Brian Fallow

The Economics Editor of the NZ Herald

OECD: House prices a risk

Economic Outlook forecast highlights financial vulnerabilities in NZ housing market

The house price to income ratio is 26 per cent above its long-term average, compared with 5 per cent below the long-term average for the OECD as a whole.
The house price to income ratio is 26 per cent above its long-term average, compared with 5 per cent below the long-term average for the OECD as a whole.

The Organisation for Economic Co-operation and Development is pointing to New Zealand's house prices, labour costs and external deficit as indicators of potential financial vulnerability.

Its 2013 Economic Outlook forecasts gross domestic product to expand 2.3 per cent this year, picking up to a "brisk" 3.3 per cent next year before easing to 2.9 per cent in 2015 - consistently outperforming average growth rates for the 34 members of the OECD of 1.2 per cent, 2.3 per cent and 2.7 per cent respectively.

But in a chapter on potential financial vulnerabilities it cites in New Zealand's case the 88 per cent rise in real house prices since the start of 2000 - the biggest increase in the OECD.

It lists New Zealand among the countries at risk of a fall in house prices, especially with borrowing costs now rising.

The house price to income ratio is 26 per cent above its long-term average, compared with 5 per cent below the long-term average for the OECD as a whole, and relative to rents house prices are 66 per cent above the long-term average, against 5 per cent above for the OECD overall.

It says the macroprudential measures, including curbs on high loan to value ratio lending, which the Reserve Bank has introduced will help contain the financial stability risks "although their effectiveness needs to be monitored and adjustments made if necessary". Another red flag the OECD sees is the relatively large increase in New Zealand's unit labour costs since the start of 2000; at 52 per cent it is exceeded only by Norway (59 per cent) and Australia (54 per cent).

By contrast unit labour costs have fallen over that period in the United States, Japan, Britain and Germany.

The other indicator of vulnerability the OECD highlights is the current account deficit - the difference between what the country earns through trade and investment from the rest of the world and what the rest of the world earns from New Zealand.

At the end of 2102 it was the equivalent of 4.7 per cent of GDP, exceeded only by Turkey and Iceland.

But it had fallen to 4.3 per cent of GDP by June and the OECD forecasts it to be 3.6 per cent by the end of his year and to remain there or thereabouts next year and the year after.

The OECD expects global activity and trade to strengthen gradually next year and in 2015 but says the recovery is likely to remain modest. But it expects world trade to grow faster than output - 1.5 times GDP growth by 2015.

Growth in the large emerging market economies will remain subdued by past standards and that is likely to exert some modest drag on advanced economies, it says.

If the United States Government's debt ceiling became a binding constraint early next year it could have large adverse effects on the world economy.

- NZ Herald

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