Housing Frenzy in New Zealand Exposes Perils of Ultra-Low Rates

(Bloomberg) -- A housing frenzy at the bottom of the world is laying bare the perils of ultra-low interest rates.

At a packed auction room in Wellington, New Zealand’s capital city, houses are selling for hundreds of thousands of dollars above their government valuations. A young couple hoping to buy their first home -- a basic three-bedroom dwelling built in the 1950s -- are forced to bow out as the bidding approaches NZ$1.2 million ($850,000).

“The housing market at the moment is quite ferocious,” says auctioneer Darryl Harper. “Interest rates historically have never been lower, so it’s easy for buyers to borrow money.”

The red-hot market is causing such concern that Prime Minister Jacinda Ardern’s government has taken the unusual step of asking the central bank to do something about it, saying surging prices are “harmful to our aims of reduced inequality and poverty.” It’s a dynamic that’s starting to play out in other countries too, as the record-low rates deployed to battle the coronavirus pandemic drive a rush into bricks and mortar.

New Zealand house prices jumped 9.2% in November from a year earlier to an average of NZ$769,000. In Wellington, a compact harbor city with a shortage of homes for its growing population, prices climbed 5.8% in the past three months alone for an annual gain of 13.5%.

Harper, of local realtor Harcourts, said the prices he’s achieving at auction are on average 41% above the government valuations used to levy local council taxes.

The house that Harriette McClelland, 27, and partner Harry Greenwood were bidding for at the Nov. 27 auction -- a modest timber-clad residence in an inner-city suburb -- sold for 66% more than its registered value and about 11 times the median household income.

“All of the houses went for a lot more than we expected,” said McClelland. “I think in Wellington it’s being driven by the lack of supply and high demand, but obviously low interest rates have really escalated things a lot.”

Covid Success

New Zealand’s relative success in beating the coronavirus -- it topped Bloomberg’s Covid Resilience Ranking -- has boosted its attractiveness as a place to live and given it a head-start on its economic recovery. But with the border still closed to international tourists and students, the Reserve Bank is concerned about rising job losses and the risk of deflation.

It has cut its official cash rate to 0.25% and embarked on quantitative easing to drive down borrowing costs. It wants to get them lower still, and will this month start offering cheap loans to banks to stimulate lending.

That monetary easing has pushed one-year fixed mortgage rates down to 2.5% from more than 4.5% three years ago. Mortgage lending has soared as a result. It jumped the most on record in October to NZ$293 billion, up 7.3% from a year earlier.

Now the overheating property market has become a political issue.

Finance Minister Grant Robertson wrote to Governor Adrian Orr last week, proposing that the central bank start to take house prices into account when it sets monetary policy. That prompted investors and economists to scale back expectations for further RBNZ rate cuts, even though Orr insisted the bank’s primary objectives will not change.

‘Really, Really Hot’

“This is a really, really hot housing market,” said Dominick Stephens, chief New Zealand economist at Westpac in Auckland. “It’s reached prime minister level and there’s a lot of political concern. But central banks cannot cheat nature. They must deliver the interest rate that the economy requires to balance inflation and employment over time.”

Orr has called on the government to look at tax policy to address the issue.

Ardern has ruled out the introduction of capital gains or wealth taxes, but the government could extend the period in which profits on the sale of investment property are taxable. It could also make changes to tax deductibility of rental property expenses to make them a less attractive investment vehicle.

In the meantime, New Zealand house prices are expected to continue to rise.

©2020 Bloomberg L.P.