Warning to households on bubble
In a blunt warning about the risk of rising house prices, Finance Minister Bill English has cautioned that a growing bubble is likely to burst, hitting the economy and households hard.
In a scene-setting speech to a Wellington business audience ahead of his May 16 Budget, English said real progress was within reach on increasing long-term savings.
"It would be a shame to throw it away on another risky housing cycle," he said.
"When we look across our economy one of the growing risks is housing values that are increasing from levels that are already very high by international standards. And that tells you that at some stage it would probably burst."
He said prices, in Auckland and other growth areas, were forecast to rise further.
House prices have risen more than 8 per cent in the past year, mainly reflecting steep increases in Auckland and Christchurch and the cheapest interest rates in about 50 years.
Credit is easy to get and banks are lending a greater portion of a home's value. Almost a third of new borrowers are getting into the market with a deposit of 20 per cent or less.
Bank economists see house prices as well overvalued and out of line with incomes.
Reserve Bank deputy governor Grant Spencer said this week "avoiding another costly housing boom" was critical for economic and financial stability.
English said the current rate of house price inflation would also boost interest rates and push the kiwi even higher.
Periods of fast-rising house prices would also create financial instability for households and the financial system "when prices inevitably, eventually drop".
The Government would try to reduce those risks, he said, pointing to restrictions on housing developments where populations are growing - a clear signal to the Auckland Council, which has clashed with the Government over expansions to the urban boundary. Such restrictions had an impact "on the whole economy, not just your local neighbourhood".
The Government was also looking at attitudes to saving to better understand how to increase it. Work by the Reserve Bank and Treasury suggested household savings may be higher than reported, because data did not include "unincorporated businesses" such as family firms.
When they were put into the mix household balance sheets looked healthier and housing represented a much smaller proportion of savings.
He said it was understandable Kiwis did not save as much when they received interest-free student loans and healthcare.
They saw their taxes as an "insurance premium" covering those things. But he said he was not signalling a move to more user-pays.
English said the Government was on track to achieve a surplus by 2014-15 despite the drought, which was estimated to slice 0.7 per cent off growth and cost up to $2 billion.
He ruled out significant tax cuts in the near future, saying it would be "a wee while yet" before there was room for that.
The Government would need significant surpluses and progress on lowering debt - from a net 30 per cent of GDP to 20 per cent between 2017 and 2020 - before it could consider tax cuts.
The next phase would be action on fees and levies, such as the recent move to cut the frequency of warrant of fitness testing. The Budget would not contain any big surprises.
REAL ESTATE INDUSTRY URGES CAUTION ON FIGURES
The real estate market has turned in its best performance since the boom times of 2007, with sales volumes racing up in March and prices up more than 8 per cent in a year.
But the head of the country's Real Estate Institute is urging regulators not to let stellar price rises in Auckland and Christchurch lead them to think the whole market is as strong.
REINZ figures show house sales volumes in March breached 8100, the highest monthly level since May 2007. The national median price also booked a record high of $400,000, up 8 per cent on March last year.
Institute chief executive Helen O'Sullivan said that volumes had certainly "returned to form" but they were still 3000 sales short of the market peak six years ago.
"This is, we think, more like the new normal."
She warned of "a real danger" people would mistake the supply shortage-driven prices in Auckland and Canterbury for the national picture, which was weaker.
"Outside of those two markets, the behaviour is quite different and it's quite important that policy makers and the media and the public understand."
Half the sales last month were from Auckland and Christchurch, yet they accounted for 90 per cent of the price rise, she said.
Wellington's prices remained relatively static, inching up 0.2 per cent in the year to March, but days to sell fell by five days to 29.
Both Auckland and Canterbury posted record median prices in March.