IMF warns NZ about housing bubble

Last updated 12:05 10/06/2014

Relevant offers


British American Tobacco offers to buy Reynolds in US$47 billion deal Ikea NZ Facebook page set up: Is it finally coming to NZ? Auckland Council and contractors ordered to pay $120,000 to the family of killed rubbish truck worker 71yo asked to stand on hot water cylinder to plug in phone after bizarre UFB install Tuanz welcomes Vodafone offer to keep internet users connected The video that exposed Samsung's problems in China Harnessing the power of Pokémon Go Mystery hotel brand to take over Old T&G building New Zealand's net migration back at record breaking levels at almost 70,000 SkyCity expects Crown Resort arrests to hit falling VIP gambling

The biggest threats to New Zealand's economy are rapid house-price inflation and a sharp downturn in China, the International Monetary Fund (IMF) says.

In a broadly positive report the IMF said growth was becoming "increasingly embedded and broad-based" thanks to the Christchurch earthquake rebuild, the housing shortage, strong commodity prices and a big increase in net migration.

But it warns that a housing bubble - or as it puts it "expectations-driven, self-reinforcing demand dynamics and price overshooting" - could take hold.

The Government's steps to ease supply bottlenecks and the Reserve Bank's moves to tighten mortgage lending and increase interest rates should help ease price pressures, it said.

"But a sudden price correction - possibly triggered by a shock to household incomes or borrowing costs - could reduce consumer confidence, impact overall economic activity, and hurt banks' balance sheets," the report said.

The key external risk to the outlook remained a sharp slowdown in growth in China, which would affect New Zealand directly through the terms of trade and indirectly through its impact on Australia, a key trading partner.

"Domestically, house-price inflation remains high and there remains a risk of house-price overshooting and accompanying vulnerabilities," it said.

Longer term, the country's external liabilities were high by international standards and national savings should increase.

Cutting the size of the Budget deficit was helping lift national savings.

But the exchange rate was likely to remain high, so non-agricultural exporters would need to increase efficiency to remain competitive.

The country's banks were well-capitalised but faced long-standing structural issues.

Macro-economic policies were moving in the right direction and the Government's plan to return to surplus was on track, it said.

"With public debt low and interest rates [in positive territory], the authorities have monetary and fiscal policy space to respond to shocks, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks," it said.

The IMF forecast growth to peak at 3.5 per cent next year and stay above 2.5 per cent for the next few years.

In the May Budget Treasury forecast growth of 3.9 per cent in the year to June 2015 falling to 2.6 per cent, 2.1 per cent, and 2.2 per cent in the following years.

Finance Minister Bill English said the IMF report was the latest in a series of encouraging views on the economy.

"The IMF is expecting New Zealand's current-account deficit to increase to around 6 per cent of GDP by 2016 - still well below the levels seen in the mid-2000s," English said.

Ad Feedback

"Although this longstanding imbalance remains a vulnerability, the latest figures are encouraging with Statistics New Zealand showing the current account deficit at 3.4 per cent of GDP." 

- Stuff


Special offers

Featured Promotions

Sponsored Content