New Zealand house prices make second biggest gain among 20 developed countries surveyed in Bank for International Settlements working paper

New Zealand's nominal house prices have risen 7459% over 53 years, the second highest gain among 20 developed countries surveyed by the Bank for International Settlements (BIS).

This titbit is included in a BIS working paper entitled Interest rates and house prices in the United States and around the world. It's authored by staff from the BIS monetary and economic department, - Gregory D Sutton, Dubravko Mihaljek and Agne Subelyte. The only country ahead of NZ is Norway with a 7726% rise in nominal house prices over 66 years. Australia comes in third with a 6556% rise over 55 years.  

The paper estimates the response of house prices to changes in short and long-term interest rates in both advanced and emerging market economies.

"We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States. Our interpretation is that this reflects the importance of the bank lending channel of monetary policy in house price fluctuations, especially in countries where securitisation of home mortgages is less prevalent," the BIS paper says.

"In addition, we document substantial inertia in house prices and find that changes in interest rates and other determinants affect house prices gradually rather than on impact. This suggests that modest cuts in policy rates are not likely to rapidly fuel house price increases. Finally, we find that US interest rates seem to affect house prices outside the United States."

Sutton, Mihaljek and Subelyte pose the question; Is housing a good long-term investment? Their answer is a qualified yes.

"Nominal house prices increased on average by close to 7% per annum and real prices by 2¼% in the sample of 20 advanced economies for which there are 45 years of data on average. The corresponding figures for emerging market economies are 7% and 3% per annum over an average sample length of 15 years. The biggest single-year nominal increases in advanced economies ranged from 16% in Germany to over 50% in Italy in 1974. The biggest single-year declines from 2%, also in Germany, to 19%, Ireland, in 2009."

"One striking feature of house price growth is its persistence. With the exception of Germany, Portugal and Switzerland, advanced economies have seen nominal house prices growing by an average of at least 6% per year for 40 years or longer. In the United States, for instance, this resulted in a 13-fold increase in nominal house prices over a period of 47 years; in Norway, in a 77-fold increase over 66 years," the paper says.

"Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of nominal house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The upswings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century."

"By contrast, downswings accounted for only 8% of the advanced economy sample. They lasted on average five years, and the longest one, in Japan, lasted 13 years. In emerging market economies, upswings accounted for two thirds of the sample. They lasted on average eight years, and the downswings four years," Sutton, Mihaljek and Subelyte say.

1 In per cent; for advanced and EME aggregates, median values over the samples.
Sources: BIS residential property price statistics; authors’ calculations.

Sutton, Mihaljek and Subelyte conclude that changes in short-term interest rates seem to have a strong and persistent impact on house price growth. Additionally they say global, being US short-term interest rates not just domestic ones, seem to matter in both advanced and emerging economies.

"The larger effect of interest rates on house prices we find reflects in part the use in our regressions of a long distributed lag of interest rate changes. For the United States, our estimates for the period from 1970 to the end of 1999 suggest that a 100 basis-point fall in the nominal short-term rate, accompanied by an equivalent fall in the real short-term rate, generated a 5 percentage point rise in real house prices, relative to baseline, after three years. We find an even larger effect if we include the data through end-2015," the paper says.

"For other advanced economies and emerging market economies, we estimate that a 100 basis-point fall in domestic short-term interest rates, combined with an equivalent fall in the US real rate, generates an increase in house prices of up to 3½ percentage points, relative to baseline, after three years."

They also suggest their findings show a potentially important role for monetary policy in countering financial instability.

"While higher short-term interest rates alone cannot significantly dampen the demand for housing, slower house price growth can give supervisors more time to implement measures to strengthen the financial system. At the same time, the finding that house prices adjust to interest rate changes gradually over time suggests that modest cuts in policy rates are not likely to rapidly fuel house price bubbles."

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