Bernard Hickey from Interest.co.nz has previously joked that the New Zealand economy was not an economy but a “housing market with a few other things tacked on”. And to be frank, Bernard has a point. A few years back, the IMF released the below charts showing that New Zealand had the highest proportion of its household wealth tied-up in housing (see below).
It appears not a lot has changed across the pond, with the latest housing finance data released by the Reserve Bank of New Zealand (RBNZ) showing New Zealanders are once again gearing-up into housing on the back of record low interest rates (see next chart).
Both the number and value of housing finance commitments have risen strongly since early-2011 (see next chart).
Likewise, housing credit rebounded sharply in 2012 after slowing abruptly in the wake of the global financial crisis (GFC). In the 2012 calendar year, outstanding mortgage credit rose by $NZ6,332 million, more than three times greater than the $NZ1,995 million expansion in housing credit experienced in 2011 (though clearly much lower than the heady pre-GFC days).
The annual growth rate of housing credit has also picked-up, from a low of 1.1% in November 2011 to 3.7% as at December 2012 (see next chart).
And because outstanding mortgage debt is growing faster than the New Zealand economy, the ratio of mortgage debt to GDP has begun to rise once more, from 83% in June 2012 to 84% as at September 2012 (see next chart).
With NZ housing supply highly constrained, particularly within its two biggest cities – Auckland and Christchurch – this extra credit demand has manifested into higher house prices rather than new construction, with New Zealand house prices recently surpassing their pre-GFC peak in nominal terms (see next chart).
The RBNZ yesterday kept New Zealand’s official cash rate at 2.5%, but warned that it was watching both house prices and household credit growth closely. The RBNZ plans to issue a discussion paper by the end of March on the potential use, targets and governance of macroprudential tools, such as loan-to-value ratio limits, which will hopefully lead to it actively attempting to mitigate the credit cycle.
For its part, the New Zealand Government has vowed to take action to free-up land/housing supply which, if implemented, should also mitigate the positive feedback loop between credit growth and house price inflation.
But for now, New Zealand continues its housing obsession, which if not addressed, risks creating further imbalances in the New Zealand economy and threatens to kill-off the tradeable goods sector.