Macroeconomic policy support may be needed if there is a deep and rapid correction in the New Zealand housing market, the International Monetary Fund says. In its latest review of the New Zealand economy, the IMF has had a close and detailed look at the housing market here.
It says that financial stability risks from a sharp downturn in the housing market are limited given high bank capitalization, "but pockets of vulnerability, particularly amongst recent borrowers, may exist".
"More broadly, there is likely to be a larger impact on consumption through wealth and sentiment effects. In a scenario of a marked housing correction, macroeconomic policy support may be needed to avoid second round effects and a pronounced downturn."
The IMF notes that price increases in New Zealand have been higher than in other advanced economies, particularly in the post-Covid-19 period. "House prices in New Zealand were already increasing faster than in its peers before Covid-19, and the pandemic accelerated this trend.
"Since 1998, prices in New Zealand have increased by over 250%, almost four times the average increase across OECD countries (around 70%). And this trend has continued during the Covid-19 period— from 2019 Q4 to 2021 Q2, house prices in New Zealand increased by close to 26%, compared with around 11% in other advanced economies and less than 7%."
A similar trend is observed for affordability metrics, with New Zealand impacted more strongly than most other OECD countries, the IMF says. The IMF says macroprudential measures in NZ to alleviate the impact of the pandemic eased housing credit attainability, including for investment, "further increasing demand".
Borrowers are vulnerable to rising interest rates, the IMF notes. "New Zealand’s household debt, most of it housing-related, is high, having increased from 158% of disposable income at end-2019 to 169% in June 2021.
As interest rates rise, homeowners, particularly those who have taken out mortgages recently with high home values, will face higher interest payments relative to their incomes as their mortgages reprice. Higher interest payments will be a drag on private consumption and economic growth, the IMF says.
Although stress tests by banks suggest that most borrowers are likely to be able to afford this increase in mortgage rates, limiting financial stability risks, interest payments as a share of disposable income are expected to increase significantly.
The IMF says tackling housing imbalances requires a comprehensive approach, and recent initiatives will help address these imbalances. Achieving long-term housing sustainability and affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments and lower construction costs. Recent amendments to the RMA and the easing of zoning restrictions to permit medium-density housing in all of the country’s major cities represent a major departure from the systems in place from the 1980s that encouraged low-density detached single-family housing
