NZ won't see same housing crash as in US, but market's 'second wind' likely to peter out, Westpac says

In Westpac's latest Bulletin, economists Brendan O'Donovan and Sharon Zollner compare New Zealand's house price boom and subsequent fall to what was seen in America over the last decade. They argue that although New Zealand's boom was more extreme in terms of the rise in house prices than in America, it will not experience the same crash as seen in the US since 2006. O'Donovan and Zollner said they expected the New Zealand housing market's 'second wind' to peter out before it came to much, but that the Reserve Bank was right to keep a close eye on it. They concluded saying they expect only slight rises in New Zealand over the next 18 months, particularly now longer term interest rates had risen. This conclusion is quite different to a recent forecast presented by Infometrics that house prices could rise 11% in the year to June 2010 and 24% over the next three years. Also, here is a link to Bernard Hickey's piece on why he thinks prices will only fall 15% from their peak instead of 30%. O'Donovan and Zollner conclude (full paper is in Srcibd below):

Was a US-style bust ever likely in NZ? Only if access to credit was shut down. This was a real risk when international funding markets were at their wobbliest, with NZ banks sourcing around a third of their funding offshore due to a dearth of national savings. But now that risk seems to have dissipated, the NZ housing market is on a firmer footing. The US housing market featured much easier credit, higher loan-to-value ratios, greater incentives on both sides to foreclose when things started to turn to custard, and a much greater supply overhang depressing prices. Essentially, houses were sold to a lot of people who could not afford to pay for them. This is a recipe for a massive bust. New Zealand lenders have behaved very differently from their US counterparts, partly because of tighter regulation, and partly because our financial sector did not go down the path of securitising mortgage lending to the same extent "“ less than 1% of NZ mortgages are securitised, versus around 75% in the US. Rather, NZ has retained the tried-and-true system where the organisation that decides to lend the money takes the risk. Although mortgage foreclosures are rising in NZ in step with unemployment, there is not a huge number of homeowners who can't realistically afford to pay the mortgage, as is the case in the US. Although the NZ housing market still looks "overvalued" relative to historical price/income ratios, there is no reason to conclude it will rapidly revert. Historically, this doesn't tend to be the case, and there is in fact no theoretical reason why it should. House prices will be determined by a multitude of factors that affect demand and supply, not just incomes (tax structures, credit availability, average inflation, interest rates, demographics, immigration...) And in New Zealand, housing demand is rising thanks to the net migration turnaround and a drop in interest rates versus a year ago, while supply growth will continue to be constrained by tighter credit and general nervousness about the economic situation. But it would be a brave person who predicted an imminent NZ house price boom starting from the current stretched levels of affordability, and we are predicting only slight rises over the next 18 months, particularly now longer interest rates have risen.