The Unassuming Economist

House prices are high in New Zealand, according to a new report by the IMF. Although affordability metrics are difficult to interpret, most show a significant deterioration in the last two decades. The median house to income ratio rose from 3 in 2000 to about 5 in 2007, before declining to about 4½ in the last five years as incomes outpaced nominal house price growth. This ratio is somewhat higher than that of several peer countries. Despite the recent decline, various measures still point to overvalued house prices. Model based analysis suggests an overvaluation of about 25 percent. Price income ratios are 20 percent higher than the average of the last three decades. Price to rent ratios, which also rose significantly during last boom, show an even larger overvaluation, although rent values in New Zealand are distorted by the large stock of public housing, which serves about 5 percent of the population.

From this high base, house prices are beginning to rise again, particularly in Auckland and Christchurch. Real house prices post-2008 had been relatively stable until recent months, when nation-wide annual house price inflation picked up to over 5 percent.Auckland has had price increases of almost 12 percent for some months. The recent price pick up creates the risk of speculative demand that could induce price overshooting. Supply response will take time, and increased demand is likely to continue. Continue reading here.