New Zealand will be "vulnerable" to a fall in house prices, which could be triggered by an overseas financial shock, Reserve Bank deputy governor Grant Spencer says.
That could do "real damage to the financial system and the economy", he said yesterday.
He told the Property Council in Auckland that the underlying issue in the housing market was a "chronic" shortage of supply.
But the Reserve Bank's new speed limits on low-deposit home loans should not discourage developers from building new homes in response to the country's housing shortage.
House prices, which had risen about 10 per cent nationally in the past year, were high compared with household incomes and rents, he said.
The Organisation for Economic Co-operation and Development had estimated that New Zealand house prices were 25 per cent above their long-term averages, Spencer said.
"If the growth in demand continues to exceed the growth in housing supply, house prices will become increasingly vulnerable to a sharp correction, which could be prompted by, say, a global financial shock," Spencer said.
While New Zealand prices fell 10 per cent from the peak after the global financial crisis hit in 2007, some countries, such as the United States, Spain and Ireland, saw prices slump up to 40 per cent.
The "vulnerabilities" built up during the 2000s housing boom had not unwound, with house prices and household debt still high relative to international prices and historic norms, he said.
From an already high starting level, house prices were "rising rapidly once more", he said, pointing to a rise of more than 17 per cent in Auckland and 8 per cent in Christchurch. In Christchurch, the shortage was a direct result of the 2011 earthquakes.
In Auckland, the shortage had grown over a much longer period, with weak rates of house building since 2005, he said.
House-price inflation took off over the past two years, coinciding with low interest rates, easier bank credit and a growing trend among renters to become first-home buyers.
The recent turnaround in immigration was adding to the excess of demand over supply.
Figures out yesterday showed Auckland median house prices had shot up $50,000 to $570,000 in the past year. In that time, national prices had risen almost 10 per cent, led by the strong gains in Auckland and Christchurch, with other markets flat or showing only modest rises.
House-price inflation in the rest of New Zealand was about 3 per cent, outside Auckland and Christchurch.
Spencer said moves to increase the housing supply were "well under way", and residential building consents were trending upwards.
Spencer said the loan-to-value (LVR) restrictions on bank mortgage lending, introduced on October 1, were aimed at moderating house-price inflation by reducing the effective demand for housing.
While they should help to reduce house-price inflation, house prices were likely to remain high.
"In this sense, it is hard to see how LVR restrictions will materially reduce the existing incentives to develop new residential property," he said.
"A more responsive supply side is key [to the housing shortage] and will require a responsive and innovative building sector, an adequate supply of labour, some of which will need to be imported, and a responsive planning and consenting process.
"The accord between the Government and the Auckland Council is a positive step in this direction. Fairfax NZ
- © Fairfax NZ News
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