By Paul McBeth
New Zealand housing is already overvalued by about 25 percent and if it continues to rise may force the Reserve Bank to hike interest rates, according to the International Monetary Fund.
Property in New Zealand has become less affordable in the past two decades with the median house price at about four times income, some 20 percent higher than the average of the past 30 years, it said.
The Washington-based institution suggests "overvaluation of about 25 percent" in its annual report on the nation. It had previously seen New Zealand housing overvalued by between 10-20 percent.
Rising house prices were a primary issue for New Zealand and could "lead to an increase in debt-financed household spending which would put pressure on aggregate demand and increase the risk of an abrupt price correction".
The Reserve Bank told IMF staff its flat interest rate outlook would be reviewed if a housing boom added to underlying inflation pressures.
"The current accommodative monetary policy stance is appropriate, but may need to change if house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures," the IMF said.
Real Estate Institute figures this week showed the median housing price index rose an annual 9.8 percent in the year ended April.
The booming markets in Auckland and Christchurch, where limited supply is failing to meet growing demand, have accounted for about 92 percent of recent gains in house sale prices, having traditionally made up about half.
The IMF raised its assessment of the potential for a sharp fall in house prices to "low to medium", from "low" previously.