Our housing bubble just a boom say economists

By DIANA McCURDY

When it comes to property, you might think you can't get much more of a bubble than New Zealand's housing market.

House prices have increased spectacularly in Godzone over the past year, with only Australia and Spain posting higher rates last year.

Swept up in the enthusiasm, New Zealanders are becoming increasingly aggressive in their borrowing. The Reserve Bank estimates the household savings rate to be -9.5 per cent compared with -3 per cent two years ago and -0.8 per cent two years before that. In other words, households are now spending $109.50 for every $100 of income.

On the surface, it looks like a big, glistening bubble just waiting to burst. But are we bubbling, or merely booming?

Westpac chief economist Brendan O'Donovan believes it's the latter. We haven't had the same super-low interest rates that have fuelled bubbles overseas, he says. Looked at over 10 years, our interest rates have been almost neutral (neither contractionary nor expansionary).

Price increases are fuelled more by strong income and population growth than cheap credit, O'Donovan says. And, over the long term, New Zealand's house price inflation appears to be less irrational than in many developed countries. Since the housing market stabilised in the mid-1990s, New Zealand house price increases have been below average.

That's not to say we are in the clear. New Zealand remains vulnerable to any downturn in the housing market because our asset holdings are so skewed towards housing. This is further complicated by our declining home-ownership rate, which is now below those of the United States, Britain and Australia. Instead of owner-occupiers, we have increasing numbers of highly leveraged investors - making house prices more volatile.

But while some concern is justified, O'Donovan foresees an orderly adjustment in average house prices.

BNZ chief economist Tony Alexander also favours the view that we are at the peak of a normal cyclical boom, rather than a bubble. He estimates that house prices are about 15 per cent higher than long-term trends suggest they should be.

"They are not grossly out of line like they were back in 1974 when they were something like 40 per cent above trend," Alexander says. "When they were last at the peak of their cycle - in late 1997 - they were about 11 or 12 per cent above their long-term trend, so we are only a little bit more overvalued than we were in 1997."

He predicts prices will fall about 5 per cent in the coming year. Prices will then stay flat for a couple of years.

There is no need to panic, though. The labour market remains tight, and there are cashed-up people still on the hunt for assets.