Housing booms have the Kiwi dollar closing in on parity with the Aussie

Housing booms in New Zealand and Australia could be putting the neighbours' currencies on course to reach parity for the first time.

Both nations have seen house prices surge in recent years, but the underlying causes are fundamentally different, according to Deutsche Bank analysis.

Australia's boom is largely home-grown, whereas New Zealand's is being fuelled by record immigration. That's affecting the countries' current accounts differently.

While Aussies are feeling richer due to house-price gains, prompting them to spend more on imports and boosting their current account deficit, New Zealand is sucking more offshore capital into its housing market, narrowing its current account gap.

Currencies are sensitive to trends in the current account – a country's balance with the rest of the world – because they are a gauge of risk for investors.

"The nature of the real estate boom in Australia should have bearish currency implications because it leads to deterioration in the basic balance,'' Robin Winkler, a London-based strategist for Deutsche Bank, said in a research note. "This is not the case in New Zealand and adds to our conviction that AUD/NZD should drop to parity.''

The two currencies have never converged in the free-floating era that began in the 1980s. They came close in April last year, when the Kiwi briefly reached 99.79 Australian cents or, to express it the other way, the Aussie dollar fell below $NZ1.01.

Parity would likely pose more of an economic challenge for the Kiwis than their larger neighbour. Australia is New Zealand's second-biggest trade partner; New Zealand, on the other hand, is only Australia's seventh largest.

In Australia, house prices have risen 34 per cent over the past five years, while in New Zealand they have surged 54 per cent. Australia's current account deficit has deteriorated over that period, whereas New Zealand's has remained largely stable.

Dr Winkler said there is a significant negative relationship in developed economies between house prices and current accounts. Rising values tend to make home owners feel wealthier, leading to increased consumption and higher imports. The link is less evident in emerging economies, where foreign capital plays a greater role in housing markets.

"There is quantitative evidence that Australia fits the developed-market model, whereas New Zealand fits the emerging-market model,'' the analyst said. He didn't say when he expects currency parity to occur.

Bloomberg