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4.2 Housing market impacts

A concern has been house prices rising faster than other prices in the New Zealand economy, leading the Reserve Bank to run tighter monetary policy than it would have otherwise.[123] This focuses policy attention on: the responsiveness of housing supply (town planning and building industry issues); biases in domestic policy settings that potentially favour housing as an investment (taxation); and immigration, including the return migration of New Zealand citizens, as a potential source of housing market pressure.

Migration affects housing demand, since immigrants require accommodation and emigrants vacate accommodation. Using census data, Sanderson et. al. (2008) found that of 109,000 new households created in New Zealand between 2001 and 2006, 42,000 were migrant couples, 21,000 were mixed New Zealand-born/migrant couples, 36,000 were New Zealand-born couples, and 3,500 were single migrants. Over the same period, the number of New Zealand-born single households decreased by 40,000, likely reflecting net emigration.[124]

Migration also affects housing supply and prices. The extent to which a rise in net migration leads to changes in supply, along with differences in preferences and wealth between locals, migrants and emigrants, and prevailing economic conditions, will determine the impact on housing prices.[125]

Migrant housing preferences evolve over time. When immigrants first arrive, they are more likely than the New-Zealand-born population to rent housing. By the time immigrants have lived in New Zealand for 15 years, their housing choices are similar to those of native-born New Zealanders.[126]

Across the OECD housing prices are strongly correlated with population growth.[127] There is also a strong correlation between population growth and residential construction activity. As noted, New Zealand has had strong population growth, with a material contribution from immigration. Migration tends to be pro-cyclical: people choose to come to New Zealand, or to remain here, when economic conditions are favourable.[128] House prices also rise with economic confidence since confidence increases expected income growth and thus housing demand.[129] Rising house prices thus reflect the combined effects of confidence and immigration, leading to difficulty in establishing causality. The evolution of house prices and migration in New Zealand is shown in Figure 3.

Figure 3: Changes in Real House Prices and Net Migration
Figure 3: Changes in Real House Prices and Net Migration.
Source: Statistics New Zealand and Reserve Bank of New Zealand.

Using a structural vector auto regression model, Coleman and Landon-Lane (2007) found that in the short term a net migration flow equal to one percent of the population led to an increase in house prices of around 10 percent at the national level. More recent work by McDonald (2013) using similar models broke migration numbers down by arrivals or departures, New Zealand or foreign citizenship and, for foreign citizens, by their country of origin. McDonald found that a one percent increase in the population caused an 8 percent increase in house prices over the following three years.[130] These estimates are surprisingly large compared with both longer-term cross country estimates (which suggest a relationship between population growth and house prices closer to unity) and international evidence on the link between migration and house prices (which suggest a positive migration shock of 1 percent of population leads to a 1-2 percent increase in house prices).[131]

Coleman and Landon-Lane suggest their work may overstate the causal relationship because it does not fully capture future income expectations that drive both migration flows and house prices.[132] Since housing supply does not adjust immediately when there is a net increase in migration, prices go up initially. They remain high because by the time new houses have been built, everyone thinks their own house is more valuable.[133] In this way, immigration can have an upward ratchet effect on expectations of future house prices, especially where repeated migrant inflows lead to further initial price rises. This may be a contributing factor to New Zealand's high house prices relative to income by OECD standards.[134]

Stillman and Maré (2008) suggest estimates of the causal impact of migration will also be biased upwards if migrants are attracted to areas with improving prospects and consequently with rising house prices, or if migrants tend to come to New Zealand when the economy is doing well and house prices are increasing. McDonald (2013) also notes that a strong relationship between migration and house prices could in part result from international factors outside the model which affect both migration and house prices at the same time (such as the performance of the Australian economy).[135]

Research on regional and local markets has found smaller or marginal impacts on house prices. Grimes et. al. (2007) found a significantly greater effect on house prices from an employment shock at the national level when compared with a region-specific employment shock. Looking at more local housing markets, Stillman and Maré (2008) found only a weak relationship - with a 1 percent increase in the population in the local market associated with 0.2-0.5 percent increase in house prices.[136]

While national analysis may overstate macroeconomic effects, local and regional analysis probably understates effects, by taking insufficient account of how local markets interact. Migration into a specific locality may have a limited impact on local prices if it increases demand for housing more broadly. For example, people living in an area with a high inflow of migrants may seek to purchase houses in other areas. If local, regional and even national house markets are close substitutes for each other, then attempting to isolate the effects of migrants to a particular local market may provide limited insight into the overall effect of migration on house prices.[137]However, as long as differences are not fully adjusted away, even if the regional aggregation is imperfect the Stillman and Maré regression should still pick up some of the relationship between immigration and house prices. A large region with higher immigration should have more sub-regions with high house price growth and high immigration.[138]

Although agreement between observable national and regional results would give greater confidence, it is possible to have large effects at the national level that are hard to identify at the regional level. On balance, the available evidence suggests that migration, in conjunction with sluggish supply of new housing and associated land use restrictions, may have had a significant effect on house prices in New Zealand.[139]

Notes

  • [123]See for example Wheeler (2013).
  • [124]Hodgson and Poot (2010), p. 10. Sanderson et. al. (2008) concluded that migrant characteristics (income, family configuration) explain differences better than migration status. It would be interesting to see whether this conclusion still holds using the most recent census data.
  • [125]Reddell (2013a) argues that relatively too much weight is put on considering house prices, and too little on considering residential investment. More building would reduce house price effects, but put even more pressure on real resources. See section 5.3 for further elaboration.
  • [126]Sanderson et. al. (2008).
  • [127]Andrews (2010), p. 24.
  • [128]Reserve Bank of New Zealand (2007).
  • [129]Goodhart and Hoffman (2008).
  • [130]McDonald (2013), p.4, found that different types of migrants may have different impacts on the housing market. When net migration is separated into arrivals and departures, McDonald (2013), p. 7, found that arrivals have larger house price effects. Real house prices rose by 4 percent when monthly arrivals increased by 1000 people, but only fell by 2 percent when departures fell by the same amount. In addition, changes in New Zealand citizen migration had smaller effects than changes in migration by foreign citizens: a 1000-person rise in the net inflow of foreign citizens led to a 4 percent increase in house prices, while a similar net fall in New Zealand citizen departures raised house prices by around 2 percent. McDonald suggested this may be because New Zealand citizens are able to move in response to economic conditions whereas foreign citizens are more constrained in the timing of their movements (ibid, p. 9).
  • [131]In a classic study based on the experience in Miami following the ‘Mariel Boatlift' which raised population by around 7 percent almost overnight, Saiz (2003a), p. 20, concluded that “an immigration inflow amounting to 1 percent of the city's population is associated with increases in housing values and rents of about 1 percent.” In a broader study of inward foreign migration on US cities in the 1970s, 1980s and 1990s, Saiz (2003b) found the overall effect of an immigration inflow of 1 percent of the initial population raises rents and prices by 0.8-1.6 percent.
  • [132]McDonald (2013), p. 13, also discusses this possibility.
  • [133]These expectations are based on previous high prices, and letters from Quotable Value confirming their own property has a higher Government valuation - which will have been imputed on the basis of recent sales prices.
  • [134]OECD (2013b).
  • [135]McDonald (2013), p 13.
  • [136]In contrast with McDonald (2013), p. 10, who found a one percent population increase comprised of foreign citizens increased house prices by more than 10 percent, Stillman and Maré (2008) found returning New Zealanders had larger impacts on house prices than foreigners. Both studies found a population increase comprised of returning New Zealanders raised house prices by 6 to 9 percent.
  • [137]Stillman and Maré (2008), p. 5, assume that this process of equilibration is only partial within the timeframes that they observe. If this is correct, “the relationship between local population change and local house price change still provides a meaningful indication of the impact of population movements on local housing markets”.
  • [138]Auckland had most of the population growth during the study period, but its house prices did not increase by as much as would have been expected relative to other cities if most house price growth was immigration related.
  • [139]The report of the New Zealand Productivity Commission (2012) analyses factors affecting housing affordability and supply in New Zealand.
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