New Zealand's housing market has a 40 per cent chance of going bust in the next two years, according to global investment bank Goldman Sachs.

In a research note published this week Goldman says the New Zealand's housing market is the most over-valued amongst the G-10 group of developed economies, Bloomberg reports.

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

Bloomberg reports 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 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."

Finance Minister Steven Joyce downplayed the report but did note the conditions which led to New Zealand's housing boom were coming to an end.


"We need to be cautious with the Goldman Sachs report because the model is very sensitive. They define a bust as a 5 per cent decline in real house prices," he said.

"The Government has a number of measures in place to influence both demand and supply in the housing market, with LVR restrictions and the bright line test moderating demand, and significant regulatory activity encouraging supply, plus of course the Crown house building programme which has been expanded significantly today.

"New Zealand is currently experiencing a building boom with 30,000 houses being built, a third of which are in Auckland. House prices in Auckland have also been flat to slightly falling over the last nine months.

House buyers were right to be cautious at this stage of the cycle, he said.

"The big increase in house building we are seeing and the lift in world economic activity means two of the big influences on house prices, historically low interest rates and supply shortages, are starting to come towards the end of their run."