Bloomberg: New Zealand housing market risks a crash as global house prices return to their pre-financial crisis peak

The latest research from Bloomberg Economics shows that New Zealand and Canada face the greatest risk of a house price crash, followed closely by Australia and the UK.

According to an index covering 57 economies, global house prices have returned to their peak before the 2008 financial crisis.

The OECD also recently issued a warning, identifying the housing market as the biggest potential problem for New Zealand’s economy.

Economist Niraj Shah examined house price-to-rent ratios, house price-to-income ratios, inflation-adjusted house prices and household debt levels to compile a housing bubble chart.

The housing bubble chart is shown below. Click to enlarge.

To restrain house prices, the Canadian government has imposed taxes on foreign buyers, while New Zealand has banned overseas buyers from purchasing existing homes.

A US Federal Reserve interest rate cut is now only a matter of time. Once it cuts rates, other central banks will follow, ushering in another global round of quantitative easing. Whether house prices will continue to rise will then become a new challenge.

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Niraj Shah said: “A new round of global monetary easing could fuel housing bubbles. While central bankers are focused on preventing a global recession, loose monetary policy could sow the seeds of the next crisis.”

At its August monetary policy meeting, the Reserve Bank of New Zealand is highly likely to cut the OCR to 1.25%. In November, it may ease loan-to-value ratio (LVR) lending restrictions, particularly those affecting first-home buyers!

The Reserve Bank of New Zealand introduced its LVR policy when Auckland’s housing market was at its hottest, limiting the volume of low-deposit loans commercial banks could issue. Even after Auckland’s housing market cooled, prices did not fall as sharply as Sydney’s. It is fair to say that the Reserve Bank of New Zealand’s earlier handling of the situation was highly professional.