What’s really behind high house prices

Dr David Law
Insights Newsletter
13 November, 2020

Prime minister Jacinda Ardern dipped her toe into the debate over rising house prices by suggesting returning Kiwis are mostly to blame for skyrocketing house prices.

Ardern is wrong to point the finger at returning Kiwi’s.

New Zealand has long struggled with housing affordability. Since 2000, real house prices have roughly trebled. Incomes have not kept pace.

The issue is complex, but a lot is known about how the housing market works. For instance, supply constraints are particularly important in New Zealand and housing demand is also strong at the moment, for various reasons.

The prime minister is correct that net migration can put pressure on house prices. All else being equal, a growing population needs more homes. But new data released by Statistics New Zealand this week suggests the role of net migration in house pricing is limited right now.

Estimated net migration in the year ended September was 67,700. However, nearly all of this (65,200) took place in the six months leading up to border restrictions.

In the six months from April-September 2020, estimated net migration totalled only 2500. The figure was almost twelve times higher (29,700) for the same six-month period in 2019.

On the other hand, Covid-19 restrictions pressed the pause button on the construction of new houses.

Completed residential construction fell by 6.3% and 19% in the March and June quarters of 2020, respectively. The number for the June quarter reflects 28 lost working days due to lockdown Levels 3 and 4.

On the demand side, it may be tempting to suggest net migration is a key driver of house price growth. After all, migration is only weakly influenced by policy makers. However, it is far more likely that monetary policy is responsible for adding fuel to this fire.

The Reserve Bank is undertaking a $100 billon programme of quantitative easing. The Official Cash Rate (OCR) is also now at a record low, reduced from 1% to 0.25% in March. These two decisions alone will lift returns on investment in housing and increase pressure on house prices, particularly as supply is constrained.

If the Government cares about fixing housing affordability, it should start by being clear on the reasons for those high prices.

Read more: “Misdirection on housing affordability unhelpful

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