Rating agency Standard & Poor's says New Zealand is at risk of a sharp fall in property prices. The agency highlighted the ''significant risk'' of a sharp correction in property prices in its latest report on New Zealand's banking outlook.
S&P said the most likely scenario was that real estate prices would continue to stabilise at current levels over the medium term.
''That said, given the uncertain short to medium-term outlook for the global economy, we are of the opinion there remains a significant risk of a sharp correction in property prices,'' S&P said.
Bank of New Zealand chief economist Tony Alexander said an upturn in the housing cycle in New Zealand had only just started and it would probably run for another three years.
''It bears greatest resemblance to the 1990s cycle, which was also led by Auckland, rather than the 2000s cycle which came out of the regions.''
The 1980s cycle was a mish-mash of everything, with massive structural changes in the economy, meaning care needed to be taken about extrapolating anything out of that decade, he said.
One of the phenomena of the 1990s cycle was that it spread out of Auckland to the rest of the country. Commentary during the past three weeks had started to revolve around that theme.
Data produced by the Real Estate Institute took the average dwelling sales price over the three months to January and compared it with the low point in 2009 and the previous peak in late 2007 - except sections, for which the peak was early 2008.
Auckland house prices were up 27%, Christchurch 23% and Wellington just 11%. Compared with the 2007 peaks, Auckland prices had advanced by 12%, Wellington was the same and Christchurch was ahead by 9%. The rest of New Zealand was up 5%.
Mr Alexander said the data suggested Wellington was due for a ''decent catch-up''.
Responding to recent talk about foreigners buying up New Zealand houses, Mr Alexander said there were literally hundreds of anecdotes flying around regarding Chinese buying residential property in Auckland.
''In two to three weeks, we will have some solid data on the presence of offshore buyers generally in the New Zealand market.''
One of the emails received by the BNZ from a housing builder-developer in Auckland complained about being shut out of tenders from ''what I am told were all Asian investors''. Every developer was complaining of being outbid by Asian investors on development land, the email said.
Mr Alexander said there was a lot of speculation those investors were using the purchase of development land to gain entry to the country under the investment route somehow - either directly or through an already established development business.
''If that was the case, it would not only be unfair competition, as they are paying a premium for the land to purchase residence, but also has implications to the housing market and surely won't be helping affordability,'' he said.
S&P said that with New Zealand banks funding about 37% of their lending from sources offshore, the country remained vulnerable should global financial markets seize up in another crisis.
S&P warned about a scenario where the world economy struck trouble and the New Zealand dollar, along with export prices, fell sharply.
It believed such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant rise in banks' credit losses after a build-up in housing prices and domestic credit in the period preceding the global financial crisis.
Such a turn of events would have a material impact on the financial strength of the balance sheets of New Zealand banks, although the four largest banks were all subsidiaries of Australian banks and retained their owners' AA-minus credit ratings.
New Zealand-owned Kiwibank was rated A+, while The Co-operative Bank and Heartland Bank carried BBB-minus rates. TSB Bank was slightly stronger, with a BBB-plus rating.
S&P's assessment comes at a time of growing government concern about a pick-up in residential housing prices, which is worsening New Zealand's housing affordability problem.
Finance Minister Bill English used a speech this week to outline the Government's desire to see the Reserve Bank of New Zealand use new macro-prudential tools to control banks' lending and capital adequacy ratios.
Labour Party finance spokesman David Parker said yesterday Mr English did not understand the housing problem. There were not enough modest affordable homes.
''The new tools are a necessary addition to the Reserve Bank's tool kit but they require finesse and subtlety in their design. Otherwise, they risk doing more harm than good.''
