NZ residential property market risky, says OECD report

New Zealand's residential property market is one of the world's most risky and second only to Denmark in the likelihood of a serious price correction, says the OECD.

The organisation studied 17 countries and found New Zealand one of the most hazardous markets - the single most volatile country in which to own a house because it had more booms and busts than the others.

The report - "Are House Prices Nearing a Peak?" - found that since the 1970s, New Zealand has had more housing peaks than any other country.

The duration of our housing cycles have been shorter and more cyclical, the report said.

Peaks were invariably followed by a downturn and a price drop.

New Zealand was at extreme risk of a real estate downturn, particularly if interest rates rose by only 1 per cent when the country would have an 83 per cent chance of a big price correction, the OECD found.

Reserve Bank Governor Alan Bollard is not expected to push up rates further this year.

The OECD said Denmark's chances of a house price crash were the highest at 95 per cent and Japan's the lowest at 0 per cent. New Zealand was one of the world's most vulnerable housing markets. But Denmark and New Zealand had also consistently topped world house price charts in the last two years, having experienced the steepest value increases.

The OECD report by Paul van den Noord shows that if prices were to continue rising this year at the same rate as in 2005 and if interest rates rose by a percentage point, Denmark, New Zealand, France and Sweden would be almost certain to suffer a crash. The Danes are most vulnerable, followed by the Kiwis then the French.

Real Estate Institute data this year shows the market plateauing and prices staying stable rather than rising fast as they did last year.

"A rise in interest rates by 100 to 200 basis points would suffice to raise the probability of a peak in the United States, France, Denmark, Ireland, New Zealand, Spain and Sweden," the report said. The report follows rankings from Britain's Economist that put New Zealand at the top of the world for the steepest price rises. In June 2004, New Zealand topped a chart of house price rises in the world's developed countries.

In an article headlined "Hair-raising", the magazine added New Zealand, Denmark and Switzerland to a list of countries tracked since 1975.

Shamubeel Eaqub, an economist with Goldman Sachs JBWere in Auckland, said the OECD report might prompt homeowners to question how much money they had tied up in the residential market.

It was also a warning for New Zealanders not to rely on housing's good fortunes continuing, he said.

"This should be good reminder for households to diversify their portfolio because 77 per cent of gross assets are in housing," he said.

A spokesman for Finance Minister Michael Cullen dismissed the report, saying any crash was extremely unlikely to occur and was an emotive concept. But the Government was also being careful not to encourage the housing market, he said.

"The Government is well aware of inflationary pressures in the economy and that's why it is maintaining a disciplined fiscal policy. Any further fiscal stimulus at this time would add to inflation and increase the risk of interest rate rises which in turn would hurt homeowners.

"That's why we regard National's multibillion-dollar tax cuts as reckless.

"Had they been introduced, inflation would have risen, as would interest rates and that would have impacted on the housing market," the spokesman said.

BNZ economist Tony Alexander also dismissed the OECD report.

"They use the last quarter of 2005 when New Zealand house prices on average were 15.3 per cent ahead of a year earlier using Real Estate Institute data.

"Annual increases have already slowed substantially so the scenario they posit is unlikely for New Zealand," Mr Alexander said.

John McDermott, Victoria University associate professor of economics and finance, also doubted the chances of the OECD report's predictions being fulfilled.

"House prices, while still increasing, are doing so at a slower pace than 2005 and official cash rates are unlikely to increase this year and are likely to be lowered in 2007 so the prospects of the OECD conditions being met seem very low," he said.

Real Estate Institute data released this week showed national sales volumes down 17 per cent between May 2003 and last month.

Auckland volumes dropped 46 per cent from 4078 sales in May 2003 to 2981 sales last month.

But prices were still rising steeply, up 36 per cent in three years in Auckland, 35 per cent in Wellington, 77 per cent in Christchurch and 96 per cent in Dunedin.

Agents are reporting an increasingly stressed market. Anne Duncan Real Estate in Mt Albert sent out a flyer this month saying the company was about to launch a series of clearance sales to auction off houses that had been on the Auckland market for a while.

The glossy flyer, headed "Clearance Sale Special", said the market had started to settle and was moving into one of its quieter phases.

Howard Morley, the Real Estate Institute's president, said housing was proving strong because the national median remained at $305,000 between April and May.

"The sales statistics show that the market has consolidated. Prices remain strong with a good number of properties continuing to sell which shows a resilient residential property market," Mr Morley said.