IMF says any ‘marked’ housing correction in New Zealand may require macro policy support


Macroeconomic policy support could be needed in the event of a deep and rapid correction in New Zealand’s housing market, according to the International Monetary Fund.

In his latest review of new zealand economythe IMF has taken a close and detailed look at the housing market here.

It says the risks to financial stability from a sharp downturn in the housing market are limited given the high capitalization of banks, “but pockets of vulnerability, particularly among recent borrowers, may exist.”

“More generally, there is likely to be a larger impact on consumption via wealth and sentiment effects. In a sharp housing correction scenario, macroeconomic policy support may be needed to avoid second-round effects and a pronounced slowdown.

The IMF notes that price increases in New Zealand have been higher than in other advanced economies, especially in the post-Covid-19 period.

“House prices in New Zealand were already rising faster than its pre-Covid-19 peers, and the pandemic has accelerated this trend.

“Since 1998, prices in New Zealand have increased by more than 250%, almost four times the average increase in OECD countries (around 70%).

“And this trend has continued during the Covid-19 period – from Q4 2019 to Q2 2021, house prices in New Zealand rose by almost 26%, compared to around 11% in other advanced economies and less than 7%.”

A similar trend is seen for affordability measures, with New Zealand being hit harder than most other OECD countries, according to the IMF.

“Comparison across countries is difficult given the very different starting points and heterogeneity in housing quality. However, we can focus on changes in these parameters to assess whether affordability has improved or deteriorated over time.New Zealand ranks first in the Asia-Pacific region and is near the top among OECD countries in terms of rising property price-to-income ratios and housing prices. real estate/rent since 2015.”

The IMF says macroprudential measures in New Zealand to mitigate the impact of the pandemic have made it easier to access housing credit, including for investment, “further increasing demand”.

“The temporary removal of loan-to-value (LVR) restrictions during the pandemic has led to an increase in high LTR loans and debt-to-income (DTI) loans.

“Investor appetite has been a major contributor to overall demand, driven in part by ease of access to high LVR mortgages for investors.

“Until recent policy action, including macroprudential tightening and fiscal policy changes, a rapid increase in lending to high LVR investors has fueled demand.

“This was particularly the case because mortgage interest payments as a share of rents were also low, leading to lucrative opportunities for investors. However, this increase in investor demand could have helped curb in to some extent the increase in rental prices.”

Today, according to the IMF, price moderation has set in, “but there are macroeconomic risks in both directions.”

“The timing and depth of the housing market recovery remains uncertain, as house prices have proven difficult to predict (housing price expectations pointed to a decline during the pandemic, which did not occur) “House prices could quickly stabilize or fall sharply. A sudden and deep correction would likely have significant spillover effects on the rest of the economy.”

According to the IMF, rising mortgage rates should “further worsen” housing affordability.

“We can measure affordability using a borrowing capacity approach based on the maximum mortgage size a household can reach to finance the purchase of a home given their income, mortgage rate in force and debt requirements.

“Until recently, low mortgage rates meant that median house prices in New Zealand were around 26% higher than achievable house prices with a debt service-to-income ratio (DSTI) of 30%.

“But the rise in mortgage rates at the end of 2021 and its projected trajectory in 2022 should increase this gap to more than 60% by June 2022 if house prices remain at the level of December 2021. This raises serious concerns in affordability.”

Borrowers are vulnerable to rising interest rates, notes the IMF.

“New Zealand household debt, mostly related to housing, is high, rising from 158% of disposable income at the end of 2019 to 169% in June 2021.

As interest rates rise, homeowners, especially those who have recently taken out high-value mortgages, will face higher interest payments relative to their incomes as their mortgages mature. reassessed.

“Although there has been a trend towards longer fixed-term mortgages, particularly in 2021 when rates were at historic lows, a large majority of mortgages in New Zealand are variable or fixed rates. for less than a year, with only 5% of homeowner mortgages fixed for three years or more.

“Estimates suggest that in 2022 almost NZ$215 billion worth of mortgages will need to be rolled over at significantly higher interest rates.”

Higher interest payments will dampen private consumption and economic growth, according to the IMF.

Although bank stress tests suggest that most borrowers are likely to be able to afford this increase in mortgage rates, limiting risks to financial stability, interest payments as a share of disposable income are expected to increase significantly. significant.

“Since their trough in June 2021, implicit interest rates on housing – calculated as the ratio of household interest payments on housing loans to total outstanding housing loans – have fallen by 3.2% to 4.2% at end-December 2021, and are expected to rise (based on our benchmark projection for policy rates) to 4.7% and 6.1% by June 2022 and 2023 respectively.

“Rising interest payments are likely to act as a drag on private household consumption and overall economic growth.

“The magnitude will depend on the elasticity of private consumption to disposable income, which can vary significantly depending on the nature of the income shock (temporary or permanent) and household characteristics (income distribution, savings, etc.) , but could range from 0.3% to 0.5% of GDP in 2022 and 0.6% to 1.3% of GDP in 2023. However, higher deposit rates could help offset some of this increase by increasing income from financial assets, although the distribution of assets and liabilities is likely to be skewed between households.”

The IMF notes that rents have increased less and that the share of rents in income has remained stable, “but the rental charge is high”.

“… Data on the price of real rents for available dwellings from household cost of living price indices show that the increases have been somewhat higher for the lower income quintiles, which also have a weight. higher rents in their overall cost price indices, suggesting a growing burden for the poorest households.

“The same is true for Maori communities, which have seen larger increases in rental prices.

“To put this into context, in comparison to other OECD economies, the rental burden in New Zealand is relatively high, especially for the bottom 20% of the income distribution.

“Furthermore, survey data suggests that housing satisfaction in New Zealand is relatively low compared to the rest of the OECD, while homelessness is high.”

The IMF says tackling housing imbalances requires a holistic approach and that recent initiatives will help address these imbalances. Achieving long-term housing sustainability and affordability critically depends on unlocking land supply, improving planning and zoning, and promoting infrastructure investment to enable developments. accelerated real estate and reduced construction costs. Recent RMA changes and the relaxation of zoning restrictions to allow medium-density housing in all major cities across the country represent a major departure from systems in place since the 1980s that encouraged low- density.

“The increase in the social housing stock also remains important. While increasing the overall supply of housing is essential, given the high number of homelessness and the rental burden, especially in the lower income quintiles , it is also necessary to take into account distribution problems.

“Even with a sharp price correction, low-income New Zealanders are unlikely to be able to enter the housing market in the near term. Housing costs for low-income New Zealanders have doubled in proportion of their income since the 1980s, and homeownership rates have fallen while household debt has risen sharply, underscoring the need to increase the stock of social housing.


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