Housing (still) matters – here's why

Economist talks about how NZ housing market works

Housing (still) matters – here's why

“Housing matters because everyone needs somewhere to live – it is fundamental to our wellbeing,” said Paul Conway, Reserve Bank of New Zealand chief economist, in a speech to the National Property Conference 2022.

Not only that, housing is also by far the most common and most valuable investment for many Kiwis. And while rent and mortgage costs are the biggest expenses for households, building houses creates jobs for tens of thousands of people who work in residential construction for their livelihood. The housing market also serves as a key link between the real economy and the financial system in New Zealand, with home loans dominating the balance sheets of commercial banks.

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These are why it is important for the central bank to understand how the New Zealand housing market works, said Conway, whose speech was focused on several RBNZ research papers on housing, published this week.

According to the research, over the years, the demand side of the housing market has been driven by strong population growth, steadily declining neutral interest rates, and a favourable tax system. The supply side, on the other hand, has been held back by strict land use regulations, as well as by a construction sector prone to boom-bust cycles, while carrying very high building costs. Due to excess demand, New Zealand has seen some of the highest house prices relative to income in the developed world.

A sense of ever-increasing house prices, along with a lack of other quality investment alternatives in the country, may have also distorted New Zealanders’ investment options.

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With the central bank tightening monetary policy and lifting the OCR to combat inflation since August 2021, actual house prices are expected to move back towards sustainable levels that are more in line with market fundamentals. RBNZ’s May Monetary Policy Statement predicted a 15% drop in house prices from their peak, which would bring them roughly back to sustainable levels.

RBNZ said that over a longer time frame, some of the core market fundamentals that determine sustainable house prices may also change. On the demand side, many Kiwis will be heading overseas to seek new experiences as the pandemic slowly recedes and international travel restrictions ease. On the other hand, immigration is unlikely to return quickly to pre-pandemic levels, contributing to slower population growth overall.

Meanwhile, urban planning rules are being freed up to unlock more housing supply.

These changes, RBNZ said, are consistent with more houses being constructed and currently high building consents translating into more actual houses. They also imply that housing market dynamics now may be different from that in future.

“For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity,” Conway said. “But the tide may well have turned against housing being a one-way bet for a generation of Kiwis. We need to keep building a new approach to housing and economic prosperity in Aotearoa-New Zealand.”