The Treasury is changing the methodology it uses to forecast house prices by putting more weight on the impact of interest rates.
Its chief economic advisor Dominick Stephens told Parliament’s Finance and Expenditure Committee of the change on Wednesday, explaining the Treasury is accordingly reducing the relative weight it gives to physical supply and demand factors.
He noted how since the onset of Covid-19, the number of new houses built has increased and the number of people who have migrated to New Zealand has decreased, but still house prices have shot up.
The Treasury has always factored interest rates into its house price forecasts, but Stephens acknowledged it hadn’t put enough weight on this factor.
The Treasury at the May 2021 Budget forecast CoreLogic’s Quarterly House Price Index rising by 17.3% in the year to June 2021. But as it turned out, the index rose by a whopping 29.0%.
Interest rates are such a big deal because land supply is so inflexible
Speaking to interest.co.nz, Stephens couldn’t put numbers on how the Treasury had altered weightings given to different influences on house prices, but characterised the change as “meaningful”.
“I do think all forecasters in New Zealand need to consider the evidence of the past couple of years,” he said.
“The past couple of years have changed the information set available to us. We hadn’t really seen a period before where interest rates diverged so radically from physical supply/demand factors.”
Stephens said the Treasury made the change following research it did with the Reserve Bank (RBNZ) and the Ministry of Housing and Urban Development. The three agencies came together to form a Housing Technical Working Group in June.
He said the group concluded, “The biggest driver of house price increase over the past 30 years in New Zealand is a decline in global interest rates in the context of longstanding issues around the supply of land in New Zealand…
“The less flexible land supply is, the more you see interest rate changes affecting prices.
“This is longstanding issue in New Zealand, and I think that’s why the Treasury is quite focussed on the supply of land in our advice [to the government] around housing.”
Stephens said the Treasury’s new model was used to forecast house price in its Half Year Economic and Fiscal Update, published on December 15.
It forecast CoreLogic’s Quarterly House Price Index falling by 0.2% in the year to June 2022. The index rose by 5% between the June and September 2021 quarters, accordingly to the latest available data.
Could this ultimately affect the way the RBNZ sets interest rates?
Interest.co.nz has asked the RBNZ whether it has likewise changed the method it uses to forecast house prices. The Bank is yet to respond.
The RBNZ in August conceded its house price forecasts had consistently undershot reality over the past decade, thanks to immigration levels being higher, and interest rates lower than expected.
“Since 2010, on average our forecasts for annual house price inflation one year in the future have been out by 5.2 percentage points,” the RBNZ said in commentary prepared for the Finance and Expenditure Committee.
Green Party committee member, Chlöe Swarbrick, said Labour Party members have blocked 22 requests she has made for the Treasury and RBNZ to appear before the Committee to discuss their house price forecast methodologies.
Asked what she made of the information Stephens shared, Swarbrick said, “This is the first insight we have into what’s going on there and I hope to get more out of it with follow-up questions.”
38 Comments
Now they are putting out this research. Well they been sleeping at the wheel all this time or just when time comes to increase the rates, they have all these things thrown out to the media?
Where was their brain when OCR was reduced to a minimum?
This is all a manipulation of the common person out there by thinking we commoners are all stupid.
What makes NZ different in terms of house prices is not the low interest rates, it's really the supply of land and the cost of new development, always has been. Low interest rates add leverage but the price of houses is a derivative of the cost to build a new one. If there were plenty of sections for sale at 200-250k (which is more than double the actual cost of development) then house prices would be a lot cheaper. The key is to make sections that cheap.
Surely we should not suggest when the RBNZ wishes to lower interest rates it pays scant acknowledgement to the impact on asset prices, but when there is pressure to rise interest rates (to combat inflation) exacting scrutiny on how that may negatively impact asset pricing is required?
The Treasury at the May 2021 Budget forecast CoreLogic’s Quarterly House Price Index rising by 17.3% in the year to June 2021. But as it turned out, the index rose by a whopping 29.0%.
and
Green Party committee member, Chlöe Swarbrick, said Labour Party members have blocked 22 requests she has made for the Treasury and RBNZ to appear before the Committee to discuss their house price forecast methodologies
Says it all. The Greens certainly don't seem to be the problem.
Vote for a minor Party is all I can say.
I genuinely respect Chloe. She is a once in a generation talent. I have relatively little time for the Greens or their self-crippling Labour-only coalition negotiation tactics so there's a high chance I will never vote for them. But it should be cause for reflection for the main parties that they couldn't head-hunt her. Chloe as an apprentice to a Joyce or an English would have been a formidable asset in terms of social investment advocacy, working with parties who can actually achieve something.
Our loss all round, really.
CWBW,
"Looks like everyone is blaming the pandemic, interest rates and immigration for all their woes in predicting house prices".
And of course the nurses. I feel sure that they must be at least partly to blame given how, according to you, they are useless financially. You know; no moolah.
Ah the penny has dropped! The whole "supply and demand" theory is often talked about and in fact some people reference that single concept when referring to house price inflation but I think we are about to find out that supply and demand dynamics can change very quickly due to other factors combining.
I guess most economists have forgotten the key phrase from their ECON 101 class that precedes the supply and demand equation, i.e, all else being constant.
Nothing is constant in the housing supply-demand equation: low interest rates, QE, LVR fiddling, population easing, fiscal failures, tax policies, etc. - all tipping the scales greatly in favour of housing demand.
No need to worry as Bernard Hickey has also mentioned that Jacinda Arden will have to pump money or relaxes norm to keep her single goal agenda/ promise to keep house price growth continuation, come what may.
https://thekaka.substack.com/p/govt-set-to-honour-housing-guarantee?tok…
.....and she wants to help FHB by keeping the housing ponzi alive and kicking.....politicians don't surprise but what is astonishing is that they get away without accountability and no questions asked by media.
I'll confess to suffering through Hickey's articles on occasion; not because I hate myself and have too much spare time on my hands, but because I think it's important to consider the full spectrum of opinion, even those at the extreme ends of it.
From what I can gather, Hickey doesn't want affordable housing. He's got too much skin in the game. He'll happily claim the moral high ground by calling for prices to fall, but only because he's convinced that this government has - in his words - "underwritten the housing market" by promising that they won't let that happen. For some reason he believes them, and satiates his guilt by waxing lyrical about the plight of the poor FHB on his blog, safe in the knowledge that this government's got his back.
Until it looks like house prices might actually fall.
Now he's wetting the bed, calling on the government to honour the "defacto promise" they made not to let that happen; as if it were a promise which could be kept anyway.
Buying a house is the one sure thing you can do to support a comfortable retirement and help your kids to a decent start in life. The tax settings make doubly sure that this is the case. Another factor - less often discussed - is that families will do anything to get the house they want in the neighbourhood that they want (with access to schools, safe amenities, not too many poors etc). Families will therefore spend as much as they can afford to get the very best house in a suburb they want to live in. This same incentive structure occurs right through the market - with families reaching as far up the ladder as they can afford. At the lower end of the price range in areas with more rentals, prices are influenced by landlord profit margins (i.e. cost of ownership vs the max amount landlords can squeeze out of tenants and MSD / Govt).
This strong local preferencing and competition between equity rich buyers (egged on by realtors) is one of the reasons why country or city-wide supply and demand analysis is useless for housing. It's also why prices in more desirable areas move out of phase with prices in less desirable areas.
So, current incentives and policy / tax settings converge to push prices up. What about interest rates?
When RBNZ increase interest rates, this takes the heat out of the lower end of market (by reducing landlord profit margins), and also reduces the amount that families can borrow. All other things being equal, a change in the interest rates of +X would lead to an adjustment in the price of houses by -Y. However, all things are not equal - the other incentives that combine to push prices up are still very much in play. This is why we have seen 8% average annual growth in the median house price over the last twenty or so years.
So, model the impact of interest rates all you like RBNZ / Treasury - but you'd be better off focusing on the incentives in play. That's where the causal drivers are. Higher (or lower) interest rates will just withold (or provide) oxygen to a fire that will keep on burning.
House prices. Transparency is not in the best interest of RE vested interests. Anything to keep the ponzii going. Even TradeMe goes along with whoever pays the piper calls the tune.
https://www.stuff.co.nz/business/industries/127775543/trade-me-sends-wa…
On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?
Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power dimension in our economic reality – how the short side, such as the producer hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen. Link
As always a good case, but i continue to struggle with the real world implications of dispersed resources and expectations.The description of the interplay between banks/ central banks and interest is outstanding....as is the noting of 'rationing.'
The theory is sound in a complete self contained economy, the only modern example I can think of was perhaps the US until the 1970s, everyone else needs (or perhaps more accurately, wants) to have access to resources they dont themselves possess, and then the complicating factor of sovereign currencies intervenes.
Hahaha this is a big joke, when you have to reduce the rates you go for it like hell-for-leather, not even thinking once what will be the implications. But now when inflation is all over the place and as per the books the interest rate should go up, treasury start feeling the importance of interest rate in regard to the property price.
I didn't understand do we have all college pass out's, junior resources in treasury at the decision-making level or these guys are brain dead. Who has to learn relativity of property price & interest rate by experience, cannot they just read the financial history of reducing interest rates & high property price.
For a period the most mathematically rigorous economics degree was UC, for like 15-20 years. They were picked over most other universities. Not sure how they all rank now…the problem is the group think in economics…not enough diversity of thought…behavioural economics clearly is unrepresented in economic analysis, policy design processes here in NZ.
Increasing interest rates:
- slows growth in house prices (note that in recent times only the 2008 GFC actually caused to a downturn)
- takes spending money away from mortgagees - leading to reduced aggregate demand in the economy and therefore higher unemployment (which reduces demand further creating high risk of recession)
- increases landlord costs - putting upwards pressure on rents (i.e. upwards pressure on inflation)
- increases futures prices - meaning companies buying things months in advance pay more (i.e. upwards pressure on inflation)
- increases the yields on NZD denominated financial assets - attracting foreign capital and increasing the strength of the NZD (making life harder for our exporters)
But, sure, it's simple - just pump up interest rates.
“The less flexible land supply is, the more you see interest rate changes affecting prices.“
Totally agree. The trouble is fixing land supply takes a long time. It is obvious to most people that excessively low interest rates & money printing has caused unexpected house price inflation over the last 2 years. No amount of changes to land supply will fix the housing affordability issue in 2 years, only increasing interest rates could do this.
There are many people that have bought property over the last 2 years & if interest rates are raised too quickly over the next 2 years many of these people will end up with big losses & the economy would suffer enormously.
However, housing affordability needs to be fixed sooner rather than later so buckle up; the Reserve Bank now has a painful job to do. If it doesn’t inflation might not be tamed as quickly as Treasury is forecasting.
Why are these economists unable to simply look back in history where interest rates rise, and see what happens. Or is anything over 10yrs obsolete and irrelievant history?. Late 60s early 70s.. then lat 70s /80s and again 90s where bounced around a bit...
Yes interest rate dramatically effect house prices..When rates go down prices go up. Then with prices at saturation point, interest rates go up, cost to service the mortgauge goes up...demand drops. Sometimes there is a slight elastic, effect in drop in price, levels out, market settles into the new parameters and flattens out.
Simple..history just repeats while 'experts' add allsorts complex and often irrelievant BS padding.
All us older who have been thru several ups and downs in interest rate trends, small and extreme in our home ownership know this. And all the younger experts run around with tails between their legs with an attitude "how can a BB know this stuff."
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