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New Zealand house prices under threat

By NZPA

Wednesday 9th June 2004

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New Zealand's recent property boom may soon end in a dramatic correction that could see house prices fall by more than 15% over the next few years, the international weekly magazine Economist says in its latest issue.

New Zealand, a recent addition to the Economist's quarterly survey of global house price indicators, recorded the largest increase in prices across 16 developed economies in the first quarter of this year, rising 22% compared with the same period a year earlier.

In second place was Australia where prices rose 17.9% over the same period.

The magazine said Australia's housing bubble could be the first to burst and had already weakened.

The most recent figures showed prices had fallen by an average of 8% in Sydney and 13% in Melbourne in the first quarter of 2004. Anecdotal evidence suggested they had continued to fall since then.

The main reason for falls in Melbourne and Sydney house prices appeared to be that: "first time buyers have been priced out of the market".

Another factor was a dry-up in demand from buy-to-let investors following net rental yields falling below mortgage rates.

The magazine said house prices might eventually return to levels consistent with long term average price-to-income ratios.

Under such a scenario, over the next four years, New Zealand house prices would fall by 15%.

In Australian prices would fall by 20%.

However, there was also room for larger falls.

"When past housing booms have turned to bust, prices have typically undershot their average by 10% or more," the magazine said.

In another article, the magazine said inflated house prices posed a bigger threat to the global economy than oil prices. Market comentators had been "wringing their hands about a property bubble a year ago, and yet prices had continued to climb".

But the magazine argued further price rises had made housing markets more vulnerable.

"The first law of bubbles is that they inflate for a lot longer than anybody expects. The second law is that they eventually burst."

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