Nine months ago in March 2019 The Economist reported that Canada and New Zealand were the economies most vulnerable to a correction in house prices.
But here we are in 2020. Apart from a drop in house prices in Auckland, so far New Zealand housing market has done well.
Economists have attributed the rise in property value in NZ largely to falling interest rates, increased bank leverage, population growth and various taxation and housing development policies.
So what would it take for NZ housing market to crash?
The simple answer is supply and demand. An oversupply or significant drop in demand (or a combination of both) can crash the housing market.
What could cause a significant drop in demand? Looking back ten years ago as the GFC hit Ireland and Spain, bank collapses and a very sharp economic downturn were enough to trigger their 50 percent-plus crash. Spain’s 35 percent slump was triggered by banking collapses, over-building, an ageing population and a long grinding recession.
US housing prices fell around 30 percent in most markets through 2007 and 2008 and also associated with bank collapses.
New Zealand avoided a massive housing slump because largely the banks did not collapse. Financial companies crashed and burnt. But the banks remained largely intact during the 2008 financial crises. Thus the Reserve Bank of New Zealand has been careful to keep the OCR low while requiring banks to tighten their lending policies. This will reduce the likelihood of a banking collapse in NZ. By reducing the chance of a banking collapse in NZ<, there will be a lesser chance of a property crash too.