CORRECTED-House prices too high IMF says

Property

New Zealand house prices overvalued by 15%-25%, prices to rents by up to 43%, says International Monetary Fund

10th May 11, 1:06pm by Gareth Vaughan

By Gareth Vaughan

New Zealand house prices appear to be overvalued by between 15% and 25%, the International Monetary Fund says in a country report on New Zealand.

The IMF says that using the Organisation for Economic Co-operation and Development's house price-to-income ratio in September 2010 suggests an overvaluation of about 15% when compared with the average of the past 20 years. However, it notes that the income measure used by the OECD doesn't take into account Statistics New Zealand's recent upward revision to household income.

Nonetheless the IMF says model based estimates that take account of income, demographics and interest rates suggest an overvaluation of 15% to 25%. And a model that includes demographics, mortgage interest rates, and the country's terms of trade as a proxy for future income, indicates that house prices are overvalued by about 15% to 20% from a medium-term perspective.

"The models suggest that a 10% fall in the terms of trade could result in an 8% fall in house prices over the medium run," the IMF says.

The IMF notes that real house prices rose by 150% in the 15 years to 2007, one of the strongest increases among advanced countries, and that they have since fallen by more than 10%. The IMF does note that some of its measures have weaknesses, adding to the uncertainty of the estimates.

Meanwhile, the IMF also says - based on the OECD's price-to-rent ratio, that houses are overvalued relative to rents by 43% compared with the past 20 years.

"However, the measure includes government subsidised rents which has pushed up the ratio over time as subsidised rents decreased, most noticeably in 2001. An alternative measure excluding subsidized housing suggests an overvaluation of 15% to 27% when compared with historical averages."

(This article has been corrected to make clear the report says house prices are overvalued relative to rents by up to 43%, rather than rents being overvalued by 43%.)

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34 Comments

by jh | 10th May 11, 1:22pm 1304990535

"The IMF notes that real house prices rose by 150% in the 15 years to 2007, one of the strongest increases among advanced countries, and that they have since fallen by more than 10%. The IMF does note that some of its measures have weaknesses, adding to the uncertainty of the estimates."

....................

Wow, that's realy looking after (some) peoples interests (not that it's anyones fault - these things just happen).

by Kermit The Frog | 10th May 11, 1:27pm 1304990865

"However, it notes that the income measure used by the OECD doesn't take into account Statistics New Zealand's recent upward revision to household income."

So the report is out of date and all rather meaningless...........

by ex agent | 10th May 11, 1:39pm 1304991540

Keep taking those pills and the real world will just go away and all will be right. Property prices will continue to go up in value as Kiwis struggle to pay for food, power, insurances and petrol.

by scarfie | 10th May 11, 3:18pm 1304997493

House prices overvalued, well bugger me who would ever have thought?

Where is the Ratmeister for comment.

by The best statu… | 10th May 11, 3:27pm 1304998022

The market says something different IMF. IMF is underestimating the true value as set by the market.

BTW, 24K mortgage now, gone in October. After that Bernard will be happy with me as I will pay for everything by cash, oh the discounts at Harvey Norman, Furniture City, Mazda. I will help reduce the current account deficit.

by FCM | 10th May 11, 3:28pm 1304998139

Was it not the IMF who also said our dollar is over valued 20 %..and what has happened..nothing ...it went up...

by Steptoe | 10th May 11, 4:52pm 1305003137

15 to 25 %

Damn all those who blamed the housing market slump on all those doom and gloomsters, including BH whgo where talking about a 30%, way back in 2006, 2007..looks like have egg on their face...

In retospect, which does have 20/20 vision, they near enough match up

Just because something is over valued doesnt mean it is going to be let crash.Things can be manipualted to advoid that in most cases, which results in smaller 'crashes' and stablising of the market, little growth over quite a few years.....which funny enough, was also predicted by the doom and gloomsters.

As a doom and gloomster from way back in pre early 2006..Im very glad we didnt expand build as we intended to...and we where sitting ready ..plans, builders , contractors waiting for the go.

Well Done BH...

I rem somewhere you had predictions going out to 2016 or 2018 (?) from memory they are damn near on the nail and far more likely to be on the money now than a few yrs back..

There are those who pin prick a couple % error here and there, or a yr or so out...but thats is just small minded pin pricking by those critics who ho hummed and cant believe they where WRONG.

by JimboJones | 10th May 11, 5:41pm 1305006083

Obviously you don't have 20/20 vision!!

I think most of us predicted pretty flat house prices (as has been the case after every other housing boom) while the doom and gloomsters predicted big drops in house prices (30%, 50%, even 90%). The doom and gloomsters have so far been wrong.

by Anon good nurse | 10th May 11, 10:34pm 1305023696

I think most of us predicted pretty flat house prices...

Nope. Pretty much every one of you property spruikers claimed that the bubble was still going great guns, and always would be.

...(as has been the case after every other housing boom)...

Previous increases were usually in line with the CPI and other indicators, and when they weren't they faded back to reality. But this last bubble was unlike anything seen previously. It was utter insanity and completey unsustainable, which is why that bubble burst and is deflating even now.

...the doom and gloomsters predicted big drops in house prices (30%, 50%, even 90%). The doom and gloomsters have so far been wrong.

The "doom and gloomsters" predicted the very thing you denied, the thing you hoped you could ignore and it would go away. They predicted falls, and falls we see. How much further the house prices will drop remains to be seen. There is no reason to believe property prices won't continue to fall for a long time to come, so the "doom and gloomsters" have a good chance of being proved 100% correct, while you spruikers just look like bloody greedy fools and suckers.

by Kate | 10th May 11, 7:25pm 1305012321

Meanwhile, the IMF also says - based on the OECD's price-to-rent ratio, that rents are 43% overvalued compared with the past 20 years.

So does that mean if the government got out of the market and stopped subsidising rents by way of these accommodation allowances - that rents on average would likely drop by (43 - 27) 16% as a minimum.

Government has ALOT to answer for!

by Noprogram | 10th May 11, 7:55pm 1305014156

JJ.....you might want to look up something called normalcy bias. Also you may want to consider something like the Irish predicament in the following article. -It's well written and in a reputable magazine.

“It is not implausible that [Irish real-estate] prices could fall—relative to income—by 40 to 50 per cent.” (They did.)

http://www.vanityfair.com/business/features/2011/03/michael-lewis-irela…

Without wanting to sound overly alarmist, their economy is now imploding along with a lot of others. -Which tends to be a problem for the people involved. The doom and gloomters in these instances were also wrong....until they were right of course.

Is New Zealand 'Inc' in much of a different position?

by DC | 10th May 11, 10:26pm 1305023219

I agree that house prices and rents are too high but where are we to live? I blame the excesssive credit boom of the mid 2000's and the fight to the top buying and selling houses to each other. Are we all better off?

Now how to fix this problem?

Sell all the state housing in Aucklands eastern suburbs and build more around available rail corridors? Increase supply.

Heavily tax overseas purchases of NZ residential property. Lowering demand and filling the tax cash bucket.

Open up the outlimits main cities and do it properly with green belts and parks in between each "village". Proving cheaper land to develop.

Provide devlopers already holding land with government susidised compliance / permits...

Push for competition in the building supplies industry.

by Anon good nurse | 10th May 11, 10:37pm 1305023832

There is nohousing shortage. It's the desperately repeated myth of property spruikers.

by bob | 11th May 11, 8:59am 1305061184

"there is no housing shortage" is actually the desperately repeated myth of the property naysayers..

by Nicholas Arrand | 11th May 11, 9:26am 1305062800

Here's why there isn't a 'housing' shortage, bob. If there are 5000 people and 2000 houses, then 2.5 people on average can live in each house. But if only 1000 people can afford to buy a house ( with savings or debt) then either 5 people live in each house, leaving 4000 empty ~ or those 4000 'empties' either rent them out, to get an income, (and have to rent them at a price level that is affordable to the occupants) or like wise sell them at an affordable price, to spread the people out again.

It's not the number of dwellings that matter, but the ability to be able to buy or rent them. So it's a capital shortage, not a house shortge that matters. And in NZ we have a capital shortage. Just check out our current debt figures!

by Nicholas Arrand | 11th May 11, 9:32am 1305063167

Actually, no. There has just been an excess of misallocated, borrowed, capital. That's what the IMF is getting at.

by bob | 11th May 11, 12:12pm 1305072730

I was simply correcting the previous post that appeared to attribute the "there is no property shortage" myth to property spruikers.

I know you believe that there is an oversupply of property because more people could be crammed into existing houses, in exactly the same way there is an oversupply of property in Mumbai where they could also cram more people into existing dwellings (as long as they all stood up the whole time).

I also already know that you like to think up little closed system vignettes that don't translate into reality - let's test your above theory against reality:

I take it as given that houses are unaffordable (or this discussion wouldn't be happening). I take it that your proposition "there isn't a 'housing' shortage" should be proven in your next two sentences.

Your first sentence is untrue (it assumes that housing is affordable). Therefore your second sentence must be true.

Your second sentence states that if housing is unaffordable ("only 1000 people can afford to buy a house") EITHER:

"5 people live in each house, leaving 4000 empty" this is not true - Statistic NZ figures show that occupancy is decreasing. OR (which MUST be true)

houses will become affordable ("...rent them at a price level that is affordable to the occupants) or like wise sell them at an affordable price.")

BUT this is also untrue as houses are not affordable.

There may or may not be a housing shortage, however your reasoning for why you think there isn't is ilogical.

by Steptoe | 11th May 11, 12:34am 1305030867

I agree that house prices and rents are too high but where are we to live?"

Now how to fix this problem?

Well if johnny gets stuck up a tree, he comes down the same way he went up.

A basic as that

When the problem was 'fix"ed, rents and house prices where not overvalued .

Things can rectify 2 ways...allow it all to happen in one big castrophic bang, basically return to the Dark Ages, or have governments step in bail stuff our and let things draw out till a few market blips and inflation brings every thing back to the long term mean....

If you really want to know where the real mean is, check out graphs going back 40yrs.

So the problem being fixed is being done so at the moment...has its ups and downs, and always as hs has happened for the last 1000 or so yrs,

May take 5 or 7 yrs...even so there will still be a few determined young people do still get their home....own or rent in the mean time...its not impossible.

The bigger problem is the long term influence, during more 'affluent' times much of our income was undermined, by taxpayer subsity, along with organised/semi organise workers abilty to maintain around the middle 'balance' . (Which is a basic reason why we are so far behind Aussies in real pay.). This has also been a influence on overinflating rents....plus since values are high, even for a reasonable min return means high rents.

Dumping substies, will be the hardest correction to make, hopefully it may influence rents.......it is not just an economic correction that is required but a social one with the social casualities....

"Government has a lot to answer for"

15 to 20yrs of governments who have purpertuated this economic and social engineered hinderance to our recovery.. The same governments that caused the over valuation by taking traditional 1/3 deposit/lending ratios of banks.

Kate we dont agree on much but that...can fair and squarely be placed at the feet of those politians in the history books.

Cheers

Steps

by Wolly | 11th May 11, 5:08am 1305047297

"A basic as that" (sic)...or Jonny called fall down....and I guess in the worst of trees he could get stuck at the top and starve...or be shot out of the tree....or the tree could be chainsawed down...or a storm blow it over...heaps of ways Steps!!!

I reckon the Banks have got the govt and Bollard where they want them...trapped and up to the eyeballs in debt...desperate to stay in power this November...willing to take on even more debt to do just that....

Jonny will remain high enough up the tree for long enough until he grows longer legs but he aint a coming down while the banks rule the roost.

The budget will reinforce the hold the banks have over the economy and the govt and the RBNZ. The country has been mismanaged over decades into being a socialist state that pretends to be a free market economy. A country that is host to several banks.

by bob | 11th May 11, 8:57am 1305061076

Thank God then I live in a house not a tree.

by Christov | 11th May 11, 9:10am 1305061857

True Bob.........but things were a lot simpler for us then.....eh..?

by Anon good nurse | 11th May 11, 9:13am 1305062032

How's all that property debt working out for you?

by Anon good nurse | 11th May 11, 9:21am 1305062512

Clueless droolers who believe that houses are the only way to get ahead in life, the be-all-and-end-all, are the reason this country is poor and in-debted, because their vapid stupidity taints all things Kiwi.

by Christov | 11th May 11, 9:22am 1305062568

and that difference...Westminister is always a lag in the timeline.....we will respond to IMF directives...given enough time to look as though it were by our own choice.

Put you money there Good Sir...we are not Australia they have people coming in...we have people going out.

by Steptoe | 11th May 11, 9:43am 1305063791

How about you get back to me when house values actually fall by 15-25%. We've got no shortage of predictions around here.

What have you been reading? who is predicting a fall?

the long term term ave, IMF, NZ sources what ever, all say the same thing and have been for 5 or 6 yrs

Just because something is over valued it doesnt mean it will fall...what most are saying ineffect is the market is stable...and If one expolates thwe long term graphs, eventually they will meet up...And If you look at long term data that is whay happens, a drop about 1/4 to 1/3 of the required correction then 5 to 7 yrs of catch up.

I think you'll find that technically over-valued ousing is an indicator of a high standard of living

I think you will find that is a miss interpetation and assumption, again, made from short term data..short term being under 30 yrs.

Again classic example of people who do not have the abity to think outside 1 ggeneration and limit ther knowledge to the philosphy of that single or less than single generation..

by Tolstoy | 11th May 11, 10:11am 1305065489

While I won't comment on the accuracy of the IMF report, the accuracy of this article leaves something to be desired.

The IMF paper does not state that rents are overvalued by 43%. It says that the house price to rent ratio shows that houses are overvalued by 43% (and then goes on to qualify the figure). A high price to rent ratio suggests that house prices, not rents are overvalued. Bit of a rookie mistake, particularly considering its in the headline.

by carkeek | 11th May 11, 11:59am 1305071943

I don't believe the house price to income ratio comparison is a useful measure for the NZ market anymore and won't have much affect on future prices.

It doesn't take into account the cost of building which has risen sharply recently. NZ's first world building act 2004 (stainless steel bolts everywhere!) doesn't match our moribund wages and salaries.

Building a house is only going to get more expensive as we compete on the international market for the raw materials. It already costs more to build a house in NZ than it is worth, hence the collapse in new building consents to levels not seen since the 1960's. I think there is going to be a severe housing shortage in the near future which will keep house prices at their current elevated levels.

The only way to reduce house price to income ratios would be to relax the building code and allow kiwis to build houses that match their incomes (i.e. mud huts, leaky tin shacks etc) or to improve our incomes through a better economy. I can't see either happening in the forseeable future, so I think the high price/income ratio will remain a permanent fixture of our economy.

by steven | 11th May 11, 12:21pm 1305073299

That is one hell of a good point (build costs) and it will be interesting to watch....the Q's to ask are, are materials priced in what they cost plus a margin, or what the vendor thinks the market will stand? I suspect very much the latter....Also I suspect that NZ companies (in particular) are so loaded with debt that it effects their pricing considerably.....

As an example my wife wants me to make a new kitchen out of compressed bamboo (lucky me), the interesting thing is I can get the material at around $60~75 a square metre or if you want $150~180 a sheet....so I can make a cabinet for about the same price i could by a 16mm melamine ready made unit for...($180).....this makes no sense to me....so the profit margin must be huge.....ditto buying ply etc from placemakers or Bunnings, yet compare to the USA where they import say oak ply from china (so we could get it).....its a fraction of the cost...compared to NZ...

Better economy is an oxy-moron now.....to grow an economy by 9say) 4% per annum we need to have (typically) 2.5% more energy per annum. the problem with that is we are past peak oil...so 4 to 8% energy decline per annum is likely...do the math on what economies go.

So at this point it seems likely if you accept my hypothis that many NZX listed (or indeed listed on any stock exchange) are grossly over-priced.......so holding shares in Fletcher etc is not a good idea....IMHO.

Basiclly what I expect is a depression and deflation......so everything will drop in cost....basically we have one huge credit bubble which is about to burst leaving the biggets hole ever seen.

regards

by carkeek | 11th May 11, 1:17pm 1305076654

I agree with you on the building costs. If you take the example of plywood, it retails for about NZ$50 / m2 in NZ. In the US it retails at about US$15 / m2.

It's a combination of economies of scale (i.e. it's much cheaper to produce over there) and the closed market created in NZ by our Building Act. I can't import US plywood to use in my house (~NZ$20 plus minimal shipping costs - i.e. half the price), because the US product does not have BRANZ approval, so my local council won't approve its usage in a house.

It's not worth the US plywood company's time to jump through the hoops here to get BRANZ certification because the market is so small, so foreign companies don't bother competing.

The govt could relax the rules and allow foreign building components to be used, but then they potentially expose themselves to another leaky homes scandal. So they would never consider it.

So we're left paying $50 a metre for plywood when no one else in the 1st world does and our homes cost the earth to build, so our house prices are and will remain ridiculously high.

by Simon | 12th May 11, 6:48am 1305139739

Nice graph.

Shows all but aussy following the same head and shoulders downward trend pattern, that for all countries is still trending downward; and unfortunately for us we are lagging the most and still have the furthest to fall relative to incomes

by muzza | 13th May 11, 6:11pm 1305267079

Rent prices are too high in Auckland and may be Wellington, but from what I've seen, they are pretty good elsewhere.

You can get a good 3bdrm place with double garage in a fairly desirable area in many places in NZ for $350/wk or under; now that's not bad for a good property.

by Kate | 21st May 11, 2:13pm 1305943992

Hi Ed.

See you're working on the weekend as the other story relating to the IMF data has been pulled.

Hope you guys do come back and clarify just what that IMF report does mean - as it is of interest (from a Government policy point of view) why things got so out of kilter in our housing/rental market.

In the past I've pretty much blamed loose credit - but I suspect underlying that are the perverse incentives created by our government - and indeed governments the world over. Until we rid our economy of these perverse incentives - the present untenable situation regards housing affordability will remain. So, what I'm saying is - don't shy away from the topic. I want to know what the IMF analysts were trying to say.

cheers.

by Bernard Hickey | 21st May 11, 2:35pm 1305945308

Kate,

We have corrected and republished the other article here.

http://www.interest.co.nz/property/53500/corrected-personal-finance-edi…

regards

Bernard

by Bernard Hickey | 21st May 11, 2:42pm 1305945738

Kate

This article has also been corrected to make clear the report says house prices are overvalued relative to rents by up to 43%, rather than rents being overvalued by 43%.

Regards

Bernard