Prime Minister Bill English says a five per cent drop in house prices is sensible and a "reasonable adjustment" not a "bust".

It was revealed yesterday that the global investment bank thinks the New Zealand's housing market is the most over-valued amongst the G-10 group of developed economies, Bloomberg reported.

Speaking from Japan, where he is to meet with Prime Minister Shinzo Abe, English said Goldman Sachs' language was exaggerated.

"It sounds to me like the language they're using is exaggerated. What they're describing, which sounds like a reasonable adjustment in house prices, I think most people would like to see that and there's some indication that that's underway in Auckland," he told media.

Advertisement

"I understand their definition of a crash is a five per cent reduction in prices. Well, there's some prices in Auckland that have reduced by that much over the last nine of months so and I think most New Zealanders would regard that as a pretty sensible adjustment in what's been a hot market."

English added the most important thing was the continued supply of houses.

"The construction sector's running about as fast as it can and it needs to keep running at that speed for some time yet," he said.

Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.

Bloomberg reported that Goldman looked at housing markets in the G-10 countries -those with the 10 most-traded currencies in the world and finds they are most elevated in small, open economies such as New Zealand, where house prices have rocketed in recent years.

Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.

"Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway," it said. "According to the model, the probability of a housing bust over the next five to eight quarters is the highest in Sweden and New Zealand at 35 to 40 percent."

While Sweden's risk, according to Goldman, is just above 35 per cent. The risk of a bust in Australia is about 25 per cent.

Labour housing spokesman Phil Twyford said on Tuesday a housing bust could be just as bad as skyrocketing prices.

He said the warning highlighted the consequences of nine years of housing neglect by the Government.

"A housing bust would see a slow-down in house construction. When only half the houses Auckland need are being built at the moment, a slow-down would be a disaster," he said.

"The resulting job losses and reduction in household confidence would ripple through the wider economy."