MACROECONOMICS IN THE GLOBAL ENVIRONMENT BUSINESS CYCLES It

MACROECONOMICS IN THE GLOBAL ENVIRONMENT

BUSINESS CYCLES It is widely believed that there is currently a bubble in Auckland house prices (although this claim is debatable, take it as given). Explain the risks of the housing bubble to the New Zealand economy. Use appropriate theoretical tools to motivate your answer

Solution

High debt levels combined with the city\'s changing market are potentially a danger, particularly if borrowers\' incomes fall, migration levels drop and demand falls away, investor buying decreases or mortgage rates rise.

There is a growing risk of a correction to Auckland house prices, which could have a large impact on the financial system due to the high level of household indebtedness.

Tax measures related to housing could be considered to reduce incentives for leveraged real estate investments by households. Such measures could help redirect savings to other, potentially more productive, investments and, thereby, support deeper capital markets