UBS Securities warns soaring house prices in Auckland, Sydney and Melbourne risk making banks vulnerable.
In a report UBS says if house prices continue to rise, the New Zealand and Australian central banks will intervene and there's an increased chance of a future economic shock.
Christopher Simcock, head of corporate client solutions at UBS New Zealand, says though the risks are real, the report's conclusions are not alarming. "There's an acknowledged risk of a correction, but no risk of collapse."
Simcock says New Zealand won't follow the path the US housing market went down in 2006, that saw thousands of mortgagee sales, and also bank failures, and triggered the global financial crisis.
The UBS report says the median house in Auckland costs 9.8 times the median household disposable income. In Sydney, the multiple is 10.3. Houses in most other cities in New Zealand are priced at around six times the median income. Even in Christchurch, prices are stable in these terms.
Auckland's multiple is now at an all-time high and rising faster than Sydney's. For house buyers, Auckland is one of the most expensive cities in the world, in third place behind Vancouver and Sydney.
About 38 per cent of all loans made by the top four banks in Australia and New Zealand are for mortgages in Auckland, Sydney and Melbourne.
Simcock says: "The four top Australian banks: ANZ, NAB, Westpac and CBA, represent a significant proportion of the ANZ 200 market capitalisation. They are among the stocks that international investors are most interested in. Given experiences elsewhere in the world, investor conversations often turn towards house prices and debt leverage.
"We haven't yet seen those conversations become alarmist."
A house price correction in Auckland is unlikely to cause as much damage as the 2006 price collapse in the US. Simcock says the Australian banks are far more cautious in their lending practices than their American counterparts.
"I'm not aware of the kind of lending practices that took place in the US or the UK. We're in a completely different environment. There's not rampant lending," he says.
New Zealand's market is different in other ways. The US had a huge oversupply of houses as builders gambled on constructing whole new communities on the edge of towns. There is no evidence of similar building taking place here. "There's a much broader base to the housing market here," says Simcock.
He says that means there's not going to be the large numbers of mortgagee sales as happened in the US, which then fed through into surrounding areas and saw prices spiral down.
Though Auckland houses sell at prices that are high compared with Auckland incomes, they are still seen as relatively cheap to many overseas buyers. "If you're a potential buyer in China or an ex-pat New Zealander living in London, even a Kiwi in Australia, you will see Auckland property as cheap".
The UBS report says the Reserve Bank has already called out higher mortgage risk weights on investment property lending. It warns that if house prices continue to rise there's a risk the Reserve Bank will take measures to curb higher risk mortgages such as interest-only loans.