Global fall in interest rates, the tax system, and restrictions on the supply of land for urban use are the main cause of higher house prices over last 20 years, but recent policy changes and reforms show promise
Te Tai Ōhanga, Te Tūāpapa Kura Kāinga and Te Pūtea Matua have published a joint paper that provides an assessment of the key drivers of the housing market over the last 20 years.
The joint paper was authored by the Housing Technical Working Group, a joint initiative of the three agencies that was established to improve our technical understanding of the housing market.
Housing Technical Working Group chair Dominick Stephens says the assessment focusses on the Hamilton Waikato area to draw insights for the rest of Aotearoa New Zealand.
“The key conclusion is that a combination of a global fall in interest rates, the tax system, and restrictions on the supply of land for urban use were the main cause of higher house prices in Aotearoa New Zealand over the past 20 years.”
Factors such as population growth and construction costs were seen as playing a more modest role.
The global decline in interest rates inevitably led to a sustained reduction in borrowing costs in New Zealand, increasing demand to buy houses.
“If land supply had been more responsive this would have sparked a larger housing supply response, moderating any initial lift in house prices and putting downward pressure on rents. Instead, restrictions to land supply meant that much of the fall in interest rates was capitalised into, or captured by, higher urban land prices,” Stephens says.
“Higher urban land prices led to higher house prices without increasing the incentive to build dwellings.”
The report also noted that when land supply is restricted, changes to the tax system will tend to affect the value of urban land rather than affecting dwelling supply or rents.
“The three agencies are committed to better understanding the interlinkages between the economy, government policy, monetary policy and the housing market, with a particular focus on social wellbeing. Our commitment is grounded in the vision and outcomes set out in the Government Policy Statement on Housing and Urban Development (GPS-HUD) released last year.
“While the paper today contained an assessment of what has happened, a lot is changing. Urban planning is being reformed to free up land supply and tax settings have been changed for investors.”
The next areas of focus for the Housing Technical Working Group will be to improve our understanding of urban land supply and the drivers of rents.
The joint paper Assessment of the Housing System: with insights from the Hamilton-Waikato Area is available at https://www.treasury.govt.nz/publications/information-release/assessment-housing-system-insights-hamilton-waikato-area.