Goldman Sachs says that of all G-10 nations, house prices in New Zealand are most at risk of experiencing a correction in the next two years
The bank defines a correction as a decline of 5% in real inflation-adjusted terms.
Using metrics such as the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation, the bank determined that there’s a 35% to 40% chance of a housing slump occurring.
“Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway,” it said in the note seen by Bloomberg.
“According to the model, the probability of a housing bust over the next five to eight quarters is the highest in Sweden and New Zealand at 35 to 40%.”
Goldman sees the probability of a similar decline in Australia at around 25%.
While the bank admits its modelling has a “few key drawbacks”, including predicting housing slumps more often than is the case in reality, it suggests there’s is still reason for concern about house-price developments in the small open G-10 economies.
“Prices do appear overvalued and credit growth has been high — traditional warning signs of real house-price declines,” it says.
As for the boom-bust housing cycles of the global financial crisis, it’s also likely that developments in population growth — as a fundamental pillar underpinning housing demand — will also play a crucial role in determining whether or not Goldman’s modelling is proven right.
According to data released by Statistics New Zealand, the nation’s population grew by 97,300 in the year to June 30, 2016, the largest annual increase on record.
You can read more at Bloomberg here.