Housing market 'boom run is over', says John Key

ANZ Bank chair John Key. Photo / NZME

ANZ bank chairman Sir John Key says house price growth is now unsustainable.

"The rapid rise in house prices is not sustainable and it can't and will not continue," he said.

"I don't know that we'll see a tremendously big correction. But I think the boom run's over."

Former Prime Minister Key was speaking (via Zoom) at the launch of a new NZ Initiative report looking at the risk of another Global Financial Crisis.

There were many reasons for that view on house prices, he said.

Interest rates are starting to track up, the Reserve Bank was starting to employ other tools (like debt to income ratios) to restrict lending.

Land supply was also one of the big factors and was being opened up.

"And we don't have migration running at levels near we've had it, in fact, it's very low. So if you put in all of those factors I think that you're going to see house prices top out," he said.

"I personally don't think house prices will collapse. I think that's a good thing because you don't want to leave a whole lot of New Zealanders with negative equity."

The report, Walking the path to the next global financial crisis, authored by Dr Bryce Wilkinson and Leonard Hong, explores the pressures building in the global economy that could lead to another serious financial crisis.

ANZ Bank chair Sir John Key, speaking via Zoom at the launch of a new NZ Initiative report looking at the risk of another Global Financial Crisis.

Key also warned that high public debt is one of the ingredients that could contribute to the next global financial crisis.

He cautioned the current Government to be careful with spending.

However, he was wary of predicting a financial crisis was likely in the near term.

Even a stopped clock was right twice a day, Key said.

So he didn't intend to make predictions or say "there will be a GFC tomorrow or there has to be a crisis coming or everything is wrong with the world per se".

But the issues the report canvassed around debt and asset bubbles could not be ignored, he said.

"The simple reality is they present the ingredients for what could be a very dark time in our economic future if we're either not careful or [not] lucky."

The focus of the "Walking the path to the next global financial crisis" report was on what was "weird and dangerous" about the global financial system right now, said co-author Wilkinson.

"Governments in the world's most prosperous countries are spending money that they do not really have to spend," he said.

"Central banks are behaving like bottom-less ATM machines."

In responding to the GFC, and now to Covid, public debt levels around the world had been ratcheted up to levels not seen before during peace-time, he said.

In fact, in three years the US Treasury was forecasting America's public debt (relative to GDP) would exceed the record set during World War II.

Central bank policies were making this possible by keeping interest rates at record lows, meaning the cost of borrowing had fallen even though debt levels had soared, he said.

"The word 'unprecedented' is not too strong to use," Wilkinson said.

Governments were hoping strong economic growth, continued low interest rates and some degree of austerity in the future would allow for a rebalancing in time.

But the report highlighted the risk that the debt situation "would still be dire when the next economic downturn hits", he said.

"To hope that 'this time it is different' is delusional. History shows that an excess of public and private debt is always dangerous."

A clear sign of the way that asset prices continued to rise in value, making middle-class households feel wealthier, despite economies being in recession, Wilkinson said.

In 2020 US household wealth rose by a record US$26 trillion (23 per cent) despite the fact that last year the pandemic caused the biggest economic decline in activity for over 60 years.

This disconnect between perceived wealth and real wealth creation was dangerous, he said.

"The problem is people are coming to expect authorities to do whatever it takes to avoid the next collapse."

That meant people continued to bid up asset prices in the belief that they could not be allowed to collapse, he said.

Only Big players like the US and Eurozone had the scale to rectify the situation, Wilkinson said.

But it was crucial that New Zealand took precautionary measures.

Private borrowers needed to avoid over-leveraging themselves and the Government needed to avoid wasteful spending, he said.