New Zealand crowned world’s riskiest housing market

Bloomberg Economics has released its list of the world’s riskiest housing markets that are most vulnerable to a house price crash.

Not surprisingly, New Zealand has taken out first place after experiencing extreme price growth over the pandemic, which helped drive home valuations to absurd levels based on price-to-rent and price-to-income ratios:

Riskiest housing markets

New Zealand for the win!

The potential impacts of a severe house price correction are spelled out clearly by Bloomberg:

Falling home prices would erode household wealth, dent consumer confidence and potentially curb future development. Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that’s losing value. And property construction and sales are huge multipliers of economic activity…

If 2021 was the year New Zealand’s house-price growth reached dizzying heights, with an annual increase of close to 30 per cent, 2022 is shaping up to be the year the music stops — and the abrupt change has left people scrambling…

Economists expect New Zealand house prices will fall about 10 per cent this year and may eventually drop as much as 20 per cent from their late 2021 peak…

“There are going to be house buyers who have just entered the market in the last year or so who started off with a mortgage rate of 2.5 per cent and all of a sudden they are rolling off on to a mortgage rate closer to 6 per cent,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “There is going to be some pain for sure.”

New Zealand’s median dwelling price has already plunged 9.2% from the November 2021 peak with the stock of unsold homes also ballooning.

The bulk of Kiwi borrowers are also on fixed rate mortgages of two years or less, which means that Kiwis that originated mortgages at rock-bottom pandemic rates have yet to impacted by the Reserve Bank’s aggressive monetary tightening.

Two-year fixed mortgage rate

This situation will change at the end of this year when these cheap fixed rate mortgage terms begin to expire and borrowers are required to refinance to significantly higher (double) mortgage rates. That is when the impact of the Reserve Banks monetary tightening will truly be felt across the economy via a sharp contraction in consumer spending.

Unconventional Economist
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Comments

  1. New Zealand was overpriced on any metric imaginable before the Covid Lockdown, and the economic pandemic support that drove house prices, (unexpectedly?!) into the stratosphere.
    But the last increase was relatively quick. The answer to restoring a balance is to be just as quick to unwind the excesses. That way, fewer people get actually hurt. Yes, it will show up on the household Excel spreadsheet as a loss in net worth, but most will be no worse off than they were in 2019.
    So if the Government & RBNZ have any sense, they’ll keep driving the rebalancing as fast and hard as they can.
    It may be politically unpalatable, but it has to be done.

    • It has to be done but it will make a National govt a certainty and based on past form they will then attempt to reverse direction on the housing market immediately.

  2. Hugh PavletichMEMBER

    Belatedly … Stuff (formally Fairfax) NZ reports on the important (and shocking for New Zealanders) Bloomberg Housing Report …

    New Zealand’s housing market ‘most vulnerable in OECD’ … Miriam Bell … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/real-estate/129073121/new-zealands-housing-market-most-vulnerable-in-oecd

    The housing inflation issue has long been the top or near top major issue for New Zealanders … as the quarterly IPSOS Issues Monitors clearly illustrate …

    17th Ipsos NZ Issues Monitor – June 2022

    https://www.ipsos.com/en-nz/17th-ipsos-nz-issues-monitor-june-2022

    … and the Annual Demographia Surveys these near past 2 decades …

    Demographia International Housing Affordability: All Editions

    http://www.demographia.com/db-dhi-index.htm

    Check out the just released supplemental Demographia United States (188 metros) Housing Affordability Survey … where the average Median Multiple across its metros is 4.7 …

    Demographia United States Housing Affordability Survey – 2022 Edition … Urban Reform Institute

    https://urbanreforminstitute.org/wp-content/uploads/2021/11/Demographia-United-States-Housing-Affordability-2021-Edition.pdf

      • Yes I read the report yesterday, free to download. It’s pretty long winded but I agree with the findings.

        Put a note out to my clients yesterday running through the argument about a shortage of housing, conclusion; depends on how you define a shortage as it descends into a discussion on the equilibrium number of occupants per unit of housing. But what’s clear is that weak population growth for two years and solid increments to the housing stock have seen about 50k extra homes delivered and the shortage built up from 2013 has unwound about 2/3. And supply growth is still running ahead of demand growth. Historically this shift in supply and demand is consistent with falling real prices. So it’s not just a money and credit story.

    • kiwikarynMEMBER

      The way they define mortgage. Most people split their mortgage, taking for example 50% of the total loan amount on a one year fixed rate, and 50% on a 3 year fixed rate. Or you may do a % fixed and a % floating. However you split it up, each portion counts as a separate mortgage loan.

      • Split mortgages are likely irrelevant and will not impact the numbers stated unless split mortgages are skewed markedly towards one or other country, as that factor should balance between the countries. Outstanding mortgage debt Australia has breached 2 trillion , New Zealand comparatively much lower at 320 billion (December2021). Whether most people split their mortgage I don’t know.,

        • kiwikarynMEMBER

          If comparing total amount of debt thats easy. Australia has almost half its population living in its two most expensive cities (Melbourne and Sydney) while NZ has only 30% living in Auckland (our most expensive city). The more people you have living in expensive areas, the higher the average mortgage will be.

  3. Hugh PavletichMEMBER

    … and don’t forget the building supplies and poor ports performance fiascos in New Zealand …

    … Is the Fletcher Gib / plaster board debacle the long overdue start of allowing internationally competitive building products in to NZ ? …

    Plasterboard taskforce set up to ease shortages … Minister Megan Woods … NZ Government

    https://www.beehive.govt.nz/release/plasterboard-taskforce-set-ease-shortages

    Simplicity fires Fletcher Building, establishes own plasterboard supply chain at 20-40% lower price … Simplicity Construction

    https://simplicity.kiwi/learn/updates/simplicity-fires-fletcher-building-establishes-own-plasterboard-supply-chain-at-20-40-lower-price/

    Simplicity blasts Fletcher Building for lack of Gib … Daniel Smith … Stuff NZ

    https://www.stuff.co.nz/business/128912460/simplicity-blasts-fletcher-building-for-lack-of-gib

    … Following the recent release of the World Bank / S&P Global 370 Ports Performance Report … which showed at a national level New Zealand is the worst in the world while China and the Middle East are the best …

    Why does it take 13 weeks longer to ship to New Zealand than Australia? … Daniel Smith … Stuff NZ

    https://www.stuff.co.nz/business/128947755/why-does-it-take-13-weeks-longer-to-ship-to-new-zealand-than-australia

  4. Hugh PavletichMEMBER

    Kiwi’s Vote With Their Wallet… VIDEO … Martin North … Digital Finance Analytics

    https://digitalfinanceanalytics.com/blog/kiwis-vote-with-their-wallet/

    New report: Worst time for first-home buyers in 65 years … Liam Dann … NZ Herald

    https://www.nzherald.co.nz/business/new-report-worst-time-for-first-home-buyers-in-65-years/YA6KBPMAUM72Q3ICSYPI3CRLPE/

    A combination of record house prices and the limited further potential for growth makes this year the worst for first-home buyers since 1957, new research by economics consultancy Infometrics has found.

    A new report Housing update: A new lens on affordability, Infometrics compares the total payments made by homeowners over the lifetime of their mortgage against the value of the property when the loan has been repaid.

    “The resulting net financial gain reveals which years were best and worst to be a first-home buyer since the late 1940s,” said Infometrics Chief Forecaster, and report author, Gareth Kiernan.

    “This approach takes better account of total housing affordability than simple comparisons of incomes to house prices or incomes to servicing costs in the first year of borrowing.” … read more via hyperlink above …

    Human Rights Commissioner: NZ’s quality of life record ‘alarming’ … Laura Walters … NZ Herald

    https://www.stuff.co.nz/national/129051826/human-rights-commissioner-nzs-quality-of-life-record-alarming

    Australia ranks fourth on global property risk list. Will we dodge it? … Elizabeth Redman … Sydney Morning Herald

    https://www.smh.com.au/property/news/australia-ranks-fourth-on-global-property-risk-list-will-we-dodge-it-20220623-p5aw4b.html

  5. Hugh PavletichMEMBER

    United States State’s Cost Of Living Index … and learning from Toyota too …

    New Study Finds Hawaii, Oregon, Among Least Affordable States To Live In … Zerohedge

    https://www.zerohedge.com/markets/new-study-finds-hawaii-oregon-among-least-affordable-states-live

    LENSA States of the United States Cost of Living Index – 2022

    https://lensa.com/insights/least-affordable-states/

    … recently released 188 Metros 2022 Demographia United States Housing Affordability Survey …

    Demographia United States Housing Affordability Survey – 2022 edition

    https://urbanreforminstitute.org/wp-content/uploads/2021/11/Demographia-United-States-Housing-Affordability-2021-Edition.pdf

    Post grossly irresponsible excessive covid fiscal and monetary stimulus (politically created housing bubbles protection rackets really) and essential wind – back and restoration of a goods and services balance … expect more competitive pricing of goods across the board … as Toyoya illustrates …

    Here Comes Deflation: Toyota Asks Suppliers To Lower Prices As Volumes Ramp … Zerohedge

    https://www.zerohedge.com/markets/here-comes-deflation-toyota-asks-suppliers-lower-prices-volumes-ramp

    Could it be possible that deflation is finally on its way? It seems as though Toyota thinks so.

    The auto manufacturer is breaking a trend in the industry of succumbing to rising prices and is asking “certain parts companies” to cut prices for the upcoming third quarter now that it expects to be ramping up output.

    Based in Japan, Toyota has a history of asking suppliers to share price savings that occur as a result of buying in volume. These cuts usually amount to about 1% price cuts per year, according to Nikkei Asia, who reported the story. … read more via hyperlink above …
    .
    .
    … Guess where Fletcher Building is heading ?

  6. Hugh PavletichMEMBER

    Supply and demand cocktail has stretched economy to breaking point … OPINION Gareth Kiernan of Infometrics … Stuff NZ

    https://www.stuff.co.nz/business/the-monitor/300617676/supply-and-demand-cocktail-has-stretched-economy-to-breaking-point

    Gareth Kiernan is chief forecaster at Infometrics.

    OPINION: It’s a nightmare trying to measure the economy’s performance currently, with an unusual cocktail of supply and demand “shocks” affecting the data.

    On the supply side, the ability of New Zealand businesses to meet demand has been limited by Covid-19 lockdowns, more than 300,000 people isolating due to Omicron, increasingly critical worker shortages, and disrupted supply chains.

    At the same time, demand pressures over the last two years have been fuelled by massive fiscal and monetary stimulus. This stimulus seemed necessary and appropriate when Covid-19 first appeared, but it has taken too long to unwind once hindsight showed it had been horribly overdone.

    Workforce and housing markets just two examples of stress
    Amid the volatility, it is clear that the yawning gap between demand and supply is stretching the economy to breaking point. These stresses are most evident in the labour market, with the 3.2% unemployment rate estimated to be at its lowest since the early 1980s. Employment has grown just 0.1% over the last six months because it’s almost impossible for businesses to find staff, and nearly as difficult to retain them. … read more via hyperlink above …
    .
    .
    A recession is coming, you can bank on it … Luke Malpass … Stuff NZ

    https://www.stuff.co.nz/national/politics/129078998/a-recession-is-coming-you-can-bank-on-it

    Luke Malpass is Stuff’s political editor.

    ANALYSIS: More than two years after the Government was buried in praise for its management of Covid-19, the chooks are coming home to roost. A recession, which was unthinkable even a year ago, is now all but a certainty. It is a matter of not if, but when.

    Throughout 2020 and 2021 New Zealand got into a national pastime: when the country isn’t down on itself it does like to indulge in a fair bit of self-congratulation. We had got through Covid, life was free and maskless compared to elsewhere around the world, economic growth was strong, exports were strong, interest rates were at a record low courtesy of the Reserve Bank of New Zealand’s low cash rate and quantitative easing.

    There weren’t any international holidays to go on, so people ploughed money back into another national past-time: housing. Travel and tourism were dead but everything else seemed to be booming. … read more via hyperlink above …
    .
    .
    Five parts of the economy affected by a weaker housing market … Miriam Bell … Stuff NZ

    https://www.stuff.co.nz/business/the-monitor/128837247/five-parts-of-the-economy-affected-by-a-weaker-housing-market

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