Shedding light on the housing crisis

The Housing Technical Working Group (HTWG) report “Assessment of the Housing System: with insights from the Hamilton-Waikato Area” was released on 18 August 2022. The report analysed the historical trends in the housing market in the Hamilton-Waikato area, including median house prices, rents, interest rates, and population growth. The report found the following:

• The key driver of house prices over the last twenty years has been the global decline in interest rates that significantly reduced the cost of debt servicing and increased home buyers’ ability to pay

         This caused an increase in demand, which in turn caused an initial lift in prices

• If land supply was not restricted, this 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

          Land supply has been restricted, causing this effect to be too small

• Due to land supply being restricted, much of the global decline in interest rates was instead capitalised into higher land prices
• As land prices rose alongside house prices, there was less change in the 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 happen
• The HTWG supports their conclusions with observations that prices rose much faster than rents, that the price of land rose much more than the cost of constructing new dwellings, and direct indications of restricted land supply. 

We support that these are two of the main drivers of house prices in the last decades, although there might still be others. It is true that interest rates have generally declined and remained low in the last two decades, as the graph below shows. We also agree that low interest rates have decreased the cost of mortgages to borrowers, which increased the demand for housing. 

The recent trends of interest rate changes indicates that the price response in the housing market is stronger to interest rate reductions than hikes. For instance, from October 2019 to October 2021 the floating residential mortgage interest rate declined 14.7 percent, but the house price index increased 46.8 percent in the same period. 

On the other hand, from September 2021 to September 2022 the floating residential mortgage interest rate increased 47 percent, while the house price index declined by only eight percent in the same period. Therefore, over the last few decades falling interest rates caused house prices to increase at a faster rate than interest rate hikes caused house prices to fall.

The other premise of the report’s main conclusion is that land supply has been restricted in the last decades. We also agree with this premise, because even though there is little data available, the data that exists points towards that direction.¹

Even though there is not enough publicly available data on the size of the urban area in New Zealand, preliminary evidence suggests that the HTWG’s claim stands correct. The graph below shows that urban areas have been growing at a constant rate over the last few decades, which suggests that land supply is not as responsive to house prices as it should be.

*Data exists only for the following years: 1996, 2001, 2008, 2012, and 2018. The average growth rate was used to estimate the data for the remaining years.

Another point that can be made is that land supply can be sticky, meaning that it takes a longer time to adjust to house price movements due to regulatory requirements. Additionally, data from the United States (US) suggest that New Zealand land supply is indeed relatively restricted. For instance, between 2000 and 2010 the house price index increased by 42 percent in the US, and the urban area increased by 15 percent in the same period.

The data suggests that the HTWG report’s conclusion is plausible, as house prices have been responsive to falling interest rates, and land supply has not been as responsive to changes in house prices. Also, it is likely that the US experienced a slower house price growth than New Zealand due to its land supply being less restricted, which corroborates with the HTWG’s conclusion. Finally, while we agree with the report’s main points, more research is needed to better understand other factors that have influenced house prices in the last decades.

¹The Manaaki Whenua Landcare Research (MWLR) has released data on the size of urban area in New Zealand only in five years, with the most recent data being from 2018.