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Our armour-plated housing bubble

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This story was originally published on Newsroom.co.nz and is republished with permission.

ANALYSIS: New Zealanders usually welcome the praise when overseas authorities describe us as the best in the world.

This time, not so much.

In the past fortnight, global economic news authorities The Economist and Bloomberg Economics have both declared New Zealand houses to be vastly over-valued relative to both rents and incomes.

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They describe New Zealand as in bubble territory similar to those seen in other countries before the Global Financial Crisis and vulnerable to the sort of 30-40 per cent price crash seen in the likes of Ireland and parts of the US through 2007 to 2010.

The Economist's long-running Global House Price Index was refreshed on June 27 with March quarter data for most countries and showed New Zealand top of the pops when it came to over-valuation relative to incomes and second most over-valued relative to rents behind Canada.

It found New Zealand prices in the December quarter of 2018 to be 57 per cent over-valued relative to rents, just above Australia's 42 per cent overvalued in the March quarter.

New Zealand was 113 per cent over-valued relative to rents, just behind Canada's 120 per cent, The Economist found.

New Zealand prices have more than trebled since 1990, while British and American prices are still less than double what they were 30 years ago.

"On this basis, house prices appear to be on an unsustainable path in Australia, Canada and New Zealand," The Economist wrote. "Ten years ago they reached similarly dizzying heights against rents and incomes in Spain, Ireland and some American cities, only to endure a brutal collapse," it concluded.


Bloomberg was no kinder on us and the Canadians.

Niraj Shah at Bloomberg Economics wrote last week that Canada and New Zealand were the economies most vulnerable to a correction in house prices, with Australia and Britain also at concerning levels.

"The results showed that Canada and New Zealand seem to be on the most unsustainable path, with the cost of housing compared with wages the highest in the world in both countries," Shah wrote.

Exceptional by most measures

New Zealand's housing market is now worth NZ$1.13 trillion, which is up by more than $1 trillion from NZ$123 billion in 1990.

The increase is more than triple because there are more houses with more extras (decks/garages/rooms) added on.

That's $1 trillion in untaxed capital gains, which at the top marginal rate would have generated extra tax revenues of $330 billion, or enough to build nearly 700,000 new state houses or fund the next 14 years of New Zealand Superannuation payments.

Our housing market is worth 3.9 times our GDP and more than 7.2 times the value of our stock market.

For comparison sake, Australia's housing market is worth A$6.6 trillion or 3.5 times Australia's GDP and 3.3 times the value of its stock market.

America's housing market is worth US$33.3 trillion or 1.6 times US GDP and 1.5 times the value of the US stock market.

I initially put quotation marks around the word bubble in my introduction, but there should not be any debate.

It's clear from any reasonable measure our housing market is over-valued relative to household incomes, rents, history, GDP and company values.

Our houses are worth 14 years of our export receipts.

Enough said. But over-valued does not necessarily mean prices are about to collapse.

Why no panic?

So why aren't we worried enough to start taking urgent action to head off a collapse?

To be fair to the Reserve Bank and Governments of both flavours over the last 10 years, there has been some action taken and goodness knows how much higher prices would have been without the so-far limited actions.

The National-led Government of 2008........

© Stuff