House prices 30% over-valued: BNZ

House prices are overvalued by about 30%, BNZ economists say, and prices could fall by more than 10% this year.

Friday, April 4th 2008, 12:00AM

by The Landlord

BLOG: The housing market is over-valued. So What?

While the economists has increased the amount house prices could fall this year, they don’t go so far as to say that the drop could be as much as 30%.

"We believe house prices risk falling by more than the 10% we already presume for this year," BNZ said in a report.

A correction was inevitable and would be painful for many people but good for the economy.

"But let's also bear in mind the good news, in that many potential homeowners, long squeezed out of the market, stand to be big benefactors."

"Well, it's here. And the potential downside bears thinking about -- as our indications of a 30% housing overvaluation attest to."

"But let's also bear in mind the good news, in that many potential home owners, long squeezed out of the market, stand to be big benefactors," BNZ said.

BNZ economist Tony Alexander says the price of traded houses on average is down 4.1% in the past three months.

“Will they fall further? Almost certainly.”

He says the negative factors dominate at the moment and are likely to remain that way until we get some strong indication from offshore that the liquidity situation is improving and that translates into easing fixed housing rates back here.

“Will prices fall 30%?

“They look 30% above measures of fair valuation but people often make the mistake of interpreting a divergence from valuation measure as a forecast. It is not. If something is 30% over-valued it first got there being 15% over-valued. Being 15% over-valued did not lead to a 15% fall.

“A 30% average fall seems highly unlikely but another 10% off current prices is possible.”

He says there are a long-list of factors which will support the market, but they are not yet in play yet.

The bank takes to task the line run by some commentators that the housing market boom was fuelled by a shortage of land and new homes.

BNZ said the boom was mostly due to over-exuberant demand factors. There was an improvement in incomes and some good old fashioned speculative behaviour as well.

"Supply issues have simply been caught in the crossfire."

Residential land supply and construction activity looked to have been, if anything, strong in recent years.

Between 2003 and 2007 there was roughly one new dwelling built for every two additions to the population. This build-rate has been higher at times in New Zealand's past but it was not low.

BNZ warns that a glut of unsold homes occurred in some states in the US because of a massive overbuild. The glut of unsold homes helped trigger the sub prime debacle.

"We need to be careful about encouraging too much of a supply response just at the wrong time."

BLOG: The housing market is over-valued. So What?

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