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The era of ultra-low interest rates and cheap finance has driven a global house price boom. In the two years prior to the fourth quarter of 2021, real house prices in the OECD climbed at their fastest pace since records began 50 years ago. Driven by drastic pandemic policies, including the closure of its borders and stimulus programmes, house prices in New Zealand soared by 43 per cent in two short years. And its price-to-income ratio topped that of many other OECD nations as the average house price grew to 10 times the median income.
That bubble means that New Zealand is a canary in a coal mine for other markets concerned that a housing crash may be on the horizon. Like many countries across the world, New Zealand's mortgage rate has fallen steadily since the global financial crisis, but that is beginning to change. In October, the New Zealand central bank moved early to push up rates, which had stood at 0.25 per cent for 18 months. It had been raised to 2.5 per cent in less than a year. That rate is likely to double again by 2023, according to economists.
The concern is that it risks driving the country into recession if New Zealand has reined in spending, there's inflation, and the cost of living continues to soar. That is where other markets, including Australia, the UK, and the US, will start to pay heed to what we should perhaps call the kiwi in the coal mine. But one factor that should shield customers from the impact of mortgage rate hikes in other markets is the falling share of variable rate mortgage loans over the past decade.
In the US, the 30-year fixed rate residential mortgage has become the most popular product, and improvements in the quality of mortgage loans is another factor that may lessen the chances of seeing a housing crash. There, more than two-thirds of people given new mortgages now have a high credit score. On top of that, historically low unemployment rates and the shortage of houses for sale are supporting housing demand in most advanced economies. Many households have also accumulated large amounts of savings during the pandemic.
Back in New Zealand, in May, the median house price had fallen 9.2 per cent from its peak in November last year. And a peak-to-trough crash of at least 20 per cent is now being factored in, the biggest fall since the '70s. As the year unfolds, houses in New Zealand now in the minds of economists the world over.