Colossal New Zealand housing bubble engulfs economy

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):

Global dwelling values versus GDP

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):

Global housing values versus incomes

Recent research from Capital Economics shows similar results, with New Zealand experiencing the sharpest rise in house prices relative to incomes across developed nations:

Change in house price-to-income ratio

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:

Consumption spending versus 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.

Unconventional Economist

Comments

    • Yep lucky we’re not leading any of those charts. Maybe the LNP can use this evidence to their advantage.

      • happy valleyMEMBER

        It’s appalling really – Straya second to Holland in household debt level to GDP and second to NZ in housing stock value to GDP.

        We need to try harder and the LNP as the best-ever economic managers should make gold, gold, gold a priority in the their forthcoming next term – this is now guaranteed as Albo was clueless when asked the cash rate and the unemployment rate (what’s he been reading/listening to for the last 3 years) by a journo this morning. The LNP will be making an ad today with this bit of vision and with Scummo saying again Albo has never prepared a budget.

        • So close yet so far away for the ALP! I bet ya Scomo is brushing up on his numbers and ensuring every question is screened going forward.

  1. Hugh PavletichMEMBER

    … The latest New Zealand Ipsos Issues Monitor …

    Ipsos NZ Issues Monitor – February 2022

    https://www.ipsos.com/en-nz/ipsos-nz-issues-monitor-february-2022

    … What Hugh Pavletich had to say about a decade ago …

    Housing affordability out of sync with incomes … Hugh Pavletich … Sydney Morning Herald

    https://www.smh.com.au/business/housing-affordability-out-of-sync-with-incomes-20110201-1aciy.html
    .
    .
    Access related MB post …

    https://www.macrobusiness.com.au/2022/04/macro-afternoon-1335/#comment-4261747

  2. That graph on Eire looks wrong. I am not sure house prices have fallen much in many places, Dublin is certainly higher. But Ireland does have 600 to 800% GDP in Government debt from the 2008 housing crisis on its books.

  3. – In the region I live in rents (for houses) are still rising but in the (major) cities rents for the top end of the market have been flat since mid 2019, These were simply too much people who wanted to borrow, buy, renovate and rent out a house or an apartment. The result is too much supply and that in turn has put “downward pressure” on rents.

  4. Hugh PavletichMEMBER

    ASB economists say last week’s ‘big lift’ in wholesale interest rates added to the upside pressure on mortgage rates … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/business/115293/asb-economists-say-last-weeks-big-lift-wholesale-interest-rates-added-upside

    Be Kind, or Be Realistic? Why Kiwis are fed up with everything right now … Virginia Fallon … Stuff New Zealand

    https://www.stuff.co.nz/national/health/coronavirus/128291641/be-kind-or-be-realistic-why-kiwis-are-fed-up-with-everything-right-now

    The New Zealand Time Machine Housing Pivot Bites! … Martin North … Digital Finance Analytics

    https://digitalfinanceanalytics.com/blog/the-new-zealand-time-machine-housing-pivot-bites/

    Demographia – Digital Finance Analytics (DFA) Blog

    https://digitalfinanceanalytics.com/blog/tag/demographia/

  5. Hugh PavletichMEMBER

    Brain drain: Officials estimate 50,000 Kiwis could leave over the next year, but number could surge to 125,000 … Henry Cooke … Stuff New Zealand

    https://www.stuff.co.nz/national/politics/300564486/brain-drain-officials-estimate-50000-kiwis-could-leave-over-the-next-year-but-number-could-surge-to-125000

    Government officials say up to 125,000 Kiwis could leave the country in the next year as borders reopen and young people flow overseas.

    But they say a number closer to 50,000 is more likely – about as high as permanent migration of New Zealand citizens was in the early 2010s as New Zealand recovered from the Great Recession.

    Kiwi citizens all but stopped moving overseas during the pandemic, with just 12,000 opting to in 2020, compared to 38,000 in 2019. … read more via hyperlink above …

    Covid-19: The exodus after the borders open – MBIE estimates 50,000 Kiwis will leave … Claire Trevett … New Zealand Herald

    https://www.nzherald.co.nz/nz/covid-19-the-exodus-after-the-borders-open-mbie-estimates-50000-kiwis-will-leave/HB4LXYDQWCFY4LM4NGPCQHW3UA/

    New Zealand reports migration loss in February … Nasdaq

    https://www.nasdaq.com/articles/new-zealand-reports-migration-loss-in-february