New Zealand regional house prices and macroeconomic shocks

Abstract

A two-part SVAR model for New Zealand (NZ) identifies impacts of common macroeconomic shocks on national and regional city house prices. Results suggest that NZ regional housing market asymmetries exist in terms of responses to, as well as the relative importance of, shocks to key macroeconomic variables. Interest rate and GDP shocks in particular have significant effects on national and city house prices some 5 years later, although responses to the range of identical shocks vary in magnitude and relative importance across cities. This implies that national policies enacted to dampen/stimulate economic activity will impact differently on regional housing markets.

Keywords:

• housing
• house prices
• macroeconomic shocks
• asymmetries
• SVAR modelling

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. A recent report by the Economist (2014) looked at house prices in various countries around the globe and concluded NZ’s were among the most overpriced. NZ houses were 74% overvalued compared with rents (the third most overvalued out of the 23 countries surveyed) and compared with incomes were 30% overvalued (the fourth most overvalued). At a city level, the 10th annual Demographia International Housing Affordability Survey (2014) classified housing in the four main regional cities, as well as NZ as a whole, as severely unaffordable compared with international benchmarks.

2. See, for example, http://www.rbnz.govt.nz/statistics/key_graphs/household_debt/.

3. KiwiSaver is a voluntary savings scheme aimed at increasing retirement wealth. Its purpose is to encourage a long-term saving habit by individuals who may reach retirement with insufficient asset accumulation to sustain their pre-retirement standard of living.

4. Otago Daily Times p. 21, 20 December 2014.

5. Murphy (2011, p. 340) argues, in reference to home ownership in Australia and NZ: ‘… is the perception that homeownership is a rite of passage for most, if not all citizens. The suburban “quarter-acre” section dream carries significant ideological force in these countries and political parties of various hues are strongly supportive of this tenure … ’.

6. As this study is interested in the relative price of housing across NZ regions (rather than the returns from housing relative to a general bundle of goods) and as the relevant NZ Consumer Price Index (CPI) index is the same for all the regions, deflating nominal prices will not impact on relative prices.

7. Auckland City has 32% of NZ’s population, Christchurch 8%, Dunedin 3% and Wellington City 9%. The addition of further centres would violate the independence assumption.

8. When additional dummies were added for other possible periods of instability, including periods of the major Christchurch earthquakes, these were statistically insignificant in the estimation.

9. Essentially, the handling of monetary policy in a small open economy such as NZ is a function largely of the exchange rate policy and the effect of large external shocks. The Reserve Bank of NZ Act 1989 specifies that the primary function of the Reserve Bank shall be to deliver ‘stability in the general level of prices’. The current Policy Targets Agreement defines price stability as annual increases in the CPI of between 1 and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint. This clearly takes precedence over any policy it has toward the exchange rate. Indeed, the exchange rate has increased markedly. There is therefore little evidence of exchange rate targeting or smoothing, which would force interest rate setting to respond directly to international developments. Monetary policy by virtue of not targeting exchange rates is remarkably independent.

10. The quarterly SDs of the (ln) core macro variables are as follows: GDP = 0.209; CONS = 0.231; HP = 0.452; I = 0.007; TWI = 0.117.

11. Dunedin has 2.3% of wage earners in excess of $100,000 compared with Auckland 7.8%, Christchurch 3.0% and Wellington 8.5%; source: 2006 Census Statistics NZ.

12. Over the period 1996–2013, Dunedin had an annual growth rate of 0.03% compared with Auckland 1.87%, Christchurch 0.74% and Wellington 0.84%; source: Statistics NZ. September 2014 average house prices were Auckland $861,978, Christchurch $461,218, Dunedin $289,472 and Wellington $533,396; source: Quotable Value.

13. See, for example, Permanent & long-term migration by age, sex and NZ area (Annual-Dec) Table ITM194AA, Statistics NZ.