The South Pacific nation’s efforts could offer a model for the many other countries facing a similar dilemma after the coronavirus pandemic. A combination of low rates, economic stimulus and shifts in buying habits as people work remotely are pushing up real estate values around the world, pushing down prices for many first-time buyers.
The problem is particularly acute in New Zealand, where the supply of housing has not kept up with population growth for much of the past decade. House prices have risen by more than 30% in the past year, according to a real estate price index from the New Zealand Real Estate Institute.
The country’s house price-to-income ratio, a measure of affordability, is the highest relative to the long-term average among the 30 key economies analyzed by research firm Capital Economics. For each economy, the company created an index setting the long-term average of the ratio of house prices to income at 100. New Zealand’s score on the index was 178, well above its long-term average. By comparison, the US score of 93, or just below its average, was the sixth lowest on the list.
Governments have several tools to influence house prices, including increasing the supply of housing either through direct investment or by changing land use regulations, restricting mortgage lending and providing financial assistance for first-time buyers.
Economists and policymakers wonder whether central banks should use interest rates to try to curb house prices by influencing the cost of borrowing. Higher rates could make mortgages more expensive and dampen housing demand, but they could also have unwanted effects on inflation or employment, the traditional areas of focus for central banks.
New Zealand is pulling on all levers. In October, the country’s central bank raised its benchmark interest rate to 0.5% from a record high of 0.25% and signaled further increases over the next year, in part due to soaring house prices. And earlier this year, the New Zealand government, in an innovative move, asked the central bank to take house prices into account when making monetary policy decisions, even though policy makers Bank have warned that this would have little impact on the market and could lead to lower employment and below target inflation.
New Zealand has also curtailed low-deposit lending, a measure designed to reduce subprime mortgages and reduce the risks of a damaging correction in the housing market, which could destabilize the economy as a whole. As of November 1, only 10% of homeowner loans can have a loan-to-value ratio of over 80%, compared to 20% of currently authorized loans. He is working on debt-to-income restrictions as an additional tool.
The government also plans to facilitate the construction of high density housing in cities and limit the deductibility of interest charges on residential real estate investments. The tax change aims to stem investor demand for existing residential properties, a dynamic that has contributed to rising house prices in the past and made it more difficult for first-time buyers to access the real estate scale. .
It is not yet clear whether New Zealand’s efforts have a measurable impact on house prices, without unwanted economic or social side effects.
In September, the latest month for which data is available, house prices in seven of New Zealand’s 16 regions hit record median levels, according to the Real Estate Institute. Prices in Auckland, the country’s largest city, fell 4% from August to September, but a Covid-19 lockdown in the city has reduced buying and selling. The institute said it expects activity to resume when the lockdown is lifted.
Gareth Kiernan, chief forecaster at Infometrics, doesn’t expect New Zealand home prices to drop anytime soon. All the combined measures of the government and the central bank could be successful in slowing price increases, he said, but it still means a grim outlook for first-time buyers.
Demand is also likely to increase, Kiernan said. The government recently decided to allow tens of thousands of people on temporary visas to stay, meaning more people will be looking to buy homes. And the construction industry is still struggling to build homes fast enough to meet existing demand.
Mr Kiernan said interest rates would have to rise a little more than currently expected to push prices down. New Zealand’s central bank forecast in August that the cash rate would reach 1.6% by the end of 2022 and 2% in the second half of 2023.
Even if house prices stop rising, and assuming incomes rise 3% per year, the house price-to-income ratio would take until 2050 to drop back to its 2000 level, Kiernan said.
“It’s going to be very painful I think, very difficult for people who want to get into the housing market, for a long time,” he said.
Capital Economics, in its recent analysis, expects home price inflation in major economies to moderate naturally over the next few months and does not expect a destabilizing drop in prices.
However, he said the risk of accidents is high in countries like New Zealand where affordability was limited even before the pandemic. Other countries in a similar situation are Canada, Denmark, Australia, Sweden and Norway, the firm said.
“We wouldn’t say house price declines in any of these countries are certain or imminent. Throw them overboard.”
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