NZ housing: she’ll be right?

The Reserve Bank of New Zealand’s most recent M10 housing report shows the value of New Zealand’s housing stock (capturing changes in both the price and the number – and quality – of houses) increased in the June quarter to $NZ 959,850 million, or 381 per cent of nominal GDP. Australia has followed a very similar trajectory.

An unusually high ratio does not in itself imply a nasty correction is imminent but it can certainly be a warning light, as it indicates either house prices are very elevated and/or there is housing oversupply.

"An unusually high [property value/GDP] ratio does not itself imply a nasty correction but it can certainly be a warning light."
Sharon Zollner, Associate Director & Senior Economist, ANZ NZ

Typically, oversupply leads to a sharper price correction when the market turns. Housing oversupply is certainly not an issue in New Zealand which has experienced very strong population growth. But there is broad agreement house price to income ratios are unsustainably high, particularly in Auckland.

In Australia, house prices have also risen strongly in the past 15 years or so, while oversupply is generally considered to be limited to pockets such as Melbourne apartments.

The US housing stock peaked at around 200 per cent of nominal GDP before the global financial crisis (oversupply was a widespread problem and house prices then dropped 30 per cent), while in Spain it was around 460per cent before the GFC – house prices subsequently dropped almost 40 per cent.

Spain has a large number of holiday homes owned by foreigners, so would be expected to have a higher ratio on average over time, but oversupply was clearly a significant issue there too. The current UK ratio is around 240 per cent.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.