New Zealand and Canada are the most vulnerable economies to a correction in house prices, with Australia and the UK also drawing concern, according to new research from Bloomberg Economics.
Seeking to build a “housing bubble dashboard,” economist Niraj Shah studied ratios of house prices to rent and income as well as inflation-adjusted prices and household credit.
The results showed that Canada and New Zealand seem to be on the most unsustainable path, with the cost of housing compared with wages the highest in the world in both countries. Australia, Norway, Sweden and the UK also raise alarm bells, Shah said.
New Zealand has the highest house price to rent ratio in the world, and the highest house price compared to income, according to Shah.
Canada has the highest house prices and the biggest percentage of credit to households, followed by New Zealand, he said.
New Zealand household credit is the equivalent of 94 per cent of gross domestic product. That compared with 100.7 per cent of GDP in Canada, 76 per cent in the US, and Australia’s 120 per cent, according to Shah’s research.
New Zealand’s central bank cut its benchmark rate, the official cash rate (OCR) to a record low of 1.5 per cent in May, prompting banks to cut mortgage rates. The Reserve Bank held the OCR last month but it expected to cut rates later this year.
There has been speculation the OCR could drop below 1 per cent.