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New Zealand Stops a Housing Bubble

Author: Peter R. Orszag, Adjunct Senior Fellow
November 19, 2013
Bloomberg.com

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Perhaps the Federal Reserve has something to learn from the central bank of New Zealand about how to manage a mortgage market. Unlike the Fed, which has been sharply criticized for having failed to keep the U.S. housing bubble from expanding, the Reserve Bank of New Zealand is sounding the alarm over rising housing prices and imposing limits on mortgages.

Risks associated with excessive increases in house prices, and the potential that the bubble might burst, have become a major threat to the country's financial system, the Reserve Bank warns.

The New Zealand housing market is indeed heating up. Over the past year, house prices in Auckland have risen 17 percent, and in Christchurch, they're up 8 percent. Those two markets account for half of home sales across the country.

Relative to income, New Zealand housing prices are now more than 20 percent above their historical average. International organizations such as the International Monetary Fund and the Organization for Economic Cooperation and Development share the Reserve Bank's concerns that real estate may be overvalued.

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