New Zealand House Prices and the Decline in Longer-Term Financing Costs

Housing matters- the big picture: House prices in New Zealand are driven by a wide range of factors – interest rates are just one part of the big picture. A global decline in interest rates and strong population growth in New Zealand has had an outsized impact on house prices because the supply of new homes has been slow to respond. This includes both opening up new land and building new homes. Tax rules in NZ favour housing against other investments. House prices are influenced by employment and incomes, as well as bank lending rules and the availability of mortgages. House prices were boosted by falling interest rates around the world in the past decade (post GFC). The Reserve Bank of NZ moves short-term interest rates to keep inflation low and stable and support employment at its maximum sustainable level. We consider the impact of our interest rate changes on house prices and how they affect the Government policy for sustainable house prices. We do not aim to drive house prices up or to stop them falling. The factors affecting house prices have changed. Building consents are now high, population growth has slowed dramatically, interest rates are rising and we are seeing house prices cool down in 2022, after a rapid rise last year. We are carrying out a wide range of research to understand the key drivers of house prices. We need to be clear about what the Reserve Bank can and cannot do and what others could do to fix this problem, which has been many decades in the making. Key findings of Analytical Note: - The financing costs associated with home-ownership are affected by both the interest rates expected in the long term and cyclical drivers of shorter-term rates today. The empirical literature suggests that longer-term rates are more influenced by global factors while short-term rates are more heavily influenced by domestic factors such as monetary policy. - We employ a user cost model to disentangle the contributions of long-term and short-term financing costs, as well as rents, to the growth in New Zealand house prices over 2001-2022. - We find that a decline in expected longer term financing costs has dominated other drivers of the increase in house prices. - We also demonstrate that the response of house prices to permanent declines in interest rates, that feeds more into longer-term financing costs, is amplified when housing supply is less responsive to prices.