Housing bubbles in most English-speaking countries around the world are likely to burst once interest rates return to more normal levels, but New Zealand should avoid the problem, says National Bank chief economist John McDermott.
"There is a growing fear that there could be a dramatic bursting of the bubble in the same way the US equity price bubble burst," he says.
Since the beginning of 1999, New Zealand house prices have risen about 7%, broadly matching general inflation and with most of the increases coming in the past year or so, reflecting net migration turning positive, he says.
In Auckland, the biggest beneficiary of immigration, the increase over the past three years is slightly higher at about 9%. Increases of that magnitude aren’t excessive, he says.
But house prices in the US are up nearly 27% over the three years, Australia’s are up 44% and Britain’s are up 53%.
"Some of those price increases are just phenomenal and we don’t think they’re sustainable."
He attributes these increases to sharp declines in interest rates as central banks responded to the global slowdown. "The easy flow of cheap credit, combined with a relatively secure job market, inflated the bubble."
Australia’s market was further inflated by government subsidies for first-home buyers.
‘The housing bubbles are directly supporting strong retail conditions with households taking advantage of low interest rates to refinance and extract equity to fund their consumption binge," McDermott says.
But with debt rising rapidly in proportion to income, "households will be forced to listen when interest rates start rising again, as one day they must," he says.
New Zealand’s interest rates, by contrast, have been kept closer to neutral, keeping the general economy and the housing market on a much more even keel. "While we have missed out on the fun, at lest we can thank the Reserve Bank for avoiding the hangover that other countries will suffer."
McDermott is positive about the local outlook for housing. While the housing market in the past has been prone to cycles of boom and bust, this time around the growth looks steadier and more sustainable, he says.
For more on the housing bubble see the latest issue of Asset magazine. In it Economics New Zealand managing director Donal Curtin examines if housing is going through a bubble period which is about to burst. Get a copy of Asset by clicking here
