New Zealand continues to leverage-up into property

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By Leith van Onselen

Data released late last week from the Reserve Bank of New Zealand (RBNZ) confirmed that New Zealanders are continuing to leverage-up into housing, with total outstanding mortgage credit increasing by 4.3% in the year to February 2013 – the fastest pace of growth since December 2008 (see next chart).

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The ratio of New Zealand housing debt-to-GDP also continues to rise, increasing for the second consecutive quarter to 85% of GDP as at December 2012, with further increases likely when the March quarter GDP figures are released over coming months (see next chart).

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The increase in New Zealand mortgage debt is being driven by mortgage rates that have been near record lows since early-2011 (see next chart).

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In addition, mortgage competition has reached fever pitch in New Zealand, with government-owned KiwiBank in February announcing that it would drop its six month fixed mortgage rate to just 4.79%, which reportedly was the lowest mortgage rate offered by a New Zealand bank for “many decades”, with mortgages being increasingly funded through offshore borrowings. And last month, ASB (owned by the CBA) announced that it would give borrowers a free 42-inch Sony Bravia LED TV as well as up to $NZ1,000 cash-back for anyone that takes out a mortgage in excess of $NZ100,000 (including refinancings from another lender).

In turn, the increasing in mortgage debt is driving strong house price appreciation, particularly in the heavily supply-restricted markets of Auckland and Christchurch, where values each rose by 12% in the year to February 2013 (see next chart).

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The growing appetite for mortgage borrowing, as well as recent strong house price growth, highlights the need for the RBNZ to expedite the implementation of macroprudential controls on mortgage lending. It also provides an ominous warning for Australia of what could happen if interest rates are cut too low and held there for too long without commensurate reforms to the supply-side and the implementation of macro-prudential controls on lending.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.