This report aims to deliver the following insights and analyses:
an independent review of the factors of house price growth (HPG) in New Zealand
a range of descriptive statistics of the HPG and its drivers over the last fifty years.
Our review includes both the academic and grey literature. We provide a list of suggested future studies to improve our understanding of the factors of HPG in New Zealand.
Despite being one of the national priorities, New Zealand’s HPG has not been discussed and analysed thoroughly and the available literature does not provide a comprehensive understanding of the drivers of HPG
With an annual growth of 3.1 percent over inflation, the HPG has led to significantly lower housing affordability with a widening gap between low- and high-income groups. This has led to high economic costs to the New Zealand economy, with a minimum $1.1 billion annual cost through lower labour productivity levels.1 The available literature provides information about the impact of supply and demand factors on house prices. This provides us with an understanding of the relative cost of the factors of supply and demand capitalised into the house prices. However, the impact of the factors on house price growth, and the relative contribution of each of these factors on HPG is not clear. Most of the available literature provides an understanding of the impact of each factor affecting house prices in isolation. While there has been extensive analysis of some factors, such as the impact of regulation on housing supply, other drivers of HPG have been neglected. Table 1 shows our evaluation of the level of agreement, the strength of evidence and the overall confidence with the impact of each factor of supply and demand on HPG. We discuss this further in the following paragraphs.
|Impacts of the factors of supply||Agreement||Evidence||Confidence|
|Impact of regulations||High||High||High|
|Impact of environmental regulations||High||Low||Medium|
|Availability of infrastructure||High||Low||Medium|
|Supply chains and construction cost||High||Low||Medium|
|Impacts of the factors of demand||Agreement||Evidence||Confidence|
|Availability of finance||Low||Low||Low|
|Monetary policy and mortgage rates||High||High||High|
|Population and migration||High||Medium||Medium|
|Tax policy and housing subsidies||High||Low||Medium|
Despite the extensive focus of the literature on the costs imposed by some factors, the studies do not provide enough information to inform policy development. For example, the extensive literature on the costs imposed from regulation, does not provide robust evidence of the role of the Resource Management Act (RMA) versus the role of other planning regulation. The RMA provides a framework for sustainable management of natural and physical resources. While the RMA does not explicitly require any supply side regulation, it provides a regulatory framework for the implementation of the planning regulations. The planning regulations cite the RMA as the driver of the zoning regulations. The linkages between the RMA and zoning regulations are untested.
Some indicators of affordability, such as price to income and price to rent ratios, are overly simplified and their implications for the analysis of affordability (and HPG) in New Zealand is not clear. There are advantages in using simplified indicators of HPG and its determinant factors – particularly, for ease of understanding and high-level policy discussions. However, we observe a trend in using overly simplified indicators for policy advice, without accounting for the underlying complexities. This can lead to unintended policy outcomes.
Our review suggests that the regulatory barriers, such as building height limits and the viewshaft policies, are costly and are a driver of HPG. However, there is no robust evidence that, in the absence of regulations, the available resources (labour, capital and technology) have the capacity required for increasing housing supply.
There is extensive literature on the costs imposed from planning regulations, such as building height limits and urban growth boundaries. There is a high level of agreement that regulation is associated with high cost to the housing market (and the economy). Most of the studies provide high quality evidence supporting this hypothesis.
Our review suggests that the RMA and environmental regulations are associated with more stringent land use regulations, leading to HPG
While the studies estimating the impacts of regulation agree on the costs associated with planning regulations, the evidence on the impact of environmental regulation and RMA restrictions is limited. Our review suggests that the environmental regulations (and the RMA) add to the costs of housing. Recent literature suggests that a reform of the Resource Management system can lead to lower economic and social costs through providing higher certainty around zoning regulations, and a more permissive regulatory regime that allow more flexibility in housing supply.
However, from the available literature, we do not know the extent to which current house prices are driven by environmental regulation, inefficiencies raised from uncertainties associated with inconsistent and opaque Acts and reforms, lack of national or local direction, or poor monitoring of the system
The RMA provides guidelines for planning regulations (and zoning). Given the overlaps, it is not clear if the impacts are driven by the RMA or councils’ desire for using zoning tools to intensify.
The inefficiencies in the infrastructure planning system are drivers of high house prices, but the literature does not provide robust evidence
The literature agrees that the lack of infrastructure is a driver of planning regulations and therefore is a reason for lower responsiveness of housing supply to increases in house prices. The current literature includes discussions of:
the lack of infrastructure being the reason for costly planning regulations; and
the potential misalignment between the plans and zoning regulations
The available literature does not provide robust evidence for the impact of infrastructure on HPG.
The larger size of houses and increased construction costs, due to the introduction of new materials and the requirements of the Building Act, has been cited as a driver of HPG. The lack of suitable technology, such as modular housing, and the small scale of the construction sector are additional factors that are cited. However, the evidence is limited. It is particularly not clear how the cost of construction will change in the absence of other (regulatory) constraints.
Our review suggests that the factors of demand, such as lower interest rates and increased immigration, have been some of the reasons for the significant HPG over the last twenty years. The number of studies that have isolated the factors of housing demand in New Zealand is smaller than the number of studies of the factors of supply. This is partly because the factors of housing demand have wider economic impacts beyond the housing market and therefore it is difficult to identity policy instruments that only affect house prices. For example, a change in interest rate affects all other economic activities, as well as the housing market.
Increases in households’ mortgage serviceability, driven by lower mortgage rates, have contributed to HPG
Based on the literature, a lower interest rate increases a household’s ability to pay for a house. If housing supply is responsive to the higher ability of a household to pay, then the increase in supply avoids significant increases in house prices. But since housing supply has not been responsive to households’ higher mortgage serviceability levels over the last decade, the lower interest rates have led to higher house prices. The impact of monetary policy highly depends on the other (supply) factors. While the long-term impact of monetary policy depends on the speed at which supply can respond to demand side factors, in the short- term monetary policy will likely always have a direct impact on house prices because supply lags behind demand, and it takes time to build more homes. The evidence-based literature on the impact of macroprudential policies2, including Loan to Value Ratio (LVR), is limited.
The pull and push factors of migration include the attractiveness of the job market, the availability of amenities and facilities and the cost of living – which is highly interrelated with housing costs. This cycle in factors of migration and house price growth leads to complexities in identifying a causal inference about the impact of population growth on house price. This has been reflected in our summary of the estimated impact of increases in population on house prices (ranging between 0.02 and 12 percent).
There has been a significant decrease in the size of households over the last decades from an average of 3 persons per household (PPH) in 1981 to 2.7 in 2001 and 2.6 PPH in 2013. A growing number of households increases the demand for dwellings and leads to higher house prices. For a population of 5 million, a change from 3 PPH to 2.6 PPH is associated with a need for more than 250,000 additional dwellings. Projections suggest that the number of households will increase further because of the projected decrease in household size to 2.5 PPH by 2038.
The available literature does not provide enough evidence-based analysis of the likely impact of tax and subsidy policies
Taxes are considered as a solution to decrease speculative behaviour and to raise funds for infrastructure investments. There is a range of tax policies, including development contributions, financial contributions, and betterment taxes. Both taxes and subsidies (depending on their type) are associated with distributional effects across different income groups, types of buyers, and regions.
The current models used by the Reserve Bank, the Treasury and the Ministry of Housing and Urban Development (HUD) do not provide any extensive tool for forecasting house prices in New Zealand. Our assessment of the available information suggests that the models are not suitable for the assessment of housing policies. We are not confident that the available models provide a robust framework for the assessment of macroprudential policies. For a policy targeting the wellbeing of New Zealand population, it is critical to assess the distributional impacts of policies, which the current models do not provide.
We use Principal Economics’ Computational General Equilibrium (CGE) model to estimate the minimum impact of the existing supply constraints on the economy.↩︎
Macroprudential policies are the Reserve Bank’s policies to control the (deposit) requirements for having the credit and lead to a reduction in the number of people who can enter the market↩︎