No one needs reminding that the housing market is running very hot right now.
REINZ monthly report after CoreLogic market update reveals yet more rapid price increases, while the Reserve Bank's numbers show record levels of mortgage lending - all while the global economy faces a covid-inspired recession.
It's great news for existing home-owners and investors who are seeing the value of their assets appreciate at breakneck speed, while the cost of servicing their debt is falling and rents are increasing.
But for first-home-buyers and those who might like to be a first-home-buyer some time in the future, the goal of home ownership is getting more distant by the week.
Overvalued?
But how hot is too hot? And could the housing market be in for a correction?
Head of research at BNZ Stephen Toplis says the market is definitely over-valued by a couple of measures.
He points to the house-price-to-GDP ratio as a sign that property values are out of whack with where the economy suggests they should be.
"Typically during recessions housing markets correct downward not upward and given this is one of the worst recessions that we’ve ever been in, it doesn’t make a lot of sense from a fundamental perspective that house prices are rising at double-digit rates," Toplis said.
House-price-to-income ratios are also extremely high, even by the standards of New Zealand's already over-priced property market.
Continuation, correction or flatline?
Toplis says there are no guarantees property prices will keep increasing forever, particularly because all the fundamental drivers of property prices – except for interest rates – are pointing in the other direction.
Any increase in interest rates – unlikely as that is in the near future – would be the catalyst for a correction.
But there are other ways a correction could occur. A prolonged run of the kind of property price inflation we have seen in recent months being one of them.
"If it (rising property prices) keeps running at 10 percent per annum for the next three years then you would have to say the likelihood of a correction is high.
"If, however, it stops running and we manage to see house prices flatline for a period of time and long enough for the borders to open and NZ’s net migration to pick up aggressively again, then it may mean that any future correction is relatively modest. Because that would put us in a situation where those house-price-to-GDP and house-price-to-income ratios actually narrow up," he said.
The interest rate effect
The unusual set of circumstances brought about by the pandemic have highlighted to many just how important low interest rates are as a driver of property prices.
With net migration now largely at a standstill and the country's main export industry on ice, only low interest rates can explain the boom, bar perhaps the relative weak listing environment, with real estate agents reporting new stock is harder to come by than usual.
In a recent weekly economic commentary, Westpac economists said lower interest rates have long been the main driver of property prices, although even they were forecasting a price decrease of seven percent in April.
Westpac now expects the property boom to roll on into 2021.
In April, all of the forecasts were saying house prices would fall. Against the backdrop of this and unemployment increases, it is not hard to see why the Reserve Bank chose to cut the official cash rate.
But now unemployment is not as bad as expected - at least so far - and with house prices booming, the wisdom of ever lower interest rates is being called into question.
The introduction of a funding for lending programme and the possibility of a negative OCR in March still loom large.
The RBNZ is not mandated to worry about the inequality and inequity produced by rampant house price inflation, unless that inflation threatens the stability of the financial system.
Financial stability risks aside, pulling the interest rate lever against the backdrop of so much recessionary pressure is always going to be tempting for the Reserve Bank and there's probably a good argument to be made that the alternative of not doing so is worse, certainly in the short-term.
The so-called "wealth effect" created by enriching existing property owners is great stimulus for the economy, but the long-term costs to society are mounting.
Has monetary policy stopped working?
Toplis argues it may be time for a re-think.
"Lowering interest rates do not fix every problem on the planet.
"But because of the Reserve Bank’s mandate, it is almost forced to do that. They are in a no-win position because their mandate says you have to keep trying to generate more growth and more inflation until you are successful and they don’t have that many tools whereby they can do this.
"The question therefore is: is monetary policy the appropriate way to approach this stuff? I would say no."
