WELLINGTON, New Zealand – Rising home prices are often welcomed as a sign of a country's economic health and vigor. But in New Zealand, concern is growing that prices have risen so high they are instead an economic anchor, sucking resources from those who can afford a home and prompting those who can't to consider moving overseas.
While much of the world remains mired in a housing slump, median home prices in the South Pacific nation rose to an all-time high of 372,000 New Zealand dollars ($303,000) in June. That's 6 percent above the peak reached before the global financial crisis and more than double the level of a decade ago, according to the Real Estate Institute of New Zealand.
Median prices are about five times the median household income, well above the historic multiple of three. In the largest city of Auckland, which is driving the market, home prices have hit a median $500,000 New Zealand dollars ($407,500). Average annual wages, meanwhile, are languishing at $53,000 New Zealand dollars ($43,000).
High home prices represent an anomaly for a developed country of 4.4 million that, Auckland aside, is sparsely populated and where available homes often lack adequate insulation or central heating. Part of the explanation lies in tradition — owning a home with a yard holds enormous social and economic significance in New Zealand and has long been the investment of choice for the middle class, who have shied away from stocks and other financial assets. But high prices are forcing more people to rent — home ownership levels have dropped from 75 percent in the early 1990s to 65 percent now.
The Economist magazine this month rated New Zealand's home prices as 66 percent overvalued when compared to rents, second only to Canada in the 21 markets measured. By comparison, the magazine concluded homes in China were 7 percent overvalued compared to rents, homes in the United States were 15 percent undervalued, and those in Japan were 37 percent undervalued. Using income as a measure, the magazine concluded New Zealand homes were 22 percent overvalued.
The Bank of New Zealand came to a similar conclusion, finding that homes were 25 percent overvalued when compared to long-term trends.
Record-low interest rates are helping fuel ever-larger mortgages, money that ultimately comes from offshore. New Zealand's household debt levels are high by international standards and are a big part of the reason why two major credit agencies last year downgraded the country's sovereign credit rating.
In some ways, however, home prices reflect the country's relative economic health. Demand for New Zealand's agricultural exports remained strong throughout the global downturn. Unemployment, government debt and foreclosures have all remained low here when compared to most other developed nations. Many observers say that in the short-term, at least, a housing crash is unlikely and prices may still rise, especially in Auckland, where demand remains high.
The situation hasn't alarmed the government or the Reserve Bank enough yet to intervene, unlike in Canada, where the government has recently tried to cool its housing market by imposing restrictions on mortgages.
Many worry, however, that damage is being done.
Economic commentator Bernard Hickey said young families who want to buy homes are delaying decisions like having children, while those who have purchased recently have saddled themselves with so much mortgage debt they are less willing to take on entrepreneurial risks, like starting a business. He said that in turn stifles the country's productivity and dynamism.
"Because interest rates are low, and house prices are not falling, people feel justified in borrowing more than they can afford," said Hickey.
The greater mobility of renters may also be contributing to the record exodus of New Zealanders to Australia, where wages are higher and there are more career opportunities, even though housing there also is expensive. Figures released this month by government agency Statistics New Zealand show that more than 1,000 New Zealanders are migrating to Australia every week. Even after taking account of Australians who move to New Zealand, the net loss remains more than 100 people every day. While those losses are being offset by immigrants from, among other places, China, India and the United Kingdom, Hickey contends New Zealand is losing irreplaceable intellectual and social knowledge.
Murray Sherwin, who chairs the government-funded Productivity Commission which this year wrote a comprehensive report on housing affordability, says there are many negatives to high housing prices.
"On any given income, it means that people are less well housed," he said. "They have a lower quality of housing, and they may not have home ownership. It affects social cohesiveness. And there's an intergenerational issue. There's been a big transfer of wealth toward those who were in the market earlier."
The commission's report identified a number of supply problems driving up home prices. It found local restrictions have choked the supply of land and forced up construction costs. It also found that New Zealand builders simply aren't constructing large-scale cheap housing and instead are focusing on bespoke homes for the wealthy. Part of the problem is the small size of the market, which means builders can't get the same efficiencies of scale they can in larger countries.
Craig Ebert, a senior economist at the Bank of New Zealand, says there's a more fundamental problem: interest rates are too low.
"We've become highly dependent on low rates," he said. "This is the problem that got the world into this predicament."
Like many other countries, New Zealand slashed interest rates after the global downturn and has kept them low to encourage growth. But any hike in interest rates now would immediately squeeze thousands of homeowners. That's because most mortgages here come with interest rates that change with the market, or are fixed for a maximum of two years. That's unlike the U.S. where homeowners can enjoy a fixed rate for the full 30-year duration of their mortgage.
Even Alistair Helm, who runs the industry-funded www.realestate.co.nz, acknowledges housing accounts for a disproportionate amount of investment in New Zealand. He said people are understandably wary of the country's stock market, which he says lacks depth and has burned many in the past due to its volatility.
"You can't help human nature," he said.
Even so, he said he's confident the home market will remain at current levels and produce steady returns.
"People talk about it being crazily overvalued," he said. "But it's only overvalued when the price you expect is not what someone will pay."
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