New Zealand is cracking down on its red hot property market, as soaring prices raise concerns of a crash

New Zealand property is too hot to handle. (Avalon, Universal Images Group via Getty Images)
  • New Zealand’s central bank has implemented strict lending policies after property prices soared 20% last year.
  • “We are now concerned about the risk a sharp correction in the housing market poses for financial stability,” Reserve Bank Deputy Governor Geoff Bascand said, restricting how much homebuyers and particularly investors can borrow.
  • While the RBA says Australia property price growth hasn’t reached unsustainable levels, it has indicated it would similarly intervene if debt entered dangerous territory.
  • Visit Business Insider Australia’s homepage for more stories.

Australia will be closely watching what happens across the Tasman, as something of a cautionary tale plays out in the New Zealand property market.

After median property prices exploded more than 20% last year, the Reserve Bank of New Zealand (RBNZ) has been forced to intervene as it becomes increasingly concerned about unsustainable growth.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged,” Reserve Bank Deputy Governor Geoff Bascand said.

The biggest of the new measures is the requirement that from May investors will be required to chip in a deposit of 40% or more when borrowing. The median house price in the Auckland market, having been particularly tight for years, is now more than $1 million, soon requiring $400,000 plus up-front for interested investors.

Banks will also restrict homebuyers albeit to a less degree. Under the new rules, just 20% of new lending can go to New Zealanders with deposits under 20% from March 1.

The RBNZ had removed some lending restrictions in April last year so as not to impede COVID-19 economic measures taken at the time. With the pandemic’s immediate economic impact eventually being exposed as more of a whimper than a bang, loosened lending saw a huge rush into the real estate market.

As prices began to rapidly rise, so too did the amount Kiwis needed to borrow in order to buy, eventually setting off alarm bells at the RBNZ that some buyers were overexposed.

“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn,” Bascand, who also serves as the Bank’s general manager of financial stability, said.

A lesson for Australia

The Australian property market may be far larger than its cross-Tasman neighbour, but concerns remain that something similar could play out here. Average property prices hit record highs in January, as capital city markets rebounded and regional markets took off.

The Commonwealth Bank for one is already forecasting 8% growth in national values this year, as record low interest rates, government incentives, and fiscal stimulus continue to work through the economy.

While Australia has a dedicated prudential regulator in APRA, the Reserve Bank of Australia (RBA) sounded off just last week to a parliamentary committee over the potential for intervention.

“It’s possible that these low interest rates generate unsustainable growth in asset rates but they haven’t yet,” Governor Philip Lowe said.

“Our focus is on the lending that is used to purchase housing. We want to see lending standards remain strong. At present, there are few signs of a deterioration in these standards. If that were to change, you could expect that we would be discussing possible responses.”

Certainly the RBA has done so before, working with APRA and others to force banks to follow higher lending standards.

“Housing prices were rising very quickly, investors were rushing into the market, they were borrowing on overly generous terms, we thought those trends in debt were unsustainable and through the council of financial regulators, we worked with APRA and my colleagues at the Bank, we put in some place some measures and that would be our approach again,” Lowe said last week of that period.

Having since been watered down, Australia has followed a similar path to New Zealand, as property prices rebounded in the second half of last year, albeit less sharply. Since then Australian homebuyers have been on a credit binge, breaking lending records month on month. Investors notably remain largely on the sidelines, a key difference to the New Zealand experience.

It’s why Lowe and the RBA have their eyes fixed firmly on how lending grows from here on out.

“It’s the debt that goes with the asset prices that would be the unsustainable element of it.”

So while Lowe says no such scenario is playing out here just yet, he also remains acutely aware of the possibility.

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