The Reserve Bank of New Zealand issued its latest financial stability report on Wednesday, which highlighted its concerns about “unsustainable” house prices. It said there was an increased risk of correction in the market.
The further house prices rise above their sustainable level, the larger the realignment could be.
The Reserve Bank said the number of factors that pointed to a drop in house prices was growing.
Recent high-loan-to-value borrowers are vulnerable to a decline in prices from their current levels. Also, while current debt servicing costs are quite low, higher mortgage rates could see debt servicing costs rise substantially for some borrowers as a share of their income, creating financial stress and reducing aggregate demand.
ANZ Bank chief economist Sharon Zollner said that, in some ways it was not too hard to draw parallels with 2007, before the global financial crisis hit.
There were a lot of asset prices and debt positions around the world that had been based on an assumption that interest rates would stay low for a very long time.
People are starting to reassess that now. It’s not just in New Zealand that inflation is rather startling, it’s everywhere. We are certainly seeing high inflation in the U.S.
She said that “Central banks have been deliberately distorting the price of risk. You potentially store up risk for somewhere down the track. That’s the concern – how many cans have we kicked down the road and how much road is left?”
So when will there be a crash or correction in the U.S. real estate market? To answer that, we need to know when the Fed will start raising interest rates and how quickly. The Fed has mentioned that they may start tapering their “quantitative easing” (i.e., the printing of money). But have they actually done much tapering yet?