A cross-country analysis of dwelling values across the English-speaking world shows that New Zealand’s housing market is by far the most overvalued.
The next chart plots aggregate dwelling values against national gross domestic product (GDP) and shows that New Zealand’s housing market is 4.8 times the size of the economy, easily beating second placed Australia (4.3 times) and third placed Canada (3.3 times):
The situation is similar when aggregate dwelling values are compared against total employee compensation, with New Zealand (11.0 times) again easily beating second placed Australia (9.4 times) and third placed Canada (6.7 times):
Recent research from Capital Economics shows similar results, with New Zealand experiencing the sharpest rise in house prices relative to incomes across developed nations:
As you can see, New Zealand house prices are nearly double (180%) their long-term average.
Capital Economics also shows that New Zealand’s consumer spending growth is particularly sensitive to changes in house prices:
Therefore, if New Zealand house prices were to fall sharply, then it is more likely to push the economy into a recession.
This last point is particularly pertinent given Kiwi economists and financial markets are tipping sharp increases in mortgage rates to between 6.25% and 7.5%, which would add up to $1,250 in monthly mortgage repayments to the median priced New Zealand home ($1,700 a month in Auckland).
If interest rates were to rise this sharply, there is a high probability that New Zealand house prices would crash, driving the economy into recession.
Finance and economics commentator Bernard Hickey once described New Zealand as a “housing market with an economy attached”. In light of the above data, this statement rings as true today as ever.
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