Booming Auckland House Market Could Affect New Zealand Economy
May 12, 2014 at 9:32 AM
With prices continuing to soar in the Auckland area, there is some concern that this may have a negative impact on the economy.
Auckland house prices have increased 12% in the past year and this has raised the alarm bells with some first time buyers in particular, concerned that if they don’t buy now that they’ll be priced out of the market in years to come.
Brian Aitken, who heads missions for the International Monetary Fund (IMF) suggests that this significant increase in Auckland properties has led to a natural reaction among many in the Auckland property market and he is concerned that people will make rash commitments that may result in unnecessary strain on the household.
"The concern is that people start expecting prices to continue to increase and therefore they jump into the housing market now because they worry they'll be priced out later and that puts even more upward pressure," Aitken said.
Auckland property interest rates have been at all time lows for almost five years and prices for properties in Auckland have doubled since 2004, making it the world’s third most over-valued property market. In April 2014, the average house in Auckland was priced at $697,454 – up from $340,000 in 2004.
The soaring house prices in Auckland combined with very low interest rates could prove very tempting for some people. However experts have advised caution over jumping the gun as any increase in interest rates could see pressure mount on borrowers.
Jesse Colombo, one of the few experts to warn of the Global Financial Crisis last decade, says Auckland property investment enthusiasts need to tread cautiously.
"New Zealand's ultra-low interest rate environment has encouraged the country's home buyers to make many of the same mistakes that the American home buyers did during last decade's bubble," he writes. "One of the gravest of these mistakes is using adjustable or floating rate mortgages, which will reset at higher interest rates when the low interest rate environment ultimately ends."
Commentators say that whether you own rental property in Auckland or living in the home you own, you should focus on paying off your mortgages and asses your ability to meet repayments if rates rise. Floating rates are around 5.5 to 6 per cent and could rise to 7.5 per cent.
Labour's deputy leader and finance spokesman David Parker says: "I think there are real vulnerabilities for the economy. Unless we get these problems under control there's likely to be a painful correction for those who've bought at the highest prices."
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