Debt-fuelled bubble 'a mistake'

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Auckland’s property market is experiencing a bubble supported by too much debt, an economist says.

Wednesday, July 3rd 2013, 10:53AM 1 Comment

by Susan Edmunds

NZIER economist Shamubeel Eaqub said more than half the debt accumulation over the past 12 months in New Zealand had occurred in Auckland, and a lot of it had been mortgages taken out with low deposits.

Speaking to the Perfecting Investment Portfolios conference in Auckland today, he said there were huge amounts of risk building up in Auckland as house prices increase from already elevated levels, on the back of a massive build-up of debt.

He said it was not a supply of housing issue, because rents have only increased 2% in Auckland over the past year, compared to prices up 16%. “It’s not a physical shortage of housing but a bubble and we’re doing it with lots and lots of debt. It’s a big risk for New Zealand.”

Eaqub said there was no room to absorb a shock and the amount of money being borrowed was a mistake. “If there’s a recession in Australia tomorrow, we’re screwed.”

Macroprudential tools to cool the housing market would likely not work, Eaqub said, and the Reserve Bank would deploy an OCR hike that would hurt the whole economy.

House prices outside Auckland and Canterbury are not increasing at anything like the same rate.

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