New Zealand Housing Market Most at Risk of Bust, Goldman Says

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(Bloomberg) -- New Zealand’s housing market is the most over-valued among the so-called G-10 economies and the most at risk of a correction, according to Goldman Sachs.

In research published this week, the investment bank said there is about a 40 percent chance of a housing “bust” in New Zealand over the next two years, which it defines as house prices falling five percent or more after adjustment for inflation.

The report looks at housing markets in the G-10 countries -- those with the 10 most-traded currencies in the world -- and finds they are most elevated in small, open economies such as New Zealand, where house prices have rocketed in recent years. In Auckland, the nation’s largest city, the average price has surged 91 percent since 2007 to more than NZ$1 million ($688,000).

Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.

“Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway,” it said. “According to the model, the probability of a housing bust over the next five to eight quarters is the highest in Sweden and New Zealand at 35 to 40 percent.”

A graph in the report shows that New Zealand’s probability of a housing bust is just above 40 percent, while Sweden’s is just above 35 percent. The risk of a bust in Australia is about 25 percent.

Immigration, Low Rates

While residential investment in New Zealand and Sweden are high, immigration booms in both countries are supporting construction demand, Goldman said. As well, debt servicing ratios in New Zealand are fairly low by historical standards, due to record-low interest rates and “a modest consumer deleveraging cycle after the 2008-09 recession.”

New Zealand’s central bank last week forecast house-price inflation would slow to 5 percent this year from 14 percent in 2016, and remain positive through mid-2020.

Goldman said its model is “just one tool” and has “a few key drawbacks,” including predicting housing busts too often.

However, taking the model output and other data into account, “we see reason for some concern about house-price developments in the small open G-10 economies,” it said. “Prices do appear overvalued and credit growth has been high -- traditional warning signs of real house-price declines.”

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