Brian Fallow

The Economics Editor of the NZ Herald

IMF picks out housing risks

Clean bill of health for economy but caution voiced on overvalued real estate market.

Bill English has welcomed the IMF's conclusion that NZ's fiscal policy strikes the right balance. Photo / APN
Bill English has welcomed the IMF's conclusion that NZ's fiscal policy strikes the right balance. Photo / APN

A mid a generally clean bill of health, the International Monetary Fund's annual report on the New Zealand economy has highlighted risks posed by the housing market.

It considered monetary policy to be appropriately accommodative and it approved of the Government's planned pace of deficit reduction.

"It withdraws fiscal stimulus at the right time by making room for increases in reconstruction spending," the IMF said, though it added that the relatively modest level of public debt gave some scope to delay the planned deficit reduction should the economic outlook worsen sharply.

But much of the IMF's report was devoted to the housing market, which its modelling suggested was overvalued by about 25 per cent.

The ratio of house prices to incomes is 20 per cent above the (30-year) historic average and higher than in Australia, Britain or the United States.

Price-to-rent ratios showed an even larger overvaluation, it said.

From this high base house prices are rising again. The Real Estate Institute's housing price index, released on Monday, recorded an increase nationwide of 9.8 per cent in the year ended April, including 14.1 per cent in Auckland and 12.7 per cent in Christchurch.

"The recent price pick-up creates the risk of speculative demand that could induce price overshooting. Supply response will take time and increased demand is likely to continue," the IMF said.

House building fell sharply in the wake of the global financial crisis and as a share of gross domestic product has been below 4 per cent over the past five years - the lowest level in 40 years and low compared with other countries, particularly as New Zealand enjoys above-average population growth.

Citing the Productivity Commission's inquiry into housing affordability, the IMF noted that the cost of building materials and the cost of building a standard house were substantially higher than in Australia, and that productivity in the construction industry over the past 30 years had been poor compared with other NZ industries and other countries.

It suggested a lack of economies of scale was a significant barrier to productivity growth.

Meanwhile, the fall in mortgage rates to multi-decade lows had allowed people to take on more debt, despite high debt-to-income ratios.

New Zealand's unusually low household savings rates were a key factor in its persistent current account deficits (which reflect the gap between investment and national savings), the IMF said.

It pointed to work IMF staff did two years ago which suggested that house price inflation in New Zealand had been a significant driver of falling household savings rates.

New Zealand stood out as one of the few developed countries where individuals did not have access to any significantly tax-preferred saving vehicles other than property.

Overall, its structurally low household savings were likely to be a major reason for the persistently strong exchange rate, current account deficits and resulting high level of net external debt ($143 billion at the end of last year). But the return to budget surplus should increase national savings, the IMF said.

Finance Minister Bill English welcomed the fund's conclusion that fiscal policy strikes the right balance between backing economic growth and limiting growth in public debt.

- NZ Herald

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