Rising home prices are often welcomed as a sign of a country’s economic health and vigor. But in New Zealand, there is growing concern that prices have risen so high they are acting instead as an economic anchor, sucking resources from those who can afford a home and prompting those who can’t to consider moving overseas.
While much of the world remains mired in a housing slump, median home prices in the South Pacific nation in June rose to an all-time high of 372,000 New Zealand dollars ($303,000). That’s 6 percent above the peak reached before the global financial crisis and more than double the level of a decade ago, according to figures from the Real Estate Institute of New Zealand.
Median prices have now risen to about five times the median household income, well above the historic multiple of three. In the largest city of Auckland, which is driving the market, home prices have hit a median $500,000 New Zealand dollars ($407,500). Average annual wages, meanwhile, are languishing at $53,000 New Zealand dollars ($43,000).
High home prices represent an anomaly for a developed country of 4.4 million that, Auckland aside, is sparsely populated and where the quality of the housing stock remains marginal, often lacking adequate insulation or central heating. Part of the explanation lies in tradition – owning a home with a yard holds enormous social and economic significance in New Zealand and has long been the investment of choice for the middle class, who have shied away from stocks and other financial assets. But high prices are forcing more people to rent – home ownership levels have dropped from 75 percent in the early 1990s to 65 percent now.
The Economist magazine this month rated New Zealand’s home prices as 66 percent overvalued when compared to rents, second only to Canada in the 21 markets measured. By comparison, the magazine concluded homes in China were 7 percent overvalued compared to rents, homes in the United States were 15 percent undervalued, and those in Japan were 37 percent undervalued. Using income as a measure, the magazine concluded New Zealand homes were 22 percent overvalued.
The Bank of New Zealand recently came to a similar conclusion, finding that homes were 25 percent overvalued when compared to long-term trends.
Record-low interest rates are helping fuel ever-larger mortgages, money that ultimately comes from offshore. New Zealand’s household debt levels are now considered high by international standards, and are a big part of the reason why two major credit agencies last year downgraded the country’s sovereign credit rating.