A high-powered government working group has concluded that declining interest rates, the tax system and restrictions on land supply for housing were the main drivers of higher house prices over the last 20 years.
The Housing Technical Working Group is a joint effort by The Treasury, the Reserve Bank and the Ministry of Housing and Urban Development. It has been studying the drivers of house prices and rents and the impact these have had on New Zealand households.
It's initial report, released today, 18 August, focused on the housing market in the Hamilton-Waikato area "to draw insights for the rest of Aotearoa New Zealand," according to the Group's chairman Dominick Stephens, who is also Chief Economic Adviser at The Treasury.
"It is commonly asserted that a lack of dwelling supply relative to population has been a key driver of rising house prices in recent decades," the report said.
"But physical supply and demand should affect rents as well as prices, and over the past 20 years house prices have risen more than rents.
"Our key conclusion is that a combination of a global decline in interest rates, the tax system, and restrictions on the supply of land for urban use have led to a large change in the ratio of prices to rents and are the main cause of higher house prices in Hamilton-Waikato, as well as other parts of Aotearoa New Zealand, over the past 20 years."
The report concludes that although falling interest interest rates had the biggest impact on house prices, that impact would have been mitigated if the supply of new homes had been greater.
"In the context of restrictions to land supply, the key driver of house prices over the last 20 years has been the global decline in interest rates that significantly reduced the cost of debt servicing and increased home buyers' ability to pay," the report said.
The resulting increase in demand inevitably caused an initial lift in prices.
"If land supply had been more responsive, then over time that initial price rise would have incentivised a larger housing supply response, causing prices to retreat and rents to fall below their initial levels relative to income.
"This did not fully happen because land supply has been restricted.
"Due to restrictions in land supply, much of the global decline in interest rates was instead captured into, or captured by, higher land prices.
"As land prices rose alongside house prices, there was less incentive to build new houses, and less of a supply response.
"Consequently, the initial price rise caused by lower interest rates persisted, and the longer run retreat in prices and decline in rents did not materialise.
"Evidence supporting our conclusions includes the fact that prices rose much further than rents, that the price of land rose much further than the cost of construction of new dwellings, and direct indications of restricted land supply," the report said.
The report also concluded that the supply of housing relative to demand from population growth, had a bigger impact on rents than it did on house prices.
"Until recently rents in Hamilton-Waikato had moved broadly in line with, and at times slower than incomes over a long period," it said.
"Trends at a national level were similar.
"But since 2015, rents have increased sharply across the Hamilton-Waikato region as population has grown faster than the supply of dwellings.
"The worsening availability and affordability of rentals has increased financial stress and homelessness.
The increase in rents since 2015 is likely to have had a larger negative impact for the wellbeing of society's most vulnerable members than the large increase in house prices."
However the report did see some relief coming for both renters and home buyers.
"Interest rates are a key driver of house prices," it said.
"It follows that the recent sharp rise in mortgage rates is the main cause of the recent decline in house prices, and are likely to dampen house prices further.
"Because rents are more clearly related to the local balance of supply and demand for dwellings than house prices, we expect a moderation in rent price inflation at a national level.
"Since 2020, population growth has been very low and construction activity has accelerated.
"This combination is diminishing the housing shortage that built up last decade, and in time this partial alleviation of the housing shortage is expected to reduce the rate of rent inflation," it concluded.
The full report is available here.
The comment stream on this story is now closed.
- You can have articles like this delivered directly to your inbox via our free Property Newsletter. We send it out 3-5 times a week with all of our property-related news, including auction results, interest rate movements and market commentary and analysis. To start receiving them, register here (it's free) and when approved you can select any of our free email newsletters.
97 Comments
Ye gods, how do I get onto one of these working groups? Do I have to suffer some kind of traumatic brain injury to qualify?
I dropped a large plank of wood on my right foot yesterday.
In other news, my right foot was suddenly very sore yesterday. I have no idea why.
.. sorry ... but , if you dropped a large plank of wood on your foot , then you're obviously working ... ipso , overqualified to be on a working group ... it's kind of a catch22 thing ...
Any objections will be responded to by Megan Woods ... the resident expert on woods ...
The only way I would be satisfied with the end of this stupid story ,- when I see handcuffs on Orr's and/or Robertson's hands. Criminals .
LOL. But it is so true. They hardly needed to waste all that money and time for a working group. It is just getting stupid
Perhaps waiting for more info is the go-to to avoid action. Though, in fairness Labour and National's Willis and Bishop have been good on pushing councils to stop their obstructionist, authoritarian NIMBY behaviour. (The danger is Luxon looks like pandering to NIMBY entitlement mentality again.)
General Comment,
As I read this, I was composing my comment which you have rendered superfluous. I can only wonder how much time was spent on this ridiculous exercise.
You'd probably be surprised at the selection criteria
"A high-powered government working group has concluded that declining interest rates, the tax system and restrictions on land supply for housing were the main drivers of higher house prices over the last 20 years."
WOW!! Who would have thought this! Amazing! Completely out of the blue! Nobody could have possibly foreseen these findings!
Isn't it amazing that we have these high-powered government working groups. What would we possibly do without them!
Well I know most, if not all, on this site, and most, if not all, in the general public knew this. But obvious that no one in the current government knew it and they wonder why we are, where we are...sigh.
I imagine these working groups are filled with corporate buzzwords from wannabes.
"Let's sit down and have a high level discussion around the pain points and have a deep dive into our core competencies. Take some time to drill down into the big data and see where we can move the needle to generate some quick wins."
Don’t forget ‘pivot’
Or finding synergies... gotta find those synergies
Do you mean integrated solutions?
... an " learnings " ... we must be open to new learnings ...
Here are the homepage and article headlines to this story:
"Government working group concludes...
...falling interest rates and restricted land supply responsible for high house prices" (Homepage)
...lack of housing supply relative to population a key driver of rising house prices over recent decades" (Article)
Two distinctly different messages.
Restricted land supply??? What are looking to achieve by paving over everything?
We need a firm and restrictive population policy. It seems to be whispered everywhere yet politely ignored by our politicians.
A managed population. That always seems to work out good.
It's managed now... to ensure growth.
Growth, replacement. Given how long a generation takes to play out, you'd need a fairly large buffer. I guess you could set future migration policy based on today's birthrate, not let people out, and restrict how long people live for.
Unmanaged growth works out even better. https://eartheclipse.com/environment/problems-of-overpopulation.html
Yeah so populations world over are stalling and falling. That's primarily because of urbanisation, was that planned or just happenstance?
Global population growth one Germany every year.
From Stats NZ , our total urban area is around 237500 hectares ( all towns & cities combined , 2021 ) ... the total land area of the nation is 27 million ha. ... so , we're hardly paving over everything .. less than 1 % , so far ...
Remember the orchards in Albany, the crop growing areas in southern Auckland and other parts of NZ?
What are we achieving with the growth? How much arable land has been lost to subdivisions over the last decade or so?
Good market garden land in south Auckland...NUTTS
Towns have been built near arable land historically because transport by foot (or 4 feet) limited the availability of labour. Building houses on rubbish quality soil wasn't an option because they would be too far away from the farms. A change in thinking is required now we have different jobs and transportation. New towns and cities built on marginal soils are the answer, with good transport options available so the residents can get to work.
I'm starting to change my mind about Wellington - it's a perfect place for building homes because the land is largely useless for anything else but trees or earthquake insurance.
... or politicians.
Nah. Less than 1% of NZ is built up. We have half the population density of the US. I love the smell of fresh asphalt in the morning.
Nah. Less than 1% of NZ is built up. We have half the population density of the US. I love the smell of fresh asphalt in the morning.
Love your work Power but the only future I can see that might satisfy you would be like the monkey scene of Space Odyseey 2001.
So no mention of the availability of credit as the drive?
Several factors they have left out:
- Population growth (migration policy)
- Reduction in social housing (and substituting with accomodation supplement)
- Lack of infrastructure spending
Anyone might be inclined to think it was predetermined.
They were looking for the main causes, not every cause.
There's also the rather horrendous cost of building, driven by a lack of qualified workers and an insane level of rules and regs. Some might also throw in supplier duopolies and cartels, which is also true, but not as much of a contributor.
It's all about finding where we want to sit on the balance board between "wild wild west" and "cotton wooled nanny state".
I made a submission to the building code survey (there are actually a lot of things the Labour government are doing behind the scenes). I said why not have 2 types of consents, the current process where council assumes responsibility and hence goes OTT to make sure it’s done right, and a streamlined process where an inspector just turns up a couple of times to make sure it’s safe. In the latter it would be noted on the council files and must be stated on sale and purchase agreements. It might not do much for new houses as it would probably pay to do it right, but it would definitely lessen the load for council regarding changes to existing houses, garages, minor dwellings, etc.
For sure, anything I've every bought has been under the assumption of buyer beware.
The insurance companies present a problem though, as they now require a far greater degree of compliance. I've dealt with people who've been unable to get insurance (and therefore a mortgage) unless their roof has all the nails removed and refixed with screws. Is that really necessary? Roofs been on for 50+ years.
Good point, it’s actually a very difficult area.
I do wonder if insurance companies would do a better job than councils, maybe the builder has to take out an insurance on a new build that covers any serious defects for 30 years or something. Insurance companies are good at measuring risk, and they would have much more ability to charge premiums based on the quality and experience of the builder, the complexity of the build, etc. they could do inspections when they are really required based on risk rather than just ticking a clipboard.
well, those roofs are 50+ years old & past performance is no predictor of future results.
Did this to my 45 year old roof last summer. Few spots where the old nail heads popped off as I walked on it to remove them. Another 5 years and that would have been prevalent. If over 50 years old roof I'd say the insurance company was probably right. Iron blowing around in a storm isn't a great thing.
If it's been maintained then it could last indefinitely. There's no grey area, it's just blanket nails=no.
- Animal spirits. The widely held idea that the RBNZ has got our backs, the government would never let prices fall.
Speculative Individuals buying multiple existing residential properties taking full advantage of shortages need be stopped and limited in these times (unless adding new to supply) until affordable / sustainable for non property industry people.
Media propaganda inciting greed and fear such as One Roof and Banks funding leveraged price increases based on conflict of interest increased paper value from the property industry itself! Need to stop the damaging Greed.
People working in real productive jobs can't financially compete, forced to take on unsustainable debt / risk. It's not fair the Tax payer is left to pick up the bill from these greedy property investors and Banks that take full advantage of the situation and are causing irreparable damage to New Zealanders lives.
Ofcourse loose credit creation into residential mortgage was never the reason !
Who knew?
Housing left out of cpi anyone?
just the most expensive thing you will need and buy( if lucky)
Pretty hard to call it a consumer good though. Rent obviously is.
The cost of existing houses, land and the cost of servicing a mortgage were included in the CPI until Bolger and Shipley removed them in the 90s.
Government policies have made the outcome of unaffordable housing inevitable.
Any report that does not state this as fact is BS.
It is no accident, it was all by design.
This report appears to confirm what most of us already know. Not the reasons why it happened, but that it did.
It was deliberate.
Eh? Deliberate would imply a conductor. This is a number of bad or ignorant calls all coming together.
I actually think a lot of people lost their minds with the Rona and bought property like it was the fall of Rome.
Spot on. It was deliberate.
Bolger and Shipley removed the cost of land, existing houses, and the cost of servicing a mortgage from the CPI in the 90s.
So house price inflation could skyrocket without an increase in interest rates to counter that increase.
Never was such an insidious plan constructed so deliberately.
I was led to believe it was the seemingly unfettered ability of banks to pooff debt into existence and then direct it into a particular speculative asset market (or homes as we used to call them..)
97% Owned: How is Money Created
Good link, thanks.
Doesn't even get a mention. Always the case. Therefore, you know that they're not really wanting to tell the truth.
"A high-powered government working group has concluded that declining interest rates, the tax system and restrictions on land supply for housing were the main drivers of higher house prices over the last 20 years."
Duh!
Summarised -
That unless we all live like battery hens to conserve the gobbling up of our main income earners productive resource (dairy land) we are at peak people.
Popn control now please Minister.
Wonder what that invaluable report cost the taxpayer ?
it was an investment, not a cost ...
be thankful a Govt. working group has reached the right conclusion - often they dont - and therefore a better late than never policy solution that might be effective - I said might and maybe a 10% chance of this given Megan Woods is involved in decision processes
lack of land also means there were restrictions on building up and infill - and unfortunately councils are still trying to stop this happening for all sorts of reasons
But if they came to any other conclusion, they would have been wrong.
The only thing this working group have shown is why the goverment have not solved the housing problem.They need to pay people to tell them the obvious
In other breaking news the Government has determined breathing and drinking water can promote good heath.
Am pleased our taxes go to employ only the best and brightest.
So...abolish the RMA.
No one is comparing Auckland to Prague anyway, our cities are ugly so they may as well be cheap.
The elephant in the room is that over a million permanent migrants arriving over the last 20 years has led to that demand, not just interest rates. Rents and house prices were manageable before we launched out large-scale non-citizen migrant programme in the 1990s. The land supply issues were largely still there, the RMA is in some ways a convenient scapegoat.
The policies in place where sufficient while managing population growth that was near static. The big mistake was thinking that the RMA could cope with rapidly expanding housing supply, it should have been abolished long ago.
One can only conclude that most of the working group, are Wellington based, otherwise they wouldn't have overlooked another significant factor, the ridiculous wages that Wellingtonians earn. WHY should Wellington houses, damp, cold, rotten, be worth so much, only one reason and its not low interest rates, its how much more than the rest of the country these boffins earn.
Stating the obvious is one thing, taking this long to publish their findings, incredible, sounds like "gliding on" is alive and well in our public service
Hard to see that being a significant factor
It totally is, wellington houses are rubbish, affordability depends on income as well as interest rates, both are part of the equation, do you live in wellington , is that why the pushback
Totally agree. And the bureaucracy there, many of whom earn well north of 100K (I know for a fact that there are many 200K+ income households, often 'bureaucracy couples'), has swollen massively in the past 7-8 years.
the very people who were in this working group are probably 180k plus, with a second professional income not far behind, total 300k for the household.
I know of hundreds of contractors in their 30s getting 200k working for any one of dept of labour, dept of health, dept of education, switching every 6 months for another 20k thanks, where else in the country is that sort of money available to FHB, not Westport, not Timaru, not a whole lot of places where exactly the same interest rates apply to a borrower, sections are no more available than wellington, and yet the prices are less than half Wellington, answer pay rates.
Where did the idea of removing interest deductibility for investors come from? Answer, a post Christmas bar BQ, when one of these boffins was on holiday. Incredible if you think about it ,but its true!
"But physical supply and demand should affect rents as well as prices, and over the past 20 years house prices have risen more than rents." Interesting conclusion? So it wasn't the fact that what was regarded as an acceptable income stream on all sorts of investments collapsed, along with all the asset bubbles being blown?
This working group - are they made up from a bunch of year 8 school kids?
"Government working group concludes lack of housing supply relative to population a key driver of rising house prices over recent decades"
Duh.
But the point is its not just lack of housing as National would have you believe "we just need to get rid of the RMA" is their only policy. The cost and availability of credit was the leading cause which was exacerbated by the restricted land supply, excessive immigration and a favorable tax system
You have it back to front, the restrictive land supply is the leading cause, ie the restrictions are an ignition to the lack of supply fuel. Everything else is just an accelerant.
Other jurisdictions with less restrictive land supply had the same loose credit and high immigration, and yet their house prices remained low relative to income, and stable.
Which jurisdictions are you referring to?
Texas is one example in the US, or even Germany/Switzerland/Austria with a slightly different approach but still lower median multiple,
Up until the early 1990s, historically in both NZ and Texas, the median house price multiple had always been 3x median income. Texas is still around that mark whereas NZ is now 8x plus and Auckland even worse.
I was wondering what meaningless work Zorro has been doing since he left Westpac.
And to rapturous applause, a government working group next concluded that one plus one does, in fact, equal two.
Government working group concludes lack of housing supply relative to population a key driver of rising house prices over recent decades
I find this title a bit misleading. From further down in the article:
The report concludes that although falling interest interest rates had the biggest impact on house prices, that impact would have been mitigated if the supply of new homes had been greater.
Our current housing bubble is a result of poor monetary policy. Sure, the unmitigated disaster which was Kiwibuild didn't help, and neither did raising immigration to record high levels despite campaign promises to do the complete opposite. But the main driver has been the cost and availability of credit, combined with major tax and cultural incentives to use that credit to buy houses.
How many immigrants have we had over the last two years?
None, but I'm not quite sure what the point you're trying to make is here.
Let me guess. Lowest immigration in the last two years, yet had the highest house price increases.
Correct, which illustrates my point. The housing bubble has been driven primarily by the cost and availability of credit, not a lack of houses being built or an increase in the number of people wanting to live in one.
But only because of the restrictions in the system, the major one being land. It takes 3 to 5 years for large-scale developments to come out of the ground due to the restrictions on the system, so while you can turn off the immigration tap quickly, other higher costs like land were baked into the system from what they had paid in the past, and the committed costs until that point.
If these restrictions are removed from the system, then the supply curve will more equally match the demand side, and be more reactive and in time both on the way up and the way down.
Cheap credit is a multiplier if restrictions exist, and are not where they don't exist.
That's why in jurisdictions with fewer restrictions, loose credit has very little effect.
genius --- how the hell do i get this type of gig -- reduced supply and cheap money = high prices WOW
"Because rents are more clearly related to the local balance of supply and demand for dwellings than house prices, we expect a moderation in rent price inflation at a national level."
In my opinion, rent price inflation will be significantly affected by the results of the 2023 election.
In NZ private landlords supply more than 80% of rental properties.
If National/ACT win the election private rental supply is likely to remain significantly higher than if Labour wins.
The main reason is that interest deductibility rules will have a big impact over the next 4 years on whether private landlords sell. The pressure will increase dramatically if the rules are not reversed after next year's election which National/Act has promised to do.
For rental properties acquired before 27 March 2021, the ability to deduct interest will be 75% (yr ending 31 Mar 23), 50% (yr ending 31 Mar 24), 25% (yr ending 31 Mar 25), 0% after that.
If the supply of private rentals remains higher (ie with interest deductibility rules reversed) the more likely we will see a moderation in rent price inflation, otherwise rent prices are likely to keep increasing at a higher rate.
Renters have been forgotten about by this government. Instead the government's focus has been on first homebuyers but that hasn't worked as housing prices have become much more unaffordable.
oh yeah cause the status quo under the previous National government was working so well
A shame the article didn’t go into how ‘the tax system’ contributed to the insane house prices we are currently experiencing. Throughout the books that were published and the lectures and training courses that were available led people to the tax loopholes/advantages in being able back then to write off your interest payments against your personal income. I personally know of 2 workmates who took advantage to the tune of 11 and 23 properties respectively. One of them told me it was like buying a farm ‘one paddock at a time’.
You can't set off residential property investment losses against your personal income any more.
"In the context of restrictions to land supply,...."Due to restrictions in land supply, much of the global decline in interest rates was instead captured into, or captured by, higher land prices.'
I can see by the response of many, that the penny still hasn't dropped, ie until you get/understand and correct this land issue, everything else that happens is a reactive response to this, and it can never be an effective enough response to counter the damage it causes, and in fact, only acts as a multiplier to the damage.
Also once you understand this, it puts everything else into context, and you can see why, if Govt. does X, then the result will be Y, which is usually to make the problem worse.
And we are now at a point where there is only going to be pain for many in correcting this. All the Govt. is doing now is looking to see where they can shift blame.
My poorly thought out idea would see a population target of 5 million. With plus/minus 500k. This would allow for adjustment for the age and skill demographics moving through the system. Not sure how to fit returning citizens into that framework but the intention is to create a stable and sustainable economy.
"It's initial report, released today, 18 August, focused on the housing market in the Hamilton-Waikato area"
You'd think the first place they'd look is Auckland. House price inflation has surely been greatest there.
Also, the reserve bank lowering the OCR hasn't been mentioned at all! House prices went up about 30 to 40% in the year following March 2020. Surely the QE and various lending programs like FLP has contributed to house price inflation?
Under Hardaker the HCC deliberately constrained land consents for 6 years, because they wanted house prices to take off to match Aucklands. This had two effects: the desired (Hamilton prices took off), and anyone who could afford to relocated to nearby towns in Waipa.
It's a pretty good example of the effect of land restrictions, and 1/10 the size of Auckland.
The only thing this working group has confirmed is that they are all clowns
Truely goundbreaking findings. Fantastic work, everyone deserves to pat themselves on the back...
Unless someone can tell me a better way to spend tax dollars, I think we need to form a new committee and have a committee meeting to discus the findings of this exceptional and world class report. BTW we also need a new committee to discuss and explain why new tax laws around tax deductability exempts "built to rent" if the development totals up to 20 or more units and probably need a newer committee to explain why not include developers who build "built to rent" with fewer than 20 units- do i smell tall poppy syndrome here?
Here are the homepage and article headlines to this story:
"Government working group concludes...
...falling interest rates and restricted land supply responsible for high house prices" (Homepage)
...lack of housing supply relative to population a key driver of rising house prices over recent decades" (Article)
Why two different messages?
Money well spent by Labour then… (hiring the high-powered working group)
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.