Brian Fallow: Four reasons not to panic about a property bubble

A view from the Auckland Harbour Bridge across Westhaven marina to Auckland City. Photo / Chris Gorman.

Here are some reasons not to embrace the long-distance view of economic analyst and Forbes contributor Jesse Colombo that New Zealand is hurtling towards crisis when a property bubble inevitably bursts.

The risk of that is not zero, but on a gauge that runs from complacency to alarm, the needle should probably point somewhere in the middle.

1. Colombo is right about the danger that a prolonged period of historically low interest rates will inflate asset prices. It is one of the reasons the Reserve Bank has started raising rates, the first developed country central bank to do so.

But that is not its first move to bolster financial stability. It has increased the amount of capital banks need to have for a given quantity of mortgage credit and last October it introduced loan-to-value restrictions on new lending.

These measures are cooling the housing market. Turnover last month was down 10 per cent on March last year and price growth is slowing, with the REINZ housing price index rising 2 per cent in the March quarter -- half its pace during the second half of last year.

2. Colombo points to the steep rise in house prices over the past decade. We had noticed.

But one reason that did not lead to the painful bust that the United States, Ireland and Spain suffered is that it did not lead to the same sort of construction boom. We still have a housing shortage, not a glut, and the current surge in net immigration suggests that will last a while yet.

3. He also rightly points to the high level of household debt relative to incomes. But what matters most at this stage is the rate at which it is increasing, which has been only slightly faster than household incomes. Housing credit growth seems to have peaked at an annual rate of 6 per cent last October and rising interest rates and the LVR curbs should rein it in.

The level of debt, the legacy of the mid-2000s boom, has the effect of lowering the pain threshold -- so that interest rates will not have to rise nearly as far in this cycle to get the attention of the mortgage belt, which is good for business borrowers and the exchange rate.

4. "New Zealand's ultra-low interest rate environment has encouraged the country's home buyers to make many of the same mistakes that American home buyers did during the last decade's bubble," Colombo says. "One of the gravest of these mistakes is using adjustable or floating rates which will reset at higher interest rates when the low interest rate environment ultimately ends."

But a key difference between our situation and the US sub-prime teaser-loans period is that New Zealand banks keep the mortgage loans they write on their own balance sheets. They do not shovel that risk off onto unsuspecting investors through securitised products.

They therefore have every incentive to consider borrowers' capacity to continue to pay the mortgage when rates normalise.