The Causes and Economic Consequences of Rising Regional Housing Prices in New Zealand

Over the last generation, house prices and rents have risen more rapidly than incomes in New Zealand. Regional house prices have also diverged significantly, with Auckland and Queenstown in particular rising above the rest. This paper explores the causes and economic consequences of recent increases in regional house prices in New Zealand. I demonstrate that recent house price increases in New Zealand are due in large part to rising house price distortions, which reflect ‘wedges’ between house prices and underlying costs of supply. These distortions are largest in Auckland, Queenstown, Tauranga, Hamilton, and Wellington. They arise due to the collision of rising demand for housing, due to factors such as population growth, availability of mortgage credit, and tax policies that incentivise property investment, with housing supply constraints, such as zoning rules that limit new subdivision, limit redevelopment of existing sites, or require large lot sizes and costly features such as on-site carparking. Regions with larger house price distortions, indicating the presence of binding supply constraints, appear to have experienced larger increases in house prices and rents in response to migration shocks. Rising house price distortions have large economic impacts due to misallocation of labour away from high-productivity regions in New Zealand, in particular Auckland and Wellington, and increased net migration of New Zealanders to Australia. To quantify these economic costs, I calibrate a spatial equilibrium model using regional economic data for the 2000-2016 period and use it to investigate the effect of counterfactual scenarios in which house price distortions had not increased in recent decades. My ‘upper bound’ estimate is that comprehensively removing constraints to housing supply would have increased New Zealand’s total economic output by up to 7.7%, increased per-worker output by 0.9%, and eliminated recent net migration outflows to Australia. More plausible counterfactual scenarios would result in smaller, but still economically meaningful, gains on the order of one to five percent of gross domestic product.