House prices are overvalued by about 30 per cent, BNZ economists warn today.
They said no moves should be taken to increase the supply of houses when the market is diving.
The bank is stopping short of saying house prices will fall by 30 per cent but sayson a number of different measures that is how much prices are above trend.
"We believe house prices risk falling by more than the 10 per cent we already presume for this year," BNZ said in a report.
A correction in the housing market is inevitable. It will be painful for many people but it will be good for the economy.
"Well, it's here. And the potential downside bears thinking about - as our indications of a 30 per cent housing overvaluation attest to."
"But let's also bear in mind the good news, in that many potential home owners, long squeezed out of the market, stand to be big benefactors," BNZ said.
The bank takes to task the line run by some commentators that the housing market boom was fuelled by a shortage of land and new homes.
BNZ said the boom was mostly due to over-exuberant demand factors. There was an improvement in incomes and some speculative behaviour as well.
"Supply issues have simply been caught in the crossfire."
Residential land supply and construction activity looked to have been, if anything, strong in recent years.
Between 2003 and 2007 there was roughly one new dwelling built for every two additions to the population. This build-rate has been higher at times in New Zealand's past but it was not low.
BNZ warns that a glut of unsold homes occurred in some states in the US because of a massive overbuild. The glut of unsold homes helped trigger the sub prime debacle.
"We need to be careful about encouraging too much of a supply response just at the wrong time."
