NZ house prices overvalued says IMF

Photo / Paul Estcourt

New Zealand house prices appear to be overvalued by between 15 per cent and 25 per cent, the International Monetary Fund says in a country report on New Zealand.

The IMF says that using the Organisation for Economic Co-operation and Development's house price-to-income ratio in September 2010 suggests an overvaluation of about 15 per cent when compared with the average of the past 20 years.

However, it notes that the income measure used by the OECD doesn't take into account Statistics New Zealand's recent upward revision to household income.

Nonetheless the IMF says model based estimates that take account of income, demographics and interest rates suggest an overvaluation of 15 per cent to 25 per cent.

And a model that includes demographics, mortgage interest rates, and the country's terms of trade as a proxy for future income, indicates that house prices are overvalued by about 15 per cent to 20 per cent from a medium-term perspective.

"The models suggest that a 10 per cent fall in the terms of trade could result in an 8 per cent fall in house prices over the medium run," the IMF says.

The IMF notes that real house prices rose by 150 per cent in the 15 years to 2007, one of the strongest increases among advanced countries, and that they have since fallen by more than 10 per cent.

The IMF does note that some of its measures have weaknesses, adding to the uncertainty of the estimates.

Meanwhile, the IMF also says - based on the OECD's price-to-rent ratio, that rents are 43 per cent overvalued compared with the past 20 years.

"However, the measure includes government subsidised rents which has pushed up the ratio over time as subsidised rents decreased, most noticeably in 2001. An alternative measure excluding subsidized housing suggests an overvaluation of 15 per cent to 27 per cent when compared with historical averages."

- INTEREST.CO.NZ