The end of the Housing BoomBy Mark Rais
There are a number of factors why housing has been on full throttle for the past three years in New Zealand. However,
two of the most substantial drivers are about to change. The fulcrum for this change is founded in international
macroeconomic events, not New Zealand based policies.
Firstly, the United States Federal Reserve Bank has raised interest rates this week by 25 basis points. Even more
importantly, it has indicated further interest rate hikes in 2017.
To understand how substantive this decision is, you must realise that the Fed has kept interest rates at all-time lows
in the United States longer than ever before in history. To now indicate multiple rate hikes is in and of itself
Moreover, as global central banks are tightly interconnected, the rate hikes will impact fundamental lending rates and
interbank rates over time. This means that even if certain institutions determine they will retain lower interest rates,
there will be on ongoing and growing imbalance between the institutional lending rates and the rates provided for
This is the result of a number of factors, and in New Zealand it is particularly an issue as banks have been loaning
significant sums while savings and on hand cash levels have fallen dramatically over the last 24 months.
You can see some of this in recent rate adjustments such as the BNZ offering for a 24 month term saver at 4% while at
the same time offering a 24 month fixed term mortgage rate of 4.45%.
The interest rates are trending upward, even though the Reserve Bank has on 10 November reduced the official cash rate
and signalled it may continue with potential further OCR cuts. This would be in complete divergence to what we see as
the cost of interbank lending is increasing with pressure from the international front, and also while actual mortgage
rates are increasing.
Interest rates are trending up world-wide, and this trend although currently slow paced, will become a major factor in
the next 12-18 months.
The ramifications of even mild interest rate hikes are going to be wide spread, especially since Housing is only one
component of where lending goes to drive the economy in New Zealand.
Secondly, housing prices especially in hyper growth regions like Auckland have now reached the point of diminishing
returns. Investors no longer find the yields match the fundamentals and the house prices are starting to trend downward.
This is validated by a number of statistics, including the fact that the auction clearance rate in Auckland is steadily
declining. Several recent reports have indicated that in some areas a substantive number of homes are no longer selling
at auction and converting to fixed pricing.
This will continue as a large number of investors pull from the Auckland market, but also as liquidity in general is
lowered globally. Liquidity is a foundational part of housing investment and over the next 18 months it will become
clearer how substantially liquidity is impeded by international monetary decisions.
The result is that house prices in most regions will slow down and begin trending to slightly lower levels, until the
full brunt of the increased interest rates in 24 months impacts the entire market. Then it is more likely that we will
see substantive corrections in some of the regions where infrastructure development and core immigration decline.
In such regions price corrections will be on order of 10-20% based on similar adjustments seen in similar housing booms
in places such as Phoenix Arizona and Vancouver.
Therefore, the combination of international monetary decisions which will impact rate levels and the declining liquidity
will begin to play a major role in New Zealand’s overall housing boom.
Will there be major price corrections or loan defaults? The probability exists if the government and the Reserve Bank
decide to move forward with policies on the basis that housing will continue to boom. Any major momentum to encourage
price adjustments from either can create a domino effect that will spur a sudden correction that is potentially
Instead, the most appropriate movement forward is to begin adjusting policy on the basis of monetary decisions being
made globally rather than fixating on the current New Zealand specific housing environment.
Other Scoop articles by Mark Rais:
Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and
has written numerous articles on the influence of technology and society.