Friday, August 10, 2012

House Prices are Overvalued

The Governor of the Reserve Bank of New Zealand has put out two statements in as many days. Warning or coincidence?

His first statement contained the following cryptic message:

House prices are overvalued. "They are certainly well above historical levels and look expensive by international standards relative to incomes or rents," governor Alan Bollard said in a speech to the Employers and Manufacturers Association on Monday.

A repeat of the house-price boom of the last decade seemed unlikely, he said, "but would be very damaging and risky were it to occur."

Now it's not fair to pick and choose statements that reinforce your particular point of view. That's blatantly fraudulent. But, for me, public statements uttered by Reserve Bank Governors, need to be treated with a dose of mirth and foreboding all at once. In other words, don't trust them.

Ben Bernanke is famous for not seeing the pending housing bubble pop in 2007. In fact he should be embarrassed. Statements taken as gospel by him before the crisis would have meant you believing, boots and all, in the 'house prices never go down' mantra.

Phew, glad we didn't.

So do we believe Mr Bollard this time or is he trying to woo the market in a particular direction that produces maximum wealth transfer to his banker masters? That I leave to your imagination.

However, it seems to me that house prices in New Zealand are ready for a major correction. An article in the NZ Herald has this to say:

There is wisdom in the saying that the four most expensive words in the English language are: "This time is different."

This time is not different. Debt at these levels cannot be sustained, especially as our jobless numbers rise and the economy tanks.

Remember too, that many people from Asia have flocked to NZ's shores this past ten years looking for opportunity, bringing with them high demand for houses in Auckland. They will depart as quickly as they came if those opportunities disappear. Another potential drag on house prices.

Also, Bollard states: "...this time it is looking as if the accumulated debt is, in fact, acting as quite a sustained drag, in New Zealand and other advanced economies."

The article further says; Someone who thinks "I can just about afford a mortgage at these rates" needs to reflect on this simple arithmetical fact: If floating mortgage rates were to rise by 2 percentage points - which is hardly beyond the bounds of possibility - that would increase their interest bill by more than a third."

Perhaps Mr Bollard is warning us in good faith this time? I think so.

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