The head of the Reserve Bank is urging would-be homeowners to exercise restraint at auctions, saying they exist to inflate the price for the buyer by encouraging buyers to act irrationally.
Speaking to The AM Show on Thursday, Governor Adrian Orr stopped shorting of saying they should be banned - but blamed them for at least some of the recent rapid rise in house prices.
"Any type of market that creates a frenzy or the FOMO, the fear of missing out, does create irrational behaviour.
"Don't get caught up in it - understand yourself, understand your earnings power. That's unrelated to who might be standing in the auction beside you, and hold strong. Don't get caught up in the frenzy."
On Wednesday the Reserve Bank chose to keep the official cash rate at 0.25 percent - the record-low cost of borrowing being blamed by some for the double-digit percentage growth in house prices over 2020, when the rest of the economy struggled with the effects of the COVID-19 pandemic.
Auctions are becoming an increasingly popular way of selling property - Harcourts said in August last year, 16 percent of all sales were done via auction - up from 10 percent a year earlier. In Auckland - one of the world's most unaffordable cities, according to recent international research - it's almost a third, nearly double what it was in 2019.
"There's many, many ways of selling an asset - it's called advertising," said Orr. "People want to create this sense of scarcity, this sense of urgency, because that maximises the price that the seller can make.
"You have to think about, as the buyer, you don't have to be involved in that. You don't have to own your house today. You can sit and wait, you can continue to rent, you can do alternative things with your money."
The median home in New Zealand now costs about seven times the median income - in Auckland it's 10, the fourth-highest ratio in all the countries looked at by analysts Demographia in their annual report, which came out earlier this week.
Orr said current price inflation is likely not sustainable, and anyone looking to invest now needs to know that.
"It doesn't mean you're looking at a sudden adjustment - it just means that don't expect forever, capital gains, capital gains, capital gains - it might actually go flat for a long time, whereas other investments may not. Think about those other investments."
If there is a bubble burst, investors who fail to get out in time will be hit hard, Orr warns.
Despite criticism that low interest rates are driving lending to property investors, Orr said the Reserve Bank was just a "bit player" and could only do so much.
"When interest rates are low, asset prices tend to get inflated and Kiwis, their favourite asset is the house. And it's been investors primarily getting in and getting carried away.
"Yes, we are concerned, and you saw us move very recently when you saw us increase the loan-to-value restrictions, especially for investors.
"We're saying look, tai ho here, folks - there is no free lunch, there is no one-way bet when it comes to any investment. When prices are so far stretched beyond the earnings of the household, that is a sign you've gone too far."