NZ has 'most bubbly house market' in the world, according to Bloomberg

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Real estate prices around the world are flashing bubble warnings, Bloomberg says.

ROSA WOODS/Stuff

Real estate prices around the world are flashing bubble warnings, Bloomberg says.

New Zealand has the most bubbly house market in the world, according to a ranking by Bloomberg Economics.

Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run-up to the 2008 financial crisis, the global news service said.

Bloomberg ranked the world’s frothiest housing markets based on key indicators such as the price-to-rent ratio, price-to-income ratio, price growth and credit growth.

On those measures, New Zealand topped the “bubble ranking”, followed by Canada and Sweden.

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“A cocktail of ingredients is sending house prices to unprecedented levels worldwide,” economist Niraj Shah was quoted as saying in the report. “Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.”

Stay-at-home workers in need of more space and tax incentives offered by some governments to home buyers were also stoking demand, the report said.

STUFF

Geoff Bascand highlights some of the risks associated with the current housing market conditions. (First published May 2021)

For many countries in the Organisation for Economic Co-operation and Development, the price ratios were higher than they were ahead of the 2008 financial crisis, the report said.

Still, with interest rates still low, lending standards generally higher than in the past, and macro-prudential policies in place, the trigger for a crash is not obvious, and the period ahead will more likely be characterised by cooling rather than collapsing, the report said.

The risk is greater when there’s a synchronised boom in house prices, as is the case in the current cycle, Shah was quoted as saying.

“When borrowing costs do start to rise, real estate markets, and broader measures put in place to safeguard financial stability, will face a critical test,” he said.

In May, the Reserve Bank highlighted the housing market and “increased risk taking” as key threats to the stability of the financial system in the wake of Covid, and warned it may need to take more action on housing.

Deputy governor Geoff Bascand said the house price situation was “not a flashing red alert, but it is a concern, and what we are expressing is a desire to see some stabilisation”.

The drivers of house inflation were probably softening due to slower population growth, more house building, and tax changes announced by the Government, Bascand said.

But he indicated that even without an expectation of further strong prices rises, the bank believed there was “a greater risk of correction than in a number of years prior”.