Housing over-valued by 25%, rates hike pressure rising: IMF

New Zealand housing is already over-valued by about 25 percent and if it continues to rise may force the Reserve Bank to hike interest rates, the International Monetary Fund says.

Property here has become less affordable in the past two decades, with the median house price at about 4.5 times income, some 20 percent higher than the average of the past 30 years, the IMF says in its annual report on the nation.

Internal research by the Washington-based global institution suggests “over-valuation of about 25 percent”.

The IMF had previously seen New Zealand housing over-valued by between 10 percent and 20 percent.

Rising house prices were a primary issue for New Zealand and could “lead to an increase in debt-financed household spending which would put pressure on aggregate demand and increase the risk of an abrupt price correction”.

The Reserve Bank told IMF staff its flat interest rate outlook would be reviewed if a housing boom added to underlying inflation pressures.

“The current accommodative monetary policy stance is appropriate, but may need to change if house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures,” the IMF report says.

“The RBNZ’s credibility and the effective monetary transmission mechanism in New Zealand should allow for a nimble response should circumstances change.”

Real Estate Institute figures this week showed the stratified median housing price index, which smoothes out peaks and troughs, rose an annual 9.8 percent in the year ended April. Auckland’s stratified housing price was up an annual 14 percent and Christchurch’s climbed 13 percent.

Booming markets

The booming markets in Auckland and Christchurch, where limited supply is failing to meet growing demand, have accounted for about 92 percent of recent gains in house sale prices, having traditionally made up about half.

That rising housing demand has seen a third of new mortgage lending at higher loan-to-value ratios, leaving the central bank uncomfortable and saying it is willing to use macro-prudential tools to limit low-equity lending if it poses a “significant risk” to the country’s financial stability.

The IMF raised its assessment of the potential for a sharp fall in house prices to "low to medium", from "low" previously. Such an event would have a medium to high impact on the economy by reducing household investment and increasing mortgage defaults.

New Zealand authorities told IMF staff the new tools would not substitute for macro-economic and micro-prudential measures, the report says.

“They stressed their intention to use these tools judiciously, and as experience with such instruments is limited, with caution, with the primary objective of limiting the periodic build-up of system-wide risk.” 

The new tools could improve the central bank’s “ability to guard against a loosening of bank lending standards” fuelling house price inflation, but because they are untested “there are questions about how effective they will be given possibilities of evasion and arbitrage”.

(BusinessDesk)

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I wonder if the IMF have their head around the school zone panic that turbo charges an already hot market.

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Tell that to the Asian parents. They seem to adore suburbs with reputable school zones.

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Sadly, the IMF, the government and the Reserve Bank never get off their butts to understand exactly what fuels Auckland price rises. It is solely fuelled by unrestricted largely Asian immigration.
And no amount of fiddling with interest rates, deposit percentages or any other half-baked schemes will make any difference other than limiting property ownership to people with NZ citizenship.
All these idiots who 'look' for solutions will achieve is to make it even harder for Kiwis to buy.

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Just goes to show these pinheads don't understand the local dynamics that result from supply & demand along with social factors making certain areas more desirable than others.
While everyone focuses on select Auckland suburbs, try and tell some owner in a provincial town that someone's calculated their house is 25% overvalued and see the reaction.

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Provinces? Where are they?

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Why is everything geared for the bank's benefit? Aren't they screwing this country and the world enough as it is!

Banks know the values are too high in areas. Let them expose themselves to this, rather than a universal increase in mortgage rates. Which means higher interest costs, meaning higher margins.

Because governments have allowed them to get too big to fail, the smarter things to do would be:

1. Increase the level of deposit required, and make it higher for higher priced housing. They are the properties which take the biggest falls.

2. House property purchasers have to live in the country for at least six months of the year. This would be easy to administer, through passport swipes at the country gateways.

Solutions to society problems are so simple. However, it is unfortunate that not many governments work for their citizens.

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With regards to having to live in the country for six months, it's not enough.

I just ran a job for an accounting assistant in a manufacturing business in Auckland. Forty applications, of which only one I would consider a true blue New Zealand, being born here and went to school here. All others were were immigrants.

We got our short list and two of the three are on temporary work visas. Need a letter offering a job and then three weeks to get the immigration lawyer to get a new visa. Unfortunately, the Kiwi girl was unqualified. One of the immigrants has been to Unitec and done a diploma, so she gets the job.

Why are there no Kiwis applying for these roles? Are they not training? Don't they want them? I'm at a loss, I feel so out of touch with how my city is changing. I don't think people have any idea how many immigrants are living temporary lives here. I don't begrudge them, I have been an expat overseas, too.

But all these new people are taking opportunties off people who have grown up here. The last wave of immigrants, Islanders and also Maori before are going to get so left behind.

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Higher deposit percentages do not impact wealthy cashed-up immigrants - only Kiwis.

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Your number 2 six-month idea doesn't make much sense. Better to limit property buyers to Kiwi passport holders and those with a residence visa.

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They are right. Cometh the interest rate increase, cometh the carnage.

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The Government has sat on its hands and done nothing.
It is only now they are realising a major bubble has formed in Auckland and they do not want it to burst before the elections.
Vested interests are involved and the Government want to look after the property investors/speculators who always vote National.
When the bubble bursts (and it will), then many people will be badly hurt, thanks to this Government's inaction.

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The Auckland bubble will never burst when we have a mayor stating that we will have an extra million in the next 30 years. Supply and demand. Look for $2 million average central Auckland house prices in the next 3 to 5 years.

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Why do people automatically believe any opinion the IMF releases is a fact? It's a free market in NZ, with values driven by supply and demand.

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Because the IMF is the old money consortium that has controlled the world under Usury for hundreds of years. They take state assets when countries default and they propose harsh social cuts when GDP:Debt Ratios get to high. They stop the sale of NZ bonds which your birth cert is a security because you are a debt slave to them.

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As soon as the banks lend on something other than houses it will provide a shift in investment. Until then, property really is the only thing you can buy that will provide at least 50% of the servicing costs and increase in value.

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I'm not saying a correction isn't possible or even likely, but haven't these guys been pushing this line for years now? I can't remember a time when they weren't saying housing was overvalued, sky about to fall, end of world nigh, etc.

Prices at 4.5 times income may be high and above the average for the past 20,000 years but hasn't this ratio been a great deal higher over the past 10 years or so?

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Spot on. Maybe they are over-valued, maybe they aren't. Who knows? One thing I do know is that those who have been predicting a house price crash for the last 15 years have been wrong time and time again.

The ratio is what it is because the banks are willing to lend that much. People won't wake up one day and say "oh, at 4.5 times income my mortgage is too high", they will just continue to borrow as much as the bank will lend them to buy a house and cut back in other areas if they have to. The same as they always have.

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In order for housing to be "overvalued", it must be worth substantially more than its cost to build. Having recently completed an upgrade and refurbishment of an existing dwelling (at a cost of double the initial house and land package together) I am not convinced that this is the case at present.
Isn't this the real issue that needs to be addressed ??
From where I look, the Government is doing just that.
Firstly they are looking hard at the RMA and local government twats that are administering it and the wider consent processes, with very little (if any) accountability to justify and curb the cost of a malfunctioning bureaucracy.
Secondly, they have recently indicated that some focus and commerce commission pressure may be brought to bear on traditional monopolistic behaviour in the building product sector.
Both of these initiatives focus on the cause of the problem - not the effect - which is of course expensive housing.
People need to realise that prospective homeowners do not pay "over the odds" for housing by choice. They quite simply have no alternatives if they need or choose to live in a city.

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What a crock. The IMF parasites have to feed the media sensationalism to justify their business class airfares and 5 star hotel expenses.
Where are the towers of speculative apartments? There are none and there is no bubble...but there is population growth and as a result there is a housing shortage in certain areas only. Another 6-7 years before there's a correction of any substance, the market will decide not the feeble IMF.

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Just wait until Kiwis start coming back from a faltering Aussie economy..

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Three steps to put a check on the rising house prices in New Zealand.

1. Stop all tax benefits claimed against investment properties.

2. Levy a 15% (of the Council RV of the property ) stamp duty on properties purchased by non-residents.

3. Levy a Seller Stamp Duty (SSD) which imposes stamp duty on residential properties. The SSD shoul be computed, based on the following rates, on the price or Council Rateable value of the property, whichever is higher:

16% for holding period of 1 year;
12% for holding period of 2 years;
8% for holding period of 3 years;
4% for holding period of 4 years and above

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If it was that simple, I am sure the govt would have done that long ago. Nevertheless, given the stakes involved ... all options are worth considering.

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Average Joe is on the right track.

I think the govt needs to step in and deter investment in residential property. When I was growing up my parents bought a single property - their family home. They invested money into improving it and sold it to move up the property ladder. You only have to look at the few landlords who took up the govt warmer, dryer housing offer to see If they are not interested in anything more then capital gain.
If property investment was an unattractive prospect perhaps more people would look at investing in the local economy, NZ businesses, startups, etc... and I might be able to buy a house for its actual value.

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Affordability ratio should only relate to price v rental - worldwide!
Then market dynamics will come to the fore, not political agendas.

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Ways to halt the rampant rise definitely include improving the tax take.

Interested in an auction of a brand-new home in the bay area on the North Shore / AKL. Builder was an Asian but the owner during the sale process was his mother. Agent had no hesitation in telling me that the arrangement was to avoid taxes for the builder - his next home was probably going to be in the builder's father's name.

Agent told me that the practice was common among Kiwi builders also. This house was never lived in by any of the builder's family prior to selling. In fact, it was only recently finished.

I am staggered that the info is so readily admitted to the general public yet the IRD either don't know about it or are powerless to gather taxes on the process.

By the way, at the auction there was one European in the room bidding. There were approximately 40 Asians - not all bidding. It was like a day out for some of them. Also noted today was the latest Barfoot and Thompson top sales agents in AKL. Out of the top 25, 19 were Asians so not only are the Asians buying the houses, Asians are virtually controlling the selling process also.

There is a revolution going on in real estate right under our noses and I believe recent comments by bank and real estate personnel that immigrants are not affecting house prices are way off the money. I suspect they are trying to maintain the run by not upsetting the applecart.

Agents also tell me privately that in their opinion dirty money is now finding a home in a NZ home as prices being paid are stupid. You won't find this in the media as it is just too unpalable but if it is true NZ runs the risk of becoming a laughing stock.

You will see prices being paid for apartments and smaller investment-type properties that are only providing a 2% return or less. How does that make sense?! The government is either asleep at the wheel or are passively giving it a nod of approval.

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