents are typically held a little lower than market rents so they tend to rent easily. But rent increases around April is always ideal as 40k students are back into Auckland and typically hard for a tenant to move out. They would have a chance to adjust to the new rent before the offpeak Christmas period comes around.
But it would be interesting to see if WINZ bails out my tenant otherwise I get a new tenant that is earning a decent wage and can afford market rents as Kate suggests.

Looks like the government

Looks like the government happy to lease your house and handle everything for you  - they take  10% management fee so you don't have to deal direct with the beneficiary. See http://www.hnzc.co.nz/rent-buy-or-own/guaranteed-rent-through-home-leasing found the advert for this on interest.co.nz too!

When you say "moved my rent'

When you say "moved my rent' ,does that mean up, down, sideways ,or some other direction that us non dickheads dont understand ? Your sounding very like the mail I get from Electricity milkers and the like that always star with "our pricing to you has changed!'" . Makes you wonder oh goody maybe It's gone down - but no invariably I'm one of the few unlucky ones where it's gone up - who would have believed it!

Can't wait for the next big

Can't wait for the next big housing collapse. Am so going to enjoy it.

Bring it on.

Bring it on.

Mark L. With central banks

Mark L. With central banks doing everything they can to fight off deflation, and running out of bullets, we are left as a world economy in unchartered territory, flying on a wing and a prayer, in what is now nothing more than a confidence game. Sooner or later something will happen, and that shaky confidence will evaporate. At that point all the world's bubbles will popski, ushering in a renaissance of sorts afterwards, where a new legion of participants will join the market and the world will see the best period of economic growth it has ever seen.  Greed or capitalism more or less guarantees that once at the point where ultimately there will be more money to be made by letting everything reset, then that's what will happen. 

Considering the supply and

Considering the supply and demand situation in Auckland you'll be waiting a while. 

Spot on there , Happy ......

Spot on there , Happy ...... amazing how many folk still don't understand that simple construct :
 
... Supply & Demand !

Just promise you'll still

Just promise you'll still come here after the SHTF. That way I can quote your S&D construct line to explain why the prices are falling.

Who says that the faecal

Who says that the faecal material will impact upon the wind oscillating device ?
 
...... you gotta stop taking Bernard's doom & gloom articles so seriously ...
 
Well , at least until such time as he gets something right .....

Bernard who? This

Bernard who? This cash-is-trash meme right now, where everybody is trying to buy assets for protection, ironically only reinforces the deflationary impulse ultimately, leading to a point wher everybody will realise they are asset rich/cash poor, and positioned wrongly. Somebody once said, 'Never underestimate stupidity of the masses.' Per that, they always seem to buy at the wrong time, leaving them no choice but to unload when it's wrong too. We'll just have to wait and see. As a cash-up guy, freehold, in his early forties, and zero debt, I got time to wait. Plenty of it.

Exact position I was in 10

Exact position I was in 10 years ago. Got a bit boring. All paid up and no income to retire on. Just a regular wage which stops as soon as you stop work.

Like you were, I too am

Like you were, I too am looking to secure my future. So it means I am looking for a good entry point to go all in. No offence, but the pro-property types here who suggest I do it now, piss me off, because they care not for me and it is obvious. When there is blood in the streets, and people are begging me to help them escape the silly position they put themselves into, will be the time. Right now, buyers have zero power. That will change. Always does.

This is much more

This is much more entertaining:
http://whosjack.org/dogs-in-tights-really/