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NZ third-most over-valued housing market in world - Deutsche Bank

New research by Deutsche Bank finds NZ is the third-most over-valued country for housing in the world - at least in terms of of the home price-to-rent ratio's percentage above its historic average.

Deutsche Bank economists Peter Hooper, Torsten Slok and Matthew Luzzetti ranked different countries by two ratios: home prices to income and home prices to rent.

Those ratios were then compared to their historic norms to gauge whether each country's housing market was over or under-valued.

The report finds New Zealand is the third most overheated market, running 77% ahead of its historic home price-to-rent ratio.

In terms of home prices to income, New Zealand is sixth-most overvalued, running 26% ahead of its historic ratio.

Wall Street Journal analysis of the Deutsche Bank study notes Canada - the most overvalued market - is "very open to foreign investors" at a time of unprecedented global liquidity.

By contrast, Japan - the most undervalued market - is the most closed to foreign investment.

The Journal speculates that Belgium is a special case. The European economic crisis has seen an influx of diplomats and other activity in Brussels, home of the EU Parliament and bureaucracy.

ckeall@nbr.co.nz

Comments and questions
17

Paper economists and naysayers have been telling us this for n years: NZ residential property is way overvalued and when the huge bubble pops, values will dive by 30 to 45%! It will be fire and brimstone for us ignorants.....

We had the worst & longest recession in living memory from 2008 to 2013. In those years, we had countless companies and manufacturers going under; employee layoff in the hundreds; shocking unemployment; high mortgagee sales; non-CBD offices lay empty; retail clearance sales everywhere etc. Everyone was affected by the GFC.

During our six-year slum, did residential property values (especially Auckland) plunge by 30 to 45%? No.

Comment sounds like it was posted by a multi-property millionaire. Dirk most people in this country (esp. Auckland) are at the point now where all you can do is pay the rent and buy a little food with each weekly income. Is this the country you want to be in Dirk? do you care?

Don't worry Joshua the answer is resoundingly no - Dirk doesn't give 2 cents about whether it is right or wrong.

But what will be more gratifying to you is that Dirk is dead wrong and in short order will be proved wrong. The residential market has just commenced an unlikely to be stopped long cyclical downturn. Whether we argue about it doesn't stop what has/is/and will happen.

And also what a load of bollix - NZ got off relatively scot free during the GFC.

Exactly - selfishness and greed is all that is important

What a boring envious rant from the three of you. It’s not the property value that’s the issue its affordability.

Guess what - based on income everyone can afford to live somewhere in NZ. The problem is that you want to live in the most expensive city with insufficient income to fund the lifestyle you want. Basic economics here is concentric ring theory. The closer you want to live to the city the more expensive it becomes. That being said the strategies to improve your lives are:

Upskill and increase your income – but that might take some effort on our part that you may not want to put in (and don’t tell me it can’t be done.as I have done it through night school – I simply traded off the desire to invest my time in up-skilling and studying rather than spending my time drinking, smoking and watching TV so don’t crap on about the fact it can’t be done because I am one of thousands who are living proof it can be done if you have the desire)

Or move to a town where its more affordable based on your skills.

One would suggest is the only thing holding up prices is the current governments willingness to allow overseas investment; free for all type of approach. The big winners being the overseas banks, which is no surprise with Key at the helm.

There are few other winners, being those that have multiple houses in Auckland and Christchurch. The rest of us are eating humble pie, and require a bigger mortgage to maintain the same standard of living.

And its the masses that this country relies upon, not the non producing house accumulators. Current politicians are such short term thinkers. Its time this government needs to go..

Tend to agree with Dirk. NZ has it's own paradigm. More demand than supply (in the main centres) for decade after decade means high housing costs in those places. Decentralisation of industry to get people back to regional NZ would slow the current Akld bubble.

a big problem is that is you want to live upper north island then auckland is most peoples only consideration. Somehow Hamilton, Tauranga, Whangarei etc need to be made more attarctive to the average person. Apologies to people from those places, but most Aucklanders don't even consider living in these places to be an option.

Looking at what has occurred globally is exactly the true reason for house prices being unrealistic in NZ. That is it is way to easy for overseas interests to purchase property in NZ. Look at some of the property in Howick that sits vacant because overseas owners use it as a source of squirrelling money out of Asia with no intention to live in it or even rent it out. Is this not a form of money laundering.

Ah, the old "new paradigm". Haven't heard that since the first dotcom(edy) bubble when business was changed forever, companies no longer had to make profits and it was all up, up and away.

Maybe it is a new paradigm - endless cheap foreign money looking for a home will keep the prices high forever if it keeps flowing. It is an odd time.

Not sure when it's going to happen, but I hope the bubble bursts soon. It'll be a healthy correction and rebalancing.

I used to hope for the same and waited for years. That the bubble would burst with a big clap and I would be able to purchase a new 3-bed brick & tile at $290k (the value in the late 1990s). I waited since 2004/2005.

When our long recession did not correct the prices, I started to change the way I think. I avoided being emotional like the rest of the first home buyers. Envious rants & jealous finger-pointing will not help. It only made it worse as the years go by. Property is just as expensive if you work in another country.

If you can't beat them, join them I say. Only by working hard and upskilling can we save a good deposit and get onto the ladder. And being an entrepreneur.

This Christmas, I recommend fellow first home buyers open up your mind and talk to colleagues, relatives, friends & even strangers during barbeques etc. You'll be shocked to find that the typical Kiwis have more than 1 home.

Just a honest assessment. If you don't want to open up your mind, that's fine. Keep up with the hideous sulk, envy, jealousy, xenophobia & hate. It would only ensure that you keep paying rent for someone's mortgage.

By any definition of the word, Auckland house prices are in a massive bubble. A bubble that is about to be pricked by rising interest rates. This is not speculation, interest rate rises are explicitly flagged by the RBNz and are therefore already priced into fixed mortgage rates.
And to the "new paradigm" claimers, look at the data and dont make silly claims based on no facts. Ak prices go up <6% pa over the medium term but are prone to spikes and falls. The only reason the 10% fall in Ak in 2008 didnt turn jnto a rout was that interest rates were slashed and kept artificially low FOR 5 YEARS. Wake up! This is NOT a new normal. The only reason rates didnt go up this year, despite Wheeler wanting to hike them, was the xrate. This is changing as the USA recovers and their money printing winds down. If you think otherwise you are a fool and should be reading the Herald rather than the NBR.

Questions:
(1) Does this study take into account underlying costs?
(2) does it compare like-for-like (rooms/ size / quality)?
(3) If not, does it mean anything about valuation?

Is any of that even remotely relevant?
An asset is worth what it can earn. That is either rental income, or rent avoided. IN NZ.
If you own a house in NZ then you either live in it IN NZ or you rent it to someone who lives IN NZ. The income stream is linked solely to what someone IN NZ can afford. That is why the only relevant metrics for long term prices are price-to-rent and price-to-income.
Who cares if the houses are bigger than in London or New York? If people here can't afford to rent them or pay the mortgage on them, they ain't worth the asking price. The owner sits with a $0 earning asset until they reduce their price.
If you think otherwise then try packing your house into your suitcase and take it to London where the rent/sqft is much higher, and try renting it there.

Auckland prices are still cheap compared the say Sydney, the issue is affordability and when the interest rates are set to rise next year we will see how far people have over extended themselves to buy into the current market

They have never thought to take a look a the size of said house, or cost to build, economies of scale.
You cant compare a hovel appartment in Japan with a 5 bedroom 200m2 house in NZ (the only sort they build now).